According to the 2002 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) on Monetary Transparency in Bulgaria, the Bulgarian National Bank (BNB) maintains a very high standard of disclosure and transparency in its conduct of monetary policy operations. Since 1997, Bulgaria has maintained a currency board arrangement (CBA). Under the CBA, the BNB has a limited role in monetary policy operations. The law limits BNB's policy operations to lender of last resort situations involving systemic risks and foreign exchange cover for its monetary liabilities. The Law on the BNB and the associated regulations clearly delineate the BNB's role in monetary policy actions. Since Bulgaria's accession to the EU on January 1, 2007, Bulgaria must treat its exchange rate policy as a matter of common interest. Therefore, any exchange rate policy that might threaten the smooth operation of the single market has to be avoided. According to the BNB, the existing currency board regime is fully compatible with the requirements of the criteria for entering ERM II. The next phase will mark the entry into the EMR II exchange rate mechanism. The final phase will be Bulgaria's entry into the Euro area, which is envisioned for the end of 2009 or the beginning of 2010.

General Overview

According to the 2002 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) on Monetary Transparency in Bulgaria, the Bulgarian National Bank (BNB) maintains a very high standard of disclosure and transparency in its conduct of monetary policy operations. (IMF 2002, p. 69)

The Bulgarian National Bank (BNB), established in 1879, is the Central Bank of Bulgaria. Its main objective is to maintain the stability of the national currency, the Lev, through the implementation of adequate policies and of an efficient payment system. After the introduction of a Currency Board Arrangement on July 1, 1997, the number of monetary policy instruments at the disposal of the Bank was reduced and the exchange rate is currently fixed by Law at 1.95583 Levs per Euro. The BNB has the exclusive right to issue banknotes and coins in Bulgaria. They are produced in the Bank's Printing Works and Bulgarian Mint. The BNB performs the function of financial agent of the government. (BNB website)

Under the currency board arrangement (CBA), the BNB has a limited role in monetary policy operations. The CBA principles, incorporated in the Law on the BNB, limit the BNB's ability to use new monetary instruments. The Law prevents extension of credit to State or State agencies, and limits credit to the banking system to very narrowly defined lender of last resort situations involving systemic risks and the BNB maintains full foreign exchange cover for its monetary liabilities. (IMF 2002, p. 69)

Since Bulgaria's accession to the EU on January 1, 2007, Bulgaria must treat its exchange rate policy as a matter of common interest. Therefore, any exchange rate policy that might threaten the smooth operation of the single market has to be avoided. According to the BNB, the existing currency board regime is fully compatible with the requirements of the criteria for entering ERM II. The next phase will mark the entry into the EMR II exchange rate mechanism. The final phase will be Bulgaria's entry into the Euro area. The country's entry into the euro-area is governed by Article 122 of the Treaty establishing the European Community. In 2004, the Bulgarian Government and the Bulgarian National Bank signed an agreement on the adoption of the Euro in the Republic of Bulgaria. The envisaged strategy for the country's membership into the Economic and Monetary Union is based on the following principles: (1) joining the ERM II as quick as possible after the date of accession to the EU; (2) preserving the currency board arrangement until the entry into the euro-area with the current exchange rate level on the Bulgarian Lev; (3) unilateral commitment of the Bulgarian Government and the BNB to maintain a zero deviation of the exchange rate from the fixed rate level (i.e., holding on to the current policy); and (4) observing the minimal required by the acquis communautaire period for staying in the ERM II and timely application of all the necessary steps for the euro-area membership. The realization of this agreement aims at Bulgaria's membership in the Euro-area and the BNB's membership in the Eurosystem from the second half of 2009 or from January 1, 2010. (BNB website)

According to the 2006 IMF Article IV consultation with Bulgaria, Bulgaria's economic program of 2006 aimed at maintaining a stable policy framework within which to prepare for EU accession on January 1, 2007 and subsequent entry into the Eurozone. Maintenance of the currency board at an unchanged exchange rate until euro adoption in 2009-10 remains the cornerstone of Bulgaria's economic policy. Strong private sector demand in anticipation of EU accession and convergence is likely to lead to continued high current account deficits and external debt levels through the medium term. The priorities of reducing these external vulnerabilities and lowering inflation in order to meet the conditions for the Euro adoption will require a continued commitment to very prudent economic policies in coming years. The 2006 program therefore remained focused on fiscal restraint, incomes policies, tight financial sector supervision, and structural reforms to strengthen competitiveness. The limited capacity and availability of fiscal and monetary policy to manage the very rapid private sector demand growth highlights the importance of the structural agenda in particular, in order for Bulgaria to grow strongly and function effectively under the currency board arrangement and, eventually, within the European Monetary Union (EMU). (IMF 2006, p. 75)

