Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-7096 BUL

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUC FlON AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CRITICAL IMPORTS REHABILITATION LOAN

IN AN AMOUNT EQUIVALENT TO US$40 MILLION

TO THE

REPUBLIC OF BULGARIA

April 21, 1997

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EOUiVALEN.TS(as of March 15, 1997)

Currency Unit LeN (plural Leva)1,600L.ev = US51.00

USSO.000625 = ILev

WEIGHTS AND MEASURESMetric System

ABBREVIATIONS AND ACRONYMS

BNB - Bulgarian National BankBTC - Bulgaria Telecommunications CompanyCAS - Country Assistance StrategyCBA - Currency Board Arraneement

CCFF - Compensatory and Contigency Financing FacilityCETAL - Central Europe Telecoitimunications Agency LineCMEA - Council for Mutual Economic AssistanceCPPR - Country Portfolio Performance ReviewDDSR - Debt and Debt-Service Reduction LoanEBRD - European B3ank for Reconstruction and Development

EIB - European Investment BankEU - European Union

FIA - Foreign I nvestment AaencyFESAL - Financial and Enterprise Sector Adjustment Loans

FIAS - Foreign Investment Advisory ServicesFRP - Financial Recovery Plan

GNP - Gross National ProductIBRD - International Bank for Reconstruction and Development

IDA - International Development AssociationIFI - International Financial Institution

IMF - International Mlonetarx FundJEXIM - Japan Export Import B inkLIBOR - London Interbank Offer RateMIGP - Minimum Income Guarantee ProgramMOF - Ministry of FinanceNES - National Employment ServiceNSI - National Statistics Institute

PAYG - Pay-As-You-GoRTC - Radio Telecommunications Company Ltd.

SFRD - State Fund for Reconstruction and DevelopmentSOE - State-Owned Enterprise

SPAL - Social Protection Adjuitment LoanSSB - State Savings BankTA - Technical Assistance

UNDP - United Nations Development ProgrammeUSAID - United States AgencN 'or International Development

VAT Value-Added Fax

Vice President: Johannes F. Linn, ECADirector: Kenneth G Lay, ECIDivision Chief: Ralph W. Ilarbison, EC1/2HRSenior Economist/Country Economist: Neeta Sirul-. ECI/2HR/Dong He, ECICO

FOR OFFICIAL USE ONLY

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON APROPOSED CRITICAL IMPORTS REHABILITATION LOAN

IN AN AMOUNT EQUIVALENT TO US$40 MILLIONTO THE REPUBLIC OF BULGARIA

CONTENTS

Loan Summary .......... i

1. THE ECONOMY .A. Background .IB. The Current Crisis .2

The Financial and Economic Crisis .2Social Impact .4Political Impact .4

C. Recent Developments .5

11. THE GOVERNMENT'S PROGRAM OF STABILIZATION AND REFORMS .... 6A. Macroeconomic Program .6

Fiscal Policy .7Monetary Policy .8

B. Structural Reforms .8Enterprise Reforms .8Banking Reforms .9Agriculture Reforms .10Social Protection Reforms .1

III. THE PROPOSED LOAN .12Objectives and Description .12Rationale for Bank Involvement and Strategy .13Loan Administration .14Benefits and Risks .15

IV. BANK OPERATIONS .15Bank's Assistance Strategy. 1 5Portfolio Implementation .16Previous Adjustment Operations .17Creditworthiness. 1 8Role of IFC, MIGA and FIAS .18

V. COORDINATION WITH OTHER MULTILATERAL INSTITUJTIONSAND OFFICIAL DONORS .19

Vi. RECOMMENDATION .21

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

ANNEXES:

Annex 1: Letter of Development PolicyAnnex 2: Government's Action Plan Policy MatrixAnnex 3: Bulgaria at a GlanceAnnex 4: Poverty IndicatorsAnnex 5: National AccountsAnnex 6: Exports and ImportsAnnex 7: Balance of PaymentsAnnex 8: External Debt Stocks and FlowsAnnex 9: Public FinanceAnnex 10: Monetary SurveyAnnex 11: Status of Bank Group OperationsAnnex 12: Timetable for Key Processing Steps

MAP IBRD No. 28735

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REPUBLIC OF BULGARIA

PROPOSED CRITICAL IMPORTS REHABILITATION LOAN

LOAN SUMMARY

Borrower: Republic of Bulgaria

Amount: US$40 million

Terms: Twenty years maturity including a five-year grace period, standardinterest rate for LIBOR based dollar single currency loan. CommitmentFee: 0.75% on undisbursed loan balances beginning 60 days aftersigning, less any waiver.

Program Objectives: To support the initial phase of the government's new stabilization andreform prograta.

Loan Description: The loan will help finance the additional costs in the initial phase of theprogram for the import of key, socially-important commodities,currently in extremely short supply. The loan will be disbursed in asingle tranche upon effectiveness based on measures already taken bythe Government.

Benefits: The proposed loan would assist the Government to reduce shortages ofvital commodities thereby helping to alleviate some of the day-to-dayhardship of the public and at the same time building public confidence inthe program of economic stabilization and structural reform which theGovernment has agreed with the Bank and IMF. Timely implementationof the program is critical to arresting (and reversing) the country's deepeconomic crisis and to the restoration of domestic and internationalconfidence in the country's economic prospects.

Risks: In light of Bulgaria's history, there is a risk that political protests willweaken Government's commitment to carrying through on painfulreforms. This risk is, however, partially mitigated in this instance by thejoint declaration of all political parties to support the program, and thefact that major infusion of external funds will await implementation ofthe currency board arrangement and major structural reform measures.An additional risk derives from the Government's weak implementationcapacity, which could impede progress on structural reforms. Provisionof TA by the Bank and other donors for SOE restructuring and bankingreform should help reduce this risk.

Rate of Return: N.A.

Appraisal Report: N.A.

Est.Disbursements: US$40 million

Disb. Schedule: 1997 - US$40 million

Financing Plan: N.A.

Project ID No.: BG-PE-50540

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON APROPOSED CRITICAL IMPORTS REHABILITATION LOAN

IN AN AMOUNT EQUIVALENT TO US$40 MILLIONTO THE REPUBLIC OF BULGARIA

I. I submit for your approval the following report and recommendation on a proposedCritical Imports Rehabilitation Loan to the Republic of Bulgaria for the equivalent of US$40million to support the initial phase of the government's new stabilization and reform program.The loan would be made at the Bank's single currency LIBOR based floating interest rates in USdollars, with maturity of 20 years, including 5 years of grace.

1. THE ECONOMY

A. Background

2. The Country Assistance Strategy (15423-BUL) discussed with the Board of ExecutiveDirectors on April 9, 1996, presented a background summary of economic developments inBulgaria, highlighting the fragility of conditions in the country. While the CAS noted a smallimprovement in economic conditions during 1994 and 1995, following a severe and prolongedrecession since the beginning of the transition (see Table I below), it also maintained that thefledgling recovery could not be sustained without much more forceful govemment effort toresolve the fundamental structural problems of the economy. In particular, the CAS stressed theneed for firm action to privatize the country's large, predominantly loss-making state enterprisesector, and most urgently, to eliminate the sector's significant losses -- which averaged in excessof 15 percent of GDP a year during the transition period. It also emphasized the links betweenthese state-owned enterprise (SOE) losses and the growing crisis of confidence among depositorsin Bulgaria's banking system, given continued financing of SOE losses by state banks (and someprivate banks) despite the deteriorating capability of SOEs to fully service their debts.

3. Indeed, by the end of 1995, about 70 percent of the loan portfolios of 9 (out of 11)Bulgarian state banks was impaired, as was nearly 50 percent of private bank portfolios. Lossesin the banking system had amounted to nearly 3.5 percent of GDP in 1995 and the total negativenet worth of the system was estimated at close to US$1.0 billion. The Bulgarian National Bank(BNB) attempted to ease the severe liquidity problems in the troubled banks by extending themunsecured credit. However, given government's failure to require adequate restructuring andrehabilitation measures by the troubled banks or to address the underlying problem of financingof SOE losses, confidence in the banking system continued to erode. The additional infusion ofliquidity simply fueled inflation and created added pressures on the foreign exchange markets. Inan effort to maintain relative stability in the value of the lev, the BNB then intervened repeatedlyin the foreign exchange markets, depleting valuable foreign exchange reserves.

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Table 1: Key Economic Indicators

Est.1992 1993 1994 1995 1996

Real EconomyGDP Growth -7.3 -1.5 1.8 2.1 -9.0Inflation (CPI annual average) 82.0 72.8 96.0 62.1 123.0Inflation (CPI end-period) 79.4 63.8 121.9 32.9 310.7Nominal Exchange Rate (Leva/IJS$) 23.3 27.6 54.1 67.2 179.2Nominal Exchange Rate (Leva/US$, eop) 24.5 32.7 66.0 70.7 487.4

Investment and Savings (% of GDP)Gross Domestic Investment 16.2 13.0 14.2 15.4 13.6Gross Domestic Savings 16.3 6.8 11.1 17.9 16.7

Balance of Payments (% of GDP)Exports GNFS 58.4 45.2 48.9 52.4 64.6Imports GNFS 62.0 53.7 53.5 50.3 61.9Resource Balance -3.6 -8.5 -4.5 2.1 2.7Primary Balance -3.1 -8.4 -2.9 3.0 4.4Current Account Balance (% of GDP) -9.3 -12.8 -2.1 -0.5 0.5

Balance of Payments (US$ million)Trade Balance -213 -885 -17 120 145

Merchandise Exports, fob 3956 3727 3935 5345 4724Merchandise Imports, cif 4169 4612 3952 5224 4579

Current Account Balance -801 -1386 -203 -59 50

Public Finance (% of GDP)Total Revenue 38.7 37.2 41.8 36.1 33.0Total Expenditure /a 45.9 48.1 48.2 41.8 43.9

Social Security 14.3 15.1 13.7 10.9 9.6Interest 8.5 9.4 14.2 14.2 20.5Other Current 20.4 21.7 18.7 15.5 13.2Capital 2.8 1.9 1.7 1.2 0.6

Primary Balance 1.3 -1.6 7.7 8.5 9.6Fiscal Balance -7.2 -10.9 -6.4 -5.7 -10.9

/a Excludes expenditures by the State Fund forReconstruction and Development (SFRD).Source: NSI, Sofia, and World Bank Staff Estimates

B. The Current Crisis

The Financial and Economic Crisis

4. By the beginning of 1996, a series of events contributed to a downward spiral ineconomic performance that deepened as the year progressed. The announcement of a poorlydesigned deposit insurance scheme, which made explicit (but limited) the government's backingof depositors claims on banks, aggravated an early run on deposits. This was further exacerbatedby growing fears among the population that the Government might confiscate foreign exchangedeposits to meet foreign debt service payments. As a result, foreign exchange deposits declined

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by close to US$1.0 billion since the end of 1995. Moreover, due to the attempts by BNB todefend the exchange rate, foreign exchange reserves declined by a similar amount during theperiod. Despite these pressures, the Government remained current in servicing foreign debtobligations.

5. Eventually, in an attempt to arrest the decline in foreign exchange reserves and prevent afurther withdrawal of deposits, the government substantially increased nominal interest rates andallowed the exchange rate to float more freely. These measures, however, did not succeed instabilizing the demand for money. Consequently, they served to sharply increase the budget'snominal interest payments and the required Central Bank financing for the rising budget deficit,which led to continued depreciation of the currency and a surge in inflation.

6. With the growing deterioration of the bank's portfolios and the eventual runs on thebanks, the true economic effects of the earlier uncontrolled financing became apparent andforced the Government to take decisive actions. Between May 1996 and January 1997, the BNBfiled for the bankruptcy of 15 banks, together holding about 31 percent of household depositsoutside the State Savings Bank (SSB) and 23 percent of total enterprise deposits. The banksplaced under conservatorship have ceased operations. The courts, however, repeatedly delayedruling on the bankruptcy of the banks in conservatorship. As a result, depositors could not regainaccess to their deposits, further undermining confidence in the banking sector.

7. In addition to closing the 15 banks, the government, throughout 1996, made otherattempts to introduce reforms aimed at reversing the economic decline and gaining support fromthe international financial institutions. These efforts, however, were hesitant and incomplete andfailed to secure timely financing for the program. Among the most important measures takenwere actions in the area of enterprise reform, where the Government started to reduce enterpriselosses through a program of liquidation, isolation, and privatization. The program was achievedin part with the effective closure or privatization of 41 enterprises that together accounted for 16percent of SOE losses. Enterprises accounting for another 50 percent of the losses were placedin isolation and have since been managed on cash basis only (with a few minor exceptions) andfinancial recovery plans have been prepared. The government also privatized several stateenterprises and proceeded with the first auction under its mass privatization program. Under thecash privatization, the Government sold enterprises accounting for 4.2 percent of long-termassets (measured in terms of 1995 assets) and offered for mass privatization 968 enterprisesaccounting for 17.5 percent of long-term sectoral assets. A first auction for sale of the SOEshares was held in 1996, during which only two-thirds of vouchers were exchanged for sharesand only 129 SOEs were fully sold.

8. These measures, while establishing the basis for more fundamental reforms in the nearfuture, nevertheless did not reach the critical level necessary to garner the level of financialsupport being sought by the government. The hesitant pattern of reforms further reducedconfidence in government's policies and introduced considerable uncertainty, which, whencombined with the general lack of available credit in the economy, led to a sharp downturn ineconomic activity. By late 1996, the country found itself in the midst of a full blown economiccrisis as the result of a vicious circle of galloping inflation, exchange rate depreciation, increasesin the budget deficit, growing payments on the domestic debt, increased Central Bank financingand consequently ever higher inflation rates. The depth of the crisis was reflected in theeconomic outcomes for 1996: real GDP fell by an estimated 9 percent; from end-1995 to end-

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1996, the lev depreciated from 71 to 487 per US dollar; and, 12 month inflation accelerated from33 to 311 percent for 1996.

9. In December 1996-January 1997 the economic crisis turned into a political one, whichaggravated, in turn, the economic crisis. The lev depreciated further to 3,000 per US dollar inmid-February; inflation reached an historical high of 242 percent for February; foreign exchangereserves dwindled to US$ 415 million (the equivalent of less than one month of imports); and thepublic sector deficit, which last year reached 10.9 percent of GDP, continued to widen, as theCentral Government's revenues in the first quarter of 1997 covered only 64 percent ofexpenditures, and were devoted entirely to meet interest payments on the public debt.

Social Impact

10. As might be expected, the impact of the economic crisis on Bulgarian households hasbeen disastrous. Even with a doubling of (nominal) wages in the budget sector in February and afurther 60 percent increase on March 1, the average wage was approximately US$20 per monthin March -- i.e., an amount insufficient to purchase even the most basic food requirements for anaverage-sized (3-person) household. Conditions have been even more dire for pensioners, othersdependent on cash transfers from the state (social assistance, disability and unemploymentbenefits) whose March incomes were below US$10 per month in most instances and thosereceiving minimum wages, which stood at about US$12 in March. Households' difficulties werecompounded by shortages and/or sky-rocketing prices of basic necessities, including breadshortages (given an estimated 600,000 ton shortfall of wheat till the next harvest due both tounfavorable weather and inappropriate policies), the near-absence of medicines due to non-payment by the health system for last year's supplies, and shortages of energy and of petroleumproducts as a consequence of a sharp decline in crude oil imports by cash-strapped domesticrefineries. Moreover, the severe shortages of seeds, fertilizer and agricultural chemicals threatenthe future livelihood of households reliant on incomes from agriculture, especially if theseshortages persist past the upcoming planting season.

11. A UJNDP-led multi-agency Needs Assessment mission which visited Bulgaria inFebruary found that the country was on the verge of a humanitarian crisis -- citing, inter alia, a25 percent increase in low birth weight babies; a small, but significant, increase in infantmortality; a decline in energy intake (especially for children) to approximately 15 percent belowrecommended daily food allowances; and rises in micronutrient deficiencies including iron-deficiency anemia, iodine deficiency and calcium deficiency due to dramatic declines in theconsumption of meat and fresh fruit and vegetables. This suggests that many households,particularly those living solely or primarily on fixed incomes provided by the state, have little orno capacity to cope with further shocks. The country's social safety net, though costly in that itamounts to about 13-14 percent of GDP, was clearly unable to assist those most in need,principally because it has tended to provide small transfers to broad segments of the population,irrespective of relative need.

Political Impact

12. The severity of the social impact of the economic crisis was instrumental in bringingdown Bulgaria's government, with resignation of the Cabinet and dissolution of Parliamenttaking place in February 1997 in the wake of sustained and intensifying political protests. Thepolitical crisis was adroitly handled by the new President of the Republic. elected in November,

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who directed the formation of a new interim Government, which will remain in office untilelections are held in the latter half of April and a new Government is formed, most likely in earlyMay. The outgoing parliament bestowed broad powers on the interim Government to manageeconomic policy, including authority to conduct negotiations with International FinancialInstitutions (IFls).

C. Recent Developments

13. Since taking office in late February, the interim Government has taken a series ofimportant measures to arrest the crisis and begun to set the stage for a more fundamentalprogram of stabilization and structural reform. Given the pressing need to alleviate the country'ssevere bread shortage, the incoming Government gave high priority to securing additionalsupplies of wheat through emergency import deals and by liberalization of the wholesale pricefor domestic wheat to increase the market availability of stocks held by producers. In addition,the Government has established by decree that state entities will sell imported wheatdomestically at US$160 per ton and maintain the price at least at 85 percent of internationalprices (as compared with US$85 or 50% of international prices until mid-March 1997). ThePrime Minister has also announced that all cereal sale prices will be liberalized as of July 1, 1997and that any existing export bans will be lifted. As a result of these efforts it is estimated thatconsumption needs through May are largely covered, but that there is still a need for anadditional 230,000 tons to cover requirements for the period from May until the next harvest inAugust.

