Debt and debt service reduction loan project Report No: ; Type: Report/Evaluation Memorandum ; Country: Bulgaria; Region: Europe And Central Asia; Sector: Macro/Non-Trade; Major Sector: Economic Policy; ProjectID: P008320 Bulgaria: Debt and Debt Service Reduction Loan (Loan 3800-BUL) The Implementation Completion Report (ICR) for the Bulgaria Debt and Debt Service Reduction Loan (DDSRL; Loan 3800-BUL for US$125 million approved and closed in FY95) was prepared by the Europe and Central Asia Regional Office. The International Monetary Fund and Netherlands provided additional financing of US$109.6 million. The borrower's evaluation is included in Appendix B. The primary objective of the DDSRL was to help the Government to finance a portion of the upfront costs of the agreement with commercial banks to reduce Bulgaria's external debt burden. The debt reduction agreement was also expected to help Bulgaria normalize its relations with the international financial community, lessen uncertainties that deterred investment and hence, enhance growth prospects over the medium term. The primary objective of the loan was achieved, as commercial debt was reduced by US$3.8 billion (27 percent of total). Total external debt was brought down from 115 percent of GDP in 1993 to 84 percent of GDP in 1995. While representing a significant debt reduction, Bulgaria's debtservice burden remains very high (approximately 10 percent of GDP in 1996). Moreover, because of delays in macro stabilization and structural reforms, the country has been unable to attract significant foreign direct investment. Thus, the medium-term objectives of the program have not been achieved. The ICR rates the project outcome as satisfactory based on the achievement of its primary objective of reducing Bulgaria's debt burden. The ICR rates sustainability as uncertain because of a lack of progress on reform of economic policies and institutions. Institutional development impact is rated as not applicable. Bank performance is rated as satisfactory. The Operations Evaluation Department (OED) agrees with these ratings with the exception of the sustainability rating. The OED rates sustainability as unlikely given the lack of structural reforms and the remaining high debt service burden. The Bulgaria DDSRL confirms a lesson of previous debt reduction operations which found that debt reduction programs are more likely to succeed when they follow, rather than precede, successful stabilization and structural reforms especially in public finance. The ICR is of satisfactory quality. No audit is planned.