The IMF further states that there has been a steady increase in inflation over the last year, although core inflation has fallen recently. Rising inflation reflected both temporary and more durable factors. Oil price hikes and flood-related shortages in 2005 raised CPI inflation to 6.5 percent by end-2005. Inflation has increased sharply during the first five months of 2006, due largely to excise tax increases, reaching 8.5 percent in May. Core inflation closely tracked the overall CPI during the first half of 2005, but has declined since. (IMF 2006, p. 6)

Bulgaria is a subscriber to the Special Data Dissemination Standard. (IMF SDDS website)

The Principles

Clarity of roles, responsibilities and objectives of central banks.

FC

According to the 2002 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) on Monetary Transparency in Bulgaria, the Bulgarian National Bank (BNB) maintains a very high standard of disclosure and transparency in its conduct of monetary policy operations. (IMF 2002, p. 69)

The objectives of the BNB are clearly defined in the Law on the BNB, in force since July 1, 1997, which, provides that: (1) the Bulgarian Lev (currency) will be fixed against the Euro; (2) the BNB will maintain full foreign exchange cover for its monetary liabilities; (3) the BNB will be independent of the Council of Ministers and other state bodies and will not extend any credits to the State or State agencies; and (4) the roles, responsibilities, and limited objectives of monetary policy are clearly specified in the Law on the BNB as well as the BNB's regulations. (IMF 2002, p. 69)

The above mentioned responsibilities and roles are published in the Official Gazette. The BNB also maintains an excellent website which provides, in Bulgarian and English, all relevant laws and regulations; weekly, monthly, quarterly, semi-annual and annual balance sheets, income statements, as well as BNB research. (IMF 2002, p. 69)

Procedures for appointment, terms of office, and removal of member of the BNB governing bodies are publicly disclosed in the Law on the BNB. The BNB's Managing Board consists of seven members including the Governor, the three Deputy Governors, and three other members. The law requires that all must be Bulgarian citizens, and must possess the highest integrity and prominent qualifications in economics, finance or banking. They must not have been adjudicated insolvent, or have been the principal owner or manager of an insolvent business. The Governor and the Deputy Governors may not engage in any other remunerative activity, other than teaching, or be members of the bodies in companies where the BNB participates or in international organizations related to the BNB activities. The other three members of the Managing Board may not engage in any other activity at the BNB, or work for banks or in the executive. (IMF 2002, p. 70)

The mandate of any member of the Managing Board is terminated before the set term only on any of the following grounds: resignation; practical inability to perform his functions for more than six months; enforcement of an imprisonment sentence for a premeditated crime; adjudication in insolvency in a capacity as a sole proprietor or general partner in a commercial company; and previous membership of a managing or controlling body of a company or cooperative, which has been dissolved by insolvency. (IMF 2002, p. 70)

All the amounts and terms of credits to the government (in so far as the Law allows), and the amounts and terms of deposits of the government with the BNB are publicly disclosed through publication of Annual and Semi-Annual Reports submitted to the Parliament, and the Monthly Bulletin of the BNB. The Law on the BNB provides that the BNB will act as the agent for public debts under terms agreed with the Ministry of Finance (MoF). The activities concerning public debt registry, settlement, and debt service are reported in the Annual and Semi-Annual Reports of the BNB submitted to the Parliament. (IMF 2002, p. 70)

The BNB acts as a manager of foreign exchange reserves as disclosed in the Law on the BNB. The responsibility of the BNB as a banker to the government is specified in the Law on the BNB, Organic Budget Law and Annual Budget Law. Under the Law on the BNB, the BNB and Council of Ministers shall inform each other of their intentions and actions in the formulation of the general outlines of the monetary and credit policy. Experts from the BNB participate in the discussions and in preparation of written statements concerning the government's economic program, the credit rating of the country and programs for financial support from international financial institutions. (IMF 2002, p, 71)

The agency roles performed by the BNB are clearly defined in the Law on the BNB, the Annual Budget Law, the Organic Budget Law, Regulation 5 on the Terms and Procedure for Issuance, Acquisition and Redemption of Book-entry Government Securities, and in the contract between the Ministry of Finance (MoF) and the BNB. This contract specifies the agency functions of the BNB concerning mainly the monitoring and servicing of the domestic and foreign public debt. (IMF 2002, p. 70)

The law on the BNB requires the BNB to publish weekly the balance sheet of the Issue Department of the BNB, showing the BNB's foreign exchange reserves and its monetary liabilities. It also requires the BNB to publish monthly in the State Gazette the balance sheets of the Issue and Banking Departments. The law requires the BNB to submit to Parliament Annual and Semi-Annual Reports, which also cover a review and assessment of the BNB's activities during the previous period. All of these reports are also available on the BNB's website. (IMF 2002, p. 70)

The only recommendation the IMF made in its report on Bulgaria's Monetary and Financial Practices is that the Ministry of Finance (MoF) and BNB should publicly disclose the agency contract between the MoF and BNB pertaining to domestic securities registration, issuance, and securities. (IMF 2002, p. 75)

Open process for formulating and reporting monetary policy decisions.

