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Bolivia

Author(s):
International Monetary Fund
Published Date:
January 2009
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I. Economic and Political Setting

1. In recent years, Bolivia experienced an export boom led by the hydrocarbons and mining sectors, which supported an improvement in the growth performance and a strengthening of the external and fiscal positions, but inflation accelerated and investment remained low in the context of persistent political tensions. The rise in export prices through mid-2008 led to exceptionally high external current account surpluses and reserve accumulation. Changes in the hydrocarbons taxation regime in 2005-06 further boosted fiscal revenue, shifting the public sector accounts from deficits into substantial surpluses. External surpluses fueled demand pressures, which—combined with increases in food prices—caused inflation to rise to double digits in 2007-08. As part of its policy response, the central bank gradually allowed the Boliviano to appreciate, which contributed to a significant reduction in deposit dollarization. However, despite the predominantly positive trends, the adverse investment climate resulting from political tensions and lingering uncertainty about property rights has contributed to keep private investment rates among the lowest in the region.

2. As Bolivia’s integration with international capital markets is very limited, the current global crisis affects Bolivia mainly through declines in commodity prices and remittances. Capital inflows have been negligible for many years, except for FDI in hydrocarbons and mining, thereby largely insulating Bolivia’s financial system from the external turmoil. However, current trends in commodity prices will have a major impact on export receipts and related fiscal revenue—starting in 2009, because of the lagged response of contractual gas export prices.

3. Following a protracted period of rising political polarization, tensions have eased significantly in recent weeks. The tensions revolved around constitutional reform, and in particular around presidential re-election rules, regional autonomy, and proposed constraints to the size of private land holdings. The draft constitution passed by the national assembly in December 2007 was strongly resisted by opposition forces, which until recently impeded congressional approval of the referendum that is required for the new constitution to take effect. Following an agreement between the government and the opposition on critical issues—notably, that the president can be re-elected only once, and that the cap on land size does not affect existing holdings—such a referendum was finally approved by Congress, and is now scheduled for January 25, 2009. If the new constitution is approved, early general elections would be held in December 2009.

4. While the authorities’ macroeconomic policy actions have been broadly in line in with past Fund advice, the complex political environment has posed challenges on other fronts. Regarding macroeconomic policies, a fiscal surplus has been maintained and greater flexibility has been exercised in exchange rate policy in the face of strong appreciating pressures. On the structural front, however, a number of past Fund recommendations remain pending (as discussed in Section II).

II. Report on the Discussions

5. As the discussions took place in the context of a major slowdown of the global economy and turnaround in commodity prices, they focused on key developments in 2008 and on the policies needed to buttress the fiscal position and reduce financial sector vulnerabilities. Regarding developments in 2008, there was consensus that high rates of monetary growth had compounded the impact of food price inflation, although the authorities also emphasized exogenous factors (speculative and political) as contributors to Bolivia’s inflation developments. Regarding the outlook, sharp changes are likely to occur in the fiscal and external current accounts, both of which—according to staff projections—would shift into deficits in 2009, for the first time in several years. The discussions covered, in addition to the baseline scenario (reflecting then available WEO projections), a more adverse alternative scenario, consistent with a 25 percent lower path for oil prices relative to the baseline (somewhat more pessimistic than the current WEO projections). In the period ahead, macroeconomic policy management will benefit from Bolivia’s high level of reserves, which provides a buffer against disorderly adjustments. Moreover, fiscal measures and financial sector reforms would reduce the downside risks to the baseline medium-term scenario and enhance the economy’s resilience to adverse external shocks.

A. Developments in 2008

6. In 2008, strong hydrocarbons and mining exports has continued to support Bolivia’s growth performance as well as its fiscal and external positions. Real GDP growth has picked up to an estimated 5.9 percent (from an average of 4.7 percent in 2006-07), boosted in part by the start of production at a large mining project (Table 1). The external current account has recorded a surplus of 11 percent of GDP, and central bank reserves have risen to historical highs. The combined public sector1 has also remained in surplus, benefiting from continued high export-based revenues.

Table 1.Bolivia: Selected Economic and Financial Indicators
Est.Projected
2004200520062007200820092010201120122013
(Annual percentage changes)
Income and prices
Real GDP4.24.44.84.65.94.04.23.93.63.4
GDP deflator8.05.913.79.314.0-2.310.06.25.36.9
CPI inflation (period average)4.45.44.38.714.08.17.56.54.94.0
CPI inflation (end-of-period)4.64.94.911.712.08.07.06.04.04.0
(In percent of GDP)
Investment and savings
Total investment11.014.313.915.218.019.321.221.020.920.5
Public sector6.66.98.19.49.38.89.59.69.69.5
Private sector4.47.45.75.88.710.511.711.311.311.0
Gross domestic savings15.817.722.922.723.115.018.920.119.918.8
Gross national savings15.918.826.429.329.118.822.423.623.422.1
Public sector1.04.612.611.211.77.69.810.19.79.2
Private sector14.814.213.818.117.411.312.613.613.712.9
Investment/saving balances 1/4.84.612.514.111.0-0.41.22.72.51.6
Public sector-5.5-2.24.51.72.4-1.20.20.50.1-0.3
Private sector10.46.88.012.38.70.81.02.22.41.9
Combined public sector
Revenues and grants26.830.934.334.636.334.033.833.733.031.9
Of which:
Royalties on hydrocarbons3.46.59.49.08.36.96.96.96.66.0
Expenditure32.333.229.832.934.035.233.633.232.932.2
Current23.223.119.620.020.122.321.420.920.620.0
Capital 2/9.110.010.212.913.912.912.212.312.312.2
Overall balance-5.5-2.24.51.72.4-1.20.20.50.1-0.3
Of which:
Balance before nationalization costs-5.5-2.24.52.63.5-0.50.20.50.1-0.3
Non-hydrocarbons balance-9.0-8.9-5.8-6.9-8.5-9.2-8.8-8.7-8.7-8.2
Total net public debt81.071.141.926.817.017.915.413.512.311.4
External sector
Current account 1/3.86.511.313.211.0-0.41.22.72.51.6
Merchandise exports24.429.233.633.835.726.626.627.025.823.9
Of which: natural gas7.011.314.515.017.212.212.812.912.211.2
Merchandise imports20.924.424.425.929.329.527.626.625.724.5
Terms of trade index (percent change)9.412.315.23.63.6-21.94.01.0-3.0-3.0
Gross international reserves 3/
In millions of U.S. dollars1,4742,0423,3855,5877,7968,3049,18310,39611,59512,565
In percent of broad money39.347.065.978.984.590.189.389.387.385.0
Exchange rates 4/
Bolivianos/U.S. dollar (end-of-period)8.048.007.937.576.97
REER, period average (percent change)-6.5-4.2-0.42.927.0
(Changes in percent of broad money at the beginning of the period, unless otherwise specified)
Money and credit
NFA of the financial system2.920.731.335.428.05.69.711.910.37.3
NDA of the financial system-4.3-6.6-12.9-3.7-4.42.04.72.73.44.0
Of which: credit to private sector (percent of GDP42.339.634.733.131.832.532.332.232.131.5
Broad money-1.414.118.531.723.67.614.414.613.711.3
Interest rates (percent, end-of-period) 5/
Yield on treasury bills in local currency9.67.95.46.29.6
Yield on treasury bills in U.S. dollars5.87.44.94.64.5
Memorandum item
Nominal GDP (in billions of U.S. dollars)8.819.5711.5313.2917.1117.7419.5921.0422.6725.01
Sources: Bolivian authorities; and Fund staff estimates and projections.

