IMF Projected Bulgaria Economy Reach to 1.9 percent this year

The near-term economic outlook for Bulgaria has weakened. Bulgaria economy are now projecting real GDP growth at 1.9 percent in 2011 and 1.3 percent in 2012, despite increased absorption of European Union (EU) funds that is helping cushion the external headwinds. “We project a small current account surplus for 2011, which will move to balance in 2012. Inflation is expected to fall below 3 percent in 2012,” a statement made by IMF staff Catriona Purfield on December 9.

However, risks are titled to the downside, especially if the global outlook deteriorates further. If euro area uncertainties are resolved, there is potential for growth to surprise on the upside given strong precautionary savings.

In spite of good policies, the recovery in Bulgaria has been hurt by the economic slowdown and ongoing uncertainty in Europe. The way forward is to maintain prudent fiscal policies, enhance fiscal buffers to help weather any deterioration in conditions, and accelerate structural reforms to lay the foundations for stronger and more sustainable recovery in growth, job creation and incomes, statement added.

Fiscal policy remains on track to exit speedily the EU’s Excessive Deficit Procedure. In 2011, the budget is likely to meet the 2.5 percent of GDP fiscal deficit target, reflecting tight control over expenditures as well as some gains from improved revenue collection. This and the low public debt burden have helped insulate Bulgaria from the escalating euro area turbulence.

The 2012 budget deficit target of 1.3 percent of GDP is very prudent. Ensuring that the fiscal reserve remains above its legislated floor during 2012 and securing the possibility for additional external market funding will help preserve confidence and enhance fiscal buffers to counter a sharper downturn. However, additional fiscal measures seem warranted, given our less optimistic growth forecasts. Early adoption of contingency measures that strive to protect capital expenditures and increased absorption of EU funds remain crucial to boost growth prospects. Concurrently advancing structural reforms that improve spending efficiency would secure additional sustainable savings. However, should growth slow by more than anticipated, allowing the deficit to widen within the ceiling established in the new Financial Stability Pact would help cushion the adjustment.

The gradual increase in the retirement age starting from January 2012 and the extended service requirements will help fund an increase in the minimum pension. In the medium-term, these reforms will yield substantial savings. Nonetheless, prompt introduction of administrative measures to counter social security evasion and abuse of disability benefits will bolster contribution collection, while protecting the truly needy.

The Bulgarian banking system is well-supervised and is well placed to weather the headwinds. At end-September, the reported system-wide capital adequacy ratio was 17.8 percent—or more than double the EU minimum requirement. When conditions normalize, banks will be prepared to step up lending given their ample liquidity cushions.”

In making conclusion of Bulgaria economy, a team from the International Monetary Fund (IMF) led by Catriona Purfield visited Sofia December 1–8, to hold discussions with the Bulgarian authorities about recent economic developments and government policies.

Two New members joined WTO Appellate Body

Messrs Ujal Singh Bhatia (India) and Thomas R. Graham (United States) were sworn-in on 8 December 2011 as members of the Appellate Body at a ceremony at the World Trade Organization (WTO).

Messrs Ujal Singh Bhatia (left) and Thomas R. Graham (right) 

During the ceremony, the Chair of the Dispute Settlement Body, Ambassador Elin Østebø Johansen, and WTO Director-General Pascal Lamy both congratulated Messrs Bhatia and Graham and welcomed them as new Appellate Body members. They also thanked the out-going members, Ms Lilia R. Bautista and Ms Jennifer A. Hillman who will be retiring after four years of dedicated service to the WTO.

The Appellate Body is responsible for hearing appeals of WTO panel reports. It is composed of seven members, each appointed for a four-year term, with a possibility to be reappointed once. The expiration dates of terms are staggered, ensuring that not all members begin and complete their terms at the same time. Members of the Appellate Body must be persons of recognized authority with demonstrated expertise in law, international trade and the subject matter of the covered agreements generally and must not be affiliated with any government. The members of the Appellate Body are appointed by the Dispute Settlement Body. From its establishment in 1995 up to the end of 2011, the Appellate Body will have circulated 107 Appellate Body reports.