FC

According to the 2002 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) on Monetary Transparency in Bulgaria, the Bulgarian National Bank (BNB) maintains a very high standard of disclosure and transparency in its conduct of monetary policy operations. (IMF 2002, p. 69)

In keeping with the Currency Board nature of the BNB, and as disclosed in the Law on the BNB, the BNB has a very limited number of monetary policy instruments. In particular, the Law forbids credit to the State or the State agencies, open market operations, and restricts lending to the banking system. The BNB does not attempt to manage interest rates. The BNB's limited and somewhat indirect instruments with monetary policy consequences are the minimum reserve requirements and a Lender of Last Resort (LOLR) facility. The relevant law and regulations are fully disclosed. (IMF 2002, p. 71)

The BNB sets the minimum reserve requirements and the method of their calculation and compliance. Variation in reserve requirements cannot be used as, an active monetary policy tool within a Currency Board Arrangement. However, Regulation 21 on the Minimum Required Reserves provides the banks with some flexibility in meeting their normal liquidity fluctuations within a monthly cycle. (IMF 2002, p. 72)

The BNB provides a strictly limited LOLR credit to solvent banks against high quality collateral for a period of no more than three months, in the event of systemic liquidity risks. The operation rules for such credit are defined in Regulation 6 of the BNB. (IMF 2002, p. 72)

The BNB can contribute to greater financial market transparency by providing more comprehensive information on the financial status of individual banks than the summary information currently published. It could also make a greater disclosure of its Lender of Last Resort assistance to distressed banks ex-post, and after a suitable "cooling off' period. (IMF 2002, p.72)

All the responsibilities and roles of the BNB are published in the Official Gazette. The BNB also maintains an excellent website which provides, in Bulgarian and English, all relevant laws and regulations; weekly, monthly, quarterly, semi-annual and annual balance sheets, income statements, as well as BNB research. (IMF 2002, p. 69)

The IMF recommends in its report on Bulgaria's Monetary and Financial Practices that the BNB should make greater disclosure of its Lender of Last Resort assistance to distressed banks ex-post, and after a suitable 'cooling off' period; and provide more qualitative information concerning the banking system and the economy more generally. (IMF 2002, p. 75)

Public availability of information on monetary policy.

FC

According to the 2002 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) on Monetary Transparency in Bulgaria, the Bulgarian National Bank (BNB) maintains a very high standard of disclosure and transparency in its conduct of monetary policy operations. (IMF 2002, p. 69)

The BNB has a very limited role in monetary policy in keeping with the currency board nature of the Bank. Nevertheless, full information concerning such decisions is widely disseminated. (IMF 2002, p. 72)

The Law on the Bulgarian National Bank provides that the BNB must maintain its accounts in compliance with the Law on the Accountancy and in connection with the International Accounting Standards. (IMF 2002, p. 72)

The weekly and monthly balance sheets of Banking and Issue Departments, and semiannual and annual reports are all publicly disclosed through publication in the State Gazette, Monthly Bulletin, and the BNB website. The Law on the BNB requires the Bank to provide a Semi-annual and Annual Report to the National Assembly concerning its operations, which includes its financial statements. The annual financial statement of the BNB must be certified by an independent auditor and shall be published together with the auditor's report in accordance with the requirements of the international accounting standards. The Annual Report also contains a report of the Chamber of Auditors on the budget of the BNB. (IMF 2002, p. 72)

The BNB publishes a weekly balance sheet of the Issue Department showing aggregate foreign exchange reserves. Data for the external sector (in particular foreign exchange reserves and other balance of payments indicators) is published monthly together with short notes in a press release. Monthly and weekly dissemination is in hardcopy and website format, which facilitates further analysis and comparison over time. (IMF 2002, p. 72)

Aggregate information on emergency financial support is contained in the aggregate items of the balance sheets of Issue and Banking departments. Detailed information on emergency financial support by the Bulgarian National Bank is not publicly disclosed. The BNB maintains a broad range of public information services, a few of which are: Publication of Annual Report, Semi-Annual Report, Government Debt Management, Secondary Market of Government Securities, balance sheets of Issue and Banking Departments, research publications (discussion papers) and information brochures, Interviews given by senior BNB officials on TV and radio programs, and Press releases of the BNB's Press Office. Further the website of the BNB contains various official publications, statistical information, texts of speeches of senior BNB officials, organizational structure of the BNB, information about the EU integration issues, etc. (IMF 2002, p. 72)

Bulgaria is a subscriber to the IMF's Special Data Dissemination Standard. (IMF SDDS website)

Accountability and assurances of integrity by the central bank.

