RESTRICTED
WORLD TRADE WT/BOP/R/34
18September 1997
ORGANIZATION(97-3728)
Committee onBalance-of-Payments Restrictions
REPORT ONTHE 1997 CONSULTATIONS WITH BULGARIA
1. TheCommittee onBalance-of-Payments Restrictions consulted withBulgaria on21and
22July 1997. Theconsultations were heldunder theChairmanship ofMr.Peter R.Jenkins
(United Kingdom) inaccordance withtheterms ofreference ofArticle XII:4(a) oftheGATT 1994
andtheUnderstanding ontheBalance-of-Payments Provisions oftheGATT 1994. TheInternational
Monetary Fund wasinvited toparticipate intheconsultations inaccordance withArticle XV:2 of
GATT 1994.
2. TheCommittee hadbefore itthefollowing documents:
WT/BOP/S/4 Background Paper prepared bytheSecretariat
WT/BOP/G/4 Basic Document supplied bytheRepublic ofBulgaria
WT/BOP/N/18 Notification from theRepublic ofBulgaria
IMF: Bulgaria,SupplementaryBackgroundMaterialfortheWTO,10July1997
3. Theopening statement bytherepresentative ofBulgaria isattached asAnnex I.
4. Thestatement bytherepresentative oftheInternational Monetary Fundisattached asAnnex II.
Discussion intheCommittee
(i) Balance-of payments position andprospects; alternative measures torestore equilibrium
5. TheCommittee wasunanimous inviewing Bulgaria 'sbalance-of-payments situation asdelicate.
Members recognized theserious economic crisis thathadaffected Bulgaria, characterized bynegative
growth, adramatic fallinthevalue ofthecurrency, hyperinflation andadecline inforeign exchange
reserves tolessthanonemonth ofimports ofgoods andservices attheendof1996. Members
commended Bulgaria foritssustained commitment toreform andadjustment; thishadalready produced
positive results suchasarebuilding ofreserves toroughly threemonths ofimport coverage byend-June.
They encouraged Bulgaria tocontinue along thepathofmarket-oriented policies inorder toassure
thecapital inflows necessary tomeetdebtservicing obligations andimprove thelevelofreserves.
(ii) System, method andeffects ofrestrictions
6. Members wereinagreement thatBulgaria hadchosen anon-discriminatory, transparent, price-
based, across theboard measure tosafeguard itsbalance ofpayments, onewhich waslessdisruptive
totrade thanother forms ofrestrictions. Itwaspointed outthatanimport surcharge could notbea
substitute forappropriate andconsistent macroeconomic policies. Members welcomed thesubmission
ofatime-table forthephasing outofthesurcharge; some Members suggested thatBulgaria might
wishtoreview thisschedule before thenextconsultation inthelightofpossible future improvements
initsbalance ofpayments. Members considered thatBulgaria wasfullyincompliance withitsWTO
obligations.WT/BOP/R/34
Page2
7. Therepresentative ofBulgaria responded thatannual consultations under Article XII:4 provided
theopportunity toreview balance-of-payments measures todetermine whether these continued tobe
justified andtoconsider aneventual acceleration oftheschedule forelimination.
Conclusions
8. TheCommittee commended Bulgaria forhaving maintained, during itsrecent difficulties, its
commitment toreform andliberalization. Itrecognized that,although Bulgaria 'sreserve position had
improved recently, itsbalance-of-payments situation wasstilldelicate, andnoted, interalia,boththe
continuing importance ofmarket-oriented policies andBulgaria 'scontinuing reliance onthetimely
disbursement ofofficial external assistance. Itfound thatrecourse toArticle XIIofGATT 1994was
justified.
9. TheCommitteewelcomedthefactthattheimportsurchargewastransparent,non-discriminatory
and,asaprice-based measure, leastdisruptive totrade; itappreciated thetimely notification ofthe
measure totheCommittee along withtheannouncement ofatimeschedule inaccordance with
paragraph 1oftheUnderstanding. Some Members oftheCommittee urged Bulgaria toaccelerate
theelimination ofthismeasure, asrecommended bytheIMFinitsstatement, andexpressed theirhope
toseeprogress inthisregard bythenextconsultation. Bulgaria affirmed thatitwould keepunder
continuous review thecompatibility ofthismeasure withitsobligations under GATT Article XII:2(b).