For historical data, the investment-savings balance, as measured in national accounts, differs from that in the balance of payments due to adjustments in the former associated with estimations of re-exports and smuggling.

Includes nationalization costs and net lending.

Excludes reserves from the Latin American Reserve Fund (FLAR) and includes Offshore Liquidity Requirements (RAL).

Official (buying) exchange rate. For 2008, the nominal exchange rate is as of December 15, and the change in the real effective exchange rate is the year-on-year change as of October.

For 2008, as of December 15.

Sources: Bolivian authorities; and Fund staff estimates and projections.

For historical data, the investment-savings balance, as measured in national accounts, differs from that in the balance of payments due to adjustments in the former associated with estimations of re-exports and smuggling.

Includes nationalization costs and net lending.

Excludes reserves from the Latin American Reserve Fund (FLAR) and includes Offshore Liquidity Requirements (RAL).

Official (buying) exchange rate. For 2008, the nominal exchange rate is as of December 15, and the change in the real effective exchange rate is the year-on-year change as of October.

For 2008, as of December 15.

7. The external developments and associated partial monetization of the increase in reserves have contributed to double-digit inflation, which peaked in mid-year and has since eased somewhat. Following an increase to 17 percent in the first half of 2008, twelve-month inflation has declined and is now projected at 12 percent for the year. While the earlier increase was driven partly by food inflation, external developments generated significant demand pressures, compounding the effects of the supply shock (Box 1). The role of excess aggregate demand in the inflationary process is evidenced by increases in non-food inflation. The deceleration in recent months reflects moderation in food prices, slower monetary expansion, as reserves stabilized, a modest appreciation of Boliviano, and substantial depreciations of trading partners’ currencies.

CPI Inflation Rate

(12-month percent change)

Median Inflation for Food and Non-Food Items

(12-month percent change)

Box 1.Main Inflation Drivers

Preliminary empirical evidence confirms that, while supply shocks have been critical, domestic factors have been important drivers of inflation in Bolivia.

  • A first empirical approach involved estimating a general equilibrium model with forward-looking features. Using quarterly Bolivian data for 1995Q1-2008Q1, the model incorporates an interest rate-based monetary policy rule, takes into account expectations about the future of the economy, and imposes exchange rate flexibility. Preliminary simulations suggest that about half of the variability in inflation is explained by food price shocks, and about a third is explained by domestic demand shocks (7.2 percent) and the interest rate on open market operations (26.4 percent)—a proxy for monetary policy instrument.

  • A second approach addressed the analysis of inflation using VAR’s. Under this alternative, a Bayesian VAR was estimated with the same sample, but assumed a money-based monetary policy framework—closer to Bolivia’s actual monetary regime—and used the stock of currency as the measure of money supply. Similarly, preliminary simulations yield that 22 percent of the variability in inflation is explained by changes in the currency stock, whereas domestic demand shocks contribute 7 percent. Both approaches thus suggest that domestic factors account for an important fraction of the variability of inflation.

Variance Decomposition of Inflation
Food prices53.5
Interest rates on open market operations26.4
Other8.2
Domestic demand7.2
Foreign interest rates3.8
Exchange rate0.6
Foreign growth (Brazil)0.2
Total100.0

8. Bolivia’s overall fiscal position has improved in 2008, benefiting from high hydrocarbons-based revenue (Tables 2 and 3). The overall fiscal surplus is estimated to rise to 3.5 percent of GDP (from 2.6 percent of GDP in 2007), reflecting in part a strong increase in the surplus of the state energy company YPFB, which benefited from high natural gas export prices and the incorporation of activities such as refining and distribution, previously carried out by private sector enterprises.2 However, the non-hydrocarbon deficit3 has risen to an estimated 8.5 percent of GDP—reflecting, inter alia, outlays on new social programs and higher fuel subsidies. Net public debt has continued to fall, with the overall fiscal surplus reflected in rising public sector deposits at the central bank.

Table 2.Bolivia: Operations of the Combined Public Sector(In millions of Bolivianos)
Est.Proj.
2004200520062007200820092010201120122013
Total revenue and grants18,66123,82931,47335,66945,20942,92448,93053,85357,53861,469
Current revenue16,64621,83628,38132,05237,88238,27543,29347,48550,81554,360
Tax revenue14,31919,37025,52428,65934,32734,19638,72842,49145,41848,474
IDH and royalties2,3335,0198,6459,26610,3668,78010,04410,99611,50711,579
Other Taxes11,98614,35116,87819,39323,96225,41728,68431,49533,91036,894
Direct taxes2,4753,2544,3573,9015,4925,8536,7167,4148,0378,807
Indirect taxes9,51111,09712,52215,49318,47019,56421,96824,08125,87328,088
Nontax revenue2,3272,4662,8573,3933,5554,0794,5654,9945,3975,886
Public sector enterprises operating balance70847326254,7822,7193,6064,2854,4194,375
Central bank operating balance2012596681,2971,040875721638730800
Grants1,7441,6511,6921,6951,5051,0551,3101,4451,5751,934
Total spending22,52025,55827,37233,01640,90543,53948,60253,12757,35361,979
Current expenditure16,17217,82218,00020,59425,02328,13330,93033,46635,91238,465
Wages and salaries 1/6,2646,6507,2309,43110,30011,79612,82913,78514,59815,328
Goods and services1,4261,4921,6492,0312,4142,6713,0613,3783,6844,073
Interest2,0382,3112,3182,6162,3522,5942,9063,1363,3343,563
Transfers1,3341,7141,3962,1325,3145,5356,0856,6537,1927,838
Of which: Petroleum product subsidies4577701,0656881,6491,1271,3981,4801,5511,601
Social programs0006712,8343,0753,5253,8904,2424,690
Pensions2,9813,1103,2843,4873,8464,4324,7805,1155,5785,975
Other2,1282,5452,1238977961,1071,2691,4001,5271,688
Capital expenditure and net lending6,3497,7369,37212,42215,88215,40617,67219,66121,44123,514
Overall balance before nationalization (deficit -)-3,860-1,7294,1012,6534,304-615328726185-510
Of which: non hydrocarbons balance 2/-6,263-6,832-5,276-7,064-10,536-11,646-12,794-13,933-15,096-15,817
Nationalization cost8681,359912
Overall balance after nationalization-3,860-1,7294,1011,7852,944-1,526328726185-510
Of which: non hydrocarbons balance 2/-6,263-6,832-5,276-7,932-11,896-12,558-12,794-13,933-15,096-15,817
Financing3,8601,729-4,101-1,785-2,9441,526-328-726-185510
External2,7241,7213701,1466761,264659561447349
Domestic1,1368-4,471-2,930-3,621262-987-1,287-632161
Of which: Central Bank-561-1,543-5,726-2,993-4,7050-988-1,279-6300
Memorandum Item
Hydrocarbons related revenue2,4035,1039,3789,71714,84011,03213,12214,65915,28115,307

In 2007, university salaries was reclassified from other spending into wages and salaries.

Excludes the following hydrocarbon-related revenues: IDH, royalties, and the operating balance of YPFB.

Sources: Bolivian authorities, and Fund staff estimates.

In 2007, university salaries was reclassified from other spending into wages and salaries.

Excludes the following hydrocarbon-related revenues: IDH, royalties, and the operating balance of YPFB.