14. The Government also moved rapidly to improve conditions in other critical areas of theeconomy. In particular, to alleviate shortages of petroleum derivatives, it raised their prices byabout 297 percent (to bring prices closer to international levels), replaced the management of thecountry's largest refinery and introduced a temporary export ban. Steps have also been taken tostem the losses of state-owned public utilities (about 30 in number) which will not be privatized.Prices of electricity, coal, natural gas, liquid fuels and water were substantially increased,bringing the prices to (or very close to) international levels and sufficient to cover costs. Theadministered prices for district heating and public transportation have also been raised, but fullcost recovery is not anticipated and subsidies to cover the gap have already been included in thebudget. To partially shield the poor from these price increases, an existing scheme providingutility vouchers to the country's most vulnerable households (roughly 17 percent of households)is being augmented with support from the European Union.

15. The Government has also taken steps in the banking sector, where a number of theremaining seven state banks continue to be financially weak. The Government has arranged forthe strongest state-owned bank to extend a loan to the Ministry of Finance, which, in turn, willsupport the immediate liquidity needs of the weakest of the large public sector banks in thecountry. This loan will be repaid with the proceeds from privatization. Overall, the health of thebanking system remains fragile, even though solvency conditions appear to have improved as aresult of the recent currency depreciation. Earlier indications of foreign investor interest in bankpurchases, which could assist in improving conditions in the banking sector, have so far notcome to fruition.

16. In parallel with the above, the interim Government has taken decisive steps to design aneconomic stabilization and reform program, working closely with staff of the IMF and the Bank.Design of the program was undertaken by several working groups under the auspices of the

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Financial Stabilization Council, headed by the Prime Minister, and the Structural ReformCouncil, led by the Deputy Prime Minister. In an unprecedented step, the two-part program,covering short-term measures to be carried out during the tenure of the caretaker Governmentand others to be implemented upon election of a new Parliament, was presented torepresentatives of all the major political parties in the country. In turn, the parties signed a jointdeclaration stating their willingness to work towards the passage of all laws required for thesuccess of the program, once the new Parliament is in place. Hence, the program is expected tobe fully pursued by a new Government, once in office.

II. THE GOVERNMENT'S PROGRAM OF STABILIZATION AND REFORMS

17. The core principles governing the Government's new economic program are theachievement of: macroeconomic stabilization; a speedy and transparent program of privatization;financial stabilization; liberalization of prices and trade; quick reduction of SOE losses; reducedcorruption and prosecution of those responsible for plundering national assets; improvedincentives for business and investment; restructured state finances and a downsized publicsector; rapid completion of the restitution of farm land; and reinforcement (through improvedtargeting) of the social safety net.

A. Macroeconomic Program

18. The main objectives of the macroeconomic program of the government are to reduceinflation rapidly and restore economic growth through the stabilization of the exchange rate, afiscal policy that does not require central bank credit, and a healthy balance of paymentsposition. The centerpiece of the macroeconomic stabilization program will be the introductionof a Currency Board Arrangement (CBA) in June 1997 aimed at: (i) establishing a crediblearrangement for reducing inflation through elimination of discretion in monetary policy; and (ii)enforcing financial discipline at the highest levels of the financial system in the expectation thatsuch discipline will permeate to the other levels of the economy. The basic elements of the CBAwill include full convertibility of the lev, readiness to redeem base money for foreign currency ata fixed exchange rate, elimination of central bank financing to the budget and other debtors,lifting of all controls on interest rates, and creation of a special liquidity fund to provide lastresort lending to banks only in the event of a systemic risk. The Board will have completeindependence from the Government.

19. In order to ensure the viability of the CBA, the Government will have to: (i) pursue strictfiscal policies that eliminate any need for central bank financing; (ii) introduce financial andbanking sector reforms that restore the soundness of, and confidence in, the system; (iii) reducethe losses of the state owned enterprises through an aggressive program of liquidation andprivatization; and (iv) embark on a program of price and trade liberalization, especially in theagricultural sector, which will remove the impediments to the creation of a market economy andhelp attract foreign investment. Preparations for establishment of the CBA are alreadyunderway, with a program to strengthen the banking sector (discussed below), drafting requiredlegislation, and a number of operational steps in both the central bank financial position and themanagement of the domestic debt issuance.

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Fiscal Policy

20. The budget agreed under the Stand-by Arrangement anticipates a rapid reduction in therate of inflation and nominal interest rates in the second half of 1997 and is predicated onsubstantial efforts by the Government to contain expenditures and strengthen revenuecollections. The overall level of non interest expenditures is programmed to remain relativelyconstant as a share of GDP (but will decline slightly in real terms since GDP is expected to fallby 5 percent in 1997). Nominal interest payments, mostly on the domestic debt, are expected todrop considerably with the reduction in the rate of inflation and improved confidence. Theoverall budget deficit of 3.8 percent of GDP will be financed primarily from privatizationproceeds and external flows. The deficit results mostly from the continued high interestpayments on the debt, since overall, the public sector actually will be running a primary surplusof 4.5 percent of GDP in 1997.

21. Control of non-interest expenditures will be achieved primarily through rationalizationof programs and a reduction in public employment by 10 percent of the work force. Measureswill be taken to improve the structure of expenditures in health and education. Social safety netprograms will be consolidated, enhanced and better targeted through improved means testing. Inline with projected increases in the minimum wage and in public sector wages (to an averagelevel of US$65 per month in the second half of 1997), the average level of pensions has beenbudgeted to increase to US$34 per month.

22. In addition, the 1997 consolidated general government budget makes explicit provisionfor procurement of critical socially-important commodities (such as agricultural inputs, wheat,fuel oil, etc.) At least $22 million equivalent has also been allocated for purchases of medicines,including essential drugs and vaccines to ensure sufficient flows of new supplies to hospitals andclinics plus an additional $20 million equivalent to clear health system arrears to pharmaceuticalsuppliers. The Government intends to achieve greater efficiency in the purchase of thesecommodities through the use of improved and more transparent procurement procedures.

23. While the level of revenues are difficult to predict under the volatile economicconditions prevailing in the country, the Government will undertake a number of measures tostrengthen collections. Tax brackets are being adjusted according to inflation. The valuation ofproperty has been raised to market levels. Tax preferences are being phased out. Penalties andinterest on overdue tax liabilities have been increased. A unit responsible for improvingcollections from large tax-payers is being established, and rules for VAT registration andinvoicing have been tightened. The Government intends to maintain the current 22 percent VATrate until the end of the year, when it expects to present to parliament a comprehensive taxreform program to improve the overall fairness, efficiency and transparency of the system.

24. In preparation for the CBA, the Government is consolidating existing budgetary andextra-budgetary cash balances into a fiscal reserve account. The creation of such an account willhelp institute a buffer for cash flow management, and will help to track fiscal developments.The account will initially be comprised of available deposits of the public sector, and willinclude external financing and privatization proceeds. The status of the account will bepublished monthly, and will be monitored according to pre-specified performance criterion. Thekey to the success for maintaining a comfortable level of funding will be the Government'sability to achieve its privatization targets and to secure external financing within the time frameenvisaged in the budget.

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Monetary Policy

25. With the removal of the need to finance the budget, monetary policy will be unburdenedand efforts will be concentrated on preparing for the introduction of the CBA. The Central Bankis winding down its reverse repurchasing agreements on government securities. It has liberalizedthe basic interest rate by linking it to the average yield on the auctions for 7 day treasury bills.The exchange rate will be managed so as to avoid a further appreciation of the currency from thelevels that prevailed in mid-March, while curbing substantial further depreciation through atightening of liquidity. Otherwise, until the introduction of the CBA, monetary policy will beguided by monthly targets, especially those for central bank net domestic assets.

B. STRUCTURAL REFORMS

26. Structural reforms are critical for the success of the government's program. TheGovernment recognizes the importance of establishing a fundamental break from past practices,and has committed itself to introducing a significant program of reforms. The program focuseson four important areas: enterprise sector privatization and loss reduction; banking sector reform;liberalization of prices and trade, especially in the agricultural sector; and social protectionreform.

Enterprise Reforms

27. Privatization and enterprise reform are at the core of the structural program. Thegovernment realizes the need to move aggressively with an expanded privatization program forboth budgetary and efficiency reasons. The financing of the macroeconomic program for 1997and the viability of the currency board arrangement depend crucially on privatization proceeds.Therefore, cash privatization for several major enterprises will have to be completed this year. Inaddition, the privatization program is key to reestablishing economic growth, to attracting muchneeded (foreign) investment, and to improving corporate governance and efficiency of theenterprise sector in Bulgaria. It will also depoliticize markets and the relationship betweenbanks and enterprises. The Government has unequivocally committed itself to complete themass privatization program and to expand the cash privatization. The Government announcedthat several of the largest SOEs, representing 22 percent of the long-term assets of the sector,will be offered for sale. So far, 18 percent of the state owned assets have been privatized (5%cash, 13% through mass privatization). With the new commitments, the Government intends tohave 25 percent of the assets privatized by June and an additional 15 percent between June andDecember 1997.

28. The targets for cash privatization for 1997 ranges between US$300 to US$350 million,with all received cash to be transferred to the budget. The completion of the cash privatizationsalong with the mass privatization program will mean that by the end of 1997, 40 percent of thelong term assets of the SOE sector will have been sold. The cash privatization scheduled for thecurrent year is very ambitious, given Bulgaria's track record, and it will test the willingness andability of the Government, and the Privatization Agency in particular, to complete the fullprocess. Accordingly, the Government has requested the assistance of the World Bank,European Union and others with the technical and financial support for investment bankingadvice. The Government's intention is to subcontract to these advisors the privatization of 30

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large companies. The Government is already relying on World Bank financed technicalassistance to finalize the sale of shares in the Bulgarian Telecommunications Company (BTC),the final sale of which will be completed in 1998.

29. A key element of the overall privatization program is the voucher based massprivatizations. The Government should complete the first wave (which includes three separateauctions) of the program by the end of June 1997. As noted earlier two thirds of the voucherswere exchanged for equity during the first auction, and 129 enterprises were fully sold. In thesecond auction an additional 61 companies are being offered for sale and the Governmentexpects most remaining shares (i.e., those not sold in the first auction) to be taken, especially ifcredibility in the government's economic recovery program is established. Depending on theoutcome of the first wave of mass privatization and the success of the cash privatizationprogram, the Government may decide to hold a second wave of mass privatization by the end of1997.

30. In the liquidation program, the Government is committed to closing 64 enterprisesinitially, which accounted for 28 percent of the SOE losses in 1995 or 30 percent of the negativevalue added in the public sector. Already 30 of these enterprises were closed and II wereprivatized. The remaining closures will be completed by June 1997. The program of liquidationwill be expanded to include those commercial enterprises formerly in the isolation program thatare not viable candidates for privatization. As part of the isolation program, financial recoveryplans (FRPs) are prepared for the 71 enterprises under the program. Now that some of the FRPshave been completed, they clearly demonstrate that some companies are simply not viable andshould be liquidated. To facilitate the process of closures the Government instituted last year aspecial severance payment mechanism for the workers being dismissed. The physical assets ofthe companies under liquidation will also be eventually sold. For the non-utility companies thatare viable, the Government has committed to offer them for accelerated cash privatization.

Banking Reforms

31. As a part of the preliminary agreements reached under the Standby Arrangement and theWorld Bank's Financial and Enterprise Sector Adjustment Loan program, the Governmentintends to take a number of legal, regulatory and policy measures to strengthen the bankingsector and to boost confidence in the convertibility of the lev under a CBA.

32. The Government plans to amend the Law on Banks and Credit Activity to rationalizebank licensing, strengthen accounting and external auditing provisions, introduce provisions onthe fiduciary duty and conflict of interests of bankers, and rationalize penalties for regulatorynon-compliance. The Law of the BNB is to be amended to provide for the independent authorityof the Deputy Governor responsible for Banking Supervision and for an annual internationalaudit. A new Law of Bank Insolvency is to be passed to facilitate the closure of insolvent banks.The Government also intends to establish a new deposit insurance scheme that will providelimited coverage of deposits while avoiding moral hazard. A review of all BNB bankingregulations is underway, including regulations for bank licensing, capital adequacy, loanclassification and provisioning, foreign exchange exposures, and liquidity. This review will leadto the adoption of revised regulations that reflect international practices which are also consistentwith the CBA.

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33. To address the problems of governance in the public sector commercial banks, theauthorities are committed to their privatization under an agreed timetable. They also adopted theprinciple that no recapitalization of banks by public funds would occur except as part and parcelof privatization. Management contracts with reputable foreign management teams will beactively sought for the banks which cannot be privatized in the near future. Impediments toforeign investment in domestic banks and to the establishment of reputable banks are to beremoved. This includes permitting foreign currency denomination of share capital, andexempting from taxes unrealized capital gains (from asset revaluation) and unrealizedexpenditures from provisioning..

34. To improve the effectiveness of banking supervision, a number of resident foreignbanking supervisors will be contracted and joint on-site inspection teams will be formed. Thenumber of qualified staff in the Banking Supervision Department will be increased, and theindependent authority of Banking Supervision will be strengthened. To enhance the liquidity ofbanks' assets, restrictions on ZUNK bonds (originally issued to recapitalize banks) are to beeliminated. In the meantime, the BNB will promote the free trading of ZUNK bonds. Thesemeasures will establish a market for the ZUNK bonds, as they are similar to the Bulgarian Bradybonds, and some arbitrage between these markets is expected to occur.

35. The banking system will be further strengthened prior to the adoption of the currencyboard. There will be no insolvent or illiquid banks present at the time of the introduction of theCBA. The problems of any state owned bank currently experiencing difficulties will have to beresolved (in a manner satisfactory to the IFIs). Besides the recent measures to provide financialsupport to the weakest state bank along with the change in its management, the Government hasestablished that measures to support any state bank to achieve acceptable levels of liquidity orsolvency will be accompanied by management contracts until privatization.

36. Legal measures will be taken to subject the State Savings Bank (SSB) to the Law onBanks and Credit Activity, and to clarify the responsibilities and powers of the SSB Board. SSBis to retain and improve its character of a narrow bank so that the 100 percent state guarantee onits deposits will not incur any contingent liability for the government. To increase theresponsiveness of deposit rates to market-determined interest rates, deposit rates at the SSB willbe adjusted monthly to reflect market conditions. The basic interest rate has in turn been allowedto reflect market yields and has been defined as the average monthly yield on short-termgovernment securities.

Agriculture Reforms

37. In the agricultural sector, the Government recognizes the urgent need to proceed rapidlywith the liberalization of the sector and to accelerate the land reform and titling in order toimprove the prospects for increased production. Bulgaria has considerable potential inagriculture, since it is well endowed with some of the most productive land in Eastern Europe.This potential can be tapped once again with the introduction of proper policies. In this context,the main policy objectives of the Government in Bulgaria are to create a competitive market-based and export-oriented agriculture and food industry. To achieve these goals it will beessential over time to remove a number of barriers faced by the sector, such as price controls,profit margins, trade restrictions, poor land titling, and the stifling presence of state controlledinstitutions and reserves.

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38. In the area of pricing and trade policy, the Government intends to eliminate the systemof controls on profit margins of agricultural and food products, and eliminate import quota andduties on cereals and cereal products, by end-May. By July 1, the Government intends toeliminate all export bans (with no export tax to be introduced) and liberalize the procurement andthe sale prices of wheat and other cereal products, remove any non-tariff barriers against theimport and export of agricultural inputs such as fertilizers, and abolish any direct and indirectsubsidies to prices of wheat, wheat flour, bread and other cereal products. This should re-establish farmers' confidence that for the next crop they will be able to receive comparableexport market prices. To promote foreign trade, there are also plans to eliminate import andexport administrative constraints such as licensing/registration, with a few exceptions includingex ante licensing for health and safety reasons, and ex post licensing for statistical purposes.

39. The liberalization of agriculture will be accompanied by the legal changes that willreduce complex regulations and will facilitate leasing arrangements, titling, occupation rightsand the foreign ownership of land. Additionally, the Government has committed itself topromote competition by privatizing many of the state trading companies and the shops, bakeriesand agricultural companies it still owns.

Social Protection Reforms

40. As noted in paras. 10-11, the past few months have been extremely difficult forBulgarian households which have suffered severe declines in income and endured shortages ofbasic necessities. Among the shortages was the near-absence of critically-needed medicines,vaccines and medical supplies, which has caused great hardship to many individuals sufferingfrom illness and disease. Shortages of vaccines have threatened the continued operation ofimmunisation and other preventive health programs, risking a reversal of the country'simpressive past achievements in public health. To ameliorate public health conditions, theGovernment's fiscal program for 1997 includes funding for the purchase of medicines andvaccines for the year's health needs. The Government has also undertaken to ensure thatadministrative arrangements are put in place to quickly deliver purchased medical supplies tohospitals and clinics. In this regard, it should be noted that contracts are already being enteredinto with foreign and domestic pharmaceuticals suppliers for virtually the full complement of1997 medical supplies. In addition, a number of other steps aimed at addressing short andmedium term social protection issues are included in the Government's program and aredescribed below.

41. The series of measures contemplated in the program, particularly the tariff adjustments,price increases and reductions in public sector employment, will have an adverse economic andsocial impact on many groups within society -- but especially the relatively poor. To ensure anadequate safety net for the population, the Government is committed to reforming its socialprotection programs with the following aims: (i) ensuring adequate protection of relativelyvulnerable population groups within a constrained fiscal envelope through improved targetingand setting of meaningful benefit levels for those targeted; (ii) ensuring the medium- and longer-run fiscal sustainability of the social protection system in a manner consistent with economicgrowth objectives in a market economy; and (iii) increasing the fiscal transparency andsubstantially reducing duplication and fragmentation among the various, overlapping socialprotection programs. As with other structuiral reforms, actions in the social protection area willbe divided into two parts, with some actions to be taken in the next 2-3 months and others to beput in place by the end of this year, following the election of the new Parliament. Measures in

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the first phase contain a mix of actions aimed at both easing the social costs of macroeconomicstabilization and structural reforms in other sectors as well as at beginning to improve thetargeting and fiscal sustainability of the social protection system. Measures in the second phaseare aimed primarily at consolidating measures to improve targeting and increase medium-termviability.

