deepening the secondary market. Both the BNB and the Ministry of Finance have been enhancing their debt tracking systems. The BNB debt monitoring system tracks both external and domestic debt, but generates only external debt service projections. Debt database of the Ministry of Finance covers state guarantees as well as the entire government debt, but its projection and reporting engines are under development.

Both institutions lack tools to analyze debt sustainability and to assess risks of their asset and liability portfolios. There exists no structured procedure to assess and compare the risk exposures, and decisions are thus made with little reference to any risk management objectives. For example, servicing the dollar-denominated debt from the Euro or lev accounts alters the net combined exposure of the fiscal authorities and the Bulgarian National Bank, thereby adding to Bulgaria's fiscal vulnerability. As a hurdle in the development of further institutional capacities, both the Ministry of Finance and Bulgarian National Bank suffer from high staff turnover.

The system for transaction processing remains complex, with several overlapping procedures in the Ministry of Finance and the BNB. It has been successful in preventing any payment slippage since 1994, but in some instances, erroneous decisions with regards to accounts and source of funds used for debt servicing have increased debt servicing costs. Streamlining the transaction processing within the overall Treasury management framework is therefore strongly warranted.

# _The proposed reform would bring social security under control_

Bulgaria's government legally guarantees an old-age pension and other social security programs. Social security guarantees are becoming fiscally expensive. Bulgaria has 2.4 million pensioners and 3.2 million insured in the mandatory social security system. The old dependency ratio, as the share of population aged 60 plus to those between 15-59, has surpassed 0.43. The system dependency ratio, as the share of pensioners to the working population, has exceeded 0.75. Social security programs are exerting increasing pressures on the budget, rising from 9 percent of GDP in 1997 to 13 percent in 1999. Social security programs include: (a) retirement and various social pensions, (b) unemployment and one-off retraining benefits, (c) various social assistance programs for specific groups (students, families with numerous children, and others), and (d) social benefits paid through the municipal budgets, but subsidized from the central budget, for the uninsured and poor.

The government spends 9 percent of GDP on old-age and social pensions. The pension system suffers from arrears in contributions (200 million BGN, which is about 1 percent of GDP, as we will discuss in the enterprise section of this paper) but not from any arrears in benefits payment. With no reform, expected demographic trends threaten to generate cash deficits in the pension system of nearly 2.7 percent of GDP by 2002 (table 3). To contain these expected increases, the government proposes to downsize the existing pay-as-you-go, improve options for voluntary private pension saving, and introduce mandatory defined contribution professional and employer saving plans. Proposed changes into the present pay-as-you-go system include a 18