CP

According to the 2002 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) on Monetary Transparency in Bulgaria, the Bulgarian National Bank (BNB) maintains a very high standard of disclosure and transparency in its conduct of monetary policy operations. (IMF 2002, p. 69)

Most provisions in respect of accountability and assurance of integrity of the BNB are exemplary. Provisions relating to the appointment of the BNB's Governing Board, independence from the State, accountability to parliament and the public, observance and disclosure of observance of the currency board rules, use of International Accounting Standards in presentation of the BNB's accounts, requirements under the Law for the appointment of the Chief Auditor and external auditor, and the frequency of financial reporting are generally excellent and are disclosed to the public. (IMF 2002, p. 73)

According to Article 49 of the Law on the BNB, the annual financial statement of the BNB is certified by an independent auditor and is published together with the auditor's report in accordance with the requirements of the international accounting standards. The Managing Board shall elect the independent auditor for a term of three years on the basis of a public tender procedure. (IMF 2002, p. 74)

The Law on the BNB requires that a Chief Auditor be appointed, reporting directly to the Managing Board of the BNB. The auditor have to perform the following functions: evaluate the quality of the internal controls systems, test the operation of these systems, their reliability and completeness of information; examine the adequacy of the existing systems for protection of the BNB's assets and, where necessary, take stock of the said assets; examine the compliance of conduct of the BNB's operations with law and other legislative acts and with the regulations issued by the BNB's managing bodies; assess whether the BNB's fund are properly used and, where necessary, make recommendations to the Managing Board; perform inspections concerning different risks in the BNB's activity; and coordinate the auditors activities with the external auditor of the BNB. (IMF 2002, p. 74)

The BNB's Managing Board adopts internal rules and guidelines for internal control over the financial activities of the Bank, which are not publicly disclosed. The reports on the budget outlays of the BNB are examined by the National Audit Chamber, which prepares a special report on the results of the examination. The report on the budget expenses of the BNB is submitted to the Parliament simultaneously with its Annual Report, but it is not published. (IMF 2002, p. 74)

According to the Law on the BNB, the employees, of the BNB when taking office sign a declaration taking an oath of allegiance and observance of law, of performing the functions entrusted in connection with the BNB activities, and of keeping bank and commercial secrecy. While satisfactory requirements exist for personal financial disclosure by members of the Governing Board, it would be appropriate to extend similar requirements to the top managers, i.e., Directors of Directorates or equivalent. (IMF 2002, pp. 74-75)

At inauguration, and at the end of each year, any member of the Managing Board has to declare to the Board his and his family members' property status and other business interests. The declarations are kept in a special register at the BNB and are not disclosed to the public. Moreover, members of the Managing Board shall not participate in the deliberation and shall abstain from decision-making on issues in which they or members of their families may have interest. They must notify the Managing Board in advance of any such interests. (IMF 2002, p. 74)

Article 28 of the Penal Code envisages criminal prosecution of the Bulgarian National Bank (BNB) officials who act beyond their authority. The wording of the Law on Banks is evidently not sufficient to prevent lawsuits against supervisory staff. The BNB also does not have policy to provide legal assistance, or financial means to do so, for their official actions. In practice, the BNB takes over any lawsuits brought against its staff with regard to civil and criminal liability arising from their official actions. However, such staff protection is not adequately formalized in the BNB's internal policy manuals or employment contracts. It is recommended that the BNB fully establish and document an adequate policy for providing the staff with legal assistance and protection in case of lawsuits arising from their official responsibilities. (IMF 2002, p. 75)

The few recommendations the IMF made in its report on Bulgaria's Monetary and Financial Practices are: the BNB should publish the agenda and minutes of the Governing Board meetings; disclose personal financial information by senior managers; report daily foreign exchange reserves, separate funds under investments management from the BNB's balance sheet; value daily at market prices securities comprising foreign exchange reserve assets; and fully establish and document an adequate policy for providing the staff with legal assistance and protection in case of lawsuits arising from their official responsibilities. (IMF 2002, pp. 75-76)