42. Among the key short-run measures to be taken are the following: (i) establishment of abetter targeted, consolidated two-tier differentiated minimum income guarantee (MIGP) program-- comprising both the existing minimum income guarantee scheme and the utility voucherprogram -- able to provide better protection to households with young children; (ii)improvements in services provided by social care institutions and outreach programs throughbetter collaboration with NGOs and centralization of responsibility for inter-municipalinstitutions; (iii) extension of the severance pay program to cover laid off workers from thebudgetary sector (approximately 60,000 workers); (iv) a gradual increase in real pensionscoupled with passage of a ministerial decree reducing the numbers of workers included in specialearly retirement categories in accordance with a time-table satisfactory to the Bank; (v) clearanceof arrears for pharamaceuticals and securing of new supplies of critical medicines; (vi) improvedtargeting of child allowances, third year maternity benefits and medical support programs; and(vii) reduction of the payroll tax for the unemployment fund from 5% to 3%, extension of thecontribution period for unemployment benefits eligibility and a change in the formula forminimum unemployment benefits to reduce work disincentives. Progress in many of these areasis already apparent and key new expenditures (e.g., for medicines, higher pensions, and theminimum income guarantee scheme) have been included in the budget despite the tight fiscalsituation -- reflecting Government's strong commitment to maintaining critical elements of thesafety net.

43. The second set of measures (to be completed before end-1997) would involveconsolidation and deepening of some of the measures taken in the first phase. A key goal wouldbe to contain costs of and strengthen the financial viability of the pension fund while maintainingadequate protection for (true) old-age risk. In this regard, Government expects to pass a newpension law for the pay-as-you-go (PAYG) system with provisions, inter alia, for elimination ofearly retirement categories except for a few very hazardous occupations, phasing in of later"normal" retirement ages, a revised benefit formula satisfactory to the Bank, and establishmentof targets for the gradual reduction of payroll tax rates for pensions. Steps would also be takento enact legislation governing voluntary, private pension schemes and funded occupationalschemes and to strengthen Government's capacity for supervision of these schemes. Othermeasures planned for the second phase would be to rescind some of the universal benefits of the"Birth Promotion Act" and replace them with targeted, means-tested benefits for mothers andchildren in need; cessation of unemployment assistance and employment subsidies paid withrespect to young workers and enactment of a youth minimum wage; and elimination of someduplicative and/or poorly-conceived social assistance and active labor market programs.

III. THE PROPOSED LOAN

Objectives and Description

44. The proposed quick-disbursing US$40 million Critical Imports Rehabilitation Loan willsupport the initial phases of the Government's stabilization and reform program (described in

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part 11). The proceeds of the loan will help finance the immediate import of socially importantgoods (e.g., medicines, wheat, fertilizer, seeds, agricultural chemicals, fuel oil etc.) which arecurrently in very short supply, and whose immediate availability is crucial to improving -- or atleast preventing deterioration of -- the conditions facing Bulgarian households. These importswill ease some of the immediate pressures confronting the Bulgarian public and help achievegreater acceptance of the Government's economic policies, especially the far-reachingstabilization and reform program to it is committed.

45. Accordingly, a key result of the proposed loan is to enable the Government to visiblydemonstrate to the public the benefits of adopting and remaining on a reform course, as well asdirectly helping to ensure the availability of selected commodities of vital importance toBulgarian households' survival and livelihoods. Given Bulgaria's history of political discord inthe post-transition period which has made achievement of economic reforms extremely difficultfor successive Governments, it is crucial that the program now agreed with the Bank, IMF andother donors receives wide public acceptance to help ensure implementation of the difficultmacrostabilization and banking, enterprise and social protection reform measures which lieahead.

Rationale for Bank Involvement and Strategy

46. As noted previously, Bulgaria remains in the throes of a deep economic crisis, which hasseverely affected real GDP, internal and external balances and household living conditions. Thecrisis precipitated the collapse of the previous Government in February this year and led to theinstallation of a new interim Government which has reached agreement with the IMF and theBank on an ambitious and comprehensive program of stabilization and structural reforms whichwill dramatically improve the country's economic prospects when implemented. Additionally,in an unprecedented step, all the country's major political parties have expressed support for theprogram and signed a declaration stating their intention to work towards passage of all requiredlegislation, as soon as the new Parliament is in place follow ing the general elections scheduledfor April 19, 1997. The proposed loan would help maintain this support by alleviating some ofthe immediate hardships being faced by the public (i.e., shortages of vital commodities), therebyhelping to strengthen public acceptance of the new Government's economic program.

47. External support at this critical juncture of Bulgaria's transition will facilitateenormously the adoption of difficult reforms and help pave the way for a more stable andsustained level of economic activity. Without adequate external financing and support,confidence will be undermined and the country could be severely constrained and unable topursue the reforms now being contemplated. It could also jeopardize Bulgaria's commitment toremain current with all of its payments obligations.

48. The Bank's primary objective noted in the April 1996 CAS remains essentiallyunchanged -- i.e., to facilitate the country's transition to a market economy in order to achievelong-term growth in a sustainable, non-inflationary environment. This approach is the mostappropriate strategy for achieving the ultimate objective of raising the living standards ofBulgaria's people. To pursue these goals, the Bank's assistance is designed to focus on fiveareas:

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i) facilitating the transition to a market economy and the expansion of private sectoractivity through structural reforms, primarily enterprise reformn (especiallyprivatization) and banking reform;

ii) supporting macroeconomic stabilization to lower inflation and sustain a viable balance-of-payments position;

iii) establishing financially viable and effective social sector policies and institutions,including a credible social safety net;

iv) rebuilding and rehabilitating Bulgaria's infrastructure and improving the environment;and

v) improving the effectiveness of Bank operations through improvements in publicadministration and project identification and preparation.

49. The Government's program is clearly aimed at furthering the first three objectives. Theproposed loan, by helping to build public confidence in the program, is also intended to furtherthese objectives, albeit indirectly. In addition, the proposed loan, through partially alleviatingshortages of some critical commodities needed by households for day-to-day living, goes someway towards directly supporting the third objective.

Loan Administration

50. Terms and Conditions. The proposed loan, in the amount of US$40 million equivalent,would be made to the Republic of Bulgaria for a period of twenty years, including a five-yeargrace period, at the Bank's single currency LIBOR based floating interest rates in US dollars.

51. Disbursement and Procurement. The Loan will be disbursed in one tranche uponeffectiveness. It will finance 100 percent of foreign expenditures associated with the reformprogram of the Government described in the Letter of Development Policy, except for itemsspecified in the negative list in Schedule I of the Loan Agreement. The total amount of the Loanwill be disbursed into a Ministry of Finance foreign exchange account with BNB especially setup for this purpose.

52. Accounts andAudit. BNB would maintain the account for the proposed Loan inaccordance with sound accounting practices. The Ministry of Finance will prepare a finalprogress report on the progress of the program six months after the closing date of the loan andsubmit the report to the Bank. The account and disbursements under the program may beaudited within six months from the end of the fiscal year by independent auditors acceptable tothe Bank. The audit report would be submitted to the Bank within six months from the end ofthe fiscal year.

53. EnvironmentalAssessmentRequirements. In accordance with the Bank's OperationalDirective on Environment Assessment (OD 4.01, Annex E), the proposed operation has beenplaced in category "C" and does not require an environmental assessment.

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Benefits and Risks

54. Benefits. The support from this operation for the initial phase of the reform programwould assist the Government to introduce its ambitious macroeconomic stabilization andrestructuring programs by helping reduce shortages of key commodities affecting the day-to-daylives of Bulgarian households. Timely implementation of the program is critical to arresting(and reversing) the country's deep economic crisis and to the restoration of domestic andinternational confidence in the country's economic management. The reform program isdesigned to reduce macroeconomic instability and to address deep-seated structural problems inthe enterprise and banking sectors, while ensuring the availability of a sustainable, targetedsafety net for the most vulnerable population groups. The restructuring of the state enterprisesector and the social protection system (especially old age pensions) would reduce fiscal deficitsand release resources to more productive purposes thereby enhancing overall economic growth.Improved viability of the banking system would re-establish a framework in which the privatesector investment can flourish.

55. Risks. Taking into account Bulgaria's history, there is always a risk that public proteststargeted at the entire reform effort or at specific measures will lead to political instability and,consequently, a change in Government's commitment to forging ahead with crucial (butnevertheless painful) reforms. This has occurred several times since the start of the transition inBulgaria, including most recently in late-1996 when the previous Government failed to carrythrough in a timely manner on fundamental reforms agreed with the IFIs, thereby substantiallydeepening the country's financial crisis and triggering the current broad, economic crisis. Threefactors do, however, suggest that there may be some reason to expect Bulgaria to remaincommitted to the current agreed program: (i) the depth of the current economic recession hasmeant more wide-spread understanding within the public of the need for reform; (ii) all themajor political parties in the country have publicly declared support for (or at least acceptanceof) the agreed program and its timely implementation; and (iii) the country is unlikely to receiveany major infusion of external funds from the IFIs and external donors until after the currencyboard arrangement is in place and fundamental structural reforms are accomplished, providing anincentive to keep the program on track.

56. A second risk to timely implementation of structural reforms derives from theGovernment's weak implementation capacity. The Government is cognizant of this risk and hasactively sought technical assistance from the Bank, IMF, EBRD, EU and USAID, among others,to assis in SOE restructuring, financial sector reform and the design of social protectionprograms. As described in paras. 79-81 below, substantial assistance is now being provided bydonors in each of these areas and should help reduce this risk.

IV. BANK OPERATIONS

Bank's Assistance Strategy

57. The Bank's assistance strategy for the 1997/early 1998 period derives from the CountryAssistance Strategy (CAS) discussed with the Board in April 1996 and the April 1997 CASProgress Report and anticipates a phased approach for Bank support: (i) a first phase of technicalassistance from the Bank, the IMF and other donors to help Government design an adequate andimplementable macroeconomic stabilization and structural reform program; (ii) a second phase

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involving rapid small-scale financial support (i.e, this proposed loan of US$40 million), with nonet increase in exposure to the Bank, upon adoption of a sound program by the Government(overall Bank commitments will not increase due to an agreement with Government to cancelpart of another loan which has been experiencing implementation problems); and, (iii) thirdly, amove to the CAS's high case scenario with support provided for two one-tranche Financial andEnterprise Sector Adjustment Loans (FESALs I and II) plus a two-tranche Social ProtectionAdjustment Loan (SPAL), totaling about US$250 million, upon actual implementation of keyreforms in accordance with a program agreed with the Bank. The first phase of this program isnow complete, with adoption by Government of a satisfactory program. The proposed CriticalImports Rehabilitation Loan presented here constitutes Phase II and recognizes the immediateneed to reduce shortages of key socially-important commodities. Preparations for FESALs I andII and the SPAL are underway and the operations will be presented to the Board after completionof key reform measures.

58. The Bank's assistance strategy is part of a concerted effort by the Bank, the IMF andother official donors to help the Government of Bulgaria deal with the current economic crisis.Both the IMF and European Union have pledged their support, and the IMF Board [approved] onApril 11, 1997 a package of support equivalent to about US$685 (at current exchange rates) for1997-98, including both a 14-month stand-by arrangement and a drawing under theCompensatory and Contingency Financing Facility (CCFF). Other donors, such as EBRD,USAID, and EU are also supporting the Government's efforts to restructure, close or privatizestate enterprises, to reform the banking sector, and to provide a viable safety net for Bulgaria'smost vulnerable households.

Portfolio Implementation

59. Bank commitments in Bulgaria total US$893 million as of March 31, 1997. The existinglending portfolio in Bulgaria consists of ten projects in the amount of US$447.3 million. Totalcumulative disbursements for all Bank loans total $476 million of which $375 million were forthe SAL and the DDSR. Only $71 million of the investment loans have been disbursed leavingan undisbursed balance of $376 million. Disbursements for FY96 total only US$15.7 million,yielding a disbursement ratio of 5 percent. Improvement in portfolio performance is a CAScondition for moving to the high case scenario for Bank lending to Bulgaria.

60. All projects in the portfolio will continue to be affected by the current macro situation inBulgaria. It is therefore unlikely that we will see much improvement in the overall performanceof the portfolio in FY97. However, some progress has occurred since the CPPR in April 1996.Power tariffs have been increased and a formula for automatic adjustments adopted. The WaterCompanies Restructuring project has been modified and a portion of the loan (about US$41million) was cancelled. The Bank has continued to press the Government for further action atevery occasion, but their attention is focused nearly exclusively on resolving the macro situation.In this context, the shortage of counterpart funds is becoming a constraint to the smoothimplementation of several of our projects, particularly in the infrastructure and health sectors.

61. With respect to meeting the benchmarks established under the CAS for portfolioimprovement, the situation is as follows. (i) improvement in the disbursement ratio to 8 percentis expected to be reached by the end of FY97 since large contracts have been signed in twoprojects which should lead to a substantial pick up in disbursements in the next few months. (ii)improvement in project implementation (by reducing the number of unsatisfactory ratings from 4

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to 3 projects in FY97) is likely to be achieved through cancellation of the remaining portions oftwo credit line operations whose performance has been consistently unsatisfactory due to thebanking crisis in Bulgaria.

Previous Adjustment Operations

62. A structural adjustment loan (SAL) in Bulgaria was approved in August 1991 andcompleted in October 1994. It was designed to support the ambitious and comprehensiveadjustment program initiated by a broad-based coalition government in February 1991. Thisadjustment program was intended to reverse the severe economic deterioration--rising inflation,declining GDP and growing extemal imbalances--that beset the country because of the politicalchanges that swept Bulgaria and the rest of eastem and central Europe in 1989. It was alsodesigned to help initiate the transition from a command economy to a market economy. TheSAL was part of a comprehensive package of international financial support for Bulgaria'sreform program. This support included an IMF stand-by arrangement and CCFF drawing andsubstantial balance of payments support from the EU/G-24, which included US$375 million inEU loan assistance and a US$100 million loan from the Export-Import Bank of Japan (JEXIM)as co-financing of the SAL.

63. The outcome of the SAL was satisfactory. The economy was extensively liberalized. Abasic legal and institutional framework for a market economy was established. A legal andinstitutional basis for transferring assets to the private sector was also established. Moreover,significant assets transfer occurred through the restitution of urban properties and agriculturalland, although progress to date in the privatization of state enterprises is disappointing. Externalimbalances were substantially reduced. Despite the favorable effect of the measures taken underthe SAL to reform the banking system and corporatize state enterprises, controlling fiscal andquasi-fiscal deficits still remain a major challenge to policymakers. The Government's failure toproceed with structural reforms in these key areas led to the present economic downturn, therebyeventually reversing some of the gains derived from the operation.

64. The Bank also extended a debt and debt service reduction loan (DDSR) to help thegovernment reduce its significant debt burden. This was achieved through three instruments: abuyback option, a 30-year discount bond, and an 18-year front-loaded interest reduction bond.The DDSR loan was designed to assist the government to finance a portion of the up-front costsof US$715 million of the DDSR agreement. The Bank's loan of US$125 million was part of ajoint effort with the IMF and the government of the Netherlands. The IMF provided anadditional US$101 million to the DDSR agreement. The Government of Netherlands alsoprovided 15 million guilders (about US$8.6 million). Official support for the DDSR agreementtotaled about US$241 million, leaving US$474 million to be financed from Bulgaria'sinternational reserves. Implementation of the DDSR was satisfactory. It was fully disbursed inone tranche in October 1994. The DDSR agreement was successfully completed in a relativelyshort time and has largely achieved its immediate objectives. However, the window ofopportunity afforded by the loan to place Bulgaria's economy on a long term sustainable growthpath was not adequately utilized by the Government which, as previously mentioned, did notpursue fundamental reforms in a timely manner.

65. In August 1996, the Board approved a one-tranche rehabilitation loan to Bulgaria aimedat facilitating and accelerating enterprise reform by partially addressing the immediate adverseimpact on workers laid off as a result of restructuring, privatization or liquidation of state

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enterprises (through the provision of severance payments). The loan was disbursed in a singletranche in November 1996 and counterpart funds used to set up a fund for the compensation ofdisplaced workers. Availability of the funds clearly did facilitate the closure of the 42 SOEswhich were liquidated in the latter part of 1996 (para. 10) and remaining funds will be used tocover severance payments for workers still to be laid-off as SOE restructuring proceeds. In thissense, the loan achieved its immediate objective of facilitating SOE reform, although it did notaccelerate the enterprise reform effort sufficiently enough to avert the escalation of the bankingcrisis and the deep economic crisis in which the country is still mired.

Creditworthiness

66. Despite the completion of the 1994 DDSR operation, Bulgaria's debt indicators and thecountry's overall debt burden remains high. Total medium and long term debt at end-1996 wasestimated as US$9.2 billion (97 percent of GDP), compared to US$12.1 billion at end-1992 (143percent of GDP). The debt service ratio constitutes one fifth of the country's export earnings.Also, the debt-to-export ratio remains relatively high, about 151 percent at end- 1996.

67. Medium term projections suggest a manageable debt service level--as long as theGovernment proceeds with fundamental structural reforms and accelerates the process ofprivatization. Under this scenario, the debt service as a percentage of export earnings (liquidityratio) would reach 15 percent by the end of the decade and would continue to fall further,reaching 10 percent by the year 2005. These projected ratios are well below the 25 percentthreshold level for sustainability. The IBRD liquidity ratio is very small - about 1.0 percent in1996, rising to 1.6 percent in 2000--and will remain under 1.6 percent for the next decade. Withthe exception of the preferred creditor ratio which exceeds the Bank's guidelines of 35 percentduring the period 1999 to 2002, Bulgaria's exposure indicators would remain comfortably withinthe Bank's guidelines. Overall, Bulgaria's creditworthiness has improved with the recentimprovement in the political environment and the recent changes in economic policy. However,the country remains highly vulnerable to the risks of political instability, stalling of economicreforms and a consequent shortfall in anticipated external support (paras. 47 and 55).

68. A predictable but worrisome by-product of the DDSR operation is the highly inflexibledebt service, that persists over the medium term. Inflexible debt service payments constituteabout 75 percent of total debt service. Thus, if debt service difficulties do arise, options forrestructuring debt will be constrained. In any case, the likelihood of debt servicing difficulties tothe IBRD is relatively low. The IBRD debt service constitutes about 12 percent of totalinflexible debt service in 1997. This ratio is expected to rise to about 16 percent by end-2003.However, the Government remains committed to its debt service payments.

