RESTRICTEDWORLD TRADE
ORGANIZATIONWT/BOP/S/7
21 September 1998
(98-3602)
Committee on Balance-of-Payments Restrictions
1998 CONSULTATIONS WITH BULGARIA
Background Paper by the Secretariat
1. This paper has been prepared in accordance with paragraph 12 of the Understanding on the
Balance-of-Payments Provisions of the GATT 1994.
I. PREVIOUS CONSULTATION WITH BULGARIA
2. The Committee on Balance-of-Payments Restrictions consulted for the first time with
Bulgaria  on 21 and 22 July 1997.  The Committee welcomed that the import surcharge, introduced at
5% on 4 June 1996, to safeguard the balance-of-payments, was transparent and non-discriminatory
and appreciated the announcement of a time schedule in accordance with paragraph 1 of the
Understanding.  The Committee recognized that Bulgaria's balance-of-payments situation was stilldelicate and found that recourse to Article XII of GATT 1994 was justified.
1
II. TRADE AND EXCHANGE SYSTEM
1. Trade Regime
3. Bulgaria acceded to the WTO on 1 December 1996.  In the course of its accession, Bulgaria
bound most of its industrial tariffs between 0% and 40% and scheduled commitments in a number ofservices sectors, including business, professional, telecommunications and financial services.
4. In January 1998, the Government introduced a new customs tariff; based on the Combined
Nomenclature of the European Community (CN) and containing 10,900 tariff lines.  Rates range from
zero to 110% (on five agricultural products).  Under the association agreement with the EU (the
Europe Agreement), Bulgaria has undertaken the obligation to reflect the amendments introduced
annually in the CN.  In 1998, the simple (unweighed) MFN average tariff equals 17.9% for all
products, 27.5% for agricultural products (HS Chap ters 1 to 24) and 15.3% for industrial products
(HS Chapters 25 to 97).  The weighted average is considerably lower – between 9 and 10% for
industrial products and between 21 and 22% for agricultural products (calculated on the basis of 1996
or 1997 imports).  For more than 94% of industrial pr oducts' tariff lines, the applied m.f.n. rate of duty
is below 25% ad valorem and for only 5% of the agricultural ones – higher than 40% ad valorem .  A
1% customs clearance fee applied to both imports and exports was eliminated on 31 December 1997.
5. As of 1 January 1998, the levels of export taxes levied on live animals, sunflower seed and oil
products, hides and skins, timber, wood and wool were reduced by 40% and the export taxes applied
until the end of 1997 on maize;  wheat;  barley;  cereal flours, groats, meal and grains were removed.
The export taxes on sunflower seed and oil products and processed wood components are to be
                                                          
1 WT/BOP/R/34, 18 September 1997-WT/BOP/S/7
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abolished on 1 October 1998.  All remaining taxes on exports, except for unprocessed lumber and
profiled timber, will be eliminated on 1 January 1999.
6. Agreements with the European Community and the EFTA States, applied as of 1993, provide
for the creation of a free-trade area over a ten-year period.  Bulgaria also participates in free-trade
agreements with the Czech Republic, the Slovak Republic and the Republic of Slovenia. The
Agreement on the accession of the Republic of Bulgaria to the Central European Free TradeAgreement (CEFTA) and the Free-Trade Agreement with Turkey, signed in July 1998, are expected
to enter into force on 1 January 1999.  As from the date of accession to CEFTA, the bilateral free-
trade agreements with the Czech Republic, the Slovak Republic and Slovenia will no longer be
applied.  Bulgaria operates a GSP scheme, which provides a preferential margin, according to the
IMF, of between 9% and 11% to beneficiary countries;  imports from least-developed countries are
duty-free.
(b) Import surcharge
7. Prior to its WTO Accession, Bulgaria introduced a temporary import surcharge of 3% on
1 August 1993 to forestall the imminent threat of a serious decline in foreign exchange reserves.
2  The
surcharge was reduced, according to a preannounced schedule annually until it was eliminated on
1 January 1996.  On 4 June 1996, a 5% import surcharge, to safeguard the balance-of-payments, was
introduced.3  The surcharge, applied to all imports except for some essential goods, was reduced to
4% on 1 July 1997 and to 2%, on 1 July 1998, in accordance with the envisaged  timetable.4  I n
August 1998 the Government adopted a regulation, providing for an accelerated elimination of the
surcharge on 1 January 1999, instead of 1 July 2000, 18 months ahead of the original timetable.
