COMMISSION OF THE EUROPEAN COMMUNITIES 
COM(91) 88 final 
Brussels,26 March 1991 
Proposal for a 
COUNCIL DECISION 
providing medium-term financial assistance 
for Bulgaria 
(presented by the Commission) 
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EXPLANATORY MEMORANDUM 
Bulgaria's request for financial support 
After several preliminary contacts with the Commission, Bulgaria 
presented its request for financial assistance from the Community and 
the Group of Twenty-Four industrial countries on the G-24 high-level 
meeting on 30 January 1991. 
By that date, the Bulgarian coalition "Government of national 
salvation" had finalised, in close cooperation with the International 
Monetary Fund, its stabilisation and reform programme. The Bulgarian 
authorities started the implementation of this programme in February 
1991, and are currently finalising a stand-by arrangement which would 
create conditions for a substantial support from the Bretton Woods 
financial institutions. The request for an additional financial 
assistance from the Community and the G-24 aims at covering the 
remaining financing gap, which is estimated to be a minimum of $800 
mi 11 ion in 1991. 
The Commission, as coordinator of the G-24 financial assistance to the 
Central and Eastern European countries has supported the Bulgarian 
request and initiated discussions with non-EEC G-24 and other third 
countries with a view to ensuring the mobilisation of the overall 
amount. There has been a general recognition of the eligibility of 
Bulgaria for complementary G-24 financial assistance and most of these 
countries revealed a positive attitude towards participation in the 
support scheme. The Council of Ministers of Economic and Financial 
Affairs of February 25 invited the Commission to present a formal 
proposal on a Community contribution to G-24 assistance to Bulgaria, to 
be debated in March. 
The reform programme 
The reform programme of the Government has three main objectives-. 
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Stabilisation of the economy by curtailing excess demand; 
Restoration of external equilibrium and the credibility of the 
country; 
Introduction of market mechanisms through the necessary structural 
adjustments. 
The strategy underlying the programme is to introduce reforms that are 
mutually supportive even if they address specific goals. Stabilisation 
policies will seek to be consistent with the external targets and with 
longer term prospects for the economy; external policies will aim at 
restoring external creditworthiness; and structural reforms 
(specification of an energy policy, social protection, financial sector 
reform, privatisation, agrarian reform) will support the stabilisation 
objective and seek to speed up the recovery of growth. If successfully 
implemented, the programme is expected to limit the decline in real GDP 
to 10-12 percent in the first half of 1991, creating the basis for a 
gradual recovery thereafter. 
In the fiscal domaine, a tax reform and expenditure restraint measures 
are being introduced. A restructuring of expenditure priorities is 
expected to permit a reduction of the overall budget deficit to 3.5 
percent of GDP in 1991 (from 13 percent of GDP in 1989). A "social 
safety net" is being created for certain target groups particularly hit 
by the recession, within a budgetary limit on social expenditures of 
12.5 percent of GDP. 
The price liberalisation is effective from February 1991. Only some 26 
percent of retail prices and 5 percent of wholesale prices will 
continue to be controlled in the short run (including some energy 
prices). While prices are expected to increase sharply initially (by 
at least 90 percent in February alone), the Government aims at reducing 
monthly inflation rates to some 15-20 percent (annual rate) by the end 
of the year. 
The monetary policy measures are being put in place including 
substantial increases in interest rates and the introduction of more 
attractive forms of bank deposits in order to eliminate the large 
monetary overhang, support the exchange reform and reduce inflation 
expectat ions. 
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Parallel to the price reform, a restrictive incomes policy has been 
agreed with the trade unions. On February 1991, all workers were 
compensated for the impact of the new state-controlled prices on a 
minimum subsistence basket. On July a new system of wage determination 
for the private and cooperative sector will become effective; it will 
involve a negotiation of new wage contracts and limits on the growth of 
wage bills. 
The exchange system reform is scheduled to replace the existing 
multiple exchange rate system by a unified floating rate. The reform 
envisages the creation of an interbank market for foreign currency and 
liberalisation of access to foreign exchange resources for commercial 
transactions. The new exchange rate regime will entail currency 
convertibility for most current account transactions by early 1992. 
Furthermore, imports are virtually free of all quantitative 
restrictions while export quotas are being phased out. A new tariff 
structure will be worked out with the assistance of the world Bank 
which would also apply to trade with former CMEA partners. The 
financial market reforms including new laws for the National Bank and 
banking activity are expected to be adopted before the end of March. 
A comprehensive land reform bill was adopted by the Parliament. It 
envisages the possibility of returning land to previous owners and 
removal of many restrictions on land sales. The privatisation process 
began in early February. The legal framework for small-scale 
privatisation has already been established and a bill on large-scale 
privatisations as well as a bill on foreign investment are to be 
enacted by the end of March. 