Role of IFC, MIGA and FIAS

69. IFC's objective in Bulgaria is to support the development of private sector activities in amanner consistent with the World Bank's priorities in Bulgaria. In the past, IFC has pursuedpotential projects in Bulgaria in the areas of agribusiness, infrastructure, tourism and capitalmarkets. However, owing to limited foreign direct investment, lack of investor confidence,delays in large-scale privatization, and serious macroeconomic instability, the environment forpromoting private sector activities has been difficult. To date, IFC has approved four projects inBulgaria.

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70. IFC's first investment in Bulgaria, the EuroMerchant Balkan Fund (IFC/R94-95), is aregional investment fund. The Fund closed in December 1994 with a subscribed capital ofUS$27.3 million, of which IFC has committed to invest up to US$5 million. So far, the Fund hasapproved seven investments totaling US$13.1 million, of which four investments totalingUS$8.1 million are in Bulgaria.

71. In May 1996, IFC approved a medium-term loan of US$3.5 million and an equityinvestment of US$0.4 million in Interlease Inc. (IFC/R96-93). Interlease grants financial leasesfor productive equipment to private companies.

72. In August 1996, IFC approved an investment (US$1.8 million) through the CentralEurope Telecommunications Agency Line (CETAL) (IFC/R95-9) in Radio TelecommunicationsCompany Ltd. (RTC), a Bulgarian cellular telecommunications company. However, IFC hasrecently canceled the CETAL line and will therefore not make an investment in RTC throughCETAL. Nevertheless, IFC is considering making a direct investment in RTC.

73. In March 1997, IFC approved an investment in Sofia Hilton, a new 256 room first classhotel to be constructed near the center of Sofia. IFC is providing US$22.3 million in long termloans comprised of: (i) a senior "A" loan (for IFC's account) of up to US$10.8 million; (ii) asenior "B" loan (for the account of participants) of up to US$9.5 million; and (iii) a subordinatedloan (for IFC's own account ) of up to US$2.0 million.

74. The Foreign Investment Advisory Service (FIAS) has been assisting the ForeignInvestment Agency (FIA) in the Ministry of Economic Cooperation and Development. In FY94,FIAS conducted a diagnostic study of the environment for foreign direct investment in Bulgaria.This was followed in FY95 with technical discussions about the establishment of a national FDIstatistical system. In FY96, FIAS advised the Government on means of reducing obstacles to theformation of joint ventures between foreign investors and state-owned enterprises.

75. Bulgaria became a member of MIGA in 1992. MIGA has issued seven contracts ofguarantee for four projects in the manufacturing and financial sectors. More particularly,MIGA's action in the financial sector involved the issuance of coverage to BNP bank for itsstart-up equity investment in BNP-Dresdner Bank (Bulgaria), and to ING Bank for itsshareholder loan to its Bulgarian branch. In addition, MIGA issued guarantees for a smallinvestment in an industrial equipment dealership, and for Rovers investment in an auto assemblyproject. To date, MIGA has registered six other projects in Bulgaria, representing an aggregatepotential investment amount of US$190 million. MIGA has also concluded a Legal ProtectionAgreement and a Use of Local Currency Agreement with the Government of Bulgaria.

V. COORDINATION WITH OTHER MULTILATERAL INSTITUTIONS ANDOFFICIAL DONORS

76. The Bank has worked closely with the IMF in assisting the Government to design themacrostabilization and structural reforms program underlying the proposed loan. The IMFStandby Arrangement is predicated on a successful program of structural reforms, supported bythe Bank. Conversely, Bank support requires a sound macroeconomic program, based on anagreement reached with the Fund. The Fund is relying on the Bank to help the Government

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implement its enterprise reform program and both institutions are providing technical support indealing with the current banking crisis.

77. In addition, several other Multilateral Organizations and official donors have expressedtheir readiness to mobilize additional resources to support the Government's structural reformprogram. The European Bank for Reconstruction and Development (EBRD), the EuropeanInvestment Bank (EIB), the European Union (EU) and USAID are currently supporting majorinvestments in Bulgaria. The EBRD has been providing technical assistance in arestructuring/recapilization operation in the banking sector and is ready to intervene directly asan investor, once the banking sector reform program has been agreed and is underimplementation. Other donor support is of two kinds: technical assistance for enterpriserestructuring and social protection programs.

78. Donor-assisted programs are already in place to provide technical support to theenterprises affected by the Government reform program. EU-PHARE is ready to provide astructural assistance reform package (MECU 15-20) in 1997 to provide grant funding in supportof the structural reforms to be financed under the IMF and World Bank programs. USAIDprogram has already provided approximately US$300,000 to finance support for closures of non-viable enterprises or the restructuring of viable enterprises. An on-going USAID program forUS$7.0 million is available over several years to facilitate reforms in the banking sector and inthe privatization of SOEs. These funds could also be made available for the privatization ofbanks once the program is underway. In developing the proposed program to supportimplementation of the state economic enterprise reform the Bank has worked closely with theGovernment and other donors, in particular EU-PHARE and USAID.

79. Donors are also providing financing for social protection including social assistance,labor market programs and pensions. Among the effforts underway are (i) an enhanced utilityvoucher program targeted to poor households which is receiving EU support in the amount of 20million ECU; (ii) USAID support of US$55 million for a small- and micro-enterprisedevelopment credit fund; (iii) EU-PHARE support for small business assistance centers in twocities with a plan for replication on four of five other locations; (iv) the ILO/UNDP and DutchGovernment provision of US$0.5 million to assist regional economic development and reducepressure in regions that are particularly affected b the Government's reform program; (v) USAIDprovision of financing for an employment services and dislocated workers program; and (vi)German Government, ILO, USAID and World Bank support for pension administration andpolicy development.

80. A Joint G24/Consultative Group Meeting was organized under the chairmanship of theEuropean Commission and the World Bank to seek international financial assistance to supportthe government's Stabilization Program to be financed under the IMF Stand-By and theintroduction of the currency board. The meeting was successful in mobilizing donor support forthese objectives and pledged a total financial assistance package of about US$400 millionequivalent for 1997, excluding IMF and Bank support.

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VI. RECOMMENDATION

81. 1 am satisfied that the proposed Critical Imports Rehabilitation Loan would comply withthe Articles of Agreement of the International Bank for Reconstruction and Development and Irecommend that the Executive Directors approve it.

James D. WolfensohnPresident

by Caio K. Koch-Weser

Washington, D.C.April21, 1997

Annex I

BULGARJIA Page I of 8

CRITICAL IMPORTS REHABILITATION LOAN

LETTER OF DEVELOPMENT POLICY

April 21, 1997

Mr. James D. WolfensohnPresidentThe World Bank1818 H Street, N.W.Washington D.C., 20 433U.S.A.

Dear Mr. Wolfensohn:

This Letter of Development Policy describes the efforts being made by theGovemrnment of Bulgaria to deal with the deep economic crisis in the country and themeasures being taken to implement a stabilization and reform program aimed at re-establishing economic growth and external viability. The program outlined in this letterwas developed by the current interim govemrnment, and has been discussed and agreed inppnnciple with the staff of the International Monetary Fund and the World Bank. Theprograrn has also received the support of the political parties in the country, which signeda joint declaration stating their willingness to work towards the passage of all lawsrequired for the success of the program, once the new Parliament is in place. Hence, theprogram is expected to be filly pursued by the new govemmcnt once in office.

The objectives of the program are first to manage the emergency situationprevailing in the country, and second to begin setting the basis for a broader program ofreforms to be pursued by the new govemment following the elections. The most pressingneeds, in the midst of the current crisis, is to secure sufficient critical imports, especiallyof grains, medicine and fuel. As described below, the interim Govenirnent has alreadytaken some important measures to arrest the crisis. In this context, the Government ofBulgaria is requesting the World Bank's financial assistance, in the form of this CriticalImports Rehabilitation Loan, to support our efforts through the current crisis before ourinitial policies begin to show results.

Annex IBackgrsud Page 2 of 8

Bulgaria is the midst of a major economic crisis. The crisis was due to manycauses. but it can be attributed primarily to the failure by successive governments tocurtail the losses of state-owned enterprises and to prevent the continued fmancing ofthese losses by the banking sector. The monetization of such losses eventually led to adrastic decline in real money demand, a large outflow of capital, a sharp depreciation ofthe domestic currency and galloping inflation. The depth of the financial crisis wasreflected in the recent economic performance: real GDP declined by an estimated 9percent and foreign trade volumes fell by about 13 percent in 1996.

The social dimensions of the economic crisis became quite severe and contributedto the poiitical changes that have recently taken place. The previous Cabinet resignedprimarily because of the growing dissatisfaction with the worsening economic conditionsand the inadequacy of economic poJicy The political crisis was adroitly handled by thePresident of the Republic, who dirccted the fornation of the interim Govermenrt, whichwill remain in office until the newlv elected Government is formed, most likely in earlyMay.

RecentMeasures

The intenrm Government. upon taking office in February, has taken a series ofimportant measures to arrest the crisis and has begun to set the stage for a morefundamental program of stabilization and structural reform. The first efforts haveconcentrated on securing the wheat and fuel supplies of the country through emergencyimnports.

A fundanental cause of grain shortage was the price and other market controlswhich the previous government had imposed on agriculture. Therefore, to allow thismarket to start to work and make available supplies of grain and other agriculturalproducts. the Government has liberalized the wholesale prices domestic producers canreceive. The Government has also established by decree that it will sell the importsdomestically at USS160 per ton and maintain the price at least at 85 percent of thecomparative interrational prices. Until recently, the state entities were selling at 50percent of intemational prices, thus undermining domestic producers of grain and leadingto smuggling of supplies across the borders.

To improve conditions in other critical areas of the economy and to deal with thelarge problem of losses being incurred by the public utilities, the government hasincreased substantially the prices of petroleum derivatives, electricity, coal, districtheating, public transportation, and water, bringing the prices to or close to internationallevels and to cover costs (except for explicitly budgeted subsidies for district heating andpublic transport). Along with the adjustment in the releconumunications tariffs in M4arch,we have selected a privatization adviser for the privatization of Lhe BulgarianTelecommunications Company and we have announced our willingness to offer at least

Annex IPage 3 of 8

50 percent of the shares of the company for saie. although the final decision will be madeon the basis of the recommendations of the privatization adviser following its analysis ofthe maximum value that can be obtained. The Goverunent is also in the process of hiringintemational privatization agents to handle the sale of at least 30 of the largest enterprisesin the country.

Finally, one of the most important actions taken by the interim Government hasbeen the adoption of an economic program that has received the support of theInternational Financial Institutions (IFIs). The program was developed by several policyworking groups under the tutelage of the Financial Stabilization Council, headed by thePrime Minister, and the Structural Reform Council, led by the Deputy Prime Minister(also the Minister of industry). The main components of the program include: (i) theadoption of a budget that eliminates the need for central bank credit; (ii) the introductionof a currency board arrangement (CBA) in mid-1997; (iii) banking scctor reform.including the privatization of state banks; (iv) enterprise sector reforms through closure ofnon-viable state enterprises, an accelerated program of privatization, cost cuttingmeasures. and tariff adjustrnent for public utilities; (v) price and trade liberalizationLespecially in the agricultural sector. along with land reform; and (vi) improvement of thesocial safety net through a consolidation of programs and better targeting.

Macroeconumic Prgram

The most important element of the macroeconomic stabilization program will bethe introduction of a currency board arrangement. The objective of the currency boardarrangement is to introduce a credible arrangement that will reduce inflation byeliminating discretion in monetary policy. Central to its success will be the enforcementof financial discipline at the highest levels of the financial system with the expectationthat such discipline will permeate to the other levcls of the economy. We see the coreattaction of the currency board arrangement as a symbol of our commitment to lastingstabilization and to lasting enforcement of hard budget constraints throughout theeconomy. The arrangement will allow us to avoid repeating the history of earlystabilization gains being overtaken by ensuing laxity.

Fiscal Policy To prepare for the currency board arrangement, we arcimplementing a budget for the remainder of 1997 that eliminates the need for central bankcredit. This will require an overall deficit of no more than 3.8 percent of GDP for theconsolidated government in 1997. as compared to an overall deficit of 10.9 percent ofGDP in 1996. rhe decline in the budget deficit is more than accounted for by theprojected decline in domestic interest payments. Achievement of our financingobjectives will depend crucially upon privatization receipts. An ambitious aadstrengthened privatization program will seek to ensure that the projected amounts ofprivatization proceeds are forthcoming. Even so, Bulgaria still needs a considerableamount of extemal financing.

Annex IPage 4 of 8

The main initiatives to strengthen revenue coilections entail improvements inmany areas of tax administration. These include, in particular, establishing a large-taxpayers' unit to closely track some 500 taxpayers that accournt for over 50 percent ofrevenues, raising the VAT threshold and de-registering tax payers below that threshold toreduce fraudulent refund claims. and increasing the penalties and interest on overdue taxliabilities Controi of non-interest expenditures will be achieved primarily through arationalization of programs and a reduction in public employment by 10 percent of thework force. In particular. the social safety net programs will be consolidated and bettertargeted through improved means testing, and the level of subsidies. especially toagriculture, have been set within strict limits.

Monetary Policy With the removal of the need to finance the budget, monctarypolicy will be unburdened and efforts will be concentrated on preparing for theintroduction of the currency board arrangement. The central bank is winding down itsreverse repurchasing agreements on government securities. It has liberalized the basicinterest rate by linking it to the averagc yield in the auctions for 7 day treasury biUs. Theexchange rate will be managed so as to avoid a further appreciation of the currency fromthe levels that prevailed in mid-March. Otherwise, until the introduction of the CBA.monetary policy will be guided by monthly targets. especially those for central bank netdomestic assets.

Structural Reforms

Structural reforms are critical for the success of the government's program. Werecognize the importancc of establishing a fundamental break from past practices, andhave committed to introduce a significant program of reforms. The program focuses onthree important areas: privatization of state owned enterpnses and commercial banks,liberalization of prices and trade, and reforming the social safety neL in order to provideadequate protection for the most vulnerable segment of the population.

Enterprise Sector Privatization and enterprise reform are at the core of thestructural progra.L The govemment realizes the need to move aggressively with anexpanded privatization program for both budgetary and efficiency reasons. The fmancingof the macroeconomic program for 1997 depends crucially on privatization proceeds. Inaddition, the privatizauion program is key to the resumption of economic growth, toattracting much needed foreign investment, and to improving corporate governance andthe efficiency of the enterprise sector in Bulgaria. It will also depoliticize markets andthe relationship bcnween banks and enrcrprises.

The targets for cash privatization for 1997 ranges between USS300 to US$350million, with all received cash to be transferred to the budget. The completion of the cashpnvauization along with the mass privaLizaTion program will mean that by the end of1997, 40 percent of the long term assets of state-owned enterprises will have been sold.In order to meet these targets, all state owned enterprises have been made available forprivatization, with the exception of a limited number of enterprises identified in a

Annex IPage 5 of 8

negative list. Any offer received from a buyer automatically triggers the opening of theprivatization procedure. Thec responsibility for restructuring enterprises will be left totheir new prvate owners. The Government will focus on making the privatizationprocess competitive and transparent. Also, a special effort is being made to developpublic understanding of and support for our privatizaion policy.

Some of the state-owned enterprises cannot be privatized in the near future eitherbecause they are incurring large losses, are not viable after the collapse of the CMEAtrading arrangement or because they are large public utilities. To deal with the acuteproblem of state enterprise losses in these arcas, the Government is procceding on a twotrack approach. We are closing down those enterprises that are not viable through theprocess of bankruptcy procedures, and we are adjusting public utility tariffs in real termsin order to cover their costs. Financial Recovery Plans have also been prepared for manyof these enterprise with the aim of reducing costs.

The Govemment is committed to eliminating the losses in the public enterprisesector by closing down the loss-making enterprises. By mid-1997, the closure ofenterprises which contributed at least 28 percent of the SOE losses in 1995, will becompleted. Sale of their assets will be initiated immediately after the closure is effective.In addition, those commercial enterprises which had been formerly placed in theisolation program, and which have proved not to bc viable candidates for privatiza=ion.will be put in liquidation.

To deal with the problem of losses being incurred by the public utilities, theGovernment will maintain administered prices at levels that ensure cost recovery in eachsector. We have already adjusted the prices in the electricity, natural gas. liquid fuels,water and teleconmunications sectors aiid no subsidies to thesc utilities will benecessary. The administered prices for household heating and Lransportation are beingraised, but full cost recovery is not anticipated and subsidies to cover the gap havealready been included in the budget. In addition, the utilities will implement themeasures agreed under their restructunng plans in order to reduce their costs. Finally,strict financial discipline will be imposed: utilities have been required to suspend serviceto delinquent customers.

Banking Sector The Governent is committed to taking a number of legal,regulatory and policy measures to strengthen the banking sector and to boost confidencein the credibility of convertibility under a currency board arrangement. We are convincedthat the privatization of the public sector banks to fit and proper investors is the surestway to instill confidence and import sound banking practices.

All legislative and regulatory impediments to privatization of banks will beremoved. Foreign currency denomination of share capital will be permitted, andurLrealized capital gains from asset revaluation will be exempted from taxation. We havecontracted an experienced privatization adviser for the Bank Consolidation Company, theGovernment's bank holding agency, to carry out the preparalory work for and assist in

Annex 1Page 6 of 8

the privanntion of public sector banks. We will announce in the intemational media theGoverrnents intention to privatize public sector banks or to enter into managementcontracts with reputable foreign banks, and will initiate an intensivc search for strategicinvestors. We expect that by the end of 1997. at least two privatization transactions willhave been concluded, and two more banks will have entered into management contractarrangements with reputable banks.

Although our expenrence shows that many of the private banks behavedirresponsibly owing to moral hazard, we agree that Lhe lcsson from the crisis is that onlyhonafide bankers should be licensed, that private owners of banks must put in sufficientcash as capital, and that supervision must be prompt and vigorous. To this end, we willamend the relevant banking laws and regulations to rationalize bank licensing, penaltiesfor regulatory non-compliance, and to provide independent authority to the DeputyGovemor of the central banak responsible for banking supervision. Capital adequacyrequirement will be tightened, with all banks achieving a capital adequacy ratio of at least12% by mid-1999. To improve the effectiveness of banking supervision. a number ofresident foreign banking supervisors will be contracted and joint on-site inspection teamswill be formed. A new Law of Bank Insolvency is to be passed to facilitate the closure ofinsolvent banks.

