Bulgaria has taken significant steps over the past few years to improve fiscal transparency. According to the 2005 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, Bulgaria meets the requirements of the fiscal transparency code in a number of areas, and in several areas Bulgaria's practices approach best practices. Further, there has been significant recent legislative action, much of it linked to European Union (EU) accession requirements. The Financial Management Information System (FMIS) began operating at the Ministry of Finance (MoF) on September 1, 2005. The FMIS contributes to improved planning, execution, reporting and control of the consolidated government budget in line with modern practices in EU Member States. However, in a 2007 review, the IMF expressed concern that the Bulgarian authorities had stepped back from their commitment to improve budgetary transparency.

General Overview

According to the 2005 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, Bulgaria has made considerable progress in improving fiscal transparency since the time of the 2000 fiscal transparency IMF report and the 2001 and 2002 updates, and now meets the requirements of the fiscal transparency code in a number of areas. Important areas where Bulgaria meets the code include the consistent use of the consolidated general government as the basis for fiscal policy and reporting; clear articulation of fiscal targets and rules; independent external audits; and clear definition of the fiscal roles of the branches of government. Areas where the Bulgarian practices approach best practice include the reporting of public debt; the timeliness of within-year fiscal reporting and reporting of the general government outturn; and the stipulation of an advance release date calendar for fiscal reporting, government/central bank relations, reporting of state aid to corporations, and financial sector regulation. (IMF 2005a, p. 23)

There are a number of other areas where Bulgaria has made progress toward meeting the requirements of the code. In a number of fields relevant to the fiscal transparency code, there has been significant legislative action, much of it linked to European Union (EU) accession requirements. Some of this legislation is quite strong, while other legislation could be better described as representing a useful step forward. (IMF 2005a, p. 23)

With effect from July 1, 1997, Bulgaria adopted currency board rules embodied in a new Law on the Bulgarian National Bank (BNB). Under a Currency Board Arrangement (CBA), fiscal policy is the main instrument for economic policy adjustment in the absence of an active monetary policy, but the rules of the currency board arrangement also impose strict constraints on fiscal policy. (Miller 1999, p. 11)

The Ministry of Finance (MoF) was established in 1879 in accordance with the Turnovo Constitution. Its objective was to prepare and implement the state budget. Since the collapse of communism the importance of the MoF has increased considerably because a market economy requires tight financial, fiscal and budgetary policy. Under the currently effective legislation the MoF is responsible for the financial management and policy of the state. The main objective of the Ministry is to sustain a transparent fiscal, financial and budgetary policy in compliance with the government strategy for accession to the EU. (MoF website)

With a view to an efficient budget implementation and in connection with the need of aligning accounting procedures with the EU requirements, the MoF is modernizing the budgeting system and is improving the accounting one. The activity of the MoF in the field of tax policy is aimed at analyzing and assessing the Bulgarian tax legislation (tax laws, regulations on their implementation, ordinances), preparing drafts and opinions on tax legislation, as well as aligning Bulgarian tax legislation with the European one. The Ministry of Finance promotes the Republic of Bulgaria's Government tax policy, coordinates and supports the activity of the National Tax Policy Council and the National Accounting Council. (MoF website)

The National Audit Office (NAO), created in 1995, participates in the discussions and adoption of the annual state budget acts in the National Assembly, monitors compliance by all spending units with budget laws and regulations, and is responsible for assessing the reliability of the reports of all spending units. (IMF 2000)

The Financial Management Information System (FMIS) is a major element of the budgetary reform. The system contributes to improved planning, execution, reporting and control of the consolidated government budget in line with modern practices in EU Member States. (IMF 2002; IMF 2005b, p. 13)

