Bulgaria’s macroeconomic performance is impressing at the background of the continued decline in Europe but external risks have increased, a report of the International Monetary Fund (IMF) on the fourth official review of the two-year stand-by arrangement reads. The main risks arise from the fact that the high rate of increase in bank lending may fail to slow down as expected, which will result in a wider current account deficit and will threaten the stability of the banking sector. There is also the danger of foreign investment inflow falling short of projections. The report also points out that the government should view fiscal reforms as a priority. The IMF recommends that the National Revenue Agency should start functioning effectively by the beginning of 2005. According to the experts, the moderate expansion fiscal policy planned for 2004 hides a certain risk but is cautious enough due to its flexibility. Another cause of concern is the fact that the cabinet continues to rely on state structures and off-budget funds to be used for public sector activities. The fund still believes the fiscal reserve should be used mainly for external debt reduction. The experts approve of the plans for full financing of the local self-governance but question the increase in employment and wages in the budget sector. Given the current macroeconomic situation, even a moderate increase would contradict the views of the government for a small and efficient public sector. The fund expects that in 2004 the current account deficit will be declining at a moderate rate to 7.5%. About 76% of the deficit will be covered by foreign direct investment. The inflation rate projected for this year is 5%.