The EU Adopted Budget Proposals for its External Instruments for 2014-2020

The European Commission on December 7 adopted budget proposals for its external instruments from 2014-2020. They will allow the Union to fulfill its responsibility on the global stage: fighting poverty and promoting democracy, peace, stability and prosperity. The range of instruments will support developing countries as well as countries in the European neighborhood and those that are preparing accession into the EU. The Commission will seek to target its resources where they are most needed, where they will have the highest impact while ensuring more flexibility to be able to react swiftly to unforeseen events. This budget will also enable the EU to further reinforce its role on the global stage and promote its interests and values.

Catherine Ashton, EU High Representative for Foreign Affairs and Security Policy/Vice-President of the Commission, said: "Even in times of crisis, Europe must look outwards and engage in the world. Our security and prosperity depend on what happens beyond our borders, not least in our own neighborhood. The EU will stand by its international commitments to the poorest and most vulnerable people, to those in our neighborhood undergoing transition and those in countries on a path to joining the Union. With these new external instruments we will also be much better placed to promote our own core values and interests, like human rights, democracy and the rule of law, but also to contribute to fighting poverty, preserving peace and resolving conflicts across the world."

European Commissioner for Development Andris Piebalgs stated: "The EU is the first donor in the world and we have to keep up our leadership in the fight against poverty. According to surveys, most Europeans agree that the EU should show solidarity by increasing its development aid. These proposals will enable the EU budget to contribute at a similar level than before to EU commitment to allocate 0.7% of EU GNI to aid by 2015. It is acknowledged that ensuring more inclusive and sustainable growth in the world is also in our EU interest. Today, we also confirm a shift in our relations with emerging countries and a focus of the aid on the poorest countries".

On the new European Neighbourhood and Pre-accession instruments Commissioner for Enlargement and European Neighbourhood Policy Štefan Füle commented: "These new instruments will allow us to respond even better in the future to our partner's needs and ambitions. Through the new European Neighbourhood Instrument and the Instrument for Pre-accession Assistance, support to our neighbours will become faster and more flexible; allowing for increased differentiation and incentives for best performers. At the same time it will continue to ensure the success of the democratisation process and improve economic and social development in our immediate neighbourhood, and support the reform process in those countries preparing for EU membership. "

The budget proposals will support the Commission's new approach - the "Agenda for Change"- to focus EU aid in fewer sectors supporting democracy, human rights and good governance and creating inclusive and sustainable growth.

Under the new principle of "differentiation," the EU will allocate a greater proportion of funds where aid can have the highest impact: in the regions and countries that are most in need, including in fragile states. Countries that can generate enough resources to ensure their own development will no longer receive bilateral grant aid and will instead benefit from new forms of partnership; they will continue to receive funds through thematic and regional program. This will be complemented by different innovative cooperation modalities such as the blending of grants and loans.

One of the major innovations and a key external policy tool is the new Partnership Instrument. It will aim to advance and promote EU interests and to address major global challenges. It will also allow the EU to pursue agendas beyond development cooperation with industrialized countries, emerging economies, and countries where the EU has significant interests.

IMF and EU Signed to Scale Up Cooperation in Capacity Building in Managing Natural Resource Wealth

The International Monetary Fund (IMF) and the European Union (EU) signed an agreement on December 8 for a contribution of €5 million (around US$6.8 million) to enhance their cooperation in capacity building under the Managing Natural Resource Topical Wealth Topical Trust Fund, to which the EU becomes the largest donor.

“This contribution agreement allows us to implement the medium-term capacity building activities that are so crucial to developing countries to better manage their rich natural resources,” IMF Deputy Managing Director Ms. Nemat Shafik said after signing the agreement at a ceremony in Brussels. “Effective management of natural resource wealth is an important pillar in developing countries’ strategy for transitioning from aid dependency to sustainable growth.”

The IMF’s topical trust funds, financed by multiple donors, provide technical assistance globally on specialized topics. The IMF launched the trust fund on Managing Natural Resource Wealth in May 2011 to scale up technical assistance to help low-income and lower-middle-income countries endowed with oil, gas, and minerals to manage these resources effectively.