The IMF's main recommendations in its 2005 ROSC were: provisions permitting executive government to spend revenue in excess of that forecast in the budget without prior parliamentary approval should be eliminated from the Organic Budget Law; the audited annual report on budget execution should be routinely published at the time it is presented to the National Assembly, without any requirement that it first be accepted by the National Assembly; the economic classification of expenditure should be aligned further with international standards, through the allocation of defense and security expenditure by economic item; and the use of company structures, such as the Public Infrastructure Projects (PIP) company, to carry out predominantly government fiscal activities should be discontinued. In addition, the IMF recommended amendments to the Organic Budget Law. The Organic Budget Law should be revised in order to incorporate, amongst other things: fiscal reporting provisions; budget management provisions; the provision of separate appropriations for significant current second-level spending units important enough to require their own distinct budget; and changes to appropriation and budget information required by the introduction of program budgeting. (IMF 2005a, pp. 24, 28)

In a 2007 review, the IMF states that given underlying vulnerabilities, the IMF considered that fiscal policy should avoid adding to already buoyant private demand. The agreed 2.3 percent of GDP surplus target for 2007 comprises a budgeted surplus of 2 percent of GDP and additional savings of 0.3 percent of GDP via further cuts in spending (preferably in non-interest current outlays). The fiscal impulse is lower than otherwise implied because part of the decline of the surplus from the 2006 outturn is attributable to Bulgaria's 1.2 percent of GDP contribution to the EU, which has little direct domestic impact. To reach the budgeted target, the IMF pressed for substitution of EU financed project spending and postponement of any tax reductions. Tax cuts and spending increases already decided by coalition partners, the IMF reluctantly agreed to the government's proposal to reach the budget's 2 percent of GDP target largely via sequestration and other measures. (IMF 2007, p. 7)

The IMF expressed concern that the Bulgarian authorities had stepped back from their commitment to improve budgetary transparency. The budget is insufficiently transparent in at least two respects. First, it contains multiple surplus targets; an effective 2 percent of GDP budgeted surplus supersedes a "headline" surplus of 0.8 percent of GDP that is operationally meaningless. Second, release of sequestered funds depends on poorly conceived and confusing triggers: (i) the current account deficit does not deteriorate from its 2006 outturn, and (ii) the budget is on-track to yield a 2 percent of GDP surplus. Greater credibility was given to the 2 percent target with the government's agreement to include in the budget the requirement that both triggers be assessed using final third quarter balance of payments and fiscal data, increasing the reliability of full-year projections for the current account and budget balances. (IMF 2007, p. 7)

The Bulgarian authorities emphasized that enhancing budgetary transparency would have to proceed in stages. They argued that, as a first step and in contrast to previous years' targeted balances, the 2007 budget at least aims at a small 'headline' surplus and is based on relatively realistic revenue projections. The authorities viewed the 0.8 percent of GDP target as a balancing of the need to sensitize legislators to the importance of spelling out policy intentions and containing the appetite for increased spending that would arise from a higher 'headline' target. The IMF agreed with the authorities that, although confusing in its multiple targets, the budget's language was clear enough for observers to ascertain the government's policy intentions. (IMF 2007, p. 8)

Given the prudent short-term fiscal stance, the Bulgarian authorities and the IMF are engaged in a dialogue over the policies to be followed after Bulgaria has joined the EU. The issue of the fiscal impact of accession, and hence the policies it entails, remains the most challenging one, as two competing objectives are present. From one hand, maximization of EU funds' utilization must be given priority, as it provides the country with a unique opportunity to speed up convergence and substantially increase living standards in a relatively short period of time. On the other hand, the authorities do acknowledge the need of fiscal surpluses in order to try to somewhat offset sustained private sector saving-investment imbalances. (IMF 2007, p. 58)

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

The Principles

Clarity of roles and responsibilities.