In the near term, the Government will ensure that no insolvent or illiquid bankswill be operating at the time of the introduction of the currency board arrangement. rfany state owned bank currently experiencing difficulties requires recapitalization to meetthe liquidity and solvency standards, this will be done without resort to central bankfinancing, and only in the context of the privatization of the bank, or of its enlering into amanagement contract with a foreign bank. To enhance the liquidity of banks' assets.restrictions on the trading of ZUNK bonds (originally issued to recapitalize banks) havebeen reduced, and are to be gradually eliminated.

Agricultural Sector In the agricultural sector, the Government recognizes theurgent need to proceed rapidly with the liberalization of the sector and to accelerate theland reform and titling in order to improve the prospects for increased production. Themain policy objectives are to create a competitive market-based and export-orientedagriculture and food industry. To achieve these goals it will be essential over time toremove a number of barriers faced by the sector, such as price controls, profit margincontrols, trade restrictions, poor land titling, and the dominating presence of statecontrolled institutions and reserves.

As noted above. the Government has already liberalized the wholesale prices ofwheat and other agricultural products. In the area of pricing and trade policy. theGovernment will eliminate the system of controls on profit margins of agricultural andfood products. and eliminate import quota and duties on cereals and cereal products, byend-May. By mid-1997, the Govemment will eliminate all export bans (with no exporttax to be introduccd) and liberalize fully the prices of cereals and cereal products, removeany non-tariff barriers against the import and export of agriculturai inputs such as

Annex IPage 7 of 8

fertilizers, and abolish any direct and indirect subsidies to prices of wheat. wheat flour,bread and other cereal products. This should re-establish farmers' confidence that for thenext crop they will be able to receive comparable export market prices. To promoteforeign trade, we also plan to eliminatc import and export adnministrative constraints suchas licensing/registration, with a few exceptions including ex ante licensing for healLh andsafety reasons. and ex post licensing for statistical purposes.

Due to the critical Jack of supplies of cereals and cereal products brought on bythe policies of the prcvious Government (along with adverse weather conditions). thecurrent Government has had to arrange, on an emergency basis, for the purchase of wheatand wheat products this spring. It is anticipated that a toLal of perhaps 450.000 tons ofwhcat or wheat flour will need to be imported under these conditions, with a total valueof roughly $80 million. This whcat is being purchased largely through competitivebidding procedures, which have been worked out with the World Bank, or tlroughbilateral arrangements with other Governments. The domestic sale of this wheat will beat a price of $160 per ton, or at least 85% of intemational equivalent prices (up from only50% previously), but in the future, and as part of the liberalization of domestic prices foragricultural products described above, the Governrnent intends to use auction proceduresfor the sale of such commodities.

The liberalization of agriculture will be accompanied by the legal changes thatwill reduce complex regulations and will facilitate leasing arrangements. titling, andoccupation rights. The ban on foreign ownership of land will be revised. Additionally,the Govemnment is committed to promoting competition by privatizing all state mills andthe 26 state trading companies by end- 1997.

Social Protection The structural reform program, and in particular enterpriserestructuring, tariff adjustments and price increases, will adversely impact thesocioeconomic status of many groups, especially the relatively poor. The Government iscommitted to reforming its social protection programs to ensure an adequate safety netfor the population with the following aims: i) ensuring adequate protection of the mostvulnerable groups through improved targeting and setting of meaningful bcnefit levels, ii)ensuring the mediumn- and longer-run fiscal sustainability of the social protection system;iii) and increasing fiscal transparency and substantially reducing duplication andfragmentation among overlapping social protection programs.

T1he most direct short-term measures will address [he recent erosion of rcalincomes as a result of high inflation by progressively increasing the average wage in thebudget sector from US $20 to US$65 and average pensions from US$10 to US$34 by thesecond half of 1997. In addition. severance payments to workers laid-off from theenterprise sector will be continued with adequate provisions in the budgeLt and expandedto cover redundancies in the budget sector.

Longer term measures are aimed at improving the targeting, effectiveness andsustainability of the social protection system. In the next few months we will, inter alia.

Annex IPage 8 of 8

establish a better largeted, consoiidated, and adcquately funrdecd two-tier ininimum incomeprogramn (MlGP'); aid improve tageting of chlild killowanccs, medical support programsand ireltemity assistulncc to uninsured iuothers. In order to incrcase fiscal transparency,sustainabiliLy and targeting of the pcisiun system. the GCoverluncmt will prepare u I1cw

pension law for thc pay. as-you-gu (PAYO) plnsion system, witli prcivisions to clininatenmost curly retirement categorics, phase itn lhigher rctirement agc,s revise the; benetlformula, and aesablish targets ior the gr4dual rcduction of pensiow Laxes. Additioially, toraduoe employment disiwiulLivcs and labor mlariket distortions futhier. thc Ciovernmcntwill decrease payroll taxces ior uncnployment fromii 5 to 3 percent.

Concluji1

Thc (uovurnment of Bulgaria believes that thc economic program beingintroduced is anmbitious and comprehensive. It rcpresents an attenmpi to break with thc

past policy patlerns, whichi have beci hesitant and limliited. Wc are conlident that theproLgram will bc carried out according to the timnctable outlined by the (Government in itsdiscussions with thc IFJs.

=1o support the initlal piluse of the stabilization and reform program as desciibedabove, the CGovcrmlnenit requests the World Banik's financial assistance, in the form olthis Critical limports Rehabilitation Loan. 'flic proceeds of the loan will support our 1997budget and facilitate the irnucdiate import of socially important goods (such as,medicines, agricultural inputs, wheat, fuel oil, etc.) wliich aru currently in very shortsupply. The availability of such goods will easc some of the immcdiate pressures

confronting the liulgarian population. Tlc 1997 consolidaLted general government budgetmakes explicit provision for procurement of these critical socially inipoutanti

conumcodifics. At least $22 million equivalent haS beci allocated in the budget for

purchlascs of IiulvicilneS, including essential drugs and vtccincs, and about $20 milliornequivalent will Ne used to clear past arrcars. This will ensure suificienlt flows of nlew

supplics to iieet hospital and clinic requirements, anid all necessary adnmiinistrative steps

will he takeln to ensute lthe medical supplies arc in flact provided to the hospitals and

cliiics. We also intend to achievc greater cfficiencv in tlec purcliase of all these

collirriodities and mcdicines dirough the use of cosL eifectivc and iranisparclt procuremncit

procedures.Sinicerely yours.

Svetuslav (iavriiskyMinistei ofrFinzwic:Republic c-f BuIguJit

Annex 2Page 1 of 5

BULGARIA: CRITICAL IMPORTS REHABILITATION LOANGovernment's Action Plan

POLICY AREA | OBJECTIVES MEASURES TAKEN FUTURE POLICY ACTIONS

I. Macroeconomic Re-establish macroeconomic stability A program of measures to stabilize the economy, Maintain a sustainable fiscal and externalProgram and restore economic growth. arrest the decline in confidence and accelerate positions

the process of reforrns was agreed with the IMFin March 1997.

a) Fiscal Policy - Reduce budget deficit from 11 % of - Accelerate cash privatization.GDP in 1996 to 3.8% in 1997 and - Strengthen revenue collection by establishing aeliminate the need for central bank large-taxpayers unit, raising VAT threshold, andcredit. increase penalties and interest on overdue tax

liabilities.- Control non-interest expenditure by rationalizing

programs and reducing public employment by 10percent of work force.

b) Monetary & - Restore confidence in the domestic - Linked the determination of basic Central Bank - Establish a currency board arrangement.Exchange Rate currency and lower the rate of interest rate to the market yields of TBills.Policies inflation. - Eliminated unsecured refinancing to weak

banks.

- Observed strict limits on the creation of netdomestic assets.

II. Enterprise Reform Accelerate privatization and strengthenfinancial discipline in SOEs.

a) Privatization - Accelerate drastically the privatization - Privatized 5 percent of the state owned assets - Privatize SOEs accounting for at least 40 percentof SOEs to transfer ownership, through cash-based programs and another 13 of total SOE long term assets (as of Decembergovernance and management percent through voucher based programs. 1995) by end 1997.responsibilities to private operators. - International privatization agent appointed for - Offer for sale BTC.This is the overriding priority of the the privatization of BTC.program.

b) Liquidation - Reduce upfront 28 percent of the SOE - Closed 30 and privatized 11 out of the original - Close or privatize by mid-1997 enterprises thatsector losses in 1995. list of 64 SOEs. contributed at least 28% of SOE losses in 1995.

- Effective sale by end-1997 of at least 50% of thel______________________________________________ long term assets of the closed enterprises.

Annex 2Page 2 of 5

POLICY AREA OBJECTIVES MEASURES TAKEN FUTURE POLICY ACTIONS

c) Isolation - Reduce upfront 50 percent of the SOE - Isolated the enterprises from the banking - Approve and implement Financial Recoverysector losses in 1995. system. Plans.

- Prepared Financial Recovery Plans. - Privatize or liquidate all enterprises which are- Increased administered prices of water, coal, not utilities or mines.

heating for industries, electricity, natural gas, - Maintain revenues of the utilities (includingliquid fuels, and telecommunications to cover budgeted subsidies) to cover at a minimum theircosts. operating and financial expenses.

- Increased prices of household heating andtransportation and budgeted subsidies.

d) Financial Discipline - Restore financial discipline and ensure - Require utilities to suspend service to enterprisesthat utilities are effectively collecting in arrears.their accounts receivable.

III. Banking Sector Re-establish the soundness of theReforms banking system through a program of

privatization and strengthening the roleof regulation and supervision.

a) Legal and regulatory - Strengthen the legal and regulatory - Amend the Law on Banks and Credit Activity;framework framework to facilitate privatization Enact a Law on Bank Insolvency.

and promote sound banking practices. - Amend the Commercial Code, the Tax Law andrelated laws/regulations to facilitate foreigninvestment in the banking sector.

- Raise the requirement of capital adequacy to12% and revise other banking regulations toreflect international standards.

- Introduce international bank accounting standards(IAS) and disclosure standards, and startimplementation.

- Enact a new Deposit Insurance Law acceptableto the Bank/IMF.

b) Banking supervision - Enhance BNB's authority and - Signed Memorandum of Understanding with 18 - Contract four residential international bankingeffectiveness in enforcing the legal banks which outlined targets for loan recovery supervisors and form joint on-site inspectionand regulatory framework. and cost cutting measures. teams.

- Placed 15 banks in conservatorship and filed for - Adopt a banking supervision program acceptablel________________________ ______________________________________ bankruptcy against these banks. to the Bank/IMF and initiate its implementation.

Annex 2Page 3 of 5

POLICY AREA | OBJECTIVES MEASURES TAKEN FUTURE POLICY ACTIONS

c) Privatization of - Improve the governance of the PSBs - Adopted a privatization strategy for BCC. - Announce in the international media thepublic sector by changing their ownership and/or - Appointed privatization adviser to BCC. Government's intention to privatize all PSBs orbanks (PSBs). control. - Started due diligence review. to enter into management contracts with

reputable banks. Initiate an intensive search forstrategic investors.

- Conclude by end-1997 four transactions, ofwhich at least two are privatizations.

IV. Agricultural Sector Create a compehtive market-based andLiberalization export-oriented agriculture andfood

industry.

- Increased the sale price of wheat by state - Eliminate the system of controls on profitentities to $160 per ton, and maintain the price margins of agricultural and food products byat at least 85% of international price CIF Sofia. end-May.

- Started using competitive bidding procedures - Eliminate by end-May import quota and dutiesfor the emergency Government purchases of on cereals and cereal products.wheat this spring. - Eliminate all export bans by mid-1997 (no export

tax to be introduced).- Liberalize the sale prices of cereals and other

cereal products by mid-1997.- Remove non-tariff barriers against import and

export of fertilizers by mid-1997.- Abolish any direct or indirect subsidies to prices

of wheat, wheat flour, bread and other cerealproducts by mid-1997.

- Eliminate import and export administrativeconstraints.

- Use open and transparent auctions for the sale ofGovermnent-procured supplies of cereals.

-Submit a new law to Parliament in July tofacilitate privatization of state-owned land,revamp the regulations for leasing, titling, andoccupation rights, and revise the ban on foreignland ownership.

- Offer for sale all state mills and the 26 statetrading companies by end-1997.

Annex 2Page 4 of 5

POLICY AREA | OBJECTIVES | MEASURES TAKEN FUTURE POLICY ACTIONS

V. Social Protection Increase effectiveness, efficiency,Reform transparency and sustainability of social

protection programs

Assistance Improve targeting of programs to - Revised benefit coefficients to increase - Establish a consolidated two-tier MIGP (utility

a) Socia sslstane provide adequate protection to assistance to children in poor households voucher and cash benefit)

vulnerable groups at affordable cost. supported by the minimum income guarantee - Set up matching fund scheme for MIGPprogram (MIGP) - Improve targeting of child allowances, medical

- Set up temporary utility voucher program for support programs and maternity assistance.poor households and benefit ievels raised since - Eliminate payment of untargeted social3/97 assistance through insurance funds

- Provide sufficient quality of social - Augmented temporarily resources for social - Involve NGOs in services and recentralizecare services care institutions via EU supplement. financing for intermunicipal institutions.

b) Severance Pay - Protect workers laid-off under - Introduced severance benefit scheme for laid- - Extend program to cover budgetary sectorstructural reform program off SOE workers employees

c) Pensions - Increase fiscal transparency, - Separated pension fund from budget - Establish one-month reserve fund for PAYGsustainabilitv and targeting of the - Made legal provision for transparent budget pension schemepension system subsidy for non-insurance expenses - Comply with legal provision for budget subsidy

- Adopted program for improved payroll tax to cover non-insurance expensesadministration and tracking of individual - Cease financing of recreational facilitiesrecords. - Enact new PAYG pension law to:

- Changed benefit formula to require extended (a) eliminate most early-retirement categoriescontribution period for full pension (b) phase in later pensionable age

- Raised mandatory retirement age by 3 years (c) introduce actuarially sound benefit formula- Introduced employee contribution. (d) establish targets for gradual reduction of

pension payroll taxes- Prepare legislation for voluntary, private

pension and funded occupational schemes.

d) Unemployment - Reduced unemployment fund payroll tax from - Further reduce payroll tax rate from 5% to 3%7% to 5% - extend contribution period for benefit eligibility

- change the benefit formula to reduce workdisincentives.

- eliminate ineffective active labor programs andstrengthen job information services.

Annex 2Page 5 of 5

POLICY AREA 1OBJECTIVES MEASURES TAKEN |_FUTURE POLICY ACTIONS

e) Supply of medicines - Ensure adequate supplies in 1997 of - Made adequate budgetary allocation to clear - Take all necessary administrative steps to ensure

medicines to hospitals and clinics. arrears of Government to domestic that medical supplies are in fact provided to

pharmaceutical suppliers (approximately $20 hospitals and clinics.

million equivalent) and to ensure adequatepurchase of supplies in 1997 (at least $22million equivalent).

April 15, 1997

Annex 3Page 1 of 2

Bulgaria at a glancePOVErTY and SOCIAL Cenral& mkddle-

Bulgaria AIsl Income Development diamond'

Population mid-190 (nilWon) 84 48& 1,154GNP per capIta 19M (USS) 1,340 2,240 13700 Life especlancyGNP 1906 (bnA*USI) liz 1,003 1,961

Averag annual growth, 111110046111

Population M_) .0.7 0.411 1.4Iabofoce M) 4.8. O.'s GNP 1vGross

Most rewt OdWMe 05AW availale 3tnc 1090)per pdmaryMost recent estimate ata.t~~uerawllahde s/nce 1909) capita enrollment

POvedTi* headoorut htAr (Kofpoputation):Urban popuAltiont (K atot paWp-li) 71 sUto c dny et blt*j"ar) 7 8Ifian Morlstty roOO.: # birts) 1S :23 3 Acs osf ae

dhorndmalutition (K o(clikien wnder5) cnet af aeAccees to softewed(w d% popule#nj) 1078Illieracy (K dtpcou/en wge 164)Gross prImawy enrollmnwt (K of achoo-age populatIon) as 97 104 _BuVarla

417 97 1106 Lower-mkkioe-lcome gropFemale 84 97 101 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

KE-Y coNOI RAtIO and LONG-TERM YTRENDS

1971 1966 1904 191016

GOP (bJllions IJSS) .. ~~~~~~~17.4 9.7 12.9 cnmcrtoGrows domnestic InvesmertlP. 32.21 14.2 15.4Export ofooods and non-folor serAices/op 42.8 48.9 52.4 Openness of ecmonoryGrous domestic sw&avig/O . 18 1. 17.0Gross national savbngs/GP .. 31.8 13.1 15.3:

Curent acoount bellance/GOP . .. -2.11 .0.50litifere paylmentsGO 1. 4. SainsInetmA

Tatal debt/G1p . 21.0 102.1 74.3 SaigkwsmnTotal etavofsot of oNPS 09. 161.8 21.8

Prenvakluofdebt/es"Ars . . 181.0Indebtedness

1964 106646 1904 1966 16604

GOP .. -2* I~ ~~~~~ ~~~A 2.0 82 -BulgadasGNW per capita . 2.2 1.7 0.3 .. Lower-mkkile4lcomne grop

E Cptt goods NW nfs .. -21.0 75S 7.0 8.:_ _ _ __ _ _ _ _ __ _ _ _ _ _

STRUCTURE of the ECONOMY(% of GDP) ~ ~~~~~1976 1966 1904 199:i Growth rkats of output and Investment(%

AgrIculture .. 11 9 10.9 10.9 20Industry 62.5 32.5 3147 10

MatnufacturingaServicses 25.6 56.6 574 .10 9

.20

Private consumption . 50.8 79.0 68.4 130

General government consumption .. 8.5 16.1 13.8 4Imports of goods and non-factor services .. 43.2 53.5 50.9 -GDI -GDP

(aveage annual growth) 1976-84 1984 1904 1096 Growth rates of expor'ts and Imports %Agriculture .. -1.3 4.0 3.0 20Indus"r . -4.9 -4.0 0.0 0

Manufacturing .. 20 . .go 9 3a

Services .. 0.0 6.8 3 .2

Privte consumption .. -5.2 -8.0 -1 5 4General governmen consumption .. 7.8 -1 1.8 -1.4 -6Gross domesic Investment .. -7.8 11.4 2.5 .soImports or goods and nion-factor services .. -24.9 -9.9 -1 3 Eprz - motGross national product .. -2.9 1.3 0 0

Note: 1995 data are preliminary estimates.The diamonids show four key indicators in the country (in bold) compared with Rts income-group average. If data are missing, fte diamond willbe incomnplete.