10. TheCommittee decided torecommend totheGeneral Council thatBulgaria bedeemed in
compliance withitsWTO obligations.WT/BOP/R/34
Page3
ANNEX I
Statement bytheRepresentative oftheRepublic ofBulgaria
Mr.Chairman,
Distinguished Members oftheCommittee,
Thepurpose oftoday'smeeting istoexamine, inthelightoftherelevant provisions ofthe
GATT 1994, theapplication bytheRepublic ofbulgaria ofatemporary import surcharge. Theimport
surcharge wasintroduced witheffect from 4June1996, before Bulgaria 'saccession totheWTO.
Information ontheintroduction ofthistemporary measure wassubmitted totheWorking Party on
theAccession ofBulgaria. Promptly following itsWTO accession, Bulgaria notified themeasure.
Inspiteoftheeconomic andfinancial crisis experienced inlate1996 andearly 1997, theRepublic
ofBulgaria isstrictly implementing theschedule ofelimination ofthemeasure asnotified totheWTO.
Today wehavetherelevant documents before us:theBasic Document, supplied bytheRepublic of
Bulgaria,theBackgroundPaper,preparedbytheSecretariatandtheSupplementaryBackgroundMaterial,
kindly presented bytheInternational Monetary Fund. Iwould liketothank theSecretariat andthe
IMFfortheirefforts inproducing thebackground materials. These documents describe theeconomic
situation intheRepublic ofBulgaria andprovide thereasons forthenecessity oftheapplication of
atemporary import measure.
Aftertheshort-livedeconomicstabilizationin1995,thedelayintheimplementationofstructural
reforms inthebanking andenterprise sectors, thehighexternal andinternal debtservice payments,
ledtoasevere banking, currency andbalance-of-payments crisis in1996. TheBOPcrisis in1996
wasthemostserious sincethebeginning oftheeconomic reform in1991. Thesignificant depreciation
ofthelevandtheshrinkage ofthesupply ofcredit inrealterms totherealsector andthebadharvest
hadanegative impact ontheeconomy. For1996thelocalcurrency depreciated against theU.S.dollar
by589percentinnominal terms andby59.9percentinrealterms. Thishasbeenthemostsharp
depreciationsincethebeginningofthereformsanditsetBulgariaintoanextremelyunfavourableposition
regarding foreign trade andthegrowth oftheeconomy. TherealGDP declined by10.9percent.
Official reserves felltoaprecariously lowlevel(lessthanUS$0.5 billion).
Asasmall open economy, Bulgaria 'sGDP growth depends toagreat extent ontheexport
growth. Asaresult oftheslower growth in1996oftheexternal demand aswellasofdomestic factors
thetotalexports declined sharply byUS$463.6 million (8.7percent) compared to1995. Imports
declinedbyUS$550.6million(10.5percent),duetotheexpenditure-reducingpolicyoftheGovernment,
switch oftheexpenditures asaresult ofthesignificant depreciation ofthecurrency, lower demand
forimports andtheimplementation oftheimport surcharge. Those factors contributed tothedrop
ofimport ofconsumer goods by29.9percentin1996 compared to1995, ofinvestment goods -by
20.6percent, ofrawmaterials -by19.4percent.
Thecurrent account wasslightly positive, itsbalance amounting toUS$106.6 million
(1.3percentofGDP).
Despite theimport decline, thetrade balance for1996 ofUS$209.0 million (2.2percentof
GDP) wasnotsufficient tocompensate forthenetinterest payments (3.6percentofGDP). Themain
factorfortheinsignificantcurrentaccountsurpluswasthenegativeinterestbalance(-US$339.7million).
Main contributors forthisnegative interest balance werethesignificant amount ofinterest payments
forservicing ofBulgaria 'sexternal debt(US$482.4 million, 5.2percentofGDP), aswellaslowerWT/BOP/R/34
Page4
interests received asaresult ofthedecline intheBulgarian National Bank'sandcommercial banks '
foreign exchange reserves since thebeginning of1996.
