CELEX: 51991PC0088
Language: en
Date: 1991-03-26
Title: PROPOSAL FOR A COUNCIL DECISION PROVIDING MEDIUM-TERM FINANCIAL ASSISTANCE FOR BULGARIA

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.
 ---pagebreak---                                     - 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
 ---pagebreak---                                  - 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.
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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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                                                                                 ISSN 0254-1475
                                                                     COM(91) 88 final
                                                       DOCUMENTS
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