Table 3.Bolivia: Operations of the Combined Public Sector(In percent of GDP)
Est.Proj.
2004200520062007200820092010201120122013
Total revenue and grants26.830.934.334.636.334.033.833.733.031.9
Current revenue23.928.330.931.130.430.329.929.729.228.2
Tax revenue20.625.127.827.827.627.126.726.626.125.2
IDH and royalties3.46.59.49.08.36.96.96.96.66.0
Other Taxes17.218.618.418.819.320.119.819.719.519.1
Direct taxes3.64.24.73.84.44.64.64.64.64.6
Indirect taxes13.714.413.615.014.815.515.215.114.814.6
Nontax revenue3.33.23.13.32.93.23.23.13.13.1
Public sector enterprises operating balance0.10.10.80.63.82.22.52.72.52.3
Central bank operating balance0.30.30.71.30.80.70.50.40.40.4
Grants2.52.11.81.61.20.80.90.90.91.0
Total spending32.333.229.832.132.934.533.633.232.932.2
Current expenditure23.223.119.620.020.122.321.420.920.620.0
Wages and salaries 1/9.08.67.99.28.39.38.98.68.48.0
Goods and services2.01.91.82.01.92.12.12.12.12.1
Interest2.93.02.52.51.92.12.02.01.91.8
Transfers1.92.21.52.14.34.44.24.24.14.1
Of which: Petroleum product subsidies0.71.01.20.71.30.91.00.90.90.8
Social programs0.00.00.00.72.32.42.42.42.42.4
Pensions4.34.03.63.43.13.53.33.23.23.1
Other3.13.32.30.90.60.90.90.90.90.9
Capital expenditure and net lending9.110.010.212.112.812.212.212.312.312.2
Overall balance before nationalization (deficit -)-5.5-2.24.52.63.5-0.50.20.50.1-0.3
Of which: non hydrocarbons balance 2/-9.0-8.9-5.8-6.9-8.5-9.2-8.8-8.7-8.7-8.2
Nationalization cost0.81.10.7
Overall balance after nationalization-5.5-2.24.51.72.4-1.20.20.50.1-0.3
Of which: non hydrocarbons balance 2/-9.0-8.9-5.8-7.7-9.6-9.9-8.8-8.7-8.7-8.2
Financing5.52.2-4.5-1.7-2.41.2-0.2-0.5-0.10.3
External3.92.20.41.10.51.00.50.40.30.2
Domestic1.60.0-4.9-2.8-2.90.2-0.7-0.8-0.40.1
Banking system-0.6-2.4-6.2-3.1-4.10.0-0.7-0.8-0.40.0
Of which: Central Bank-0.8-2.0-6.2-2.9-3.80.0-0.7-0.8-0.40.0
Memorandum Item
Hydrocarbons related revenue3.56.610.29.411.98.79.19.28.87.9

In 2007, university salaries was reclassified from other spending into wages and salaries.

Excludes the following hydrocarbon-related revenues: IDH, royalties, and the operating balance of YPFB.

Sources: Bolivian authorities, and Fund staff estimates.

In 2007, university salaries was reclassified from other spending into wages and salaries.

Excludes the following hydrocarbon-related revenues: IDH, royalties, and the operating balance of YPFB.

9. Booming hydrocarbon and mining exports, together with high remittance inflows, led to a record-high current account surplus and large reserve accumulation, with major pressures on monetary/exchange rate policy during the first three quarters of 2008. In the period through September, the central bank stepped up open market operations, mainly through greater placement of indexed instruments. However, foreign exchange inflows were only partially sterilized, so that monetary expansion remained strong. Meanwhile, the authorities continued to implement small nominal upward adjustments to the exchange rate under the crawling peg regime. Since September, central bank reserves have declined somewhat, in part as a result of lower foreign exchange inflows and greater demand for foreign assets, resulting in a significant slowdown of monetary expansion. As a result, the growth rates of broad money and currency in circulation declined somewhat to, respectively, 24 percent and 35 percent for the year as a whole (Tables 4 and 5). During the last three months, the exchange rate has been stable, following about three years of gradual nominal increases. In real effective terms, the Boliviano has appreciated markedly over the past year, reflecting mainly the high inflation in Bolivia and significant currency depreciations in trading partners.

Table 4.Bolivia: Central Bank of Bolivia 1/
Est.Proj.
200420052006200720082009
(Flows in millions of Bolivianos, unless otherwise indicated)
Net international reserves1,1124,10510,27015,49115,5183,154
(In millions of U.S. dollars)1385031,2891,9992,135443
Net domestic assets-354-2,208-7,676-10,162-10,816-1,526
Net credit to the nonfinancial public sector-561-1,543-5,725-2,993-4,7050
Net credit to financial intermediaries-355-604-1,620-6,131-4,713-429
Of which: o pen market operations (increase -) 2/-356-168-1,171-5,397-4,992-327
Net medium- and long-term foreign liabilities (increase -)873856245
Other items (net)-311-69-336-1,044-1,422-1,101
Currency issue7581,8972,5945,3294,9051,629
(Stocks in millions of Bolivianos, unless otherwise indicated)
Net international reserves8,64012,78524,29140,70554,28456,337
(In millions of U.S. dollars)1,0761,5683,0505,2527,4677,910
Net domestic assets-4,357-6,605-15,517-26,602-35,276-35,701
Net credit to the nonfinancial public sector1,710236-6,952-9,337-12,746-12,746
Net credit to financial intermediaries1,200627-1,455-7,906-13,200-13,629
Of which: open market operations 2/-517-690-1,868-7,290-12,103-12,430
Net medium- and long-term foreign liabilities-227-220-212-207-178-173
Other items (net)-7,039-7,248-6,898-9,152-9,152-9,152
Currency issue4,2836,1808,77414,10319,00820,637
(Changes in percent of beginning-of-period currency issue)
Net international reserves31.695.8166.2176.6110.016.6
Net domestic assets-10.0-51.6-124.2-115.8-76.7-8.0
Net credit to the nonfinancial public sector-15.9-36.0-92.6-34.1-33.40.0
Net credit to financial private sector-10.1-14.1-26.2-69.9-33.4-2.3
Of which: open market operations (increase -) 2/-10.1-3.9-19.0-61.5-35.4-1.7
Net medium- and long-term foreign liabilities (increase -)24.80.20.10.10.20.0
Other items (net)-8.8-1.6-5.4-11.9-10.1-5.8
Currency issue21.544.342.060.734.88.6
Memorandum items
Currency issue (average stock in percent of GDP)4.65.67.19.816.716.5
NIR coverage of broad money (in percent)28.636.859.776.084.584.0

Stocks and flows in foreign currency are valued at accounting exchange rates for 2004-05 and at beginning-of-period exchange rates for 2006-09.

Includes direct placements to individuals

Sources: Central Bank of Bolivia; and Fund staff estimates.

Stocks and flows in foreign currency are valued at accounting exchange rates for 2004-05 and at beginning-of-period exchange rates for 2006-09.