“Ensuring sustainable resource extraction and increasing domestic revenues are indispensable for successful long term development in our partner countries,” said Mr. Fokion Fotiadis, Director General for Development Cooperation of EuropeAid, who signed on behalf of the EU. “Technical cooperation provided by this Trust Fund will be crucial to prevent what is commonly known as "the resource curse" and will provide an opportunity for better donor coordination.”

The EU joins Australia, the Netherlands, Norway, Switzerland, Kuwait and Oman on the Steering Committee of the Trust Fund. With a budget of $25 million, the fund will provide capacity building for approximately 50 countries over the coming five years. The EU has significantly increased its contributions to IMF capacity building since a Framework Agreement between the EU and the Fund was signed in 2009. Today’s agreement brings the total contributions by the EU to IMF capacity building to almost $49 million.

The Managing Natural Resource Wealth fund complements other topical trust funds focused on Anti-Money Laundering/Combating the Financing of Terrorism, and on Tax Policy and Administration. Responding to the recent crisis, further topical trust funds are envisaged, including on sustainable debt strategies and managing debt portfolio risks.

The Latvian Economy accepted to reach around 5 percent this year

The Latvian economy is now recovering from a severe downturn, with economic growth of 4½–5 percent expected this year, according to International Monetary Fund (IMF) and the European Commission (EC) statement released on December 8. However, growth is likely to slow sharply next year, owing to the deteriorating external environment. While consumer price inflation is likely to ease next year, efforts to promote a sustainable low-inflation environment are warranted. This year’s budget deficit should come in below target, despite significant unexpected costs associated with airBaltic. Labor market conditions have improved but long-term unemployment remains high, and skill losses and skill mismatches require particular attention. Poverty rates remain among the highest in the European Union (EU). Against this background, the mission teams have continuously stressed the need to retain a sufficient level of social safety net spending.

The Latvian government will aim at a 2012 budget deficit of 2.5 percent of GDP, with a view to meeting the general government deficit criterion for Euro adoption on a sustainable basis. Although the mission teams expressed doubts about some measures in the government’s budget proposal, such as further cuts in road maintenance and reduced safety net spending, the budget should be sufficient to achieve the fiscal target. As a contingency, the government stands ready to introduce additional measures during 2012 if these will be needed to meet the deficit criterion.

In the banking sector, the government submitted its final sales strategy for the Mortgage and Land Bank to the EC on 2 November with a view to launching the orderly sale of its commercial portfolio. This step provided for the release on 21 November of another €100 million for general government financing from the funds earmarked for banking sector support.

IMF Approved $US 13.8 Million Disbursement for Sierra Leone

The Executive Board of the International Monetary Fund (IMF) on December 7 completed the second and third review of Sierra Leone’s economic performance under a program supported by the Extended Credit Facility (ECF). The Board’s decision enables the immediate disbursement of an amount equivalent to SDR 8.88 million (about US$13.8 million), bringing total disbursements under the arrangement to an amount equal to SDR 17.76million (about US$27.6 million).

In completing the reviews, the Executive Board approved waivers for nonobservance of performance criteria on net domestic bank credit to the central government and net domestic assets of the central bank, both for end-December 2010, and for the continuous performance criterion on the ceiling on new nonconcessional external debt. The Board also approved a modification of three performance criteria for end-December 2011 related to the net domestic bank credit to the central government, net domestic assets of the central bank, and gross foreign exchange reserves of the central bank to reflect envisaged changes in fiscal and monetary policy.

The three-year ECF arrangement for Sierra Leone was approved on June 4, 2010 in an amount equivalent to SDR 31.11 million.

Following the Executive Board’s discussion of Sierra Leone, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, issued the following statement:

“The economy is continuing to recover, reflecting steady growth in mining, manufacturing, and construction. Inflation, however, remains high due to exogenous shocks and loose monetary policy at the end of 2010. Given tighter policies and more favorable external conditions, inflation is expected to decline in the near term. Gross international reserves remain at comfortable levels.

