The World Bank approved a US$150 million Second Programmatic Adjustment Loan (PAL 2) for the Republic of Bulgaria. This is the second in a series of PALs that is providing a single umbrella of support to reforms across different sectors of the Bulgaria’s economy while assisting the implementation of government’s reform program.

The main objectives of the PAL program are the achievement of average annual growth rates of 4.5-5.0 percent during 2002-05, the reduction of the poverty rate by half by 2005 compared to 2001, and decrease in unemployment from 18.1 percent in 2001 to 12-14 percent in 2005, while making substantial progress towards EU accession.

In the past few years, Bulgaria has deepened its structural reforms. Today two thirds of the country’s output is created by the private sector, compared to just over 50 percent 5 years ago. Bulgaria is now more attractive for investors that resulted in more employment opportunities. As an outcome, unemployment has decreased significantly to 13.3 percent, and household incomes went up with 18 percent in real terms in 2002. Poverty is also coming down – from 36 percent in 1997 to 13 percent in 2001, and further decrease is expected.

At the same time Bulgaria is facing new challenges in continuing its structural reform agenda while sustaining its good economic performance. Increased competitiveness and productivity is key to realizing higher growth, particularly in the EU accession context. There is a need to further raise public and private investment. Increased growth and investment will shorten the period of convergence with the EU – currently Bulgaria’s per capita income is only 28 percent of the average EU income levels.

To engage with these challenges the government medium-term program is supported by the three PALs is built on five pillars:

• sustaining structural reforms in the enterprise sector, with emphasis on the restructuring of the energy, railways, telecommunications, and water sectors;
• establishing a market-friendly business environment, focusing on entry and exit policies, regulatory costs, delivery of public services, competition, and judicial reform;
• deepening the financial sector addressing the constraints to increased lending by the banking system and the development of financial markets;
• improving public sector governance, including implementing the anti-corruption strategy, strengthening local governments, and reforming public administration and judiciary;
• investing in human capital and strengthening social programs, focusing on education, health, and pension reforms and social assistance effectiveness.

The PAL program is comprised of three loans for a total of US$450 million. PAL 1, that was approved in February last year, was targeted at improvements in the business environment, the restructuring of infrastructure sectors and further deepening of financial sector. PAL 2 continued the reforms initiated under PAL 1 and is supporting key reforms in the country to improve public sector governance.

Bulgaria has made strong progress in achieving this by strengthening public administration capacity, improving service delivery, pursuing actions to reduce corruption, ensuring stronger accountability and transparency, strengthening public expenditure management, and increasing the efficiency and effectiveness of judicial system. For example the number of requests by public for official information has increased by 213 percent in the last year compared with 2002. Currently the government and the World Bank teams are working on the preparation of PAL 3 that will continue structural reforms through building human capital and improving delivery of social services.

The PAL program is a key component of the World Bank’s assistance strategy for Bulgaria which envisages financial support up to US$750 million equivalent during the period (2002-2005), together with a package of analytical and advisory activities. The loan approved today, PAL 2, will be disbursed in Euros with 17 years maturity including a 5 year grace period. The total amount of EUR 123.7 million will be disbursed in two tranches. The first tranche of EUR 103.7 million will be disbursed immediately after PAL 2 loan effectiveness. The second tranche of EUR 20 million is floating and will be disbursed after satisfactory progress on privatization of Bulgartabak company.

Since Bulgaria joined the World Bank in 1990, the total World Bank-assisted program in the country comprises 34 operations totaling to US$1,971 million equivalent. This includes twelve adjustment loans (US$1,201 million), 19 investment projects (US$751 million), two Global Environmental Fund (GEF) grants (US$17.4 million), and one Prototype Carbon Fund grant (US$2 million).