Includes direct placements to individuals

Table 5.Bolivia: Financial System Survey 1/2/
Est.Proj.
200420052006200720082009
(Flows in millions of Bolivianos, unless otherwise indicated)
Net short-term foreign assets8676,24910,89214,41514,9963,618
(In millions of U.S. dollars)1087661,3681,8602,063508
Net domestic assets-1,277-1,998-4,469-1,502-2,3751,268
Net credit to the public sector-359-2,134-5,760-3,482-5,1160
Credit to the private sector-1,1081,0681,9584,4006,8512,181
Net medium- and long-term foreign liabilities (increase -)635-390-105359-292-52
Other items (net)-444-543-562-2,779-3,818-861
Broad money-4104,2516,42312,91312,6214,886
Liabilities in domestic currency1,5443,4415,57811,51110,397-287
Foreign currency deposits-1,9548108451,4022,2245,174
(Stocks in millions of Bolivianos, unless otherwise indicated)
Net short-term foreign assets13,14119,49631,49446,82359,39961,812
(In millions of U.S. dollars)1,6362,3913,9546,0428,1708,678
Net domestic assets17,02415,2699,2126,7654,8715,225
Net credit to the public sector4,3932,361-4,884-7,760-11,623-11,623
Credit to the private sector29,28730,77832,17136,53740,99542,520
Net medium- and long-term foreign liabilities-2,896-3,326-3,368-3,006-3,122-3,114
Other items (net)-13,760-14,544-14,707-19,007-21,379-22,559
Broad money30,16534,76540,70653,58864,27067,036
Liabilities in domestic currency6,76410,20615,78427,29538,42738,139
Foreign currency deposits23,40124,55924,92226,29325,84328,897
(Changes in percent of broad money at the beginning of the period)
Net short-term foreign assets2.920.731.335.428.05.6
Net domestic assets-4.3-6.6-12.9-3.7-4.42.0
Net credit to the public sector-1.2-7.1-16.6-8.6-9.50.0
Credit to the private sector-3.73.55.610.812.83.4
Net medium- and long-term foreign liabilities (increase -)2.1-1.3-0.30.9-0.5-0.1
Other items (net)-1.5-1.8-1.6-6.8-7.1-1.3
Broad money-1.414.118.531.723.67.6
Liabilities in domestic currency5.211.416.028.319.4-0.4
Foreign currency deposits-6.62.72.43.44.28.0
Memorandum items
Broad money (average stock in percent of GDP)41.041.738.745.246.547.7
Credit to private sector (average stock in percent of GDP)42.339.233.933.131.832.5
Financial system NFA coverage of deposits (percent)50.066.896.3115.7128.5130.3
Dollarization (end-period stocks)
Foreign currency and dollar-indexed deposits89.084.276.265.055.960.9
Foreign currency and dollar indexed credit95.792.686.979.178.581.1

The financial system comprises the central bank; commercial banks; nonbanks financial institutions; and the National Financial Institution of Bolivia and FONDESIF, which are state-owned second-tier banks.

Stocks and flows in foreign currency are valued at accounting exchange rates for 2004-05 and at beginning-of-period exchange rates for 2006-09.

Sources: Central Bank of Bolivia; and Fund staff estimates and projections.

The financial system comprises the central bank; commercial banks; nonbanks financial institutions; and the National Financial Institution of Bolivia and FONDESIF, which are state-owned second-tier banks.

Stocks and flows in foreign currency are valued at accounting exchange rates for 2004-05 and at beginning-of-period exchange rates for 2006-09.

Exchange Rates

NIR Accumulation and Sterilization

(12-month flow s in US$ million)

10. The banking system appears to be stable and liquid, although some vulnerable areas require special attention. Mainly reflecting sluggish demand in the context of political uncertainties, credit to the private sector has continued to expand at a very low pace, contributing to high levels of bank liquidity. Bank capitalization stands at 14 percent, and nonperforming loans have fallen to 5 percent of total loans. However, the level of restructured loans (about 9 percent of total loans or 40 percent of equity) still raises concerns.4 In addition, the system remains exposed to exchange-rate-induced credit risk, as loan dollarization remains high.

Banks’ Liquid Assets

(In percent of total assets)

B. Outlook for 2009

11. The baseline staff projections5 suggest that the negative terms of trade shock from lower energy and mining prices, as well as an expected decline in remittances, will slow GDP growth markedly in 2009—to 4 percent (from 6 percent in 2008)—while the fiscal and external current accounts would shift into small deficits. At the same time, further reductions in food prices would contribute to a decline in the twelve-month inflation rate to about 8 percent by end-2009. While the baseline scenario suggests that current fiscal/monetary policies, as well as the exchange rate level, are sustainable, Bolivia’s outlook is highly sensitive to developments in export prices, and their further weakening could give rise to significant financing needs and undermine external and fiscal sustainability. The authorities envisaged somewhat higher export prices and real GDP growth than suggested by the staff’s baseline projections, and expected that fiscal and external current account deficits could be averted.

External Current Account

(In percent of GDP)

Fiscal Position

(In percent of GDP)

1/ Before nationalization costs

Fiscal policy

12. Staff projects that the overall fiscal position would shift from a surplus of 3.5 percent of GDP in 2008 to a deficit of 0.5 percent in 2009. This would reflect a reduction in hydrocarbons-based tax revenue, a lower operating surplus of the state energy company, and higher current spending—the latter due to a catch-up increase in wages and pensions. The mission took the view that, while financing a small deficit is manageable and does not impair debt sustainability, the authorities need to target a reduction in the non-hydrocarbons deficit by about 3½ percentage points of GDP over the medium term (to about 5 percent). Under the baseline assumptions, this would imply an overall surplus in the order of 3 percent of GDP (somewhat lower than the average of the last three years). Such an adjustment would reduce dependency on volatile export-based revenue6 and lead to greater inter-generational equity in the use of hydrocarbons wealth.

Impact of Changes in Oil Prices on the Fiscal Balance

13. To strengthen the fiscal position, the authorities may need to consider a reduction of explicit and implicit hydrocarbons subsidies7—projected at about 1 percent and 4 percent of GDP, respectively, in 2009—while using part of the substantial resulting fiscal savings to protect vulnerable groups.8 This is particularly relevant since there is consensus that these subsidies are inefficient, give rise to smuggling, and discourage investment and energy conservation. The authorities are keenly aware of these distortions and of their fiscal cost, and are considering policies to address them. The mission also recommended wage and pension restraint9 and a rigorous prioritization of investment projects.

Box 2.Structural Fiscal Issues

The authorities concurred with the thrust of the mission’s recommendations on fiscal reform. However, they indicated that progress was likely to be limited until the ongoing constitutional reform process is completed.

  • Tax reform. There is a need for measures aimed at simplifying the tax system and improving its efficiency and equity. In line with previous IMF technical assistance, the mission recommended eliminating the transactions tax and the complementary tax to the VAT (RC-IVA). The associated revenue loss (about 2½ percent of GDP) could be more than offset by an increase in the VAT rate (currently 13 percent), the closing of loopholes in the corporate income tax, and the transfer of special regime (such as simplified regimes for small taxpayers and free trade zone regimes) taxpayers to the regular tax regime. Appropriate turnover thresholds would need to be added to the VAT and the corporate income tax, below which taxpayers would be exempt from the VAT and liable to presumptive taxation only under the corporate income tax.

  • Intergovernmental relations. Also in line with previous Fund technical assistance recommendations, the mission emphasized the need to better balance expenditure allocations and resources available at each level of government, rationalize the transfer system, and strengthen controls over sub national borrowing.

  • Budget process. Adoption of the draft Budget Framework Law prepared in 2005 would contribute importantly to strengthening the budget process.

Monetary and exchange rate policy

14. The mission argued for a more active monetary policy to reinforce the downward trend in inflation. While lower food prices will facilitate progress towards price stability, inflation is still high, and real interest rates remain negative on non-indexed central bank instruments. The mission recommended conducting open market operations in a way consistent with bringing about higher interest rates on non-indexed bonds, which would not only have an impact on inflation but also reduce the incentives for dollarization and indexation.10 While accepting the thrust of the staff’s views, the authorities argued that supply-side factors (such as speculation and road blockades) had played a key role in fueling inflation, and that their reversal would also contribute to the disinflation process.