Thecapital account wasstrongly negative in1996(amounting to-US$706.7 million), mainly
duetotheexternal debtnetpayments andthecapital flight, remarkably highforthescaleofBulgarian
economy andthecountry 'sforeign exchange reserves. Twomajor forms ofcapital flight occurred:
resident capital outflow (withdrawal ofcashfromforeign exchange deposits -themostsignificant since
thebeginning oftheeconomic reform) andcapital outflow abroad because ofexpectations ofadrastic
nominal devaluation ofthelevbased onthe1995 over-valuation ofthelevinrealterms, thedecline
inforeign reserves anddramatically shaken confidence inthebanking system.
Thecapitalflightthroughout1996totalledUS$1,007.3million(10.8percentofGDP),including
resident capital outflow amounting toUS$797.3 million. Theslight current account surplus, the
considerableforeigndebtprincipalpayments(4.8percentofGDP),thelimitedforeignexchangereserves
ofthecountry anditspractical isolation from international financial markets made itimpossible to
soften theunfavourable consequences oftheshock onthecapital account.
Asaresult, foreign exchange reserves fellsharply byUS$753 million (8.1percentofGDP)
fromUS$1,236.4 million in1995 toUS$483.4 million. Interms ofmonths ofimport ofgoods and
non-factor services andinterest payments theforeign reserves fellto0.9attheendof1996.
Thesituation called foraforceful response toexisting economic difficulties withaview to
re-establishconfidenceinthebankingsector,strengthenfinancialdiscipline,bringdowninflationquickly
while limiting further decline ineconomic growth, ensure fiscal andexternal viability, strengthen the
balance ofpayments andre-build depleted official reserves toalevelcommensurate withBulgaria 's
debtservice requirements.
Thebalance-of-payments developments during thefirstquarter of1997werestrongly influenced
bytheunstable political andeconomic environment. Thedecline intheGDP (by11.2percent)caused
asharp decline inrealmoney balances. Theeconomic agents (especially firms andhouseholds) resumed
withdrawing theirdeposits inlevaandbuying foreign currency. Currency substitution contributed
tothestrong pressure ontheforeign exchange market. Forthesameperiod thelevdepreciated against
theU.S. dollar by319.7 percentinnominal terms. Thehighest monthly inflation since 1991
(240percent) wasrecorded inFebruary.
Asaconsequence ofthesharp decline indomestic demand inthefirstquarter of1997, the
decline inimports wassharper thanthatinexports. Imports fellby37.5percent(amounting to
US$765.5 million) compared tothefirstquarter of1996, whereas exports declined by4percent
(amounting toUS$1,144.5 million). Theforeign exchange reserves remain ataverylowlevel-
1.2months ofimports ofgoods andnon-factor services andinterest payments.
SinceMarch1997someimprovementsindomesticconditionshavebeenobserved.Thecaretaker
Government, inoffice from February toend-May, successfully negotiated anagreement withthe
International Monetary Fund oneconomic reforms andanewStand-By Arrangement, undertook
discussions withtheWorld Bank onapackage ofstructural reforms linked tonewfinancial sector and
enterprise structural adjustment loans, started negotiations withtheEuropean Commission ona
comprehensive newpackage ofassistance from theEuropean Union. Ajointhigh-level G-24 and
ConsultativeGroupmeetingwasheldinApril1997withtheobjectiveofmobilizinginternationalfinancial
assistance toBulgaria inorder tobridge theBOPgapandtosupport theeconomic andstructural reforms
undertaken bytheGovernment.WT/BOP/R/34
Page5
Asaresult ofthemeasures taken bythecaretaker Government, April'searlyelections, followed
byaGovernment withaclear mandate forreform, thestabilization programme oftheGovernment
andthesuccessful negotiations withtheIMFfollowed byanapproval ofanewStand-By Arrangement,
thesupport oftheother international financial institutions andthesubsequent funding commitments
and,theintroduction ofacurrency board exchange regime since 1July1997. Thelevwaspegged
atarateof1,000 totheGerman Mark.
