Press Release No. 03/15

Press Release: IMF Completes Review and Approves US$36 Million Tranche Under Stand-By Credit for Bulgaria

February 7, 2003

The Executive Board of the International Monetary Fund (IMF) today completed the second review of Bulgaria's economic performance under the stand-by credit. The decision will enable Bulgaria to draw SDR 26 million (about US$36 million) from the IMF after February 14.

The two-year Stand-By Arrangement was approved on February 27, 2002 (see Press Release No. 02/12) in a total amount of SDR 240 million (about US$330 million). So far, Bulgaria has drawn SDR 84 million (about US$115 million) under the stand-by credit from the IMF.

Following the Executive Board discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, said:

"Macroeconomic performance has been impressive in Bulgaria since the first program review, despite weak economic conditions in its main trade partners. The authorities' economic program, supported by the Stand-By Arrangement, continues to be centered on the Currency Board, which has been supported by a prudent and flexible fiscal policy and a strict incomes policy. These policies have contributed to robust growth, decelerating inflation, and a stronger-than-programmed external position. Unemployment, while still high, declined significantly in 2002. The authorities have made progress in some critical structural reform areas, including key privatizations in the financial sector, the enactment of the bank bankruptcy law, and increases in household electricity and district heating prices toward cost recovery levels. However, progress has lagged in other important areas, and there have been delays in the completion of privatizations of the state-owned tobacco holding and telecommunication companies.

The authorities' 2003 budget deficit target is appropriate and necessary to maintain macroeconomic stability. However, achieving this target will present challenges. In this context, we welcome the authorities' decision to proceed cautiously with discretionary spending during the first three quarters of the year and to monitor revenue developments monthly. Over the medium term, fiscal policy continues to target a balanced budget, with a lower tax burden and increased social and EU-related spending to be offset by cuts in subsidies and other unproductive spending. To achieve these goals, it is critical that the National Revenue Agency be made operational and that other efforts to strengthen tax administration and collection be increased. On the expenditure side, the reform of municipal finances, and the hospital, railways, and heating sectors, continues to be key.

Structural measures to strengthen further the financial sector, enhance competitiveness, and sustain high quality growth are also important. The sharp rise in credit to the private sector from a low base has contributed to economic growth, but will require increased vigilance in banking supervision. Reforms to simplify business regulations and increase labor market flexibility will be necessary for attracting more investment and reducing unemployment. In the same vein, the authorities should move forward to complete their privatization programs," Ms. Krueger said.