15. The external current account, which has recorded large surpluses over the last three years, is projected to move into a deficit of 0.5 percent of GDP in 2009 (Table 6). The value of exports is projected to decline by 23 percent in 2009, to US$4.7 billion, reflecting mainly lower export prices. In addition, manufactured exports to the United States will be affected by the recent suspension of trade preferences under the Andean Trade Promotion and Drug Eradication Act (ATPDEA), and remittances are projected to decline by about 10 percent, reflecting recessionary conditions in developed countries. Nonetheless, the overall balance of payments will remain in surplus as continued FDI would more than cover the current account deficit.

Table 6.Bolivia: Balance of Payments(In millions of U.S. dollars, unless otherwise indicated)
Est.Proj.
2004200520062007200820092010201120122013
Current account3376251,2971,7581,889-79236566568410
Trade balance3024571,0601,0461,091-529-2077431-154
Exports, f.o.b.2,1462,7913,8754,4906,1044,7135,2085,6745,8555,983
Natural gas6201,0861,6691,9892,9482,1592,5042,7162,7722,792
Of which:
To Brazil5428961,3571,6242,7811,8902,0082,0762,1192,135
Volume (mmm3 p/day)19.522.424.426.931.131.131.131.131.131.1
Price ($/000cf3)2.23.14.34.76.94.75.05.25.35.3
To Argentina49162280326167269496640653658
Volume (mmm3 p/day)2.24.85.14.61.53.66.27.77.77.7
Price ($/000cf3)1.72.64.35.58.65.96.26.46.66.6
Mining4565441,0611,3721,9471,3211,4841,6011,6091,596
Soy - related 1/387264237266311231239252272292
Other6848979078648981,0029811,1051,2021,303
Imports, c.i.f.-1,844-2,334-2,814-3,444-5,013-5,242-5,415-5,600-5,824-6,137
FDI/project related-50-358-213-158-195-213-185-187-192-175
Non FDI/project related-1,794-1,976-2,602-3,286-4,818-5,029-5,229-5,414-5,632-5,962
Services (net)-71-42-168-159-216-226-236-246-257-268
Income (net)-385-374-418-212-64-301-330-337-338-343
Of which: interest due on external public sector de-107-135-133-109-123-134-138-139-138-136
Of which: investment income (net)-289-268-389-324-370-388-408-428-449-472
Transfers (net)4915848221,0831,0789771,0091,0751,1311,176
Of which: HIPC assistance from grants6862442000000
Of which: public sector grants207209194190202205198
Of which: non identified6-3400000
Capital and financial account-211-132224232245522547523535472
Capital transfers 2/891,8131,180000000
Direct investment (net)63-280281204413510585591593535
Gross investment385404582739973852927933935877
Disinvestment and investment abroad-322-684-301-535-560-342-342-342-342-342
Portfolio investment (net)-35-15340-10-164-67-111-128-108-102
Public sector loans234163-1,543-1,0829717486725744
Disbursements547499337395325401269244220195
Amortization 2/-313-336-1,880-1,477-228-227-183-173-163-150
Fin system net foreign assets, excl. liquid asset requ18-97-109127803-5-4-20
Nonbank private sector loans65380-25-92-28-92-3-2-10
Other, including errors and omissions-563-153-231-92-14800000
Overall balance1264931,5201,9902,1354437841,0891,102883
Financing-126-493-1,520-1,990-2,135-443-784-1,089-1,102-883
Memorandum items
Current account (in percent of GDP)3.86.511.313.211.0-0.41.22.72.51.6
Merchandise exports (in percent of GDP)24.429.233.633.835.726.626.627.025.823.9
Merchandise imports (in percent of GDP)-20.9-24.4-24.4-25.9-29.3-29.5-27.6-26.6-25.7-24.5
Gross official reserves (end-of-period)1,2121,6743,0645,2527,4667,9098,6939,78210,88511,767
(In months of imports of goods and services)5.15.89.011.015.015.316.317.618.617.1
GDP (in millions of U.S. dollars)8,8099,57411,52613,29217,11417,74219,58921,04022,67125,012

Excluding reexports.

In 2006, includes effect of MDRI debt relief from the IMF and the World Bank equivalent to US$ 1,804.3 million. In 2007 includes equivalent to US$ 1,099 million.

Sources: Central Bank of Bolivia; and Fund staff estimates and projections.

Excluding reexports.

In 2006, includes effect of MDRI debt relief from the IMF and the World Bank equivalent to US$ 1,804.3 million. In 2007 includes equivalent to US$ 1,099 million.

16. Against this background, the mission discussed with the authorities the appropriateness of Bolivia’s exchange rate level and degree of flexibility of its exchange rate regime.11 While the Boliviano is mildly overvalued according to CGER estimates (Box 3), it would appear to be broadly appropriate given the high degree of uncertainty associated with such estimates. Regarding the exchange rate regime, the mission noted that the inflationary pressures associated with large reserve accumulation prior to the decline in export prices had underscored the need for greater exchange rate flexibility, which could be in the form of greater and/or more frequent adjustments under the exiting crawling peg. Looking forward, such flexibility would help absorb negative external shocks, like further declines in commodity prices, while intervention in the foreign exchange market could be used to forestall disruptive exchange rate adjustments.

Alternative scenario

17. In anticipation of downward revisions to the WEO oil baseline, the mission developed an alternative scenario in which oil prices are 25 percent lower than in the baseline (Table 7). In such a scenario—which has become more relevant given downward revisions to the WEO baseline since the discussions—, both the external current account and the overall fiscal balance would record significant deficits in 2009 (respectively, 4.3 percent and 2.8 percent of GDP). There was consensus that, in the event of a further deterioration in exports and related fiscal revenue, the first line of defense in the policy adjustment would be on the fiscal front. Specifically, the authorities indicated that, if oil prices were to display a sustained gap vis-à-vis the baseline path, they would compensate for lower revenue through cuts in government capital expenditure—where they see scope for streamlining while preserving critical investments and social spending. Staff concurred with such an approach.

Table 7.Bolivia: Alternative Medium-Term Scenario 1/
Proj.
20092010201120122013
(Annual percentage changes)
Income and prices
Real GDP4.04.23.93.63.4
GDP deflator-7.910.86.24.96.7
CPI inflation (period average)8.17.56.54.94.0
CPI inflation (end-of-period)8.07.06.04.04.0
(In percent of GDP)
Investment and savings
Total investment19.721.320.920.920.5
Public sector9.39.59.69.69.5
Private sector10.411.711.311.311.0
Gross domestic savings11.415.216.316.315.5
Gross national savings15.418.619.719.819.0
Public sector5.78.38.58.38.0
Private sector9.710.411.211.511.0
Investment/saving balances-4.3-2.6-1.2-1.2-1.5
Public sector-3.6-1.3-1.1-1.3-1.5
Private sector-0.6-1.3-0.10.20.0
Combined public sector
Revenues and grants33.733.233.132.531.6
Of which:
Royalties on hydrocarbons6.36.26.15.95.4
Expenditure37.334.534.233.833.1
Current23.622.321.921.520.9
Capital 2/13.712.212.312.312.2
Overall balance-3.6-1.3-1.1-1.3-1.5
Of which:
Balance before nationalization costs-2.8-1.3-1.1-1.3-1.5
Non-hydrocarbons balance-10.1-8.6-8.5-8.4-8.0
Total net public debt21.419.819.018.818.5
External sector
Current account-4.3-2.6-1.2-1.2-1.5
Merchandise exports24.724.424.723.822.1
Of which: natural gas9.710.110.29.78.9
Merchandise imports31.629.228.127.226.0
Terms of trade index (percent change)-30.33.80.8-3.6-3.3
Gross international reserves 3/
In millions of U.S. dollars7,6737,8298,2438,6268,826
In percent of broad money89.386.084.180.676.2
(Changes in percent of broad money at the beginning of the period, unless otherwise specified)
Money and credit
NFA of the financial system-1.41.94.63.91.9
NDA of the financial system1.96.84.55.16.4
Of which: credit to private sector (percent of GDP)32.532.332.232.131.5
Broad money0.58.79.19.08.3
Memorandum item
Nominal GDP (in billions of U.S. dollars)16.7218.5919.9721.4623.63

Reflects a 25 percent reduction in oil prices relative to the baseline.