“Notwithstanding progress with respect to macroeconomic and structural policies, recent performance under the authorities’ program, supported by the three-year Extended Credit Facility, has been mixed. Despite improved revenue performance in the second half of 2010, an acceleration of infrastructure investment under the government’s Agenda for Change led to a surge in unbudgeted spending and commensurate liquidity expansion. As monetary policy accommodated the fiscal easing, key fiscal and monetary targets for December 2010 were not met. The government took action in early 2011 to tighten policies, resorting to both revenue and expenditure measures, resulting in improved program performance. It is also taking action to impose a statutory limit on central bank credit to the government. Continued fiscal restraint will be critical to maintaining macroeconomic stability in the period ahead.

“The medium-term outlook is favorable. Full operation of an iron ore megaproject in 2012 is expected to boost GDP and exports substantially. The fiscal space for infrastructure investment and social spending is, however, constrained in the near term, as government revenue is expected to increase only gradually in the first years of new mining activity. Financing the upcoming elections, as well as the government’s decision to reduce excises on fuel, puts additional burdens on the 2012 budget.

“Monetary policy will seek to contain inflationary pressures, bringing inflation down to single digits by 2013, while improving policy implementation and communication. Exchange rate flexibility should be maintained to facilitate adjustment to external shocks.

“Administrative reforms must also underpin policy efforts with a focus on improving tax administration, strengthening public financial management, and deepening the financial sector. These reforms will help create fiscal space for capital and social spending, while encouraging private sector investment and activity in support of inclusive and broad-based growth”, Mr. Shinohara added. 

IMF Approved 14.8 million Disbursements for Kyrgyz Republic

The Executive Board of the International Monetary Fund (IMF) On December 7 completed the first review of the Kyrgyz Republic’s economic performance under the program supported by a three-year, SDR 66.6 million (about US$103.53 million) Extended Credit Facility arrangement. Approval of the review makes SDR 9.514 million (about US$14.79 million) available to the Kyrgyz Republic. This would bring total disbursements under the arrangement to SDR 19.03 million (about US$29.58 million).

In completing the review, the Board approved the authorities’ request for an upward modification of the quantitative performance criteria (QPC) on the net international reserves held by the National Bank of the Kyrgyz Republic (NBKR) for end-December 2011, reflecting higher-than-expected foreign-exchange inflows. with the subsequent modifications in the QPC on the NBKR’s net domestic assets. The Board approved also the authorities’ request for an upward modification of the QPC on the general government overall deficit target for end-December 2011 to reflect the advancement of the foreign-financed energy infrastructure project. Moreover, in light of the successful renegotiation of the borrowing terms on the first phase of this project, the Board approved a downward modification of the ceiling on contracting or guaranteeing of nonconcessional external debt by the public sector.

Following the Executive Board's discussion, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“Implementation of sound policies under the Fund-supported program has helped the Kyrgyz Republic recover from the sharp slowdown last year. Growth has been strong and inflation has fallen considerably. However, the country faces a number of challenges going forward, including from a deterioration in the global economic environment.

“Fiscal performance has been strong and the authorities have agreed to accelerate fiscal consolidation in the medium term to reduce vulnerabilities, rebuild policy buffers, and ensure debt sustainability. The government intends to restrain current spending while preserving priority capital outlays to increase the economy’s long-term growth potential. Reforms in tax policy and administration are expected to boost revenues, while public financial management reforms will strengthen governance and transparency.

“The authorities’ response to the pickup in inflation has been effective. The central bank plans to maintain a tight monetary stance to mitigate underlying price pressures. While key banking indicators have been improving, ongoing efforts to enhance the resilience of the financial sector are critical. The authorities intend to press ahead with legal reforms to strengthen the bank resolution framework and to keep monitoring closely systemically important institutions.

“Good governance and sound institutions remain key to creating a level-playing field for strong private sector-led growth. The authorities remain committed to ensuring that all of their development plans are consistent with the principles of good governance and transparency.”

IMF Approved US$8 million for Solomon Islands

The Executive Board of the International Monetary Fund (IMF) has approved a one-year arrangement under the Standby Credit Facility (SCF) for Solomon Islands, in an amount equivalent to SDR 5.2 million (about US$ 8.08 million). This arrangement is intended to be precautionary, meaning that the authorities do not intend to draw on the Fund’s resources unless a need arises.