Annex 3

Page 2 of 2

Bulgaria

PPICES and GOVERNMENT PMANCE1976 1986 1964 196 Id 6}

Domesfc priek(% Chn) 250 Consumerpric .. .. 96.0 82.6 implicl GDP deabr .. 0.2 72.3 63.6 150

osavnment lfnnce 5a(% oGf ) G _'Cumrrwn nue .. 55.2 41.8 36.0 9 SI 92 0 54 5Current budgt blance .. .GOP dOva urpl .. .. -6.4 -5.7

TRADE

(milon' US$) 1975 198 1 19 199 Ipo* i nd S d IMM pon levels (mnll. UU)Total esot (fob) .. 10,668 3.035 544SMeX X 2,125 1,060 1,145Ohsragriculure .. 1,791 1,135 1,266 ooaManufadures .. 0 .. .. apo

TOt Iports (CM) 11,196 3.952 5224 4 , Food .. 545 60 1.189Fuel andeonwrg 2.217 972 1.29 2.00CapIta goods .. 4.532 1,142 1.521 _ _ _ _ _ _ _ _ _ _ _ _ _ _

Expot ptce Index (1987m100) .. 112 96 103 00 t 9z2 93 g4 o5knportelpcelndex(1987u100) .. 66 132 141 ncEports nlmporsTwms o(tbe (197aI100) .. 169 73 73

BLANCE of PAYMIETS1978 136 19" 1s"

(aNions US$) Currant account balance to BIDP rafto(%Exports of goods, ad non-fcto service.s. 11.761 4,757 6774 a kmports of good and noncloraervcee .. 11.872 5,198 6496 so U n 531Resource baance .. -112 -441 278 .2

Not alcorillCOe .. -101 64 -469 4.Na curnrd bt, .. 74 174 132 J1.i

Curren account balanc,beoreoikcl tnsfes -202 -59

Fnancng Ht (not) 249 307 410 Chane In net resvs -423 -47 -248 "1

Akwno:Resrve Including gold (amN USS) 1297 1545Com wsUonrat PocakVSS) 1.9 53.7 67.1

EXTERNAL DEST and RESOURCE FLOWS1978 1166 Is" 1336

(mIons USS) 1976 of td91 da. IU5 (ntL US$)Toal dei oubalndr and disbued 20 3,852 9962 9597

IBRO 0 0 399 414IDA 0 0 0 0 k 5414

Total d service 2 1,178 760 903 C 720NMRD 0 0 15 31 1/"4) oIDA 0 0 0 0 f I /

Coeosition dof not resource NoaOffl Wgrants 0 0 102 6S 1 E t5MOffical crdors 0 74 281 14Privt cradtors 1 81i7 -487 -139Foregn dkred imeetnw 0 0 105 135 F6044Portfllo *qu y 0 0 6 5

World Dank progmmCommitents 0 0 175 193 1R0 E- _atDOnbur5 ft5 0 0 246 1S B-IDA D O aOl svi_e P dPF-PrIncIal rpayments 0 0 0 0 C -IMF G -Shaot.hmNot lws 0 0 246 1SiAnreatpeykent 0 0 15 31Nit _asrs 0 0 231 -16

Itrnatn Econmc Dprtment 497

Annex 4

Bulgaria Page I of 2

Most Same region/income group NextLatest single year recent Europe Clower- higher

E nit of estimate & Central middle- incomelIndicator measure 1970-75 1980-85 1988-93 Asia income group

Priority Poverty IndicatorsPOVERTYUpper poverty line local curr. ..

Headcount index % of pop. ..

Lower poverty line local curr.Headcount index ' of pop. .. .. ..

GNP per capita USS .. 1.990 1.140 2.450 1.590 4.350SHORT TERNI INCOME INDICATORSUnskilled urban wages local curr. .. .. ..

Unskilled rural wagesRural terms of trade .. ..

Consumer price index 1987=100 .. .. ..Lower income ..

Food' 96 424UrbanRural

SOCIAL INDICATORSPublic expenditure on basic social services % of GDP .. 6.3 .. ..Gross enrollment ratiosPrimary % school age pop. 99 102 90 .. 104 105Nlale " 99 103 91Female 99 102 88

NMoralityInfant mortality per thou. live births 26.0 18.0 14.0 24.8 39 0 35 SUnder 5 mornality .. .. 19.0 36.4 61.5 42 6

ImrnunizationMleasles % age group .. 99.0 97.0 77.6 820DPT .. 99 0 99 0 .. 82 2 74 2

Child malnutrition (under-5)Life expectancyTotal years 71 71 71 69 67 69Female advantage 5.2 5.8 7.1 8.8 5.9 5.9

Total fertility rate births per woman 2.2 2.0 1.5 2.1 2.9 2.9Maternal mortality rate per 100,000 live births .. 22 ..

Supplementary Poverty IndicatorsExpenditures on social security % of total gov't exp. .. .. 32.4Social security coverage % econ. active pop. .. .. ..

Access to safe water: total % of pop. .. .. 100.0 .. .. 86.7Urban .. 100.0 93.9Rural . .. 100.0 .. .. 66.7

Access to health care .. 100.0 100.0

Population growth rate GNP per capita growth rate Development diamondb

(annual average. perent) (annual average, percent) Life expeancy

6l (ana avrae percent)erolren4- 5

GNP Gross21 *- . .. * 0 ~~~~~~~~~~~~~~~~~~~~~~~~per primary

capita ~~~~~enrollment

-2 -1011970-75 1980-85 1988-93 1970-75 1980-85 1988-93 Access to safe water

[I Bulgaria _ BulgariaLower-middle-income Lower-middlc-income

a Sce the technical notes, p.387. b. The development diamond. based on four key indicators, shows the average level of development in the countrycoiip;arCd with its; incoine group. See the introduction.

Anniex 4

Bulgaria Page 2 of 2

Most Same region/income group NerfLatest single_year __ recent Europ-e-__Lo'7&i higher

Un it of estimate & Central middle- incomefIndicator mneasure 1970-75 1980-85 1988-93 Asia income group

Resources and ExpendituresHUNIAN RESOURCESPopulation (mre=1993) thousands 8.722 8.960 8.870 494.619 1.096.665 500,507A.ge dependencv ratio ratio 0 49 0.48 0.49 0.57 0 69 0.62Urban %c of pop. 57.5 84.5 69.5 64.8 54.,7 71 2Population Lro%% th rate annual %0.5 0 2 -0 4 0.6 1 6 1.7Urban '2.5 1.3 0.5 1.5 2.9 1.8

Labor force (15-64) thousands 4.496 4,483 4.500 237.897 459.196 190,136Agriculture %l of labor force 27 18 .

Industry 42 45 .

Female '46 46 47 47 31 29Fenmales pe r 1 00 malesUrbani nunmber 96 100Rural 105 100

N'ATUR-AL RESOURCE-SArea thou. sq. km 110 91 110.91 110.91 24.320.56 40.6S2.67 21,848.14Density pop. per sq. kni 78.64 80.79 80.26 20.20 26.52 22.51IA.-rcultural land %7 of land area 53.87 5-5.80 55.67 .. 39.61 41.26Change in agricultural land annual %7 -1 37 .0.05 .0.11 -1.28 -0 13 0,08Agricultural land under irrigation %7 18.94 19.92 20.10 7 15 12 66 8.84Forests and %xoodland thou. sq. km 0.04 0 04 0.80 5i.95 8,04Deforestation (net) annual % . -0 22

INCOMEHousehold incomeShiare of top 20% of households %7 of- income .36

Share of bottom 40%7 of households .. 24Share of bottom 20% of household.s .. 10

EXPEND)ITUREFood %rof GDP .17.0

Staples 1.8Meat. fish, milk, cheese, eggs .8 2

Cereal imnports thou. metric tonnes 665 1.792 241 34.452 66.281 48.947Food aid in cereals . .200 4.392 5.477 544Food production per capita 1987 =100 95 92 75 .. 101 102Fertiliter consumption kg/ha 114.0 140.1 46.7 41.7 48.0 67.8Share of agriculture in GDP %of GDP .. 11.9 13.0 13.5 15.7 8.0Housing %7cof GDP ... 6.7 6.0A% erage hou-.hold size persons per household 3.].Urban 3.0...

Fixed irnestment: housing %of GDP ... 1.1 5.2-Fuel and power % ofGDP L...18 1.2Energy consumption per capita kg of oil equiv. 2.662 3.410 1.954 2.959 1.595 1.632Households with electricityUrban % of households . ..

RuralTransport and communication % of GDP ... 7.0Fixed investment: transport equipment . 2.7Total road length thou. km .. 38 37

INVESTMENT IN I{UMAN CAPITALHealthPopulation per physician persons 537 276 318 362 3.277Population per nurse .1239 155 .. 249Population per hospital bed 129 90 104 136 604 395Oral rehydyration therapy (under-5) % of cases ..- . .S

EducationGross enrollment ratioSecondary % of school-age pop. 89 102 71 -- 53 53Femnale .. 102 73

Pupil-teacher ratio: primary pupils per teacher 20 18 14 . .25

Pupil-teacher ratio: secondary 13 17 13Pupils reaching grade 4 % of cohort 96 95 95Repeater rate: primary % of total enroll 2 2 3Illiteracy % of pop. (age 15+) . .. 5 19 14Female % of fem. (age 15+) ... .. .17

Newspaper circulation per thou, pop. 232 293 164 .. 74 125World Bank international Economieis Department. April 199%

Annex 5

Bulgaria Page I of 2Crkial Impo1f Rehabiawios Loan

Natinl Accou

actual Proiection1990 1991 1992 1993 1994 1995 1996 1997 199 1999 2000

A. In Curmnt Prices (bil. LCUs)

GDP atmarketprkee 45.4 135.7 200.8 298.9 522.2 867.7 1687.1 20758.8 28866.9 33113.5 37535.9Net IndirectTaxes -1.9 5.9 12.1 14.6 49.7 96.3 192.0 2387.3 3357.2 3894.2 4463.0ODP atPactorCost 47.3 129.8 188.7 284.3 472.6 771.4 1495.1 18371.5 25509.7 29219.4 33072.8

Agncultuhr 8.1 19.6 24.2 31.8 52.9 85.2 164.1 2061.2 2760.6 3120.8 3503.6Indu-try 23.3 50.7 81.3 104.6 179.2 291.4 564.2 6964.0 9619.9 11035.1 12448.7

of which Manufacturing NA NA NA NA NA NA NA NA NA NA NAServices 14.1 65.4 95.4 162.5 290.1 491.1 958.8 11733.6 16486.4 18957.6 21583.6

Resource Balance -1.6 10.4 -7.2 -25.5 -23.7 18.7 44.6 459.7 483.1 616.9 662.9Impors (ONFS) 16.7 54.4 124.5 160.7 279.3 436.3 1044.9 11770.9 12958.9 13795.1 14717.4Expons (GNFS) 15.0 64.8 117.3 135.2 255.6 455.0 1089.5 12230.6 13442.0 14412.0 15380.3

Total Expenditure 47.0 125.4 208.0 324.5 545.9 849.1 1642.5 20299.1 28383.9 32496.6 36872.9

Consumption 35.4 94.7 168.1 278.7 464.5 712.6 1405.0 17072.0 24061.1 27594.5 31316.1Govcrnment 10.2 24.3 37.3 52.2 84.3 120.3 199.5 2532.4 3848.1 4426.7 5032.2Privatc 25.2 70.4 130.8 226.5 380.2 592.3 1205.6 14539.6 20213.0 23167.8 26283.8

Gross Domestic Investment 11.6 30.7 39.9 45.7 81.4 136.5 237.4 3227.1 4322.8 4902.2 5556.9Government 1.0 1.7 -1.8 4.8 9.2 16.5 28.4 381.3 501.1 566.6 642.3Non-Govermnent 8.7 23.0 34.4 33.9 65.1 116.7 200.8 2693.9 3540.2 4003.0 4537.6Total fixed mvestment 9.7 24.6 32.6 38.7 74.3 133.3 229.2 3075.3 4041.4 4569.7 5179.9Total investment in stocks 2.0 6.0 7.4 7.0 7.1 3.2 8.2 151.8 281.4 332.5 376.9

Domestic Savings 10.0 41.0 32.7 20.2 57.7 155.1 282.1 3686.8 4805.8 5519.1 6219.8+ Net Factor Income (NEY) -3.6 -11.6 -12.5 -13.8 3.5 -31.5 -66.4 -787.6 -727.9 -800.1 -841.8+ NetCurrentTransfers (NCT) 0.7 1.3 1.0 1.0 9.4 8.9 30.6 341.4 361.8 373.6 384.4

= National Savings 7.1 30.7 21.2 7.5 70.6 132.5 246.3 3240.7 4439.8 5092.6 5762.4

GrossNational Product 41.8 124.1 188.3 285.2 525.7 836.2 1620.7 19971.3 28139.1 32313.4 36694.1Gross National Disposable Income 42.5 125.4 189.3 286.2 535.0 845.1 1651.4 20312.7 28500.9 32687.0 37078.5

B. shares of GDP (current vrices)

GDP at mrket prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0NetdlnirectTaxes -4.2 4.4 6.0 4.9 9.5 11.1 11.4 11.5 11.6 11.8 11.9

Agriculure val added 17.7 14.5 12.0 10.6 10.1 9.8 9.7 9.9 9.6 9.4 9.3Industby value added 51.3 37.4 40.5 35.0 34.3 33.6 33.4 33.5 33.3 33.3 33.2

of which Manufacturing NA NA NA NA NA NA NA NA NA NA NAServices vale added 31.0 48.2 47.5 54.4 55.5 56.6 56.8 56.5 57.1 57.3 57.5

Resource Balance -3.6 7.6 -3.6 -8.5 4.5 2.2 2.6 2.2 1.7 1.9 1.8Imports (GNPS) 36.7 40.1 62.0 53.7 53.5 50.3 61.9 56.7 44.9 41.7 39.2Exports (CiNFS) 33.1 47.7 58.4 45.2 48.9 52.4 64.6 58.9 46.6 43.5 41.0

Total Expenditure 103.6 92.4 103.6 108.5 104.5 97.8 97.4 97.8 98.3 98.1 98.2

Government consumption 22.5 17.9 18.6 17.5 16.1 13.9 11.8 12.2 13.3 13.4 13.4Private consumption 55.5 51.9 65.1 75.8 72.8 68.3 71.5 70.0 70.0 70.0 70.0Government mvestment 2.2 1.2 -0.9 1.6 1.8 1.9 1.7 1.8 1.7 1.7 1.7Non-Govermnent invesument 19.1 16.9 17.1 11.4 12.5 13.5 11.9 13.0 12.3 12.1 12.1

Gross Domestic Savings 22.0 30.2 16.3 6.8 11.1 17.9 16.7 17.8 16.6 16.7 16.6Gross Natioal Savings 15.5 22.6 10.6 2.5 13.5 15.3 14.6 15.6 15.4 15.4 15.4

Gross Natimal Product 92.1 91.5 93.8 95.4 100.7 96.4 96.1 96.2 97.5 97.6 97.8Gross Nationsl Disposable Income 93.6 92.4 94.3 95.7 102.5 97.4 97.9 97.9 98.7 98.7 98.8

Memorandum items:

Price indices (% change)GDP defltor 26.2 238.5 59.6 51.1 71.6 62.8 113.7 1192.5 31.6 10.8 9.0Consumer price index 64.0 238.9 82.6 72.8 96.0 62.6 123.0 1363.2 33.3 22.2 15.0

Total GDP (million current USS) 20,726.3 7,629.4 8,604.3 10,833.3 9,719.6 12,918.2 9,416.7 10,679.3 14,433.5 16,556.8 18,767.9Conversion factor used (LCU/US$) 2.2 17.8 23.3 27.6 53.7 67.2 179.2 1943.8 2000.0 2000.0 2000.0

Percapita grossnationalproduct 2,180 1,508 1,360 1,172 1,163 1,340 ..(Atlas mehod: in 1987 US$)

Annex 5u Idgarbia Page 2 of 2

Ndod Accouxk

actual Projection1990 1"1 192 1993 1994 195 1996 1997 1996 1999 200I

C. In Constant 1990 Pric (bl. LCUs)

GDP at market prim 45A 40.1 37.2 36.6 37.3 38.0 34.6 32.9 34.8 36.0 37.5GDP at Factor Cost 47.3 37.7 33.3 33.0 30.1 29.5 26.7 25.3 26.7 27.5 28.5

Agricultre 8.1 8.7 8.0 7.8 7.5 7.4 6.7 6.5 6.6 6.8 7.0Ingsty 23.3 18.9 17.6 17.3 17.2 17.2 15.6 14.9 15.6 16.2 16.8of which Manufactring .. .. .. .. 1. 1. .. .. 1. 1. 13

Services 14.1 12.5 11. 12.5 112.5 13.4 12.3 11.5 12.6 13.1 13.8

Rource Balance -1.6 3.2 2.8 1.8 2.3 4.4 4.1 4.1 4.3 4.6 4.8Impos (GNFS) 16.7 5.8 8.0 8.7 7.6 9.0 8.3 8.5 8.9 9.2 9.6Expos (GNFS) 15.0 9.0 10.7 10.5 9.9 13.5 12.4 12.6 13.2 13.8 14.4

Total Expendiure 47.0 36.9 34.4 34.8 34.9 33.6 30.5 28.8 30.5 31.5 32.7

Consumption 35.4 25.5 25.6 28.3 29.1 27.7 26.2 24.3 25.9 26.7 27.8Governmt 8.3 7.3 6.7 6.7 5.8 5.1 3.9 3.9 4.5 4.7 4.9Private 27.2 18.2 18.9 21.6 23.3 22.6 22.2 20.4 21.4 22.1 22.9