Includes nationalization costs and net lending.

Excludes reserves from the Latin American Reserve Fund (FLAR) and includes Offshore Liquidity Requirements (RAL).

Sources: Bolivian authorities; and Fund staff estimates and projections.

Reflects a 25 percent reduction in oil prices relative to the baseline.

Includes nationalization costs and net lending.

Excludes reserves from the Latin American Reserve Fund (FLAR) and includes Offshore Liquidity Requirements (RAL).

Medium-Term Oil Price Assumptions 1/

(In U.S. dollars per barrel)

20092010201120122013
Baseline 2/68.075.079.382.083.0
Alternative 3/51.056.359.461.562.3
Memorandum item
WEO (November vintage)54.364.871.375.077.5

For each US$ 10 dollar/barrel reduction in oil prices, the overall fiscal balance and external current account deteriorate by 1½ percent and 2½ percent of GDP, respectively.

Based on WEO’s October vintage.

Reflects a 25 percent reduction relative to the baseline.

For each US$ 10 dollar/barrel reduction in oil prices, the overall fiscal balance and external current account deteriorate by 1½ percent and 2½ percent of GDP, respectively.

Based on WEO’s October vintage.

Reflects a 25 percent reduction relative to the baseline.

Box 3.Exchange Rate Assessment

Staff estimates based on CGER methodologies suggest that the Boliviano could be mildly overvalued following the recent sharp changes in commodity prices and in trading partners’ currencies.

  • The macroeconomic balance approach (MB) suggests an overvaluation of 8 percent. The underlying current account balance—i.e., that which would prevail under current real exchange rates once temporary factors have dissipated—is estimated to be a surplus of 1.8 percent of GDP, much lower than in 2008 because of the recent reduction in the terms of trade. Meanwhile, an estimation of the current account norm for Bolivia yielded 3.4 percent, using the same parameters as those in the CGER exercise.

  • The equilibrium exchange rate approach (ERER) suggests the Boliviano could be overvalued by 7 percent. Econometric evidence points to a long-run relationship between the real exchange rate and terms of trade, public consumption, productivity, FDI, and the net foreign assets of the banking system (NFA). Until recently, the Boliviano was undervalued, but the observed real effective exchange rate has rapidly risen, while the equilibrium real exchange rate has fallen because the effect of declining terms of trade more than offset that of the prior increase in NFA.

  • The external sustainability also suggests an overvaluation of 10 percent. Bolivia would need a current account surplus of 4 percent of GDP to stabilize its net foreign asset position, compared with the estimated underlying current account surplus of 1.8 percent of GDP. The exchange rate adjustment required to close the gap would be about 10 percent.

C. Financial Sector Issues

18. The financial system in Bolivia continues to be broadly unaffected by the ongoing global financial turmoil. While deposits fell in September by about US$160 million (2.5 percent of the total), this could be attributed to political tensions as deposits have since stabilized. Furthermore, there are no signs that the small existing international credit lines are being curtailed or cancelled. The recent drawdown in central bank reserves appears to reflect a portfolio shift on the part of the financial and nonfinancial private sectors to rebuild their dollar positions—which had been reduced in response to previous currency appreciation trends. Nonetheless, NIR still represent 120 percent of financial system deposits.

19. While dollarization declined markedly in recent years, the slight increase in the share of dollar deposits in recent months suggests that a reversal of that process could be taking place. A full-blown re-dollarization is not expected, but the risk of such a development would be particularly high in the event of a sharp depreciation of the currency.

Banking System Dollarization Ratios

(In percent)

20. The authorities concurred with the thrust of the mission’s recommendations to enhance on financial sector soundness. Specifically:

  • Efforts to reduce vulnerabilities need to continue, even if the financial sector appears to be stable and highly liquid. The mission welcomed plans to fully adopt IAS by January 2010 and the ongoing efforts to improve risk management practices in banks, including countercyclical loan-loss provisioning. The mission recommended ensuring that new regulations on subordinated debt, foreign exchange exposures, and the use of general provisions as tier II capital do not depart from international best practices. It also stressed the need for prudential regulations to mitigate credit risks from dollarization and market risk, as dollar-denominated loans represent about 70 percent of bank credit. In addition, there is scope to improve further the assessment of risk management procedures on household lending. The supervisory agency was encouraged to continue assessing, in the field, the sufficiency of all financial institutions’ loan provisioning and solvency.

  • Addressing some pending legal, prudential, and institutional issues would contribute to reducing potential vulnerabilities. This would include: (a) the creation, in due course, of a deposit insurance scheme; (b) amendments to the legislation governing corporate bankruptcy/restructuring; and (c) strengthening further the Financial Intelligence Unit (in particular staffing) and anti-money laundering legislation.12

  • The authorities are considering the possibility of conducting an FSAP update in early 2010.

D. Supply Side and Social Issues

21. The mission suggested that improving the investment climate was a top priority for Bolivia, as private investment remains significantly below the levels displayed in the past decade, which has contributed to growth rates below the regional average. Investment picked up in 2008, but the increase was concentrated on residential investment and the completion of a large mining project. In May 2008, the government expropriated the shares needed to regain control over five companies in the hydrocarbons sector, and intervened the telecommunications company ENTEL, which have triggered demands for international arbitration from the affected investors. More recently, the government announced plans to recover control over the three electricity generation companies. The mission suggested the importance of pursuing actions on the nationalization front through mutually agreeable arrangements with the concerned private parties.

Net FDI

(In percent of GDP)

Private Investment

(In percent of GDP)

22. While acknowledging the desirability of higher rates of private investment, the authorities emphasized that their development strategy ascribes a leading role to public sector investment. In their view, the private sector will, in due course, take advantage of investment opportunities that are expected to arise from major infrastructure improvements.

23. The authorities emphasized the importance of ongoing efforts to reduce poverty. These include, most notably, transfer schemes targeted at youth and the elderly. The mission welcomed these initiatives and underscored the need for more timely data to better assess progress in poverty reduction.13

E. Medium-Term Outlook

24. The key elements of the baseline medium-term macroeconomic scenario are:

  • Growth. Real GDP growth is projected to slow to around 3½ percent toward the end of the projection period (2012-13) as mining output stabilizes following the completion of a large project. The authorities noted that growth could be sustained in the vicinity of 6 percent if account were taken of envisioned investments and production increases in the hydrocarbons sector, which would enable a substantial boost to natural gas exports to Argentina in the context of the 2006 bilateral agreement. While recognizing their potential effects, staff has not been incorporated these elements in the projections because the related investment plans and financing arrangements have not yet been fleshed out. Moreover, the envisaged increase in natural gas exports to Argentina is contingent on the construction of a pipeline in that country.

  • Investment. The assumed growth rate is consistent with private investment picking up from the 2008 level, reflecting mainly the start of a new large mining project (El Mutun), which is projected to add on average about 1 percent of GDP a year to private investment levels over the five-year period beginning in 2009.