The need for additional financial support 
Like other countries in Eastern and Central Europe, Bulgaria is faced 
with a number of large external shocks in 1991: the disintegration of 
the long established trade relations with other CMEA countries, a 
significant terms of trade loss resulting from the shift to world 
market prices in intra-CMEA trade, and the impact of the Gulf crisis. 
Overall, these shocks contribute to produce a trade deficit of over 
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$1.5 billion and a current account deficit of over $2 billion, which 
assumes a degree of adjustment of at least two-thirds of the external 
shocks in the short run. 
By the end of 1990, Bulgaria's convertible currency foreign debt 
amounted to more than $10 billion (mostly owed to commercial banks), 
out of which some $400 million constituted arrears built up since 
Bulgaria declared a unilateral moratorium on the servicing of its debt 
in March 1990. For 1991, scheduled payments of principal and interest 
on this debt represent more than $2 billion. With the normalisation of 
accumulated arrears and a build-up of official reserves necessary for a 
minimum of four weeks of imports, the total gross financing requirement 
of Bulgaria for 1991 is estimated at some $4 billion. 
With no chance to meet these requirements with fresh money from private 
sources, the Bulgarian authorities have requested a rescheduling of the 
official debt to the Paris Club governments and CMEA banks and the 
deferral of commercial debt servicing payments. On this basis, the 
financing requirement for 1991 would be reduced to some $1.6 billion. 
Of this amount, up to about $800 million are expected to be provided by 
the IMF and the World Bank and the remaining gap by the financial 
assistance requested from the Community and the Group of 24. 
Main features of the loan 
The Commission is proposing that the Community would participate up to 
ecu 290 million in a medium-term financial support package from the G-
24 - and possibly other countries - to Bulgaria, the total amount of 
which would be approximately ecu 580 million, with a maximum duration 
of seven years. 
The loan the Commission is envisaging will be closely linked to the IMF 
programme and would be disbursed in two tranches. The disbursement of 
the first tranche would be conditional upon: 
the approval of the IMF stand-by agreement; 
the adoption of a rescheduling agreement on official debt between 
Bulgaria and its Paris Club creditors; 
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the adoption of an interim deferral agreement on commercial debt 
servicing payments between Bulgaria and its commercial banks 
creditors. 
The second tranche - which is to be disbursed in the third or fourth 
quarter of the year - would be conditional upon compliance with a 
number of performance criteria which are to be discussed with the 
Bulgarian Government in consultation with the Monetary Committee. 
The Community would provide the funds through market borrowing with a 
guarantee by the Community budget. Bulgaria would subsequently borrow 
from the Community. The borrowing and lending operations will be 
perfectly matched and without any commercial risk for the Community. 
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Proposal for a 
COUNCIL DECISION 
providing medium-term financial assistance 
for Bulgaria 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Economic 
Community, and in particular Article 235 thereof, 
Having regard to the proposal from the Commission1 submitted following 
consultation with the Monetary Committee, 
Having regard to the opinion of the European Parliament2, 
Whereas Bulgaria is undertaking fundamental political and economic 
reforms and has decided to adopt a market economy model; 
Whereas the said reforms are already under implementation and their 
financial support from the Community will strengthen mutual confidence 
and bring Bulgaria closer to the Community; 
Whereas, following the changes in the international environment, the 
Bulgarian economy is in deep recession and facing external shocks which 
might sharply deteriorate its balance of payments and weaken its 
precarious reserve position; whereas a particularly heavy external debt 
burden makes the Bulgarian economy even more exposed to the said 
external shocks; 
Whereas the Bulgarian authorities have requested financial assistance 
from the International Monetary Fund (IMF), the G-24 and the European 
Community; whereas, over and above the estimated financing which could 
be provided by the IMF and the World Bank, a financial gap of 
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some 580 million ecus remain to be covered in 1991, in order to 
prevent a further erosion of Bulgaria's uncertain reserve position and 
avoid an additional degree of import compression which could seriously 
jeopardise the achievement of the policy objectives underlying the 
Government's reform effort; 
Whereas the success of the reform process in Bulgaria will depend 
crucially on the solution of the acute debt problem which faces the 
country, whereas the grant to Bulgaria of medium-term financial 
assistance should be conditional upon the adoption by the Paris Club of 
a rescheduling arrangement on Bulgaria's official debt and the adoption 
by Bulgaria's commercial bank creditors of a deferral arrangement on 
debt servicing payments; 
Whereas the Commission as coordinator of assistance from the Group of 
24 industrial countries has invited them and other third countries to 
provide medium-term financial assistance to Bulgaria; 
Whereas the grant by the Community of a medium-term loan to Bulgaria is 
an appropriate measure to support the balance of payments and to 
strengthen the country's reserve position; 
Whereas the Community loan should be managed by the Commission; 
Whereas the Treaty does not provide, for the adoption of this Decision, 
powers other than those of Article 235, 
HAS DECIDED AS FOLLOWS 
Article 1 
1. The Community shall grant to Bulgaria a medium-term loan facility 
of a maximum amount of 290 million ecus in principal, with a 
maximum average duration of seven years, with a view to ensuring a 
sustainable balance-of-payments situation and strengthening the 
reserve posit ion. 