CP

According to the 2005 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, Bulgaria has made considerable progress in improving fiscal transparency since the time of the 2000 fiscal transparency IMF report and the 2001 and 2002 updates, and now meets the requirements of the fiscal transparency code in a number of areas. (IMF 2005a, p. 23)

The following are the main findings of the 2005 IMF report: general government is largely defined consistently with Government Finance Statistics (GFS) principles, and is well covered in the budget process; the fiscal roles of the executive, legislative and judicial branches are clearly defined in law; the responsibilities of different levels of government are relatively clearly defined; mechanisms for the coordination and management of budgetary and extrabudgetary activities are well defined; there is a clear separation between the monetary and fiscal authorities, and the Bulgarian National Bank (BNB) has a high degree of independence; relationships between government and nonfinancial public corporations are being progressively clarified; and government regulation of the nonfinancial private sector is complex, but efforts are being made to simplify business regulation and the legal framework for privatization has been made more transparent in recent years. (IMF 2005a, p. 29)

The 2005 IMF report also indicates that the legal framework for management of public funds is mostly clear and comprehensive and public servants are legally subject to a code of behavior and to other probity requirements. The tax and customs administration are being strengthened, however, the hidden economy remains large and the magnitude of corruption continues to be a major problem. The legislative bases for some taxes have been harmonized with European Union (EU) standards and taxpayers' legal rights are well defined. (IMF 2005a, p. 29)

The role of the government is defined in the Constitution, the laws on state and municipal property, and in the government's medium-term program (Agenda 2001). (IMF 2000)

Budgetary execution is defined in the State Finance Control Act, the Organic Budget Law, annual budget laws, annually adopted Council of Ministers decrees on budget implementation, and in various regulations on the implementation of the budget issued by the Ministry of Finance (MoF) and usually valid for the current budget year. (IMF 2000)

Fiscal relations between the central government and the municipalities are covered in the Organic Budget Law and the Law on Municipal Budgets. The Law on Municipal Budgets broadly defines municipal budget jurisdiction, and clearly identifies municipal revenue sources and financial resources that municipalities receive from the republican budget. (IMF 2000)

Bulgaria has strengthened its administrative bodies in charge of financial control. The role and responsibilities of the Public Internal Financial Control Agency have been clearly defined in the Public Internal Financial Control Act, effective since January 1, 2001. In 2001, Bulgaria became the first European Union (EU) accession candidate country accredited to manage Special Accession Program for Agriculture & Rural Development (SAPARD) money under the same guidelines that EU member countries use to manage state aid. (IMF 2001)

Taxation is based on the Tax Procedure Code, laws on specific taxes (the Corporate Income Tax Law, the Personal Income Tax Law, the Value Added Tax (VAT) Law, the Excise Duty Law, and the Law on Local taxes and Fees), the Budget Laws, the Civil Procedures Code, the Trade Act, and the Contracts and Obligations Law, and laws on specific taxes. (IMF 2000)

According to the IMF, in 2004 the Bulgarian authorities intended to maintain a tax system with low rates and few exemptions while continuing to shift from direct to indirect taxation. Tax administration improved with the implementation of the National Revenue Agency (NRA) in 2005. (IMF 2004, p. 18)

With assistance from the IMF, Bulgaria has committed itself in making further progress to ensure the smooth functioning of fiscal decentralization, especially by enhancing transparency and establishing clear and predictable financial relations between the central government and the municipalities. To help avoid arrears on municipal governments' own mandates, the Bulgarian government will assist municipalities in finding replacements for the road and inheritance taxes and raise their own revenue level. (IMF 2005b, p. 69)

Expenditure standards for central government mandates have been developed and all mandates are fully funded. The incorporation of the lev-denominated accounts of all autonomous budgetary entities in the Treasury Single Account as well as the deployment of the Financial Management Information System (FMIS) in all ministries would further enhance expenditure management. Finally, the authorities planned to strengthen local government finances through closer monitoring. (IMF 2005b; IMF 2004, pp. 18-19)

To enhance expenditure control and transparency, the Bulgarian authorities incorporated the expenditure accounts of the judicial system in the budgetary payments system (other budgetary entities completed this process in 2004). (IMF 2005b, p. 13)

Open budget processes

CP

According to the 2005 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, Bulgaria has made considerable progress in improving fiscal transparency since the time of the 2000 fiscal transparency IMF report and the 2001 and 2002 updates, and now meets the requirements of the fiscal transparency code in a number of areas. (IMF 2005a, p. 23)