2. Exchange Rate Policy
8. Since 1 July 1997, the Central Bank's exchequer department has acted as a currency board
with the Bulgarian lev fixed at 1,000 per one German  mark.  Under this arrangement, the monetary
base has been fully backed by foreign exchange and monetary gold and the central bank is no longer
allowed to extend new credit to the Government or commercial banks.  Local companies must
repatriate foreign exchange earnings, although foreign investors may repatriate 100% of their profits.
9. The authorities are reviewing the foreign exchange system and related regualtions with the
intention of accepting the obligations of Article VIII, sections 2, 3 and 4 of the IMF's Articles of
Agreement by the end of 1998.
III. MACRO-ECONOMIC DEVELOPMENTS
1. The domestic economy
10. After negative or low output growth since market reforms began in 1991, Bulgaria
experienced a severe financial and economic crisis in late 1996 and early 1997, culminating in
hyperinflation and a drop in annual real GDP by 10.9% and 6.9%, respectively.
11. Since the introduction of the currency board on 1 July 1997, macroeconomic stability has
been achieved and the key financial variables have improved dramatically. Output which declined in
both 1996 and 1997, is expected to increase by around 5% in 1998 reflecting the recovery in domestic
demand and improved export performance. Agricultural output was positive in 1997 but industrial
                                                          
2 WT/ACC/BGR/5, 20 September 1996.
3 WT/BOP/N/18, 24 March 1997.
4 WT/BOP/N/30, 9 October 1997; WT/BOP/N/37, 7 July 1998.WT/BOP/S/7
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growth, due to the effects of restructuring and the lingering impact of the financial crisis, remained
negative. The annual rate of inflation peaked at over 2000% in the spring of 1997 but has declined
steadily to –1.5% in July 1998.  During the first six months of 1998, consumer prices rose by only
2.3% in total and is projected to reach 9% for 1998, declining further in 1999.  Real wages dropped
dramatically as nominal wages increased more slowly than prices: average public sector wages fell by
nearly 40% in 1996 and by mid-1998 had recovered to close to their pre-crisis levels (Table 1).
Table 1
Selected Economic Indicators, 1996-98
1996 1997
Real economy
GDP, real growth from previous year -10.9 -6.9
CPI, 12-month percent changea310.8 578.5
Public wages (in U.S. dollars)
Monthly 64 95
Consolidated governmentb(Percent of GDP)
Revenue 33.6 31.3
Non-interest expenditure 23.8 25.5
Primary balance (excluding BNB transfers) 9.7 5.8
Interest payments 20.7 7.9
Overall balance -11.0 -2.1
External financing -2.5 -0.8
Domestic financing 13.5 -0.3
Bank financing 12.3 -0.4
Privatization 0.0 3.2
Total debt 105.8 104.1
Domesticc22.0 24.3
a End of period.
b Includes the republic budget, municipalities, and extra-budgetary funds excluding the State Fund for Reconstruction and
Development.
c Domestic debt increased by 2.5% of GDP in June 1997 due to a restructuring of central bank claims on Government.
Source: International Monetary Fund.
12. The radical reform undertaken by the Government and the stabilizing effects of the currency
board system are reflected in the continued strong fiscal performance.  Incomes policy, with wages
linked solely to labour productivity, is in place  and the budget deficit, 2.5% of GDP in 1997, is
estimated to balance in 1998, as a result of declining interest payments and the revenue effects of
continued privatization efforts.  Privatization, much of it funded through foreign investment,contributed receipts equivalent to 3.3% of GDP to revenues for 1997 (US$360 million).  Between
1992 and 1997, less than 20% of state-owned long term fixed assets were sold.  The goal of the
authorities is to privatize a cumulative total of about 70% of fixed assets by the end of 1999.  Stakes
in all state banks are slated for sale by the end of 1999. the Law on Banks has been approved helping
to strengthen capital adequacy and other prudential requirements as well as facilitate the resolution ofinsolvent institutions.WT/BOP/S/7
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2. External sector developments
13. Bulgaria’s external position deteriorated drasti cally in 1996 when foreign debt servicing and
capital flight contributed to a critical decline in foreign reserves to less than one month of imports of
goods and services at the end of 1996.  The exchange rate depreciated markedly and the lev lost over
85% of its value. Since the fixing of the lev to the German mark through the currency board
arrangement and the increased confidence in the economy, foreign exchange reserves have risen toUS$2.8 billion (end of June 1998), over six months of  imports.  External debt remains high, at about