Toachieve success ofthestabilization programme andsustainability ofthecurrency board
itisrequired thatBulgaria notonlymaintains macroeconomic policy discipline, butalsotakesnecessary
steps intheareaofstructural reform. Thecutofthefiscal deficit isanimportant stepofthe
programme. From 10.8percentofGDPin1996, for1997thedeficit isprojected tofallto6.2percent.
Theacceleration ofprivatization, aswellastherecovery ofthebanking sector areimportant elements
oftheGovernment 'sprogramme.
Oneofthemostimportant determinants forthebalance ofpayments in1997 istheexternal
debtservice. Theexpected trade balance surplus for1997 amounting to2.1percentofGDP, non-
interest current account of4.9percentofGDP arenotsufficient forthecountry tobeabletoservice
itsdebtpayments (10.1 percentofGDP) without external BOPsupport, aswellastobeabletomake
theinvestments necessary forachieving asustainable growth inthemedium andlongterm. TheGDP
growth isaprecondition forregular debtservicing (amounting approximately toUS$1 billion peryear
fortheperiod uptoyear2000) withnoorlimited external financing andalsoformaintaining anadequate
levelofforeign exchange reserves.
Inspiteofthemeasures provided forinthestabilization programme andthefirstpositive results
ofitsimplementation, theeconomic situation inthecountry remains fragile. Thegoals ofthe
stabilization programme oftheGovernment canonlybeachieved through successful implementation
ofthecurrency board arrangement. Under thecurrency board regime, anypossible decreases offoreign
exchange reserves mayhaveanegative impact ontheoutput through themoney supply. Thisiseven
more important in1997, during theinitial period ofthecurrency board implementation. Therefore,
additional measures areconsidered necessary withaview tomaintaining asteady level offoreign
exchange reserves. Forthatreason, further application ofthesurcharge isconsidered asanimportant
factor contributing foratrade balance surplus andfortheadequate foreign exchange reserves level.WT/BOP/R/34
Page6
ANNEX II
Statement bytheRepresentative oftheInternational Monetary Fund
1. Bulgaria joined theWTO inthemidst ofarapidly worsening economic andfinancial crisis.
Thecrisis, rooted inheavy internal andexternal indebtedness andfinancial indiscipline inthebanking
andenterprise sectors, wastriggered bythepublic recognition inearly1996oftheinsolvency ofseveral
banks. Following thefailure ofthestabilization package adopted inmid-1996, thecrisis peaked with
thehyperinflationofFebruary1997.Inresponse,agovernmentcommittedtoreformbeganimplementing
acomprehensive stabilization andreform program supported byastand-by arrangement withtheFund
approved inApril 1997 andassisted byother official financing committed attheApril Consultative
Group meeting. Theprogram isgenerally ontrackandthestabilization component hasyielded positive
results sooner thanexpected.
2. Bulgaria hassustained theliberalization ofitstrade andexchange rateregime thattookplace
intheearly1990s, andhasmade progress towards eliminating remaining restrictions. However, when
official reserves declined toaprecariously lowlevelinmid-1996, raising concerns overBulgaria ’s
ability tomeetitsexternal debtservice payments, Bulgaria imposed atemporary 5percentimport
surcharge aspartofastabilization program. Thesurcharge applies mainly toconsumer goods and
intermediate products, representing about 50percentoftotalimports. Inlinewiththecommitment
tophasing itoutby2000, thesurcharge wasreduced to4percentinJuly1997.
3. The1996 crisis hitBulgaria withunexpected virulence asconfidence inthebanking system
andthecurrency collapsed. RealGDP fellby11percent, realmoney demand fellby63percent,
thelevdepreciated by85percent,andinflation accelerated to311percent(yearonyear)byend-1996.