However, the IMF in its Stand-By Arrangement (SBA) 2005 report argues for greater transparency in budget preparation and a full accounting and better presentation of expenditure but also admits that the country will continue to implement structural reforms to enhance fiscal transparency and performance. (IMF 2005b, p. 13)

The following are the main findings of the 2005 IMF report: a statement on medium-term fiscal policy objectives is included in the Budget Report presented to the National Assembly with the budget bill; fiscal rules are used in the budget process; macroeconomic assumptions underlying the budget are presented in the annual Budget Report presented to the National Assembly, but there is no formal consultation process to agree on a consistent macroeconomic framework for the budget; estimates of the fiscal impact of new initiatives and ongoing costs of government expenditure policies are not distinguished in the budget documents presented to the National Assembly; and the assessment of the sensitivity of budget estimates to changes in economic variables is limited, as is the discussion on fiscal risks to the budget. (IMF 2005a, p. 30)

The 2005 IMF report also suggests: the annual budget process is mostly open but the presentation is not fully consistent with international standards; the objectives and expected results from government activities are at this stage discussed in the budget documents only in respect to a selected number of ministries which are piloting the introduction of program budgeting; the overall balance of general government is the main indicator of the fiscal position of the budget, and the general government balance is monitored during the year; and the broader public sector balance is not targeted, although this is not inappropriate given certain factors such as the greatly reduced size of the public corporation sector, the reduction in quasi-fiscal activities by public corporations and the comprehensive reporting of state aid to public corporations. (IMF 2005a, p. 30)

Furthermore, the accounting system is capable of producing accurate in-year reports on the general government budget outturn and procurement rules have been improved by recent legislative changes, but problems in their implementation remain. Civil service employment procedures are relatively clear, but the relevant legislation will take some time to fully implement and internal audit is not fully effective and is currently undergoing major reform. The independence of the tax administration is set out in law, but there is provision for Ministerial instruction. (IMF 2005a, p. 31)

The legislature does not undertake a mid-year budget review. The audited final accounts are presented to the National Assembly within nine months of the end of the fiscal year, but have not always been promptly made public. The budget documents presented to the National Assembly in recent years have included a program budgeting appendix in respect to each of a number of ministries piloting the introduction of program budgeting. These appendices contain information on the program objectives and performance indicators. (IMF 2005a, p. 31)

In a 2007 review, the International Monetary Fund (IMF) states that budgetary presentation must be made more transparent. Although the revenue projections for the 2007 budget are more realistic than in previous ones, it is regrettable that the government has stepped back from its commitment to avoid spending sequestrations. While politically expedient, sequestration is a blunt instrument that undermines expenditure prioritization and, therefore, the effectiveness of public finances. In addition, multiple budget targets cause confusion. As Bulgaria takes on the responsibilities incumbent upon EU members, full budgetary transparency will be essential to avoid sending confusing signals about fiscal policy. (IMF 2007, p. 10)

Bulgaria reports monthly balance of payments data on a regular and timely basis, but data are subject to large and frequent revisions, often going several years back. Particularly, data on reinvested earnings by foreign-owned companies are subject to large revisions due to incomplete responses on surveys used for preliminary estimates including, in part, the omission of the largest firms. The most recent revisions relate to the 2004 data on reinvested earnings. In 2003, the ROSC mission identified the following problems in the balance of payments statistics: (i) residents' foreign currency accounts with resident banks are incorrectly included; (ii) merchandise trade data are prone to errors and are not timely; and (iii) most data are collected on a cash basis. The authorities are taking measures to address these problems. (IMF 2007, p. 50)

All the data categories meet or exceed the Special Data Dissemination Standards (SDDS) prescribed periodicity and with the exception of International Investment Position (IIP) data (for which the country has taken the flexibility option), all other data categories, meet or exceed the timeliness requirements of the SDDS. (IMF SDDS website)

The Financial Management Information System (FMIS) is a major element of the budgetary reform. The system contributes to improved planning, execution, reporting and control of the consolidated government budget in line with modern practices in European Union (EU) Member States. (IMF 2002, p. 3; IMF 2005b, p. 13)

Public availability of information.

