Bulgarian National Bank (BNB) is preparing to introduce new measures on April 1 to curb lending growth that is threatening the country’s foreign trade balance.

The International Monetary Fund (IMF) urged Bulgaria’s central bank in January to further tighten its restrictions on growth in lending, which the IMF blamed for the country’s rising current account deficit.

Bulgaria’s 2005 current account gap widened to an all-time high of 14.9 per cent of GDP from 8.5 per cent in 2004.

The new set of restrictions, focusing mainly on mortgage lending, are contained in amendments to BNB’s Ordinance 8 on the Capital Adequacy of Banks, which were approved on February 24.

Under the revised ordinance, mortgage loans will be classified as assets risk-weighted at 50 per cent when the amount of the loan is no more than 50 per cent of the mortgage. Currently, the allowed coverage is 70 per cent.

In cases when the amount of the loan is 100 per cent of the mortgage, the loan will be classified as an asset risk-weighted at 100 per cent, which will have the respective implication on the interest rate paid by the borrower.

The new rules will likely prompt banks to require a bigger mortgage co-payment from the borrowers. At present, some Bulgarian banks market loans that cover 100 per cent of the mortgage.

The central bank also amended Ordinance 21 on the minimum obligatory reserves of commercial banks, kept with the BNB, to expand the definition of the term “credit” used in determining the amount of the reserves.

After April 1, banks will be required to book as loan exposures all bonds and other debt securities acquired after December 31 2005.

The new definition excludes bonds and other debt securities issued or underwritten by national governments, central or local banks or entities rated at least Baa3 by Moody’s or BBB- by Standard&Poor’s or Fitch Ratings.

The central bank will also recommend that loans to households (consumer and mortgage loans) should only be granted if the remaining income is at least 100 leva for a household member after interest rate and principal are paid each month.

The central bank has introduced a series of restrictions in the past two years to slow the growth in lending. As a result, credit growth slowed to about 30 per cent in 2005 from 50 per cent in both 2003 and 2004.

BNB has said it plans that the new restrictions will slow credit growth to 17.5 per cent this year.

The IMF has repeatedly warned the country of risks that may arise from the widening of its current account deficit. The Fund and BNB have blamed the rise on the generous lending to consumers that has fuelled imports, increasing the trade deficit and opening a wider gap in the country’s current account balance.

Bulgaria targets a current account deficit of 12 per cent of GDP for this year.

The Cabinet agreed in January to demands from the IMF to aim for a budget surplus equal to three per cent of GDP this year in order to offset possible risks from a deteriorating external balance. However, the Government could lower the fiscal surplus target if the current account deficit fell below 12 per cent of GDP in 2006.

International investors are carefully monitoring the current account gap in Bulgaria as the country operates under an IMF-advised currency board system that pegs the national currency, the lev, to the euro, bans the central bank from lending to the government, and restricts the central bank’s options for monetary policy influencing.

In another development on February 27, European Central Bank (ECB) president, Jean-Claude Trichet, who was on a visit to Sofia, identified the rising balance of payments and inflation as the two major challenges facing Bulgaria on its path to joining the European Union and the eurozone.

In Trichet’s view, the dynamic of the current account deficit shows it needs more attention. The dynamic must be improved by more loans granted to the private sector, and by measures of BNB seeking to restrict lending to households, he believes.

Trichet described inflation as the most serious difficulty on the road to joining the eurozone and the adoption of the euro. He said that the 6.5 per cent inflation in 2005 was too high and a lot remained to be done to bring it under control. Its volatility proves it - from 3.4 per cent it dropped to 2.3 per cent in 2003, and now is climbing again.

“A rigid fiscal policy combined with acceleration of the structural reforms will play a pivotal role in curing inflation,” Trichet said.