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2. To this end the Commission is empowered to borrow, on behalf of the 
European Economic Community, the necessary resources that will be 
placed at the disposal of Bulgaria in the form of a loan. 
3. This loan will be managed by the Commission in full consultation 
with the Monetary Committee and in a manner consistent with any 
Agreement reached between the IMF and Bulgaria. 
Article 2 
1. The Commission is empowered to negotiate with the Bulgarian 
authorities, after consultation with the Monetary Committee, the 
economic policy conditions attached to the loan. These conditions 
shall be consistent with the agreements referred to in the third 
paragraph of Article 1 and with arrangements made by the G-24. 
2. The Commission shall verify at regular intervals, in collaboration 
with the Monetary Committee and in close coordination with G-24 and 
the IMF, that the economic policy in Bulgaria is in accordance with 
the objectives of this loan and that its conditions are being 
fulfilled. 
Article 3 
1. The loan shall be made available to Bulgaria in two instalments. 
The first instalment shall be released as soon as: 
a "Stand-by Arrangement" has been concluded between Bulgaria 
and the IMF; 
a rescheduling agreement on official debt has been concluded 
between Bulgaria and its Paris Club creditors; 
an interim deferral agreement on commercial debt servicing 
payments has been concluded between Bulgaria and its commercial 
bank creditors. 
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2. The second instalment shall be released after a period of at least 
two quarters subject to Article 2(2). 
3. The funds shall be paid to the National Bank of Bulgaria. 
Article 4 
1. The borrowing and lending operations referred to in Article 1 shall 
be carried out using the same value date and must not involve the 
Community in the transformation of maturities, in any exchange or 
interest-rate risk, or in any other commercial risk. 
2. The Commission shall take the necessary steps, if Bulgaria so 
decides, to include in the loan conditions, and also to exercise, 
an early repayment clause. 
3. At the request of Bulgaria, and where circumstances permit an 
improvement in the interest rate on the loans, the Commission may 
refinance all or part of its initial borrowings or restructure the 
corresponding financial conditions. Refinancing or restructuring 
operations shall be carried out in accordance with the conditions 
set out in paragraph 1 and shall not have the effect of extending 
the average duration of the borrowing concerned or increasing the 
amount, expressed at the current exchange rate, of capital 
outstanding at the date of the refinancing or restructuring. 
4. All related costs incurred by the Community in concluding and 
carrying out the operation under this Decision shall be borne by 
Bui gar la. 
5. The Monetary Committee shall be kept informed of developments in 
the operations referred to in paragraphs 2 and 3 at least once a 
year. 
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Article 5 
At least once a year the Commission shall address to the European 
Parliament and to the Council a report, which will include an 
evaluation, on the implementation of this Decision. 
Done at Brussels, For the Council 
The President 
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FINANCIAL RECORD 
1. Budget line concerned 
Article (BO-215) loan guarantee for aid to Bulgaria (to be created 
through an amending and/or supplementary budget). 
2. References (legal base) 
Article 235 of the Treaty 
3. Classification of the Expenditure 
Obi igatory 
4. Description and Justification for the action 
a) Description of the action 
Provision of a guarantee from the Community for a loan to 
Bulgaria in view of supporting its balance of payments and 
strengthening the country's reserve position. 
b) Justification for the action 
The G24 and the Council of the EEC have endorsed the 
principle of providing assistance in response to a request 
from Bulgar ia. 
The budget entry is intended to provide a budgetary support 
for guarantee offered by the European Community to cover a 
loan extended to Bulgaria. 
5. Nature of the expenditure and method of calculation 
a) Nature of the expenditure 
A guarantee to a loan to Bulgaria. 
b) Method of calculation 
A token entry is proposed given that the amount and timing of 
any call on this budget line cannot be calculated in advance 
and because it is expected that this budget guarantee will not 
be cal led. 
6. Effect of the action on intervention credits 
Only in the case of an effective call on the guarantee. 
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7. Financing of intervention expenditure 
Endowment of the line by transfer, by reutilisation of 
reimbursed amounts (Article 27(3) of the Financial Regulation 
of 1977), or by amended and/or supplementary budget. 
In order to fulfil its obligations, the Commission can 
provisionally ensure the debt service with funds from its 
treasury. In that case, Article 12 of the Council Regulation 
(EEC, Euratom) No 1522/89 of 29 May 1989 will apply. 

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