Press Release No. 04/20

Press Release: IMF Completes Fourth Review Under Stand-By Arrangement with Bulgaria, Approves US$39 Million Disbursement, Grants Waivers, and Extends Arrangement

February 4, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Bulgaria's economic performance under its Stand-By Arrangement. In completing the review, the Executive Board approved the disbursement of SDR 26 million (about US$39 million) to Bulgaria and the extension of the arrangement from February 27 to March 15, 2004. The Board further granted Bulgaria's requests for waiving applicability for the end-December 2003 performance criteria on the overall fiscal deficit of the general government and the limit on the growth of the wage bill for 60 monitored state-owned enterprises, and for the non-observance of the end-December 2003 performance criterion on the reduction of tax arrears.

The two-year Stand-By Arrangement was approved on February 27, 2002 (see Press Release No. 02/12) for a total amount of SDR 240 million (about US$358 million). So far, Bulgaria has drawn SDR 188 million (about US$281 million) under the Stand-By Arrangement.

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

"Macroeconomic performance remains strong in Bulgaria. The authorities' economic program, supported by the Stand-By Arrangement, is centered on the currency board and has been supported by a prudent and flexible fiscal policy and a broad program of structural reforms. These policies have resulted in robust growth, low inflation, and a declining unemployment rate, although the high external current account deficit poses risks.

"The authorities' small surplus in 2003 helped contain the current account deficit. The small budget deficit programmed for 2004 appears sufficiently prudent for now, especially given the built-in flexibility of budget implementation and Bulgaria's strong track record in this regard. It is critical, however, to monitor external developments closely and to take prompt action, if needed. The authorities have correctly decided to proceed cautiously with discretionary spending in the first three quarters of the year, and to postpone potential transfers to a state enterprise for road construction until at least the second half of 2004 and to make any such transfer contingent on macroeconomic developments. Plans to fully fund local government mandates and to implement health care reforms, in order to limit the scope for arrears and spending overruns in 2004, are welcome. Over the medium term, fiscal policy continues to target a balanced budget. This will require further progress with fiscal reforms—including the full operation of the National Revenue Agency and implementation of the Financial Management Information System.

"While the recent rapid growth of private sector credit reflects a desirable catch-up from depressed levels, this development requires continued vigilance to ensure that the banking system remains healthy and import growth is sustainable. In this regard, the measures taken by the Bulgarian National Bank (BNB) to intensify its already-strong supervision are commendable. Of particular importance is the strategy to tighten the definition of bad loans and to expand the coverage of the loan register. The government's decision to return deposits from commercial banks to the BNB is appropriate, as this will help moderate the pace of credit growth.

"Progress has been made in many areas of structural reform, including restructuring of the energy and railway sectors, simplification of business regulations, and enactment of judicial reforms. However, additional efforts are needed to complete the reforms, especially in the fiscal area, in order to provide further impetus to economic growth. Completion of the privatization program, including sales of the tobacco holding and telecommunications companies, and measures to increase labor market flexibility should help attract additional investment and further reduce unemployment," Ms. Krueger said.