In a press release, the IMF announced expectations of increased bank lending in the first quarter in 2005, which will drop sharply once the central bank measures, aiming to restrict lending expansion come into force. The imposed regulations provide for decreases in the deadline for unpaid debts. A new method for calculation of the minimum obligatory reserves is expected to result in a withdrawal of liquidity from the bank system. A certain percentage of the bank assets will have to be kept in liquidity instruments including an increase in minimum reserve requirements to 4 percent. Regulatory policy ensuring control on leasing companies will come into force, as their services are form of an credit. The aim is to achieve sustainable credit growth of 30 % a year rather than to cut lending.
The growth of credit to the private sector was running at 50%, well above the targeted range of 20-30% and the IMF defined this volume as a problem. It threatens the macroeconomic stability of the country, as to it leads to an increase in the current account deficit.
Bulgaria’s macroeconomic framework is centered on the Currency Board Arrangement. Its policy is expected to result in real GDP growth of 5.24 percent on average in 2004-2006. The IMF programme relies on strict public sector income policy, tight banking supervision and liquidity management and restructuring and privatization. The legislative and statutory amendments aim to harmonize Bulgaria’s framework with the EU laws and the bank capital framework known as Basel II it allows complexity in measuring and managing the risk while meeting the capital requirements. The objective restrictions and the implementation of Basel II are mainly related to the necessary capital under the requirements. Even so there are some concerns that the current Bulgarian capital requirements are higher than those stipulated in Basel II. The Bulgarian economy is based on a fixed exchange rate regime, the main risk towards EU entry remains the potential loss of competitiveness in a later stage caused by the convergence process. Thus the persistent account deficit implies the possibility of revision of the Currency Board Arrangement as a tool for providing a stable macroeconomic environment.
