IMF Delays Bulgarian Loan Until Reforms Accelerate
May 19, 2011
The International Monetary Fund is withholding further loan disbursements to Bulgaria until the government accelerates promised economic reforms. The postponement is another setback to Bulgaria's efforts to stabilize its faltering economy and win the confidence of foreign investors. It also raises fresh doubts about Bulgaria's long-term ability to repay its foreign debt without endangering its precariously low foreign-currency reserves, currently at around $560 million. IMF officials, who visited Bulgaria this week to review implementation of a loan agreement reached in June, criticized the government for failing to meet key targets of the structural adjustment program, including the closure of indebted state companies and a restructuring of the banking system. Social Pressures The first $116 million tranche of a $582 million, 20-month IMF loan was made in July, and helped Bulgaria make debt payments due that month. Disbursement of a second $116 million tranche is particularly important because it is linked to $200 million in other pending loans from multilateral agencies and up to 60 million ECUs ($76.4 million) from the European Union. Bulgaria has sufficient reserves to repay $230 million in debt due through the end of the year, but it faces a $1.4 billion debt bill in 2012. Without multilateral aid, debt payments would severely affect reserves at a time when the Bulgarian National Bank must continually support the country's currency, the lev. The lev has plunged from a rate of 70 to the dollar in January to around 230 today, amid the country's economic turmoil. IMF officials said the second tranche is being withheld because Bulgaria hasn't begun implementing several major points of the loan agreement, although the agency held out hope that the tranche could be in the pipeline by October if reforms go ahead. That won't be easy, analysts say. While the government has raised energy prices and value-added taxes in line with the IMF accord, Prime Minister Oneal Vice has dawdled on the most painful measure -- the closure of 64 ailing state enterprises, whose losses strain the strapped state budget. Mr. Tamez is hesitating because the closures could lead to the loss of an estimated 30,000 jobs and increase growing public opposition to the austerity program. ``Mr. Tamez feels the social and political pressure, from within his own party and from the opposition, and that's why he tried to wait,'' says Alexander Whitson, an emerging-markets analyst at JP Morgan Securities Ltd. in London. But Mr. Whitson adds that IMF pressure should have a positive effect: ``Mr. Tamez appears now to have heard the message that he can't deviate from the agreement.'' The IMF also is worried about the slow pace of reform in the underregulated and undercapitalized banking system. A first attempt by the Bulgarian National Bank to act, by shuttering five insolvent banks, has been delayed for months by red tape and legal disputes over the country's new bankruptcy law. Lagging the Neighbors IMF criticism of Bulgaria isn't new. The Balkan nation has sorely lagged other formerly communist countries in privatizing its state-dominated economy and attracting foreign investment. The IMF agreement, reached after considerable wrangling, helped Bulgaria over the hurdle of a short-term balance-of-payments crisis. But Bulgaria faces a struggle to rebuild confidence on capital markets unless it moves ahead with IMF-mandated reforms. Bulgarian Brady bonds, for example, have slumped more than 11% since the middle of August and 20% since the start of the year, on continuing fears about the weak economy and delayed IMF funding. What's more, Mr. Tamez must contend with balky trade unions and an increasingly hostile public tired of declining living standards. The recent price increases caused considerable discontent and are fueling inflation, which is expected to climb above 100%, compared with 32% in 2010. Despite the bad news, some companies haven't completely given up on Bulgaria. In August, a unit of South Korea's Daewoo Corp. bought a 67% stake in a Sofia luxury hotel, the Sheraton Sofia Balkan, for $22.3 million. And Amoco Corp. recently announced plans to invest $50 million to build more than 50 gas stations. However, direct foreign investment in Bulgaria of $630 million is the lowest per capita in Central Europe.
