PROPOSAL FOR A COUNCIL DECISION PROVIDING MEDIUM-TERM FINANCIAL ASSISTANCE FOR BULGARIA
Date: 1991-03-26
Institutions: European Commission
Subjects: Bulgaria, Community loan, International Monetary Fund, financial aid, medium-term credit, reflation

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) 

- 2 -

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-. 

-  3  -

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. 

-  4  -

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 

-  5  -

$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; 

- 6  -

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. 

- 7 -

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 

- 8 -

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. 

- 9 -

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. 

- 10 -

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. 

-  11  -

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 

-  12  -

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. 

-  13 -

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. 

- 4 1 ,-

ISSN 0254-1475 

COM(91) 88 final 

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ISBN 92-77-70983-9 

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