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USIA - Text: IMF Stand-By Credit and Drawing Under CCFF for Bulgaria, 97-04-11
From: The United States Information Agency (USIA) Gopher at <gopher://gopher.usia.gov>
TEXT: IMF STAND-BY CREDIT AND DRAWING UNDER CCFF FOR BULGARIA
(Credits totalling $479.5 million) (1400)
Washington -- The International Monetary Fund (IMF) approved credits
totaling $657 million for Bulgaria, the majority of which ($510 million) is
available over the next 14 months under a stand-by credit to support the
government's economic program for 1997-98.
The program "represents a break with the past and aims to restore
confidence in public institutions and to put Bulgaria firmly on the path to
a market economy. The basic strategy is one of rapid stabilization of the
economy underpinned by durable structural reforms," according to the
IMF.
Of the total $657 million, about $147 million is available under the
Compensatory and Contingency Financing Facility (CCFF) because of increased
import costs prompted by a significant decline in cereal yields and
production during 1996/1997.
Following is the text of the IMF announcement.
(Begin text)
International Monetary Fund
Washington, D.C. 20431
April 11, 1997
IMF APPROVES STAND-BY CREDIT AND A DRAWING UNDER THE CCFF FOR BULGARIA
The International Monetary Fund (IMF) today approved credits totaling SDR
479.5 million (about $657 million) for Bulgaria. Of the total, the
equivalent of SDR 107.6 million (about $147 million) is available under the
cereal element of the Compensatory and Contingency Financing Facility
(CCFF) [1] because of increased import costs prompted by a
significant decline in cereal yields and production during 1996/1997. A
further SDR 371.9 million (about $510 million) is available over the next
14 months under a stand-by credit to support the government's economic
program for 1997-98.
Background
The IMF approved a 20-month stand-by credit on July 19, 1996, equivalent to
SDR 400 million (about $548 million), of which Bulgaria drew only SDR 80
million (about $110 million). Delays in structural reform held up policy-
based external financing and further eroded the confidence in the
government's ability to meet its external debt obligations, contributing to
withdrawals from the banking system and pressure on the exchange rate and
reserves. Real money demand continued to fall sharply, making it impossible
to finance interest payments on domestic debt without recourse to central
bank financing and acceleration of inflation. As the crisis deepened, the
IMF staff, in consultation with the authorities, recommended a stabilization
strategy based on a currency board arrangement. Although this idea gained
broad support, progress was halted by the government's resignation in
December, a development that provoked a political stalemate and a further
worsening of the economic situation. The depth of the economic crisis is
apparent from the 9 percent fall in real GDP in 1996, the acceleration of
12-month inflation from 33 percent to 311 percent in 1996, and the decline
in lev money demand by 63 percent in real terms.
The onset of the political crisis at the turn of the year compounded these
developments and consumer price inflation in February reached a record high
of 243 percent. The political stalemate was resolved in early February with
the appointment of a caretaker government and the agreement among political
parties to hold early elections on April 19. The caretaker government moved
rapidly to alleviate basic food and fuel shortages and to begin stabilizing
the economy with the announcement and implementation of a strong adjustment
program. The first results are already apparent; inflation fell sharply in
March to about 12 percent and the exchange rate has stabilized over the
past few weeks after an initial appreciation.
The 1997-98 Program
The authorities' program, supported by the new stand-by credit, represents
a break with the past and aims to restore confidence in public institutions
and to put Bulgaria firmly on the path to a market economy. The basic
strategy is one of rapid stabilization of the economy underpinned by
durable structural reforms. Key to this strategy is the commitment to
establish a currency board arrangement by mid-year. The program aims to
limit the decline of real GDP to 4.8 percent in 1997, as growth turns
positive by midyear; reduce monthly inflation to 2 percent by the end of
the year; maintain a small surplus in the current account; and double
official reserves to the equivalent of three months of imports of goods and
nonfinancial services.
Fiscal policy has been designed to support the objective of rapid
stabilization by cutting the overall budget deficit to 3.8 percent of GDP
in 1997 from 10.9 percent of GDP in 1996 and by eliminating the need for
central bank credit to the government. This will be accomplished through a
major effort to strengthen revenues and rationalize expenditures, and an
ambitious privatization program. Until the introduction of a currency board
arrangement, monetary policy will by guided by monthly indicative targets,
especially those for the central bank's net domestic assets. For the next
few months, given the considerable uncertainty, the authorities will
maintain a flexible exchange rate regime.
Structural Reforms
Bulgaria aims to underpin its stabilization efforts and prepare for the
adoption of a currency board with a comprehensive program of structural
reform designed to strengthen the banking system, harden budget constraints
on state-owned enterprises, and liberalize the economy, to provide the
basis for development of a healthy private sector. In the banking sector,
any remaining weak banks are being strengthened and supervision is being
enhanced to ensure that the banking system is robust enough to function
under a currency board arrangement. Other measures in this area include
removing legislative and regulatory impediments to the privatization of
banks, with the goal of privatizing them within two years. Financial
discipline is being imposed on state-owned enterprises through privatization,
liquidation and the implementation of financial recovery plans that combine
administered price increases, cost-cutting measures and budgetary support
to ensure the financial viability of enterprises. The authorities are
committed to privatize all commercial enterprises and half of the country's
utilities within two years. The liberalization of the agricultural sector,
by removing price controls and trade restrictions, and the removal of any
remaining impediments to foreign direct investments are expected to
contribute to the establishment of a private market economy.
Addressing Social Needs
The dramatic fall in real pensions and wages in the budgetary sector over
the past six months has caused extreme hardship for large segments of the
population. In the course of 1997, the government intends to restore wages
and pensions to levels that meet the basic requirements of the recipients
and to restructure the social safety net through consolidation of programs
into a well targeted system of income transfers to the poor, old-age
pensions, and unemployment insurance. A significant amount of foreign
resources is explicitly targeted to increase spending in these areas.
The Challenge Ahead
Bulgaria should begin to reap some of the fruits of the shift to a market
economy provided the currency board arrangement is supported by continuously
cautious fiscal policies, vigilant banking supervision, and privatization
of enterprises and banks. The room for policy slippages has been exhausted,
however. It is therefore essential that the authorities stick with utmost
determination to the path of stabilization and reform that they have laid
out and resolve any problems through strongly implemented policies.
Bulgaria joined the IMF on September 25, 1990; its quota [2] is SDR 464.9
million (about $637 million); its outstanding use of IMF credit currently
totals SDR 380 million (about $520 million).
1. The cereal element of the CCFF provides financing to member countries
experiencing balance of payments problems caused by an excess in the cost
of their cereal imports that is both temporary and beyond the control of
the authorities.
2. A member's quota in the IMF determines, in particular, the amount of its
subscription, its voting weight, its access to IMF financing, and its share
in the allocation of SDRs.
BULGARIA: SELECTED ECONOMIC INDICATORS
1994 1995[3] 1996[3] 1997[4] 1998[4]
Real GDP 1.8 2.1 -9.0 -4.8 5.7 (Percent change)
Consumer prices 122.0 33.0 311.0 769.0 14.0 (end of period)
Overall general (Percent of GDP)
government balance -5.8 -5.7 -10.9 -3.8 0.0 (deficit-)
External current
account balance -2.1 -0.5 0.5 0.1 0.4 (deficit-)
Sources: Bulgarian authorities; and IMF staff estimates and projections.
3. Estimate.
4. Program.
(End text)
From the United States Information Agency (USIA) Gopher at gopher://gopher.usia.gov
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