80% of GDP, and debt servicing, just under 10% of GDP. Nevertheless, Bulgaria recorded a current
account surplus at the end of 1997, primarily due to a contraction in imports by some 25.6% in the
first quarter of 1997 of both consumption goods and industrial inputs; interest payments on external
debt fell slightly to US$520 million. (Table 2)
Table 2
Balance-of-payments, 1996-98
1996 1997 1998
January-June
(US$ million)
Current account balance 77 433 29
Trade balance 188 381 28
Exportsa4,890 4,925 2,192
Importsa4,703 4,544 2,165
Services balance -281 -185 -110
Receipts 1,547 1,547 687
Of which:  Interest received 143 158 93
Payments 1,828 1,731 797
Of which:  Interest due 548 519 254
Transfers, net 170 232 111
Capital account balance -928 664 221
Foreign direct investment, net 81 497 108
Medium- and long-term financial capital, net -296 -372 218
Disbursements 196 136 486
Amortization due 491 508 267
Portfolio investment, net -129 77 -78
Short-term trade credits, netb338 155 -9
Other short-term capital, netc-923 310 -19
Overall balance -851 1,097 249
Memorandum items:
Gross official reserves (including gold) 781 2,468 2,897
(in months of imports of GNFS) (1.6) (4.4) (4.5)
(Percentage of GDP)
Current account balance 0.8 4.3 -0.3
Non-interest current account balance 4.9 7.8 1.7
External debt 100 99 …
External debt service 12.9 11.0 5.1
… Not available.a Customs basis.WT/BOP/S/7
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b Includes the value of repayments made by Russia in the form of gas provided to Bulgaria under the Jamburg agreement in 1996
and the first half of 1997.
c. In 1988, the residual financing gap after identified financing commitments.  In 1999-2004, the gross financing gap including
official non-project finance and private sector disbursements.
Source: International Monetary Fund.
14. The capital account was also in surplus, as foreign direct investment and portfolio investment
inflows outweighed debt amortization payments.  With no room for manoeuvre on monetary policy
and limited access to the financial markets, the Government continues to rely heavily on external
financing, much of it official through the multilateral lending agencies, in order to service its debt.  A
standby arrangement by the IMF has expired and a request for a three-year support under theExtended Fund Facility is under consideration.
IV. TRADE DEVELOPMENTS
15. Merchandise trade continued to be affected by a struggling economy, where low real wages,
and tight lending policy dampening domestic demand resulted in lower imports (down 3.1% in 1997).
Exports in 1997, affected by the commodity price decline rose slightly (0.7%), partly due to a betterperformance of textile and metallurgical products.  Total imports amounted to US$4.5 billion in 1997,
exports US$4.9 billion, generating a trade surplus of 3.7% of GDP.
16. Industrial exports are quite diversified; agricultural exports have been important traditionally,
and, following poor performance of this sector in 1995 and 1996, are expected to recover, with
Bulgaria once again becoming a net wheat exporter.  On the import side, for 1997 raw materials and
fuels account for close to 40% of total imports and chemical products, textiles, machinery and
transportation equipment together amount to one third of imports. (Chart 1)WT/BOP/S/7
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Africa  1.4ExportsPer cent
Source :  Chart 1
Merchandise trade by main origin and destination, 1997
Miscellaneous
7.8
Asia
6.0
Other central &
eastern Europe
15.1
Total:  US$4.92 billion Total:  US$4.89 billionEU15
43..3
Russian Federation
8.0Asia
6.3EU15
41.8
Russian Federation
28.1America  
5.5
Miscellaneous  1.9
Africa  1.0
Other western 
Europe
5.6Other central and 
eastern Europe
9.7Imports
Other western 
Europe
15.1America
5.0
17. The geographical composition of trade has changed.  European Union countries increased
their share of both imports and exports in the course  of 1997,  to roughly 40% of Bulgaria's external
trade.  CEFTA countries, with whom Bulgaria has a free trade agreement, still represent a small share
in Bulgaria's external trade but are growing in impor tance. Russia's position as a supplier to Bulgaria,
mainly of oil and gas, slipped slightly, but Russia still accounts for close to 30% of Bulgaria's
merchandise imports. (Chart  2)Source:WT/BOP/S/7
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ExportsPer cent
Source :  Chart 2
Merchandise trade by product groups, 1997
Miscellaneous
3.4
Total:  US$4.92 billion Total:  US$4.89 billionMining
18.7Manufacture
61.1Manufacture
49.5
Mining
36.4Miscellaneous
  2.6
Agriculture
11.5Imports
Agriculture
16.8
_______________Source: