RESTRICTED
WORLD TRADE WT/BOP/S/4
3July1997
ORGANIZATION(97-2780)
Committee onBalance-of-Payments Restrictions
1997 CONSULTATIONS WITH BULGARIA
Background Paper bytheSecretariat
1. Thispaper hasbeenprepared inaccordance withparagraph 12oftheUnderstanding onthe
Balance-of-Payments Provisions oftheGATT 1994.
I. TRADE AND EXCHANGE SYSTEM
(1) Trade Regime
2. Since 1991, theGovernment ofBulgaria haspursued atransformation toamarket economy
adopting far-reaching structural reforms aimed attheliberalization ofprices, markets, foreign trade
andinvestment. Foreign trade, under statemonopoly until1989, wasopened toalleconomic agents.1
TheCompany Act,inforcesinceJuly1991, endowed allforms ofcompanies, irrespective ofownership,
withtherighttotradeinternationally; noprivate orpublic companies haveexclusive import privileges.
TheLawontheEconomic Activity ofForeign Persons andontheProtection ofForeign Investments,
adopted in1992, opened Bulgaria 'seconomy toforeign investors. Foreign firms aregranted thesame
status asdomestic firms andthere arenorestrictions ontherepatriation ofearnings.
3. Astothetrade regime, quantitative restrictions wereremoved andthetariff, withthefreeing
ofprices intheeconomy, became thecentral tradepolicy instrument. Bulgaria adopted theHarmonized
System foritsTariff on1July1992. Thesimple (unweighed) m.f.n. average in1992wasjustunder
18percent, withfiveratesranging from 5to40percentandarateof55percentapplied tothree
agriculturalitems.Thisratedeclinedmoderatelyto17.4percentin1996,andbroadlythesamestructure
oftariff levels remains ineffect. Latest changes intheCustoms Tariff concern, ontheclassification
side,theadoption ofaclassification ofgoods, based ontheCombined Nomenclature oftheEuropean
Community andreflecting changes intheHarmonized System asof1January 1996 and,onthetariff
side,amendments asofthedateofaccession oftheRepublic ofBulgaria totheWTO totakeintoaccount
market-access commitments ongoods. Acustoms clearance fee,onepercentin1995, applied toboth
imports andexports, istobebrought intoconformity withArticle VIIIoftheGATT 1994 by
31December 1997.
4. Export taxes arelevied oneleven groups ofproducts (sunflower seedandoil,hides andskins,
timber, wood, wool, grain flour) torelieve critical shortages offoodstuffs andother essential products.
TheGovernment iscommitted tominimize theuseofthese taxes anddismantle themasthedomestic
supply situation improves.
1The1991 Constitution states thattheeconomy isbased onfreeenterprise andguarantees allcitizens and
legal entities equal juridical conditions foreconomic activity.WT/BOP/S/4
Page2
5. Bulgaria acceded totheWTO on1December 1996. Inthecourse ofitsaccession, Bulgaria
bound mostofitsindustrial tariffs between 0and40percentandscheduled commitments inanumber
ofservices sectors, including business, professional, telecommunications andfinancial services.
6. Afreetrade agreement withtheEuropean Community came intoeffect on1February 1995;
asimilar agreement hasbeensigned withtheEFTA States: theseprovide forthecreation ofafree-trade
areaoveraten-year period. Bulgaria alsoparticipates infree-trade agreements withtheCzech Republic,
theSlovak Republic andtheRepublic ofSlovenia; free-trade agreements areunder preparation with
Hungary, Poland andRomania. Bulgaria operates aGSPscheme which provides apreferential margin
ofbetween 20and40percenttobeneficiary countries; imports from least-developed countries are
duty-free.
(a) Import surcharge
7. Prior toitsWTO Accession, Bulgaria introduced atemporary import surcharge of3percent
on1August 1993 toforestall theimminent threat ofaserious decline inforeign exchange reserves.2
Thesurcharge wasreduced, according toapreannounced schedule annually untilitwaseliminated
on1January 1996. On4June 1996, a5percent import surcharge, tosafeguard the
balance-of-payments, wasintroduced (WT/BOP/N/18). Thesurcharge, applied toallimports except
forsome essential goods, willbereduced eachyearon1Julyuntilitiseliminated on1July2000.
(2) Exchange RatePolicy
8. Following theestablishment in1991ofaninter-bank market, therateofthelev(BGL) against
theU.S.dollar wasquoted dailybytheBulgarian National Bank (i.e.theCentral Bank) andreflected
theaverage weighted rateofsalesandpurchases offoreign currencies ontheinter-bank market. The
exchange rateoftheBGL, quoted bytheBNB, wasapplied forthepurposes ofstatistics, accounting
andcustoms valuation. Itwasnotobligatory fortransactions andserved onlyasareference tothe
licensed banks andexchange bureaux. Customers could freely negotiate theexchange ratewiththe
commercial banks andtheforeign exchange agents. They hadtheright tosellorpurchase foreign
exchange without anyrestrictions. Companies could freely buyfromtheinter-bank market theforeign
exchangeneededforpaymentsinconnectionwithimportsandothertypesofcurrentaccounttransactions,
aswellastrade foreign currencies among themselves. There wasnosurrender requirement forthe
foreign currency earned. Local persons andforeigners could freely trade foreign currencies onthe
inter-bank currency market forcurrent account transactions. Norestrictions existed fornationals and
foreign persons toopenaccounts inforeign currencies withcommercial banks andtodispose ofthe
funds intheiraccounts.
9. Asof1July1997, theCentral Bank'sexchequer department actsasacurrency board with
thelevfixed at1,000 peroneGerman mark. Under thisarrangement, themonetary basewillbefully
backed byforeign exchange andmonetary goldandthecentral bankisnolonger allowed toextend
newcredit totheGovernment orthedomestic money banks.
10. Theauthorities plantoreview theforeign-exchange lawlaterintheyearwithaviewtoaccepting
theobligations under Article VIIIoftheFund'sArticles ofAgreement, aftereliminating theremaining
restrictions oncurrent-account transactions. Theauthorities alsointend toliberalize capital transactions.
2WT/ACC/BGR/5, 20September 1996.WT/BOP/S/4
Page3
II. MACROECONOMIC DEVELOPMENTS
11. Bulgaria’smacroeconomicsituationweakenedconsiderablyin1996.Largeforeignanddomestic
debtandproblems inthebanking andpublic enterprise sectors werethemaincontributors. Abanking
crisis triggered alossinconfidence and,inavicious cycle, caused inflation andcurrency substitution,
reserve losses, andagrowing fiscal deficit, thefinancing ofwhich further stimulated inflation. Foreign
exchange shortages andadeeprecession emerged, which depressed savings, investment andtrade.
(1) Output andprices
12. After negative orlowoutput growth inthefirsthalfofthe1990s, Bulgaria experienced adeep
recession in1996. Realgrowth declined from around 2percentin1994-95 tominus 10.9percent
in1996 (Chart 1).Allsectors were affected butadverse weather conditions exacerbated problems
inagriculture inparticular.
13. Inflation accelerated from about 30percentin1995 toover300percentin1996 (Chart 2).
Atthesame timerealwages declined strongly asnominal wages increased more slowly thanprices.
Average public sector wages, forexample, fellfromUS$80permonth attheendof1995toUS$40by
theendof1996.WT/BOP/S/4
Page4
(2) External sector developments
14. Bulgaria ’sexternal position deteriorated drastically in1996 when foreign debtservicing and
capitalflightcontributedtoacriticaldeclineinforeignreserves.Theexchangeratedepreciatedmarkedly
andthelevlostover85percentofitsvalue.
15. These external problems didnotprimarily arisefromthecurrent account. Thelatter improved
from asmall deficit in1994 and1995 toasurplus of1.3percentofGDP in1996, despite interest
payments onforeign debtexceeding 4percentofGDP (Chart 3andTable 1).However, thefigures
disguise adecline inimport andexport volumes ofover13percent, andasmall decrease inservice
trade, aseconomic activity andimport demand were depressed.
16. Thecapital account recorded adeficit of10percentofGDP in1996, afterasurplus in1995.
Foreign debtamortization andIMFrepayments amounting to6percentofGDP andother capital
outflows (including capital flight) ofover11percentofGDP byfarexceeded available financing in
theform ofloandisbursements, export credits, andforeign direct investment. Asaresult, official
reserves (excluding gold) declined from2.1months ofimports andinterest payments attheendof1995
tolessthan1month attheendof1996 (Chart 4).WT/BOP/S/4
Page5
WT/BOP/S/4
Page6
Table 1
Bulgaria -Balance ofPayments, 1994-1996
1994 1995Prel.
1996
(US$ million)
Trade balance -17 120 209
Exports 3,935 5,345 4,881
Imports 3,952 5,224 4,673
Services balance -360 -312 -262
Receipts
Payments
ofwhich: interest due1,341
1,701
4551,581
1,893
6151,546
1,808
532
Unrequited transfers (net) 174 132 170
Current account balance -203 -59 117
Foreign direct investment (net) 105 82 100
Medium andlong-term loans (net)
ofwhich: amortizations due-333
-476-18
-185-326
-468
Exports credits extended (net)1263 293 339
Other capital2-7 -5 -1,056
Capital account balance 29 252 -943
Other adjustments3-418 191 284
OVERALL BALANCE -389 443 -659
Change inreserves (increase: -) -329 -248 765
Other financing4718 -195 -106
Memorandum items
Export volume
(in%change overprevious year) 1.5 20.7 -13.3
Import volume
(in%change overprevious year) -16.1 21.4 -13.5
Current account balance
(in%ofGDP) -2.1 -0.5 1.3
Official reserves (excluding gold, inmonths of
imports ofgoods andnon-factor services and
interest payments)2.1 2.1 0.9
External public debt
(in%ofGDP, endofperiod)97.5 64.5 88.3
External debtservice payments
(in%ofGDP)10.3 8.1 10.9
1Includes repayments byRussia innatural gasunder theYamburg Agreement through March 1997; thereafter, theYamburg pipeline
onlygenerates transit payments.
2Includes thediscrepancy between settlements andcustoms data intrade account, short-term capital flows, clearing account
transactions, andchanges innetforeign assets ofdeposit money banks.
3Includes errors andomissions andofficial BOPsupport.
4Includes obligations deferred/unscheduled, change inarrears anduseoffundcredit (net).
Source: Bulgarian National Bank, Bulgarian authorities andtheInternational Monetary Fund.
17. Bulgaria ’sforeign debtburden stayed veryhigh. Although thecountry fulfilled allofitsdebt
service obligations andreduced foreign debtslightly innominal dollar-terms in1996, negative growth
andexchange ratedevelopments caused thedebt-to-GDP ratiotoincrease from 65to88percentof
GDP. Debtservice obligations reached 20percentoftheexport value andover10percentofGDP.WT/BOP/S/4
Page7
(3) Savings andInvestment
18. Bulgaria ’srecent economic andexternal difficulties arereflected lessinthesavings and
investment balance (which isthemirror image ofthecurrent account balance) butrather inthesavings
andinvestment levels. Thelatter increased considerably in1995, ascompared to1994, because the
macroeconomic climate improved. In1996, however, savings andinvestment fellagain (from over
14percentto12percentofGDP) astheeconomic situation worsened (Chart 5).
(4) Explanatory Factors
19. Asmentioned, Bulgaria experienced astrong recession, accelerating inflation, andarapid
deterioration intheexternal position in1996. Large foreign anddomestic debt, abanking crisis and
delays inthetransition process were themain contributing factors:
- Thepublic discovery thatmany banks were insolvent astheresult oftheaccumulation of
non-performing loans inlate1995ledtoabanking crisis inthecourse of1996andtheclosure
offivemajor andanumber ofsmall banks. Theconfidence lossencouraged currency
substitution andcapital flight, andincreased demand forforeign exchange cashholding. This,
inturn, putpressure ontheexchange rateandreserves, andtheservicing ofBulgaria ’shigh
foreign debtbecame increasingly difficult.
- Thebanking crisis andforeign exchange shortages undermined monetary stability. Despite
astrong increase innominal interest rates, currency substitution progressed. AsthedemandWT/BOP/S/4
Page8
fordomestic currency fellandtheshareoftransactions conducted indomestic currency declined,
inflation accelerated, stimulating further currency substitution anddepreciation oftheBulgarian
lev.
- Rising inflation andthequasi-fiscal costs from thebanking crisis alsoundermined fiscal
consolidation efforts. Despite aremarkable primary surplus (thedifference between revenue
andnon-interestexpenditure),risingnominalinterestratespushedinterestpaymentsondomestic
debtin1996 to17.6percentofGDP, asopposed tothebudgeted 12percent(Table 2).
Consequently, theoverall fiscal deficit wasmuch higher thanenvisaged, reaching almost
11percentofGDP. Tofinance thegrowing deficit, government recourse tocentral bank
credit accelerated, fuelling inflation further.
- Delays intheprivatization andreform ofstateenterprises heldupsome external financing and,
thereby, compounded theforeign exchange shortage. Thepoorperformance ofstateenterprises
andtheiradverse effects onthebanking system alsocontributed, directly andindirectly, to
thedeepening recession, anddeclining savings, investment, andtrade.
Table 2
Bulgaria -Consolidated General Government, 1994-1996
1994 1995 Prel.
1996
(PercentofGDP)
Revenues 39.9 36.2 33.6
Non-interest expenditures 32.2 27.6 23.8
Primary balance 7.7 8.6 9.7
Interest 13.5 14.3 20.7
External interest
Domestic interest1.3
12.22.8
11.52.9
17.9
Overall balance -5.8 -5.7 -11.0
Financing 5.8 5.7 11.0
Foreign financing
Domestic financing
ofwhich: banking system-0.5
6.3
5.5-1.3
7.1
4.9-3.0
14.0
12.8
Source: Bulgarian Ministry ofFinance andtheInternational Monetary Fund.
III. TRADE DEVELOPMENTS
20. Trade growth recorded strong fluctuations overthepastyears, andtrade volumes arestill
below pre-transition levels. Economic stabilization in1995 wasaccompanied byincreases inexport
andimport volumes above 20percent. However, asmentioned, thefallineconomic activity translated
intodeclining trade volumes in1996.
21. Thetrade composition haschanged significantly sincetheearly1990s. Theshare ofmachinery
inexports andimports declined fromabout 50percentin1990tolessthan20percentinrecent years.
Therelativeshareofmanufacturingproductsincludingtextilesandgarments,chemicalsandmetallurgical
products increased to60percentoftotalexports. Agricultural exports havebeenveryimportant
traditionally, butthepoorperformance ofthissector reduced theirexport share in1995 and1996.
Ontheimport side,rawmaterials andfuelsaccount forover40percentoftotalimports andchemical
products, textiles, machinery andtransportation equipment together amount toonethirdofimports.WT/BOP/S/4
Page9
22. Thegeographical composition oftrade haschanged towards trade withindustrial countries
sincetheearly1990s.About50percentoftradeisnowconductedwithindustrializedcountries,whereas
theshare oftrade withformer planned economies declined fromapre-transition levelof80percent
tolessthan50percentin1995(Chart 6).Germany, Russia, Greece andItalyeachaccount foraround
10percentofBulgaria ’sexternal trade.