Bulgaria ROSC

I.	Overview
II.	Data Dissemination
III.	Fiscal Transparency
IV.	Transparency of Monetary Policy
V.	Banking Supervision
VI.	System of Deposit Insurance
VII.	Insurance Supervision
VIII.	Securities Market Supervision

SURVEY What do you think of Reports on the Observance of Standards and Codes?

1.  This chapter provides an assessment of fiscal management practices in Bulgaria against the requirements of the IMF’s Code of Good Practices on Fiscal Transparency—Declaration on Principles (available on the IMF web site at http://www.imf.org/external/np/fad/trans/code.htm). The Code identifies desirable transparency practices for governments in their conduct of fiscal policy. Following the Code, this chapter focuses on: clarity of roles and responsibilities; availability of information on fiscal activities; openness in budget preparation, execution, and reporting; and integrity of fiscal information.

2.  In making public the objectives of fiscal policy, the government enhances the public’s understanding of what it is seeking to achieve, and provides a context for articulating its own policy choices, thereby contributing to the effectiveness of fiscal policy. Further, by providing the private sector with a clear description of the considerations guiding fiscal policy decisions, transparency about the policy process makes the fiscal policy transmission mechanism generally more effective, in part by ensuring that market expectations can be formed more efficiently. By providing the public with adequate information about its activities, the government can establish a mechanism for strengthening its credibility by matching its actions to its public statements.

A.  Description of Practice

Clarity of roles and responsibilities

3.  The role of the government is defined in the Constitution, the laws on state and municipal property, and in the government’s medium-term program (Agenda 2001). The 1991 Constitution delineates the distribution of powers between the National Assembly and the Council of Ministers (COM). The Constitution also contains rules concerning the National Audit Office, control of the execution of the State Budget, and the budgetary autonomy of the municipalities. The distribution of powers between the National Assembly and the COM is further specified in the 1996 Law on the Structure of the State Budget (Organic Budget Law). This law defines the scope and the structure of the state budget, including its subdivision into several sub-budgets. Other laws, including the National Audit Office Act and the State Financial Control Act, further define the legislative framework of the budget. The National Assembly approves the state budget and the budgets of the National Social Security Institute and the National Health Insurance Fund. The other extrabudgetary funds, as well as the budgets of the municipalities, are controlled indirectly through the parliamentary approval of subsidies and legislation governing their tax powers and other sources of revenue. Most central spending units and municipalities have extrabudgetary accounts for donations; while at present there is little central control over these accounts, the establishment of a new Treasury system is expected to enhance this control significantly from the beginning of 2000. The currency board arrangement places strict limits on the government’s options for financing the budget. This arrangement is clearly defined in the Law on the BNB (see Chapter IV). A recent COM decree has established the main criteria for granting state guarantees, as well as a mechanism for identifying priorities in assuming these guarantees. Finally, the regulation of the non-bank private sector is covered in functional and sectoral legislation.

4.  Taxation is based on the Tax Procedure Code, laws on specific taxes (the Corporate Income Tax Law, the Personal Income Tax Law, the VAT Law, the Excise Duty Law, and the Law on Local taxes and Fees), the Budget Laws, the Civil Procedures Code, the Trade Act, and the Contracts and Obligations Law, and laws on specific taxes. Tax administration is being reformed in accordance with the Tax Procedure Code which will enter into force on January 1, 2000. This reform is aimed at strengthening the interpretation and enforcement of tax laws and at streamlining procedures for taxpayers.

5.  Fiscal relations between the central government and the municipalities are covered in the Organic Budget Law and the Law on Municipal Budgets (LMB). The LMB broadly defines municipal budget jurisdiction, and clearly identifies municipal revenue sources and financial resources that municipalities receive from the republican budget. Specific and general subsidies are set annually based on a specified methodology. The LMB gives municipalities protection from changes in central government policy and allows for compensation if changes made to the budget law affect municipal expenditures. Despite the enhanced status of municipalities in the budget process, the central government retains control. The LMB remains vague on the allocation process for state transfers and the role of sectoral ministries in defining expenditure priorities. It mentions that the draft budget should incorporate “suggestions put forward by the ministries concerning structural changes in their systems in keeping with the independence of the municipal budget,” but does not specify the level of autonomy municipalities have in determining the allocation of funds across facilities and expenditure types.

6.  Fiscal control and transparency of extrabudgetary funds and accounts have improved in 1999 as the number of such accounts was reduced significantly and the central spending units began making their payments through a single treasury account. The Ministry of Finance has carried out a survey of all government bank accounts to ensure that budgetary funds are transferred to the single account as required and not redirected to special-purpose accounts held by the spending units. Additional improvements are planned for 2000, including further consolidation of extrabudgetary funds and accounts into the budget on a gross basis.

7.  The delineation between government and the rest of the economy is changing with ongoing privatization. The government’s privatization strategy is set out in the annual program approved by the COM and implemented by the Privatization Agency and the line ministries. The privatization strategy is available on the agency’s web site in English. The rules for privatizing firms under this strategy are generally clear. For enterprises that are not included in the current program (those that handle infrastructure and military-related businesses) alternative plans, typically involving restructuring, are being developed and implemented.

Public availability of information

8.  Fiscal information is made publicly available in biweekly, monthly, quarterly, and annual publications prepared by the Ministry of Finance and the Bulgarian National Bank, as well as in the IMF’s Government Finance Statistics and International Finance Statistics pages. A highly aggregated report of the consolidated budget, based on cash flows from the central budget, is included in Ministry of Finance’s monthly publication. Detailed information on the previous year’s outturn is given to the National Assembly together with the draft budget. This information is published with a reasonable lag in The Budget (a monthly publication of the MOF) and in the press. In 1999, the COM distributed an informative pamphlet about the budget to all households in Bulgaria. Data on contingent liabilities, tax expenditures, and quasi-fiscal activities are not published, but are available to the National Assembly. The MOF, jointly with the BNB, publishes a detailed monthly survey of domestic and external debt. A soon-to-be-launched MOF web site is expected to become an important information channel.