CP

According to the 2005 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, Bulgaria has made considerable progress in improving fiscal transparency since the time of the 2000 fiscal transparency IMF report and the 2001 and 2002 updates, and now meets the requirements of the fiscal transparency code in a number of areas. (IMF 2005a, p. 23)

The following are the main findings of the 2005 IMF report: fiscal reporting covers all of general government; defense and security expenditures are not transparently reported in the budget; the budget document discloses the main general government fiscal aggregates for two years prior to the budget year and provides some information in respect of the two years beyond the budget year; some information is published on contingent liabilities, but there is no information published on Quasi-fiscal Activities (QFAs) or tax expenditures; comprehensive information on gross public debt is published and information on government financial assets is not published; fiscal data is published on a basis which covers all general government including relevant local government activities; commitments for the regular publication of fiscal data have not been codified in law; and monthly and quarterly Budget Execution Reports are prepared and made available publicly on a timetable established by the Council of Minister by regulation pursuant to the Annual Budget Law and there is an administratively-defined timetable for the publication of Government Finance Statistics (GFS) 1986. (IMF 2005a, pp. 29-30)

Among its recommendations, the IMF suggests that high priority should be attached to allocating defense and security expenditure by economic item in accordance with GFS principles; priority should be given to completing the coverage of key medium-term fiscal projections; high priority should be given to reporting of contingent liabilities other than debt guarantees (which are already reported); priority should be given to reporting of financial assets; and priority should be attached to including reporting requirements in the Organic Budget Law. (IMF 2005a, pp. 29-30)

Since 2001, several improvements were made to budget documents. The budget report provides a clear view of the macroeconomic environment and the implementation of the previous year's fiscal objectives. It also includes an expanded discussion of fiscal risks, estimates of tax expenditures, and an analysis of the quantitative effects of each of the proposed changes in the tax system. The report is published on the Ministry of Finance (MoF) website. (IMF 2001)

In April 2000, the Council of Ministers (CoM) approved a debt management strategy. This strategy sets out the main directions in which the MoF will establish and implement a medium-term strategy. The strategy also sets the stage for improved coordination between the MoF and the Bulgarian National Bank (BNB) on debt and cash management issues. A State Debt Law provides the legal framework for the debt management strategy. (IMF 2001)

On December 1, 2003, Bulgaria became a subscriber to the International Monetary Fund's Special Data Dissemination Standard (SDDS). Data provision and quality are sufficient for program monitoring, and progress has been made in observing international standards and codes. The IMF's Dissemination Standards Bulletin Board (DSBB) for Bulgaria provides comprehensive documentation in English on Bulgaria's statistical practices for SDDS data categories. Data for all sectors including the fiscal sector have advance dissemination release calendars and are simultaneously released to all interested parties. (IMF SDDS website; IMF 2005b, p. 18)

In a 2007 review, the IMF states that statistical methods conform with the key classification and valuation principles of the IMF's Monetary and Financial Statistics Manual, 2000. Consistency in the coverage of the BNB's claims on banks (which included claims on liquidated banks) and the banks' liabilities to the BNB improved in January 2003 after the BNB wrote off most of the claims on the liquidated banks. With respect to its near-term statistical program, the BNB is progressively harmonizing its data collection and compilation methods in line with the European Central Bank's framework for monetary statistics. In particular, a significant number of enhancements in sectoral and instrument detail and classification have progressively been made in the data for 1995 and onward. These were reflected in the revised monetary statistics published in the August 2002, November 2003, and October 2004 issues of IFS. The latter revision in IFS is a consequence of the BNB's statistical work in earl 2004, which allowed to recast monetary data to further harmonize with ECB requirements. Among the changes in the national presentation was the creation in February 2004 of a new long-term liabilities category outside the money supply that includes deposits and securities with a maturity over 2 years, deposits redeemable at notice over three months, and capital and reserves. For program purposes, deposits of the newly created public investment company, municipalities and social security funds are considered part of the consolidated general government. These deposits are excluded from M3 and included in net lending to the consolidated general government. (IMF 2007, p. 49)

Independent assurances of integrity.