  • External current account. The current account balance would return to surplus in 2010, benefiting from a projected recovery in hydrocarbon prices and higher export volumes to Argentina (based on greater utilization of the already existing pipeline capacity).

  • Fiscal position. The overall fiscal position would shift to small surpluses in 2010-11 but subsequently move back to small deficits, as hydrocarbons-based revenue declines in relation to GDP due to stable export volumes.

  • Inflation. Inflation, which is projected to drop to single digits in 2009, in line with projected declines in food prices, would decline further over the medium term as the external sector is not expected to be a source of liquidity pressures.

25. In the alternative medium-term scenario, the external current account and the overall fiscal deficits would narrow somewhat in 2010, reflecting mainly the assumed higher natural gas export volumes to Argentina. Following a small decline in 2009, central bank reserves would rise gradually, to US$8.8 billion by 2013 (compared with US$12.5 billion in the baseline scenario).

External Current Account

(In percent of GDP)

Overall Fiscal Balance

(In percent of GDP)

Debt sustainability

26. Longer-term projections beyond the baseline medium-term scenario suggest that Bolivia’s public and external debts are likely to remain sustainable. However, standard stress tests suggest that the debt ratio would rise in the event of severe exogenous shocks.14

III. Staff Appraisal

27. Strong hydrocarbons and mining exports continued to support Bolivia’s growth performance as well as its fiscal and external positions. In 2008, real GDP growth picked up, the external current account surplus remained very large, and international reserves reached record levels. The combined public sector balance remained in surplus, benefiting from continued high export-based revenues. The currency strengthened, which contributed to a further significant reduction in deposit dollarization.

28. The high rates of monetary expansion prevailing until recently have contributed importantly to double-digit inflation. While food inflation has also been an important factor, the role of domestic demand in the inflationary process that peaked in mid-2008 was evidenced by increases in non-food inflation. The decline in inflation in recent months is a welcome development that reflects not only moderation in food prices but also slower monetary growth and the effect of a substantial real appreciation of the currency.

29. In view of the major changes in the external environment and outlook, the key policy challenge has shifted from containing inflation to maintaining a sound fiscal position and external stability. While Bolivia’s financial system continues to be broadly unaffected by the global financial turmoil, the major decline in the terms of trade from lower energy and mining prices, as well as an expected decline in remittances, are projected to slow GDP growth markedly in 2009, and to push both the fiscal and external current accounts into deficits. The staff’s baseline scenario suggests that current fiscal and monetary policies are still appropriate while the exchange rate remains competitive. However, Bolivia’s outlook is highly sensitive to developments in export prices, and their further weakening could give rise to significant financing needs and call for a strengthening of policies to ensure external and fiscal sustainability.

30. In the event of a deterioration in exports and related fiscal revenue, the first line of defense in the policy adjustment should be on the fiscal front. Staff welcomes the authorities’ approach, which includes cuts in government capital expenditure—where there is scope for streamlining—while preserving social spending. Moreover, given the need to reduce dependency on volatile export-based revenue and ensure intergenerational sharing of hydrocarbon wealth, the authorities need to target a reduction in the non-hydrocarbons fiscal deficit over the medium term—in the order of 3½ percent of GDP. To this end, the authorities could consider a gradual reduction of explicit and implicit hydrocarbons subsidies while using part of the resulting fiscal savings to protect vulnerable groups. This is particularly relevant since there is consensus that these subsidies are inefficient, give rise to smuggling, and discourage investment and energy conservation. Meanwhile, it will be of paramount importance to exercise wage and pension restraint, and a rigorous prioritization of investment projects.

31. In addition, there is scope to further strengthen Bolivia’s fiscal position through well-designed structural reforms. First, the tax system could be modified to simplify it and improve its efficiency and equity. To this end, the staff suggests eliminating the transactions tax and the complementary tax to the VAT, while increasing the VAT rate, closing loopholes in the corporate income tax, and transferring special regime taxpayers to the regular tax regime. At the same time, it would be important to rationalize intergovernmental relations, and in particular better balance expenditure allocations and available resources at each level of government. In addition, Bolivia would benefit from improving the budget process, a blueprint for which is available in the draft Budget Framework Law prepared back in 2005.

32. A more active monetary policy would help speed up the decline in inflation, currently in the double digits. The central bank is encouraged to conduct open market operations in a manner consistent with bringing about higher interest rates on non-indexed bonds, which are negative in real terms, and thereby eliminate the incentive for indexation. Higher real interest rates and lower inflation would also help consolidate the reduction in dollarization achieved in recent years.

33. The exchange rate of the Boliviano is broadly appropriate. While standard estimates suggest a mild overvaluation, and indeed the current account deficit could be significant in 2009, the outlook points to a subsequent improvement in the external current account. Regarding the exchange rate regime, the inflationary process—associated in part, until recently, with large unsterilized intervention—has highlighted the need for greater exchange rate flexibility. Looking forward, greater flexibility would help to minimize deviations from the real equilibrium exchange rate, as well as to absorb possible negative external shocks stemming from adverse movements in commodity prices.

34. While the financial sector appears to be stable and highly liquid, efforts to reduce vulnerabilities should continue. The staff welcomes plans to fully adopt international accounting standards and the ongoing efforts to improve risk management practices in banks. The authorities are encouraged to introduce prudential regulations to mitigate credit risks from dollarization and market risk. In addition, addressing some pending legal, prudential, and institutional issues may also contribute to reducing potential vulnerabilities. Priorities in this area are establishing a deposit insurance scheme; adopting legislation governing corporate bankruptcy/restructuring; and strengthening further the Financial Intelligence Unit and legislation on anti-money laundering.

35. Improving the investment climate remains a top priority for Bolivia, as its private investment rate remains significantly below the levels observed in the past decade and well below the regional average. The investment climate, which stands to gain from the recent easing in political tensions, would also benefit from restraint with regard to nationalizations—which should be pursued, as far as possible, through mutually agreeable arrangements with the concerned private parties.

36. Bolivia’s data provision to the Fund has some shortcomings, but is broadly adequate for surveillance.

37. It is proposed that the next Article IV consultation with Bolivia be held on the standard 12-month cycle.

Table 8.Bolivia: Selected Vulnerability Indicators
200220032004200520062007Nov.

2008
Liquidity coverage
Net international reserves (US$ million)7728881,0761,5683,0505,2527,596
NIR coverage, in percent of:
Dollar deposits24.028.136.952.197.5154.8228.9
Total deposits22.326.032.943.874.3100.6119.8
Broad money20.123.228.636.859.776.090.8
Net foreign assets of the financial system (US$ million)1,3451,4791,6362,3913,9546,0427,688
NFA coverage, in percent of:
Dollar deposits41.846.956.279.4126.4178.1231.6
Total deposits38.843.350.066.896.3115.7121.2
Broad money35.038.643.656.177.487.491.8
Debt ratios1/
(In percent of GDP)
Total gross public debt69.174.176.780.455.240.935.0
Domestic public debt20.023.024.422.516.624.927.0
External public debt49.251.152.357.938.616.18.1
Financial dollarization
(In percent)
Dollar deposits92.992.389.084.276.265.052.3
Dollar credit95.897.295.792.686.979.173.6
Banking sector indicators
Nonperforming loans (in percent of total loans)17.616.714.011.38.75.64.7
Restructured loans (in percent of total loans)31.933.933.125.819.413.09.0
Nonperforming and restructured loans (in percent of total loans)49.550.647.137.128.118.613.7
Capital adequacy ratio16.115.314.914.713.312.613.8
Profits after tax (in percent of equity)0.62.7-1.26.312.921.221.3
Cash and short-term investments as percent of total assets25.925.828.330.733.935.240.6
Memorandum items
Fiscal balance (in percent of GDP) 2/-8.8-7.9-5.5-2.24.51.72.4
Total financial system deposits (US$ million)3,4633,4203,2753,5784,1055,2226,412
Of which: Sight deposits1,1779758689341,0991,3751,321

Reflects end-2008 projected debt levels.