Open budget preparation, execution, and reporting

9.  The fiscal policy objectives and the macroeconomic framework that underlie the budget are defined in the MOF’s internal budget preparation documents. The objectives and the framework are to some extent also reflected in the budget report submitted to the Economic Commission and Budget Commission in the National Assembly, although they are not published in detail. The budget report includes estimates for the current year and forecasts for the core macroeconomic indicators and the budget for the next three years. There are no long-term economic projections in the budget documents, the macroeconomic framework does not include indicators related to tax expenditures and quasi-fiscal operations, and there is no comprehensive analysis of overall fiscal risks.

10.  Arrears to the budget are now made transparent. While some municipalities and state-owned enterprises continue to have overdue obligations, these are gradually being cleared. The government’s strategy toward reducing arrears focuses on the restructuring of state-owned monopolies which have accumulated the largest arrears.

11.  Budgetary execution is defined in the State Finance Control Act, the Organic Budget Law, annual budget laws, annually adopted COM decrees on budget implementation, and in various regulations on the implementation of the budget issued by the MOF and usually valid for the current budget year. The funds of first-level spending units are managed through the Single Account System established in January 1999. The MOF issues monthly spending limits to the FLSUs which in turn are responsible for the control of the spending of subordinate units.

12.  The National Audit Office, created in 1995, participates in the discussions and adoption of the annual state budget acts in the National Assembly, monitors compliance by all spending units with budget laws and regulations, and is responsible for assessing the reliability of the reports of all spending units. The reports of the state budget, the National Social Security Institute, and (from 2000) the Health Insurance Fund are approved by the National Assembly. The National Accounting Office audits these reports and presents the results to the National Assembly. The accounting reports focus on the financial position of these entities. There is little or no emphasis on measuring results achieved against objectives. Budget accounting is currently on a cash basis. In the central government and some other institutions there are additional systems for monitoring certain items, such as tax arrears, on an accrual basis.

Independent assurances of integrity

13.  Mechanisms to ensure the integrity of data and budget processes have been established. The National Audit Office is independent from the executive branch of government; in particular, the National Assembly elects its chairman and members. The NSI is assured of technical independence under the Law on Statistics. The Agency for Economic Analysis and Forecasting, a semi-independent institution, carries out much of the macroeconomic analysis and forecasting. Its projections are open for external review, but there are no formalized arrangements to carry out such reviews.

B.  IMF Staff Commentary

14.  Over the past few years, the Bulgarian authorities have taken significant steps to improve fiscal transparency. Many reforms are already firmly established within the fiscal management framework. A number of additional measures are under implementation or being planned.

15.  Discussions with the authorities have revealed some areas where Bulgaria could build on this progress to achieve additional improvements in fiscal transparency:

• The government should strengthen ongoing efforts to explain the objectives and benefits of the reforms in public finance. These reforms have broad implications across the public sector and the whole economy, but there is currently limited knowledge and understanding of the reforms among many who will be influenced by them. The reforms could be presented in the context of a comprehensive strategic vision, outlining the long-term results of the reforms and their impact on the government, the private sector, and the public.
   
• The relative roles of the government and the private sector in the longer term could be elaborated and clarified, especially the government’s strategy toward state-owned enterprises in the energy and other infrastructure areas.
   
• The establishment of a modern internal audit function in the context of the new Treasury system would make financial management more efficient and transparent. Setting up mechanisms for evaluating and monitoring budget expenditure, including detailed in-year reporting, could help to improve the quality of these expenditures. Strengthening procurement processes would improve transparency, reduce the risk of corruption, and enhance the quality of public expenditures.
   
• Also in the context of the new Treasury system, the government should develop a new and comprehensive accounting framework that provides for both cash- and accrual-based accounting reports. Budget classification should be brought into line with ESA 95. The program to establish a comprehensive computerized accounting system, with a view to generating timely and reliable data on all stages of the payments and receipts process, should be implemented.
   
• The budget report to the National Assembly would be improved further by the inclusion of a more complete description of the macroeconomic framework, assumptions and risks related to revenue and expenditure assessments, and the government’s expenditure programs, priorities, and objectives. It should also give a more complete picture of the consolidated government, in particular the municipalities and the remaining extrabudgetary funds and accounts.
   
• Transparency can be enhanced by assessing and publicizing long-term fiscal sustainability, all contingent liabilities, as well as tax expenditures and quasi-fiscal arrangements. These assessments should include close monitoring and scrutiny of state guarantees and interactions with state-owned enterprises.
   
• Current macroeconomic models that underlie the budget preparations should be documented in more detail and be made more open for external scrutiny.
   
• Further progress is needed in ensuring uniform interpretation and enforcement of tax laws.
   
• The budget report should be published and distributed more broadly. It could be made available to subscribers and be posted on the Ministry of Finance web site. A shorter, summary version could be distributed very widely, as is the practice in many countries.
   
• As the present monthly publication by the Ministry of Finance is primarily directed at financial management personnel in the spending units, the scope of this publication should be expanded. Alternatively, it could be supplemented by another publication with a broader focus.
   
• A formal public commitment should be made to promote transparency and provide financial information, and to establish and announce a detailed schedule for publishing key economic data. The Ministry of Finance web site could be used for this purpose.