Gro Domestic lnveuamt 11.6 11.3 8.8 6.6 5.8 5.9 4.3 4.6 4.7 4.8 5.0Government 1.0 0.6 1.0 1.0 1.1 1.1 1.1 1.2 1.2 1.3 1.3Non-Governmet 8.7 7.2 6.6 4.7 4.0 4.1 3.0 3.1 3.1 3.1 3.3Totl fixed invesment 9.7 7.7 7.6 5.7 5.1 5.2 4.2 4.3 4.3 4.4 4.6Total invesment in stocks 2.0 3.6 1.2 0.8 0.7 0.8 0.2 0.2 0.3 0.4 0.4

Terms of trade (11) effect 0.0 -2.1 -3.2 -3.2 -3.0 -4.1 -3.7 -3.8 -4.0 -4.2 -4.3Gros domestic imnco 45.4 38.0 33.9 33.5 34.3 34.0 30.9 29.1 30.9 31.9 33.2Domesc sving (TT adjted) 10.0 12.4 8.4 5.2 5.2 6.3 4.7 4.9 5.0 5.2 5.4Not facorincon, -4 -3 -2 -2 0 -1 -1 -1 -1 -I -IGNP at mkt prices 42 37 35 35 38 37 33 32 34 35 37

D. Annual rowth rates (199 tmices)

GDP at muke tprim -9.1 -11.7 -7.3 -1.5 1.8 2.0 -9.0 -4.8 5.7 3.5 4.0Agicultue -3.7 7.7 -7.7 -3.2 -3.0 -1.0 -10.0 -2.8 1.8 2.0 3.0Industy -12.5 -18.6 -7.0 -2.0 -0.2 0.0 -9.5 -4.5 5.0 3.5 3.5of which Manufacturing NA NA NA NA NA NA NA NA NA NA NA

Services -6.1 -11.3 -7.5 0.4 8.0 6.7 -7.8 -6.3 8.8 4.3 5.1

kmpos (GNFS) -69.5 -65A 37.9 9.6 -13.4 19.6 -7.9 2.1 4.7 3.8 4.2Expors (GNFS) -71.4 -40.2 19.3 -2.2 -5.8 36.3 -7.9 1.7 4.5 4.5 4.2

Totel Expenditure -9.8 -21.6 -6.7 1.3 0.3 -3.8 -9.1 -5.6 5.9 3.1 4.0Conupto 5.1 -27.9 0.2 10.5 3.0 -5.0 -5.3 -7.4 6.6 3.3 4.0Investmat -37.0 -2.3 -22.3 -25.5 -11.5 2.0 -27.0 5.4 2.1 2.4 4.0

Gross dometic income -9.5 -16.3 -10.6 -1.4 2.5 -0.9 -9.1 -5.6 5.9 3.4 4.0Gross domestic saving -39.4 24.7 -32.9 -38.0 -0.2 22.1 -25.8 4.5 2.0 3.8 4.1

Per CaYita .rowth rates:

PercapitsaODP(mp) -5A -11.0 -6.6 -1.0 2.2 2.3 -8.6 -4.5 6.2 3.9 4.5Per cpita towlconmnption 9.4 -27.4 1.0 11.1 3.4 -4.8 4.9 -7.1 7.2 3.7 4.5Per capita prvate cau4ptin -6.8 -32.4 4.7 14.8 8.2 -3.0 -1.0 -8.1 5.5 3.5 4.4

E. Period Avere udieators 1%449 19694 1994-9

Marginal naioml saving rate -0.1 0.7 -0.2

Incremental capital-oput ratio 0.0 -4.7 -20.7

Imort elaticity -0.2 2.3 -2.1

Annex 6

Bulga*a Page I of IC6icai Issp.e R.Aabiusaauk Ia.

Eapint .d lap.erl

actual nproleton19"9 191 192 199 1994 1"5 1996 1997 19" 1999 2000

A. Value In Current Prices (JSS tlions)

Total Merchndise Exports (FOB) 3,743 3,141 3,956 3,727 3,935 5,344 4,724 4,883 5,222 5,555 5,915Prmaiy products 2,270 1,660 2,026 2,030 2,194 2,411 2,564 2,765 2,9S1 3,209 3,453

CP.X.MQT.X 1,380 890 978 980 1,059 1,145 1,238 1,335 1,439 1,549 1,667CP.X.OAORI 890 770 1,048 1,050 1,135 1,266 1,326 1,430 1,542 1,660 1,786CP. . . . .. .. .. ..

CP. . . . .. .. .. ..

Manufactured goods .. .. .. .. .. .. .. ..

Other gods 1,473 1,481 1,930 1,697 1,741 2,933 2,160 2,118 2,241 2,346 2,462

Total Merchandise hIpoi (CIF) 4,661 2,491 4,169 4,612 3,952 5,224 4,579 4,740 5,089 5,421 s,772Food 150 358 942 1,042 S93 1,181 1,035 1,071 1,150 1,225 1,304Ofwer Consumer Goods 529 167 429 475 407 538 472 488 524 558 595POL and OtherBnagy 1,392 495 1,026 1,135 972 1,285 1,126 1,166 1,252 1,334 1,420Intenrmediate Goods n.e.i. 884 208 567 627 537 710 623 645 692 737 785Primry Goods 884 208 567 627 537 710 623 645 692 737 785Manufacturod Goods .. .. .. .. ..

Capit Goods 1,706 1,263 1,205 1,333 1,142 1,510 1,323 1,370 1,471 1,567 1,668

B. Value In Costt 1967 Price. (lUSS mnLUos)

Total Merchandise Exports (FOB) 7,061 7,892 4,215 3,986 4,083 5,306 4,811 4,890 5,116 5,305 5,516KP.X.MBT.X 2,659 2,972 1,587 1,501 1,537 1,998 1,811 1,841 1,927 1,998 2,077KP.X.OAGRI 2,354 2,632 1,405 1,329 1,361 1,769 1,604 1,630 1,706 1,769 1,839KP. .. .. .. .. 0 0 0 0 0 0 0KP. .. .. .. .. 0 0 0 0 0 0 0Manufactures 0 0 0 0 0 0 0 0 0 0 0Other Expots 2,048 2,289 1,222 1,156 1,184 1,539 1,395 1,418 1,484 1,538 1,600

Toal Merchadise Import (CIF) 11,593 18,451 3,249 3,608 2,999 3,794 3,410 3,471 3,647 3,786 3,937Food 517 823 145 161 134 169 152 155 163 169 176Other Cosumer Goods 994 1,583 279 309 257 325 293 298 313 325 338POL nd OthrEnergy 1,569 2,498 440 488 406 514 462 470 494 513 533Intenmediate Goods D.C.i. 1,168 1,859 327 363 302 382 344 350 367 381 397

Primay Goods 1,168 1,859 327 363 302 382 344 350 367 381 397Manufactured Goods .. .. .. ..

Capital Goods 7,345 11,689 2,058 2,286 1,900 2,403 2,161 2,199 2,310 2,399 2,494

Memorandum Items:

ExportvoIumegrwthrite -32.6 11.8 -46.6 -5.4 2A 30.0 -9.3 1.6 4.6 3.7 4.0lmportvolum growthrate(CIF) 3.0 59.2 -82.4 11.1 -16.9 26.5 -10.1 1.8 5.1 3.8 4.0

C. Prie Indces (1967 = 100)MerchandieE xport 53 40 94 93 96 101 98 100 102 105 107Merchandise hmport 40 13 128 128 132 138 134 137 140 143 147Merchandise Terms of Trade 132 295 73 73 73 73 73 73 73 73 73

D. Non-Faetor Services(indiccs bae 1987 = 100)

Expots of NFS - volune index 2 1 1 10 5 7 -2 2 4 7 5Bxporof NPS - price index 0 0 237 236 244 254 248 252 258 265 271

Impots of NPS - vohmc indcx I I 1 4 12 -16 4 3 3 4 5ImportsofNFS-priceindex 0 0 279 278 286 299 292 297 303 311 318

Annex 7Bulgaila Page I of I

crw Iypow Rw _ d La"BAlmao Pon-& (mEmu o1 US$J

1996 1991 1d9M im 19 19 196 1997 1 1"99 288

TowI ENrs of MNFI 4,433 3,559 5,026 4,898 4,757 6,774 6,081 6,292 6,721 7,206 7,690Marchamde (FOB) 3,743 3,141 3,956 3,727 3,935 5,344 4,724 4,s83 5,222 5,555 5,915Nom-FcsoSrevice 691 418 1,070 1,172 s22 1,430 1,357 1,409 1,499 1,651 1,775

Tobl npou of aNmS 5,165 2,991 5,334 5,823 5,198 6,496 5,832 6,056 6,479 6,898 7,359Machmdiae (POB) 4,660 2,491 4,169 4,612 3,952 5,224 4,579 4,740 5,089 5,421 5,m7Nn-PactorServices 504 500 1,165 1,211 1,246 1,272 1,253 1,316 1,390 1,477 1,587

Rmwce Balsaem -731 569 -308 -925 -441 278 249 236 242 308 331

Nd Fader Inerne 4613 -1,168 -536 -498 64 -469 -370 -405 -364 -400 421paccoe 110 62 125 93 520 154 168 140 212 200 mnpaco Payn_i 723 1,230 661 591 455 623 538 546 576 600 648

Toal }atree DUE (scbh 510 159 990 803 391 598 533 545 576 600 648_bued Paid 452 104 990 803 391 5s9 533 545 576 600 648

Duo but adoid 58 55 0 0 0 0 0 0 0 0 0OFdr Por Pay_m 213 1,071 -329 -212 64 25 5 0 0 0 0

NotpnvalcCurrentTmwfena 113 70 43 37 174 132 171 176 181 187 192CwreutReceipts 200 124 114 286 348 132 171 176 181 187 192

ofwhichwakm'rmitnces 0 0 0 0 0 0 0 0 0 0 0CurentPayme -87 -54 -71 -249 -173 0 0 0 0 0 0

Net ficial curreat trua 0 0 0 0 0 0 0 0 0 0 0

Currnt Aceemt Bgalne -1,231 -530 -801 -1,386 -202 -59 50 7 59 95 103

Officialc#piaLgrml 0 0 0 0 0 0 0 0 0 0 0

Privaie ivedum (net 4 56 42 55 105 82 95 330 250 230 205Dimu luvee_ient 4 56 42 55 105 82 95 330 250 230 205PmtflWoa nveabnm 0 0 0 0 0 0 0 0 0 0 0

Not LT Bamw 3 276 322 9 341 -209 -412 187 15 -121 44Di_bucm perDRS 876 391 461 152 571 82 158 487 473 210 357LT RePaY.ma (cb~ 872 114 138 143 4S0 291 570 301 458 331 401

Prk.c rqpaid 872 114 138 143 480 291 570 301 458 331 401Due bt not paid 0 0 0 0 0 0 0 0 0 0 0

OEterkW bmul-r w i sd(not) 0 0 0 0 257 0 0 0 0 0 0

Adusaunls ttoSb " wdebtvice 58 55 0 0 0 0 0 0 0 0 0Debt Service na pid 58 55 0 0 0 0 0 0 0 0 0Rduction inimnpr qaymcnb(-) 0 0 0 0 0 0 0 0 0 0 0

Odber Capitl Fbl (nt 755 272 849 1,009 -84 610 -377 -107 115 201 218Ndo9.t-Tenm (S)Capital 0 0 -148 0 0 0 0 0 0 103 110Capil Flows n.e.i. 0 0 996 1,009 -. 4 680 -377 -107 115 98 108Errormd cminsdioa 755 m 0 0 0 0 0 0 0 0 0

C1ne in ad ia n'l ruerms 411 -130 -412 314 -166 -494 644 -417 -438 -405 482(- hzdica ucreu inc aab)

Toal Gros Rerves, of which 505 635 1,240 969 1,297 1,545 793 1,622 2,108 2,383 2,657Total Reavw mna gold .. .. .. .. .. .. .. ..

Gold (at year end Lodon pnce) .. .. .. .. .. . .. ..

TOWl On_Rove$ imoaiPo 1.2 2.5 2.8 2.0 3.0 2.9 1.6 3.2 3.9 4.1 4.3

Exchase raeAmg-l Avere tLCUAMS) 2.2 17.8 23.3 27.6 53.7 67.2 179.2 1943.8 2000.0 2000.0 2000.0At end yeur (LCUIUS$) 2.2 21.8 24.5 32.7 60.0 70.7 179.2 1943.8 2000.0 2000.0 2000.0IndxrMalaverqeX-RAIm(1991-1 .. 100.0 117.7 178.5 .. .. .. ..

CwmrtAcco t8 Buoa % GDP -5.9 -6.9 -9.3 -12.8 -2.1 -0.5 0.5 0.1 0.4 0.6 0.5

_ a..

Annex 8Bilgaria Page I of 2

CM"*k Ia,p.e R~abdalWA Lw.ExAmi Dak Steb uzd #Um (,i.,, of US$)

1990 19 9 199 199 I" 199 19I7 199 2000

A. Grn DbbuzgmuUPFlibc & Publicly Oawuitd 875.6 390.9 264.0 53.4 566.0 S2.0 15S.1 487.2 472.5 210.2 356.S

a. Mubilaal 43.7 261.2 92.0 21.4 364.0 42.0 90.1 200.2 271.5 178.2 206.8of which IBRD 0.0 58.2 92.0 3.0 246.0 15.0 52.5 140.4 161.7 123.5 134.8of whch EBRD/BIB 0.0 0.0 0.0 18.4 118.0 27.0 37.6 59.8 109.8 54.7 72.0

b. Biblteral 36.4 10.3 172.0 32.0 202.0 40.0 68.0 287.0 171.0 0.0 50.0Privat creditor. 795.5 119.4 0.0 0.0 0.0 0.0 0.0 0.0 30.0 32.0 100.0of which banda 64.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Privat Non-Ouasiteed 0.0 0.0 196.6 98.3 5.0 0.0 0.0 0.0 0.0 0.0 0.0Toal Lon-Tem Diaburnm 75.6 390.9 460.6 151.7 571.0 82.0 158.1 487.2 472.5 210.2 356.8

Net Short-Ton Capital 0.0 0.0 -147.6 0.0 0.0 0.0 0.0 0.0 0.0 1%J3.5 110.4IMF Pumbae 0.0 395.8 278.0 42.5 227.3 0.0 116.0 506.6 178.4 0.0 0.0Totl Disburi. (LT+IMF+SM) 875.6 786.7 591.0 194.2 798.3 82.0 274.1 993.8 650.9 313.6 467.2

B._Public & PubricIyOuaru.tcod 872.4 114.4 41.0 6.0 408.0 203.0 425.1 160.7 451.0 324.4 393.7

a. Multilateral 29.9 24.3 0.0 0.0 75.0 0.0 12.6 33.7 65.3 82.6 94.9ofwhich IBD 0.0 0.0 0.0 0.0 0.0 0.0 12.6 33.7 43.3 50.6 52.9ofwhich BRDIEIB 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 22.0 32.0 42.0

b. Bilaal 0.7 0.7 22.0 6.0 102.0 77.0 156.5 75.0 333.7 209.8 280.8Privatecrediora 841.8 89.4 19.0 0.0 231.0 126.0 256.0 52.0 52.0 32.0 18.0of which bonds 0.0 0.0 0.0 0.0 0.0 20.0 208.0 52.0 52.0 32.0 18.0

Pxivat Non.Ouanted 0.0 0.0 97.4 137.0 72.4 88.0 145.0 140.0 7.0 7.0 7.0Tod Laft-TeamAmmoizAtm 872.4 114.4 138.4 143.0 480.4 291.0 570.1 300.7 458.0 331.4 410.7

IMF Rqrchpaea 0.0 0.0 85.0 0.0 65.0 246.0 224.0 94.0 131.0 129.5 185.0Toa Amuizatma (LT+IMF) 872.4 114.4 223.4 143.0 545.4 537.0 794.1 394.7 589.0 460.9 585.7

C. Not D liamP:bfic & PWlic Gluamnd 3.2 276.5 223.0 47.4 158.0 -121.0 -267.0 326.5 21.5 -114.3 -36.9

a. Mulilater 13.8 236.9 92.0 21.4 289.0 42.0 77.5 166.5 206.2 95.6 111.9of which IBRD 0.0 58.2 92.0 3.0 246.0 15.0 39.9 106.7 118.4 72.9 81.9of which DRD/EIB 0.0 0.0 0.0 18.4 118.0 27.0 37.6 59.8 87.8 22.7 30.0

b. Bilater 35.7 9.6 150.0 26.0 100.0 -37.0 -88.5 212.0 -162.7 -209.8 -230.8Prival crediton .46.3 30.0 -19.0 0.0 -231.0 -126.0 -256.0 -52.0 -22.0 0.0 82.0of which bonds 64.5 0.0 0.0 0.0 0.0 -20.0 -208.0 -52.0 -52.0 -32.0 -18.0

Private Nmn-(uaratoed 0.0 0.0 99.2 -38.7 -67.4 -.8.0 -145.0 -140.0 -7.0 -7.0 -7.0Toa Lcg-TeamNetDiab. 3.2 276.5 322.2 8.7 90.6 -209.0 412.0 186.5 14.5 -121.3 -43.9

Not Shot-TeCapita 0.0 0.0 -147.6 0.0 0.0 0.0 0.0 0.0 0.0 103.5 110.4Netdua of IM Crodt 0.0 395.8 193.0 42.5 162.3 -246.0 -108.0 412.6 47.4 -129.5 -185.0Tot a tDisbura. (LT+IMP+ST) 3.2 672.3 367.6 51.2 252.9 455.0 -520.0 599.1 61.9 -147.3 -118.5