For 2008, reflects the full-year estimate.

Sources: Bolivian authorities; and Fund staff estimates.

Reflects end-2008 projected debt levels.

For 2008, reflects the full-year estimate.

Table 9.Bolivia: Millennium Development Goals
First

Observation
200420052006Target

2015
Goal 1. Eradicate Extreme Poverty and Hunger
Target 1: Halve, between 1990 and 2015, the proportion of people whose income is less than one
dollar a day.
Population below US$1 a day (in percent)41.2 (1990)36.737.724.1
Target 2: Halve, between 1990 and 2015, the proportion of people suffering hunger
Prevalence of child malnutrition (percent of children under 3)38.3 (1990)19.0
Goal 2. Achieve Universal Primary Education
Target 3. Ensure that, by 2015, children will be able to complete a full course of primary schooling.
Net primary enrollment ratio (percent of relevant age group)94.094.592.2100.0
Percentage of cohort reaching grade 555.4 (1992)79.577.875.6100.0
Goal 3. Promote Gender Equality and Empower Women
Target 4. Eliminate gender disparity in primary and secondary education preferably by 2005 and to all
levels of education by 2015.
Gender disparities at completion of primary education (percent)6.6 (1992)0.3-0.60.0
Gender disparities at completion of secondary education (percent)3.4 (1992)-0.4-1.50.0
Goal 4. Reduce Child Mortality
Target 5. Reduce by two-thirds, between 1990 and 2015, the under five mortality rate
Infant mortality rate (per 1,000 live births)89 (1990)30.0
Immunization against measles (percent of children under 12-months)68 (1994)84.582.695.0
Goal 5. Improve Maternal Health
Target 6. Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.
Maternal mortality ratio (modeled estimate, per 100,000 live births)416 (1990)104.0
Proportion of births attended by skilled health personnel (percent)27 (1995)59.661.965.070.0
Goal 6. Combat HIV/AIDS, Malaria, and Other Diseases
Target 7. Halt by 2015, and begin to reverse, the spread of HIV/AIDS
HIV prevalence, total (percent ages 15-24)1.8 (1990)13.419.319.213.0
Target 8. Halt by 2015, and begin to reverse, the incidence of malaria and other major diseases
Incidence of malaria (per 1,000 people)7.5 (1990)4.15.55.22.0
Incidence of tuberculosis cases cured (percent of diagnosed)52.6 (1995)78.776.395.0
Target 10. halve by 2015 proportion of people without access to safe drinking water
Access to potable water (percent of population)57.5 (1992)72.371.773.178.5
Access to improved water source (percent of population)28 (1992)41.643.555.764.0
Goal 8. Develop a global Partnership for Development
Target 17. Provide access to affordable essential drugs
Proportion of households expenditure on essential drugs (percent of national health expenditure)17.8 (1995)15.0
Source: Bolivian authorities.
Annex 1. Summary of Annexes

The full annexes to this report may be viewed in CyberDocs on the Fund’s intranet and on the secure extranet for Executive Directors and member country officials.

Fund relations

As of November 30, 2008, Bolivia did not have any outstanding purchases or loans. The latest SBA expired on March 31, 2006. The last Article IV consultation was completed by the Executive Board on July 13, 2007 (IMF Country Report No. 07/248). Bolivia has received wide-ranging TA in recent years. An update safeguards assessment was completed in 2004. This assessment confirmed that measures had been implemented to address all previously identified vulnerabilities, except for those requiring a change in the central bank law. Currently, the Central Bank of Bolivia is not subject to the policy. Mr. Esteban Vesperoni has been the IMF resident representative since February 2006.

Relations with the World Bank Group

The World Bank’s support to Bolivia under the Interim Strategy Note (ISN) approved in November 2006 concluded in June 2008. The World Bank and the Government are negotiating a new strategy in order to continue and deepen the Bank’s long-term support to Bolivia’s development priorities. Preliminary discussions focused on extreme poverty eradication. Lending under the last ISN included only IDA resources, which financed 11 investment projects, with disbursements of US$140 millions over the last two years. The Bank’s current portfolio in Bolivia comprises eleven projects under implementation, with total commitments of US$272.8 million of which US$196.2 million remain undisbursed.

Relations with the Inter-American Development Bank

As of November 30, 2008, Bolivia’s outstanding debt to the IDB was approximately US$530.0 millions with undisbursed approved funds for US$460.0 millions. New IDB lending to Bolivia will be following newly adopted operational guidelines for concessional funds under the Fund of Special Operations performance-based allocation system. The Bank’s 2008 operative program contains a portfolio of sovereign guaranteed operations of 6 loans for a total amount of US$105.0 millions for the year, concentrated in water, housing and agricultural productivity sectors. Seven additional loans for US$130.0 millions have been identified and are already in the Bank’s lending pipeline for the 2008-2009 cycles.

Statistical issues

Data provision to the Fund has some shortcomings, but is broadly adequate for surveillance. A data ROSC mission in early 2007 confirmed advances in recent years, and reiterated the existence of shortcomings that might hamper the formulation of appropriate policies. Bolivia has participated in the GDDS since November 2000 and plans to subscribe to the SDDS are at an advanced stage.

The combined public sector comprises the general government, the public enterprises, and the central bank’s operating balance.

A one-off deferred receipt from 2007 sales also contributed to the increase in the surplus.

The non-hydrocarbons balance excludes natural gas royalties and the Impuesto Directo a los Hidrocarburos (IDH), as well as the operating balance of YPFB.

The delinquency indicator for restructured loans is about 30 percent and the repayment schedule of some of them reportedly includes larger installments toward their maturity.

The baseline projections are consistent with the October 2008 WEO vintage.

As shown in the chart, a further large drop in oil prices could push the fiscal deficit to as high as around 6 percent of GDP, which would give rise to serious financing difficulties and undermine fiscal sustainability.

Implicit subsidies are associated with the longstanding freeze on domestically produced crude oil price at US$27 per barrel, which provides the basis for maintaining very low administered prices for petroleum products in the domestic market. These policies depress the base for the corporate profit tax and for excise taxes.

For example, through targeted food and urban transportation subsidies, as highlighted in FAD’s 2004 PSIA report.

A pension reform proposal has been submitted by the government, and is currently with the relevant committee in Congress, which would include a fully-funded minimum pension benefit. Such a minimum pension would be paid in addition to the transfer scheme for persons over age 60 created in 2007, the Renta Dignidad.

Academic work—for example, “Addicted to Dollars” (NBER Working Paper 10015, 2003) by Reinhart C. and K. Rogoff—supports the view that a high degree of dollarization does not pose an insurmountable obstacle to monetary control or to disinflation.

Central bank staff conducts significant analytical work on equilibrium exchange rate issues.

Bolivia’s progress in implementing the FATF 40+9 Recommendations against money laundering and the financing of terrorism was recently discussed at the last Plenary meetings of GAFISUD (the FATF-style regional body for South America). The related progress report noted a recent progress in Bolivia’s political commitment to fight these crimes. As a result, no counter-measures or sanctions were applied.

The latest poverty indicators date from 2006 and show stable poverty levels at 60 percent.

See accompanying external and public debt sustainability analysis.

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