The SCF-supported program aims at consolidating recent macroeconomic progress, implementing a new resource taxation regime to promote fiscal transparency and enhance the efficiency of tax collection, reforming mining legislation to broaden the tax base, and implementing public financial management reforms to strengthen fiscal institutions. The SCF-supported program is expected to be instrumental in anchoring the authorities’ policy agenda going forward.

IMF Completes Third Review for Mozambique

The Executive Board of the International Monetary Fund (IMF) has completed the third review under the three-year Policy Support Instrument (PSI) for the Republic of Mozambique.

Mozambique continues to weather the global economic turmoil well. Real GDP growth is projected to remain above 7 percent in 2011, benefiting from good harvests, a robust performance in the services sector, and the coming online of new megaprojects in the natural resource sector. While risks related to the external environment have increased, Mozambique’s macroeconomic stability and prudent policy mix over the past few years should help the economy mitigate the impact of a temporary global downturn. The tightening of monetary policy in 2011 has been effective in curtailing inflation. The prudent execution of the 2011 budget has contributed to a judicious policy mix that has fostered macroeconomic stability at a critical time and positioned the country well to respond to downside risks should such a need arise. All quantitative targets for end-June 2011 were met, except for reserve money growth which was missed by a small margin. Progress on the structural front has also been good.

The authorities’ economic program under the PSI will continue to emphasize preserving macroeconomic stability and debt sustainability while promoting economic and social development. Monetary policy will be geared toward further reducing inflation while fostering financial deepening. Fiscal policy will seek to step up public investment to close the infrastructure gap and support an expansion of social safety nets to address chronic poverty, consistent with the authorities’ four-year poverty reduction strategy (2011–2014). The necessary fiscal space is expected to be created through a continued strong revenue effort, the phasing-out of the fuel subsidy, selective non concessional borrowing, and a moderate increase in domestic borrowing. The program’s structural reforms will focus on improving public financial management including debt management, tax administration and policy, and monetary policy framework.

IMF and African, Caribbean and Pacific Group of States Intensify Cooperation

The International Monetary Fund (IMF) and the African, Caribbean and Pacific (ACP) Group of States agreed on December 7 to strengthen their cooperation in the field of capacity building to bolster members’ economic institutions and policy making expertise. IMF Deputy Managing Director Nemat Shafik and ACP Secretary General Mohamed Ibn Chambas signed a memorandum in Brussels acknowledging their common interest in fostering sustainable capacity building initiatives in the ACP States and in establishing and maintaining effective consultation, cooperation, and exchange of views and information.

Before the signing ceremony, in a presentation to the ACP Ministerial Committee on Development Finance Cooperation, Ms. Shafik discussed how the global economic crisis has affected low-income countries as well as the IMF’s response. “Though low-income countries have been affected significantly by the crisis, many were able to mitigate the impact of the shock with a countercyclical policy response. Now it is critical that ACP and other low-income countries strengthen buffers against future shocks by mobilizing domestic revenues, increasing domestic savings, further developing local financial markets, and expenditure prioritization,” Ms. Shafik said.

In addition to its policy advice and lending, the IMF actively assists countries in building capacity in its areas of expertise. Half of IMF technical assistance already benefits ACP countries, most of it delivered through six Regional Technical Assistance Centers. The global financial crisis and continued vulnerabilities of ACP countries make the advice and technical assistance provided through these centers even more relevant. The planned expansion of the centers serving ACP regions, including the opening of a new Center in West Africa as soon as funding has been secured, would permit virtually full coverage of the ACP zone.

“The network of regional technical assistance centers serving ACP countries is a project that benefits all your members and help them better address the growing volatility of the economic environment. It greatly contributes to reinforce coordination between the national, the regional and the supra-regional level in the ACP zone. The IMF is determined to further develop its cooperation with the ACP Group,” Ms. Shafik stressed during the signing ceremony.

Mr. Chambas noted: “There are substantial synergies between the regional technical assistance centers and the core work of the ACP group. The areas in which the technical assistance centers are providing assistance, such as debt and revenue management, are critical in helping ACP countries to navigate through these challenging times.”