D. IPublic & Piblicly Ouarmd 451.7 103.6 955.0 694.9 309.4 477.5 450.0 472.8 493.0 481.7 468.7

A. Muiaeal 13.3 49.3 89.0 48.6 27.2 55.6 59.6 64.1 74.0 87.6 92.4of which IBRD 0.0 0.0 6.0 22.2 25.9 46.4 48.5 50.3 55.9 63.3 66.5ofwhichEBRDIEI 0.0 0.0 0.0 0.0 1.3 9.7 11.6 14.3 18.5 24.8 26.4

b. Bilatea 0.3 0.5 75.0 101.1 96.9 132.5 126.3 131.5 142.4 114.2 91.0Private creditor 438.1 53.8 791.0 545.2 185.2 289.4 264.1 27.1 276.7 279.9 285.2of which bond 15.5 10.3 15.0 22.0 22.0 22.0 20.0 7.0 4.0 1.0 0.0

Privie Noa-auteed 0.0 0.0 0.0 47.2 16.0 9.0 4.0 3.0 0.0 0.0 0.0Todiletre otlnoap.Teom l.o 451.7 103.6 955.0 742.1 325.4 486.5 454.0 475.8 493.0 481.7 468.7

lalerea an Sbort-Tem Debt 58.0 49.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7.5 15.4DMeP CIA 0.0 6.1 35.0 60.6 65.6 111.9 79.1 63.7 82.5 76.6 63.6Totl We (LT+D"+MT) 509.7 158.7 990.0 802.7 391.0 598.4 533.1 539.5 575.5 565.8 547.7

_AMff M1Thl

Annex 8BRulmi Page 2 of 2

Ea:. Dal SMoah md HAw * V USS)

10 19i 1 1 1994 19" 16 197 199 20

Pubihc A PWble uassd 9S16.6 9990.4 11046.0 11412.3 8514.3 S431.8 8273.8 S603.3 8626.8 8512.5 8475.6a. Mullatl 615.9 852.1 771.6 831.6 1234.6 1315.1 1506.6 1673.1 1879.3 1974.9 20S6.8

of which IBRD 0.0 60.5 150.3 153.3 399.3 414.3 454.2 560.9 679.3 752.2 S34.1odwhich EBRD/E1B 0.0 0.0 0.0 IS.4 136.4 163.4 201.0 260.8 348.6 371.3 401.3

b. Biliral 1045.9 1160.7 1668.4 1691.3 1791.3 1754.3 1665.8 1877.S 1715.1 1505.3 1274.4Privte credor 8154.S 7977.6 8606.0 8889.4 5438.4 5362.4 5106.4 5054.4 5032.4 5032.4 5114.4a. Brai 327.3 339.6 351.0 351.0 351.0 331.0 123.0 71.0 19.0 -13.0 -31.0

Private ? Nkw-Ousraned 0.0 0.0 631.0 592.3 524.9 436.9 291.9 151.9 144.9 137.9 130.9Totl Laf-Team DOD 9816.6 9990.4 11677.0 12004.6 9039.2 886.7 8570.7 8757.2 8771.7 8650.4 8606.5

Sbod-Tae Debt 1054.7 1569.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 103.5 213.8Us o MP Crdit 0.0 413.7 589.5 632.0 922.8 728.2 589.1 1001.7 1049.0 919.5 734.5

Totl DOD (LT+IMF+ST), of which 10471.3 11973.4 12266.5 12636.6 9962.0 9596.9 9159.S 9753.8 9S20.8 9673.4 9554.9Priwl Anen 355.9 1443.3 5024.5 5984.7 .. .. .. ..

Irsd Arrean 225.1 766.3 796.0 516.6 .. .. .. ..

F. Delt ad dbt BUde Indators:

TctOldebrvice ilJUS$) 1382.1 273.1 1213.4 945.7 936.4 1135.4 1327.2 934.2 1164.5 1026.7 1133.5Iee (LT + ST + IMP) 509.7 158.7 990.0 802.7 391.0 598.4 533.1 539.5 575.5 565.8 547.7

P-ocipsi (LT + IYF) 872.4 114.4 223.4 143.0 545.4 537.0 794.1 394.7 589.0 460.9 585.7

For ttal DOD and Total debt servee (flS):DODMExpraofGNPS 245.2 336.4 244.1 258.0 209.4 141.7 150.6 155.1 146.1 134.2 124.2DOD / ODP 52.5 156.9 142.6 116.6 102.5 74.3 97.3 91.4 68.0 S.A 50.9TD SllVpmt of GS 31.2 7.7 24.1 19.3 19.7 16.8 21.8 14.8 17.3 14.2 14.7

IBRD expemru bndictor:IBRDDebthSrviee/PublicDS 0.0 0.0 0.5 2.9 3.1 4.5 5.2 10.6 8.6 11.3 10.7PfCor ditorDS/Public DS 0.0 2.7 11.3 10.9 18.6 39.9 31.9 32.3 30.5 37.2 39.3MRD D9Bxpcnt aGNPs 0.0 0.0 0 0.5 0.5 0.7 1.0 1.3 1.5 1.6 1.6Cntry SS areU IBRD Poafoio 0.0 0.0 0.0 0.0 0.1 0.1 0.2 0.2 0.3 0.3 0.3

Annex9BUZgGJ*a Page I of I

CrN4m Ii.p.el RabdtsOMWn Lom,Pab& %moe,e. (bLCUWi)

1--I 1991 1992 1993 1"4 19" 199 1997 _ 199 28

Toa Carrem Reveuam 24 55 78 111 218 313 556 58S5 8664 9548 10817Direct a 9 28 28 31 63 86 138 1557 2195 2518 2854Indirecti ae. 8 20 31 52 107 152 262 3185 4915 5263 5961

On dame goods ad services 8 18 27 43 92 131 220 3069 4787 5133 5815on ialomti alxtrade 0 2 4 9 15 21 42 116 128 130 147

Nc-Tax Reejipta 6 8 19 2S 49 75 157 1142 1555 1767 2002

Total Coumt Erpe _dkhre 27 64 87 138 243 353 728 6390 8224 8982 10011hed oa lxexlnal debt 0 7 4 3 7 24 47 508 672 906 88Sbtreat a dmeadic debt 0 8 13 25 67 99 298 1210 420 -150 -254Trfav to private ector 10 19 29 52 77 100 172 2009 3101 3590 4107Traufen to dcr NFPS 0 0 0 0 0 0 0 0 0 0 0Subsidies 7 5 4 6 8 9 12 131 183 210 238Ca_icim n 10 24 37 52 84 120 199 2532 3848 447 5032

Wagea ad ulaies 2 7 12 19 29 41 62 719 1090 1263 1446Oler ccauqRWV 8 18 26 33 56 80 137 1813 2758 3163 3586

Budgary Saving -3 -8 -9 -27 -25 -40 -172 -506 441 566 806CapjaRlRve. 0 0 0 0 0 0 0 0 0 0 0TotalCa*aExpeudkors 1 3 6 6 9 10 11 204 440 828 1129

Cqvitl tAe&n 0 0 0 0 0 0 0 0 0 0 0Budgsay lixed mveamt 1 3 6 6 9 10 11 204 440 828 1129

Overalbalanc (- - dedkO) -4 -11 -14 -33 -34 -50 -183 -710 1 -262 -322

Soures of fnandg (+) 4 11 14 33 34 50 183 710 -1 262 322OfCqbialcaphalOras 0 0 0 0 0 0 0 0 0 0 0BEx alB-owiog(net) -2 11 9 -I 6 -18 -41 223 368 591 688Meazy SyM Credt (net 6 39 37 104 83 -7 224 -213 -719 -307 -264Oder Dtics Bamrww (net) 0 -39 -31 -70 -56 75 0 700 350 -22 -102

Swee of GDP at camut vrke

Curretrevuiues 52.8 40.8 38.7 37.2 41.8 36.1 33.0 28.3 30.0 28.8 28.8Current epaditue 58.9 47.0 43.1 46.2 46.5 40.6 43.2 30.8 28.5 27.1 26.7Budg4eay -vis -6.0 -6.2 -4.4 -9.0 -4.7 -4.6 -10.2 -2.4 1.5 1.7 2.1

Capital revenues 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Capitl cxpad 3.1 2.0 2.8 1.9 1.7 1.2 0.6 1.0 1.5 2.5 3.0OvenC Balac (- = ddcit) -9.1 -8.2 -7.2 -10.9 -6.4 -5.7 -10.9 -3.8 0.0 -0.8 40.9

Official capil gr u, 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Exnewni BOowitgOm* -4.4 7.8 4.6 -0.4 1.2 -2.1 -2.4 1.1 1.3 1.8 1.8Mantay Systna Crdit (1e1) 12.9 29.0 18.3 34.7 15.9 -0.8 13.3 -1.0 -2.5 -0.9 40.7Otber Deiic Borrowing (net) 0.6 -28.6 -15.7 -23.4 -10.7 8.7 0.0 3.4 1.2 -0.1 -0.3

Gavemeat Debt (DOD at the end of the Year)

ExteaniDebtinbillkm of LCU 24 213 286 349 535 645 1641 18970 19642 19347 19110BilEaaDekbtimmilloaof US$ 10871 11973 12267J- 12637 9962 9597 9160 9759 9821 9673 9555Det To Mentay Systan(WCU bi) 14 53 90 194 277 269 494 281 -438 -745 -1009Odber Deedc Debt (LCU bil) 0 0 0 0 153 148 350 3531 3632 3450 3269Total Oovenaut debt 37 266 376 542 965 1062 2485 22782 22836 22052 0TotlGoveenmntdebtaspermentO 83 196 187 181 185 122 147 110 79 67 0

Ta bordn ladeslo,. 1

DirecttAe /IODP 20.9 20.4 13.8 10.4 12.0 10.0 8.2 7.5 7.6 7.6 7.6lad.r an domestc GaS / GDP 17.6 13.5 13.4 14.3 17.6 15.0 13.0 14.8 16.6 15.5 15.5Indir bx anedanO&SlprivCoas 31.8 26.1 20.6 18.9 24.2 22.0 18.2 21.1 23.7 22.2 22.1tzea ietl trde, /mercbhnpom 0.5 0.3 0.4 0.9 0.7 0.6 0.5 0.1 0.1 0.1 0.1

- _~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~llM

Bilgaria Annex 1CrhWea1 Amp.aO R.hihU.Juiima Lem Page I of I

M.ary SunM bi. WC,)

anual DsieD

1990 m191 1992 199 1994 1995 199 197 199 199 2090

A. maual IFlws:

Net Intebnnmsl Resaves -11 -176 -30 -107 208 121 -135 512 371 351 394

Dmnedic Credit 14 100 75 154 147 85 827 2048 1484 1403 1575To Cloven at 9 95 70 136 106 -28 647 241 -75 -127 -79

Oovemal Budget 6 39 37 104 83 -7 224 -213 -719 -307 -264Oher ini-fi'l public setor 3 55 33 32 23 -21 422 454 644 IS0 185

ToReatofdbeecmomy 5 6 5 18 41 113 180 1807 1560 1530 1654Pcivateinector 5 6 5 IS 41 113 IS0 195 189 179 161Other r'socialh nis 0 0 0 0 0 0 0 1612 1371 1351 1494

TolalAswts = liabltie 3 -76 45 47 355 207 692 2560 1856 1754 1969

Maney ad Qusxcy 7 57 52 76 184 166 727 2560 1856 1754 1969

Other Liabilities (net) -3 -133 -7 -29 171 41 -34 0 0 0 0

B. End of Year Stacks:

Net IeenktimAl Reraves -27 -203 -233 -340 -132 -10 -145 367 738 1089 1483

I)anedic Crdit 67 168 242 396 543 628 1455 3504 4988 6391 7966To orvernmet(NFPS) 60 155 225 360 467 438 1045 1326 1251 1124 1045

GOcermue Bu4det 14 53 90 194 2m7 269 494 281 -438 -745 -1009Odher ncn-fin'l pubec sector 47 102 135 167 190 169 591 1045 1649 1869 2054

ToRcstofthe csomfy 7 13 18 36 77 190 370 2177 3737 5267 6922Privalesector 7 13 18 36 77 190 370 565 754 933 1094Other f'inialinstitutions 0 0 0 0 0 0 0 1612 2983 4334 5828

TotalAsets = liabiieis 40 -36 9 56 412 618 1310 3871 5726 7480 9449

Mae-y -dQuaknouey 49 106 158 234 418 584 1310 3871 56 7480 9449

OtberL lia i (ad) -9 -142 -149 -178 -6 34 0 0 0 0 0

C. Fasetors aseeundg formonetary ezuason_ (as % MOM)

NotlntenalioaalReweves -55.4 -191.6 -147.6 -145.3 -31.5 -1.8 -11.1 9.5 12.9 14.6 15.7CredittoGovernent(NMPS) 122.4 145.7 142.0 153.9 111.6 75.1 82.8 34.3 21.8 15.0 11.1Credktoseatoftbgecommy 14.7 12.2 11.3 15A 18.3 32.6 28.2 56.3 65.3 70A 73.3Oher Liabes (set (-) -18.3 -133.7 -94.4 -76.0 -1.6 5.9 0.0 0.0 0.0 0.0 0.0

Totl increase i MQM 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

D. Memorandum Ites:

Net intudioal rsves i USSFlow dhg the year -5 -10 -1 -4 4 2 -1 0 0 0 0Stok at the aof-year -12 -9 -10 -10 -2 0 -1 0 0 1 1

E. Momey Croft ad Plice

M2/GDP 104.4 78.2 78.7 78.3 80.0 67.3 77.7 18.6 19.8 22.6 25.2AnnusgrowthrawcMl 14.1 115.8 49.0 48.0 78.6 39.6 124.5 195.4 47.9 30.6 26.3Annualgrowthpfivawecrekt -85.1 79.2 37A 101.6 113.0 148.1 94.7 52.7 33.4 23.8 17.2Inrease i privae credit as % -312.0 53.3 83.9 160.0 304.8 943.6 72.0 37.4 78.8 84.6 69.8

of iereae in damnstic credit

MA.M MA AflTh~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~MMda0

Annex 11Page 1 of 2

Status of Bank Group Operations in BulgariaIBRD Loans and IDA Credits in the Operations Portfolio

DifferenceOriginal Amount in US$ Millions Between actual

Loan or Fiscal and expected

Project ID Credit No. Year Borrower Purpose IBRD IDA Cancellations Undisbursed Disbursements a/

Number of Closed Loans/credits: 3

BG-PE-8307 L33840 1991 REPUBLIC OF BULGARIA TA REFORM 17.00 0.00 0.00 8.92 8.92

BG-PE-8312 L36310 1993 GOVT. OF BULGARIA PRIV. INV. & EXPORT 55.00 0.00 0.00 40.90 37.90

BG-PE-8316 L35630 1993 ENERGY 93.00 0.00 0.00 71.30 62.96

BG-PE-8322 L35920 1993 GOVT. OF BULGARIA TELECOMMUNICATION 30.00 0.00 0.00 20.46 l8.56

BG-PE-8309 L37710 1994 GOVERNMENT OF BULGARIA AGRICULTURAL DEVELOP 50.00 0.00 0.00 50.00 40.34

BG-PE-8319 L37390 1994 GOVT. OF BULGARIA WATER COMPANIES REST 98.00 0.00 41.00 51.43 25.29

BG-PE-831B L40000 1996 GOVT. OF BULGARIA HEALTH SECTOR RESTRU 26.00 0.00 0.00 25.96 -.04

BG-PE-8315 L39220 1996 BDZ RAILWAY REHABILITATI 95.00 0.00 0.00 87.51 19.17

BG-PE-8323 L40810 1997 MOF SOCIAL INSUR. ADMIN. 24.30 0.00 0.00 24.30 0.00

Total 480.30 0.00 41.00 380.78

Active Loans Closed Loans Total

Total Disbursed (IBRD and IDA): 66.52 405.00 471.52

of which has been repaid: 0.00 17.77 17.77

Total now held by IBRD and IDA: 447.30 387.23 834.53

Amount sold 0.00 0.00 0.00Of which repaid : 0.00 0.00 0.00

Total Undisbursed 380.78 0.00 380.78

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.b. Rating of 1-4: see OD 13.05. Annex D2. Preparation ot Implementation Summary (Form 590) . Following the FY94 Annual Review of Portfolio performance (ARPP),

a letter based system will be used (HS - highly Satisfactory, S - satisfactory, U - unsatisfactory, HU - highly unsatisfactory): see proposed Improvements

in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.c. Following the FY94 ARPP, 'Implementation Progress" will be reported here.

Generated by the Operations Information System (OIS)

Annex 11Page 2 of 2

BulgariaSTATEMENTOF IFC's

Committed and Disbursed PortfolioAs of 02/28/97

In Mllions US Dollars

Committed DisbursedIFC IFC

FY Company Loan Equity Quasi Partic Loan Equity Quasi ParticApproval

1994 Euromerchant F'ND 0.00 5.00 0.00 0.00 0.00 2.50 0.00 0.00

Pending Commitments1996 * INTERLEASE INC. 3.50 .40 0.00 0.00

Generated by the Operations information System (OIS)

Annex 12Page I of I

REPUBLIC OF BULGARIAPROPOSED CRITICAL IMPORTS REHABILITATION LOAN

TIMETABLE FOR KEY PROCESSING STEPS

(1) Time taken to prepare 3 weeks

(2) Project prepared by Bank Staff(*)

(3) Concept Meeting March 14, 1997

(4) Loan Committee April 16, 1997

(5) Appraisal April 16, 1997

(6) Negotiations April 21, 1997

(7) Board Presentation May 8, 1997

(8) Closing Date June 30, 1998

Preparation of this loan was a team effort involving ECI Staff from the Resident Mission in Bulgaria, eachsector and country operations. The team was comprised of N. Sirur (Leader), F. Batzella, MH. Bricknell, M.Debatisse, D. He, H.O. Moritz, A. Musalem, J. Nash, N. Nikolov, E. Patterson, E. Somensatto, G. Sotirova, andP. Tardy. G. Mikhlin (Counsel) worked closely with the team. The report was prepared by N. Sirur and D. He,drawing heavily for key sections on an economic update written by E. Somensatto. F. Hassan and N.Mangosing-Koeppen prepared the Annex Tables. H. Sutrisna and J. Francis O'Connor processed the report. C.Poortman and R. Harbison are the Division Chiefs, F. Lysy is the Lead Economist, and K. Lay is the DepartmentDirector.

ISRD 28735

22- 23 24' i5. 27 27' 29-

~~I rO~YO K,,Io,

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Report No.: P 7096 BULType: PR