site.btaMarch 17, 1997: Bulgaria Steps toward Stabilization amid Financial Collapse

On March 17, 1997, Bulgarian Prime Minister Stefan Sofiyanski's caretaker cabinet signed a memorandum with the International Monetary Fund (IMF), committing itself to a currency board arrangement to overcome Bulgaria's financial collapse.

That was a really pivotal moment in Bulgaria's modern history. In 1997, Bulgaria was in the midst of a severe economic and political crisis. Hyperinflation, banking collapses, and mass protests had paralyzed the country. The crisis peaked in early 1997, when inflation soared above 300%, and people were facing widespread shortages of basic goods.

Stefan Sofiyanski was appointed caretaker Prime Minister after the resignation of the socialist government led by Zhan Videnov. One of his key moves was signing the memorandum with the IMF in April 1997, committing Bulgaria to a currency board arrangement. The currency board was introduced in July 1997 and pegged the Bulgarian lev to the German mark (and later the euro), effectively putting an end to hyperinflation and restoring financial stability.

The currency board meant Bulgaria had to maintain strict fiscal discipline since it couldn't print money freely anymore - the monetary base had to be backed by foreign currency reserves.

This marked a turning point for Bulgaria, paving the way for economic reforms, foreign investment, and eventually Bulgaria’s path toward EU and NATO integration.

Following is the story in BTA's English-language service on the signing of the Bulgaria-IMF agreement:

Bulgaria, IMF Reach Agreement

Sofia, March 17 (BTA) - Following prolonged and difficult negotiations Bulgaria and the International Monetary Fund (IMF) finally reached an agreement under which the Bulgarian cabinet undertakes to introduce a currency board and implement an economic stabilization programme and the IMF to provide financial support for the reforms.

Bulgaria will receive a financing package of SDR 479 million (some USD 659 at the current exchange rate) if the IMF Board of Directors approves the signed agreement, IMF Mission Leader for Bulgaria Anne McGuirk said at a news conference on Monday which was
attended by Prime Minister Sofiyanski and Finance Minister Svetoslav Gavriiski. The details of the stabilization programme were specified late on Sunday evening. The financing from the Fund will have two elements: USD 510 million under a proposed 14 month stand-by
arrangement and a USD 150 million for purchasing cereals. The first USD 180 million tranche will be disbursed in early April, McGuirk said. The remaining sum will be disbursed in equal tranches every quarter until March 1998.

"This is a strong and historical agreement", McGuirk said. By it the Bulgarian Cabinet undertook to introduce a currency board in June which is expected to quickly stabilize prices and the exchange rate, McGuirk added. The Mission welcomes Bulgaria's programme,
says a press release of the IMF Resident Mission in Sofia. "The financial stabilization and structural reform set the stage for strong sustainable growth with low inflation. This commitment represents a clear break with the past, and can be expected to bring a rapid stabilization of prices and the exchange rate, according to the IMF.

The agreement should be backed by a sound fiscal policy and strong supervision on the part of the Cabinet. The programme provides for increases in budgetary wages and contains a social safety net to cushion the effects of the present recession on the poor.

The Government has also undertaken to implement a structural reform - privatization of the banking system and the production sector. A strong cash privatization programme will be implemented by June.

The IMF will extend USD 50 million for stabilizing Bulgaria's banking system.  The lending institutions should be stabilized before a currency board is put in place and steps to their stabilization will be launched already tomorrow, Prime Minister Stefan Sofiyanski
said.  The people should not worry about their savings, Sofiyanski added.

The financial stabilization programme has been adjusted to the servicing of Bulgaria's foreign debt, Finance Minister Gavriiski said.  It is almost impossible to achieve a rescheduling of the debt to the London Club which Bulgaria owes USD 250 million a year.  "The
agreement with the IMF gives us grounds to hope that we may receive an invitation to negotiations on a rescheduling of payments to the Paris Club soon," Gavriiski added.  If the privatization programme is duly implemented, payments on credits received till 1991 will be no problem, Gavriiski said.  It has been provided for internal and foreign debt payments to be effected not by taking fresh loans but by increasing production, exports and revenues from privatization.

The finance minister projected a steep drop in inflation in March, April and May.  Inflation is expected to drop below 50 percent during these months.  After the introduction of a currency board the inflation rate is projected at 1-2 per cent a month.

The budget deficit is expected to be up to 4 per cent of the GDP. The final decision on the budget framework will be made by the future Cabinet and Parliament, the Finance Minister said.

Union of Democratic Forces (UDF) leader Ivan Kostov described the agreement reached with the IMF as "an extremely important success" at a news conference on Monday. Kostov stressed that the support the Cabinet received from the major political forces
before starting the negotiations shows that there is no confrontation among them on strategic issues. Some things may be further improved but there are no disturbing clauses in the agreement, Kostov added. This country may achieve financial stabilization on this basis, Kostov believes. EK/ND/