CP

According to the 2005 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, Bulgaria has made considerable progress in improving fiscal transparency since the time of the 2000 fiscal transparency IMF report and the 2001 and 2002 updates, and now meets the requirements of the fiscal transparency code in a number of areas. (IMF 2005a, p. 23)

The following are the main findings of the 2005 IMF report: budget estimates are not a reliable indicator of the actual budget outcome; statements on accounting policy are not included in the budget and final accounts documents for government as a whole (the Consolidated Fiscal Program); the process of accounts reconciliation is mostly effective; external audit is independent of the executive branch, and its mandate covers almost all public sector activities, however, the legislature does not have processes for systematically following up on audit findings; external scrutiny of macroeconomic models and assumptions is not generally encouraged; and the National Statistical Institute has a substantial degree of independence by law. (IMF 2005a, p. 31)

Mechanisms to ensure the integrity of data and budget processes have been established. The National Statistical Institute (NSI) is assured of technical independence under the Law on Statistics. The Agency for Economic Analysis and Forecasting (AEAF), a semi-independent institution, carries out much of the macroeconomic analysis and forecasting. Its projections are open for external review, but there are no formalized arrangements to carry out such reviews. (IMF 2000)

A number of steps have been taken in past years to improve the quality and transparency of fiscal data. A Chart of Accounts for the general government was developed and applied in the execution of the 2001 budget. The Ministry of Finance (MoF) in cooperation with other ministries and agencies, and assisted by Support for Improvement in Governance and Management in Transition Countries (SIGMA) - Organization for Economic Cooperation and Development (OECD) advisors and IMF officials, prepared a unified budgetary Chart of Accounts. Its structure and the principles and rules for classification of assets, liabilities, income and expenditures correspond to the methodology of the Government Finance Statistics Manual (GFS 2001), the System of National Accounts (SNA 93), and the European System of National Accounts (ESA 95). The chart of accounts allows the preparation of a consolidated government report on both cash-and accrual basis. (IMF 2002, p. 2)

On December 1, 2003, Bulgaria became a subscriber to the International Monetary Fund's Special Data Dissemination Standard (SDDS). Data provision and quality are sufficient for program monitoring, and progress has been made in observing international standards and codes. The IMF's Dissemination Standards Bulletin Board (DSBB) for Bulgaria provides comprehensive documentation in English on Bulgaria's statistical practices for SDDS data categories. Data for all sectors including the fiscal sector have advance dissemination release calendars and are simultaneously released to all interested parties. (IMF SDDS website; IMF 2005b, p. 18)

According to a 2007 IMF review, in recent years, following the recommendations of a combined STA/FAD mission and within the framework of fiscal reporting requirements for European Union (EU) accession, the authorities have made great progress on the implementation of accrual accounting for government, budgetary and statistical systems. Consolidated data on central government operations are routinely reported for publication in the GFS Yearbook and in IFS. For the GFS Yearbook 2006, 2005 data for the general government sector and its subsectors were reported on a cash basis. The MoF prepares data on the execution of the consolidated government budget on a monthly basis. These data do not conform to GFS standards and while not published in a bulletin format they are posted on the MoF's website. The authorities have made progress in presenting data on a disaggregated basis, including expenditure by functional classification. In addition, a full economic classification of expenditure is now available, and the authorities have provided such data on an annual basis back to 1998. (IMF 2007, p. 49)

The National Audit Office Act adopted by Parliament in December 2001 defines the way in which the external audit is to be conducted by the National Audit Office. (IMF 2002, p. 3)

Documentation on methodology and sources used in preparing statistics on fiscal data are disseminated on government and other regulatory body websites or publications. Bulgaria provides for dissemination of component detail, reconciliation with related data, and statistical frameworks that support cross-checks and provide reasonableness of data. (IMF SDDS website)