Nevertheless, strong fiscal adjustment helped contain theimpact ofthecrisis ontheexternal accounts
andpermittedBulgariatoremaincurrentonitsexternaldebtserviceobligations.Non-interestexpenditure
wasseverely compressed —byabout 3.5percentofGDP in1996 butproportionally more during the
second halfoftheyear—andtheprimary surplus increased to8.4percentofGDP. Even though the
adjustment effort andthedisruption ineconomic activity anddepreciation ofthelevcontributed to
amodest increase inthetradesurplus, thebalance ofpayments recorded alargeoverall deficit, mainly
resulting fromcapital flight andlargeexternal debtservice payments. Official foreign exchange reserves
declined byabout US$0.7 billion toUS$0.5 billion byend-1996 (equivalent tolessthanonemonth
of1996imports). Withtheemergence ofthepolitical crisis inlate1996, trade andeconomic activity
became severely disrupted andmonthly inflation reached 240percentinFebruary 1997.
4. Toresolve thecrisis, acomprehensive adjustment program wasadopted inFebruary, centered
ontheprospective establishment ofacurrency board arrangement which became effective asof
July1,1997.Structuralreformsweregivenanewimpetusthroughaccelerationanddeepeningofreforms
inthebanking andenterprise sectors, mainly through anambitious privatization program, andmeasures
toliberalize tradeandprices, particularly intheagricultural sector. Measures havebeentaken tobring
theoverall budget deficit to6.3percentofGDP in1997, halfthelevel of1996, andconsiderable
foreign exchange reserves havebeenbuiltup(US$1.3 billion, excluding gold, atend-June), providing
confidence inthegovernment ’sability tomeet itsobligations. With confidence improving, thelev
appreciated significantly before being fixed at1,000 perDMunder thecurrency board arrangement.
Asaresult, inflation hasdeclined considerably andisexpected toremain below 2percentpermonth
fortheremainder of1997. Yields ongovernment securities havefallen fromover20percentpermonth
atthestartofthestabilization program tolessthan1percentpermonth.WT/BOP/R/34
Page7
5. Thecomprehensive adjustment effort, together withasupportive incomes policy, isexpected
topermit Bulgaria torealize a5percentofGDP surplus ontheexternal non-interest current account
in1997. Thetrade surplus would remain atabout US$200 million, withbothexports andimports
expected toremain subdued astherestructuring oftheenterprise sector continues andtightfinancial
policies areimplemented. Thecurrent account isexpected torecord amodest surplus ofabout
US$75 million or0.8percentofGDP. Butevencombined withanacceleration offoreign direct
investment, which hasalready shown promising upturn, Bulgaria willstillneedtorelyonthetimely
disbursement ofofficial external assistance ofabout US$1.2 billion tomeet external debtservice
obligations, estimated atabout 10.8percentofGDP in1997. Thiswould allow official reserves to
increase toabout US$1.6 billion byend-1997, aleveldeemed prudent inviewofannual debtservice
ofabout 9.5percentofGDPin1998, withasubstantial bunching inprospect during thefirstquarter.
Provided financial policies remain ontrackandtaking intoaccount theneedforcapital goods imports,
amodest financing gapcould arisein1998 aftertaking intoaccount Fund andBank financing.
6. Tohelpcreate afavorable climate forinvestment andgrowth, theauthorities remain committed
tofurther tradeandexchange liberalization. Bulgaria hasconcluded anumber ofmultilateral andbilateral
tradeagreements, reducing external protection. Asplanned, theauthorities reduced theimport surcharge
to4percentandhavereplaced export bansonselected agricultural products withatemporary export
taxof15percenttobephased outbyend-1997. Bulgaria intends toremove remaining exchange
restrictions onprofit remittances ofsmall enterprises andthelimitonpurchases offoreign exchange
fortourism, soastoallow ittoadopt theobligations under Article VIII, sections 2,3and4ofthe
Fund’sArticles ofAgreement. Italsointends toliberalize capital transactions.
7. Insum,while Bulgaria ’sprospects haveimproved significantly overthepastfewmonths, large
external debtservice anduncertainties about thetiming andimpact oftherestructuring oftheenterprise
andbanking sectors ontheexternal accounts require vigilant implementation oftheadjustment program
andprudent management ofofficial foreign exchange reserves. TheFund hasemphasized thatstrong
andsustained implementation ofappropriate macroeconomic policies willrestore balance-of-payments
viability andeliminate theneedfortrade restrictions andhasrecommended totheauthorities thatthe
import surcharge bephased outentirely, wellahead oftheexisting commitment forend-1999.