Journal Issue


International Monetary Fund
Published Date:
June 2012
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1. Prudent macroeconomic policies, accompanied by strong terms of trade, have allowed Bolivia to achieve impressive economic outcomes in recent years. Exports of goods have tripled since 2005, reflecting increased volumes of gas, mineral, and agricultural products, and the decade-long boom in commodity prices. Real GDP growth, which averaged 3.3 percent annually during 1996–2005, rose to an average of 4.7 percent during 2006–11. The fiscal position strengthened sharply, as larger export receipts, higher taxation of hydrocarbon production, and moderate rates of increase in government spending led to substantial fiscal surpluses. The external current account also registered surpluses, contributing to the build-up of a strong reserves buffer, now equivalent to close to 50 percent of GDP. Combined with the debt relief obtained under MDRI, these developments have helped Bolivia become a net external creditor country since 2008. In 2011, gross NFPS debt declined to less than 35 percent of GDP and net debt to only 14 percent, reflecting the accumulation of large general government deposits at the central bank.

Current Account Balance and Terms of Trade

2. Strong results have also been achieved on improving social inclusion and income distribution. Cash transfer programs have been successful in lowering extreme poverty, while investment in infrastructure has helped improve access to basic services (water and sanitations, energy) and transportation (mainly roads). Various initiatives have also been launched to support small businesses, generating employment and providing income stability to informal and vulnerable workers. To strengthen food security, the government has limited exports of certain products (sugar, soybeans, corn, meats) while reducing import tariffs on others and on inputs for their production. Social challenges persist, however, including still-high levels of poverty, infant mortality, and long-standing inequalities (Annex I).

Selected Regional Countries: Poverty Headcount Ratio at US$2 a day in PPP

(percent of population)

Source: World Bank, World Development Report, Instituto Nacional de Estadistica de Bolivia, and IMF staff estimates.

3. Private investment has remained subdued, amid lingering uncertainty about the legal framework. The new constitution (2009), which gives the State a primary role in economic affairs, requires amending key economic laws, including those governing the central bank, the financial sector, the exploitation of natural resources, and inter-governmental fiscal relations. Social and regional disputes have also persisted, including with respect to revenue-sharing arrangements and the location of infrastructure.

4. In completing the 2011 Article IV consultation, the Executive Board welcomed Bolivia’s strong economic performance, underpinned by prudent macroeconomic policies. Directors concurred that the main short-term priority was to contain inflation, and stressed that meeting developmental needs and making inroads into poverty reduction remained the main medium-term objectives (Box 1).

Box 1.Fund Policy Recommendations and Implementation

Monetary and exchange rate policy. Directors recommended rapid exit from the monetary stimulus and a moderate appreciation of the currency to help reduce inflationary pressures. Over the medium term, directors suggested greater exchange rate flexibility to enhance the economy’s capacity to respond to external shocks.

The authorities responded to rising inflation by withdrawing liquidity through open market operations, especially in the first half of 2011. The Boliviano was allowed to appreciate slightly during the year.

Fiscal policy. Directors stressed the importance of increasing productive and social investment to address developmental needs, while enhancing the effectiveness of public spending and implementation capacity across all levels of government. Directors welcomed plans to introduce multi-year budgeting and a fiscal savings fund to facilitate anti-cyclical policies and encouraged the authorities to limit fiscal claims on the central bank and enhance the transparency of state owned enterprises.

The authorities are working on multi-year framework to guide fiscal policy and budget planning and envisage basing their budget projections on prudent estimates of oil and gas prices to generate savings and accumulate them in a fiscal fund. They indicated that they continue to work on a framework law for public corporations, which would provide tools for enhanced management and governance.

Financial sector. Directors highlighted the need to continue improvements in the financial sector in line with FSAP recommendations, especially to ensure appropriate levels of banks’ liquidity and capital buffers. They suggested to avoid using interest rate policy and prudential rules for development purposes, recommended strengthening financial sector supervision more broadly, and considered that deposit insurance would be a useful addition to the crisis management framework.

Implementation of recommendations is underway (details are presented in Annex II).

Structural policies. Directors stressed the need to improve investment climate through further reforms of the legal framework to ensure clear and stable rules for the private sector. They also called for strengthened social policies, improving further the targeting of transfer programs, facilitating the reduction of fuel subsidies, and introducing free price setting in agriculture.

Envisaged legal reforms in the mining and hydrocarbons sectors are still under discussion. The reform of the fuel pricing policy is subject to political constraints. The authorities believe that price and trade controls in agriculture are necessary to limit speculation and ensure food security.

5. Exchange system and statistics. Bolivia has accepted the obligations under Article VIII, sections 2, 3, and 4. The exchange system is free of restrictions on the making of payments and transfers for current international transactions. Despite shortcomings, data provision to the Fund is broadly adequate for surveillance.

Recent Developments, Outlooks And Risks

A. Recent Developments

6. In 2011, economic activity remained robust amid strong domestic demand growth. Real GDP grew 5.2 percent, led by domestic services, construction, and hydrocarbons production. After a sharp increase at the beginning of 2011, twelve-month inflation gradually declined to 4 percent in March 2012, reflecting a softening in international food prices, price agreements in agriculture, and a gradual re-anchoring of expectations. In 2011, domestic demand grew briskly, with imports climbing over 40 percent with respect to 2010. As a result, the external current account surplus narrowed from close to 5 percent of GDP to 2¼ percent of GDP, despite record-high export prices. International reserves rose to over 80 percent of M2 (which includes dollar denominated deposits), and about 50 percent of GDP (Figures 1 and 2).

Figure 1.Bolivia: Real Sector Developments

Sources: Central Bank of Bolivia and Fund staff estimates.

1/ Median real GDP growth of Argentina, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay and Venezuela.

Figure 2.Bolivia: External Developments

Sources: National Authorities and IMF staff calculations.

Data for 2011 corresponds to Staff projections except for the NIR which corresponds to information up to December 2011.

7. Policies have been broadly accommodative. The overall surplus of the public sector fell from 1.7 percent of GDP in 2010 to 0.8 percent of GDP in 2012. Revenue performance improved significantly, as collections registered a 25 percent increase in real terms. This strength was particularly evident in the corporate income tax and VAT, reflecting both improved compliance and higher commodity prices and imports. At the same time, public investment picked up strongly, contributing to a fiscal impulse of about 1 percent of GDP (Figures 3 and 4).1 In the monetary area, after a tightening in monetary conditions in early 2011, in response to the pickup in inflation, the central bank has been reducing the pace of liquidity withdrawal, allowing for a resurgence in excess bank liquidity (to above 5 percent of deposits). Banks have continued to expand credit to the private sector at a fairly brisk pace (above 20 percent y/y in nominal terms). During the course of 2011, the central bank let the Boliviano appreciate slightly (1.3 percent).

Figure 3.Bolivia: Monetary Developments

Sources: National Authorities and Fund staff calculations.

Figure 4.Bolivia: Fiscal Developments

Sources: Central Bank of Bolivia, Ministry of the Economy and Public Finances, and Fund staff estimates.

B. Outlook and Risks

8. Growth prospects remain favorable in the near term, reflecting continued strength in the natural resource sector and private demand. Staff projects real GDP growth at 5 percent in 2012, in the context of still high terms-of-trade and accommodative policies. Gas production and export volumes are expected to increase, while construction and services would continue leading GDP growth.

9. With the output gap closed,2 there are some risks that rapid demand growth could lead to overheating. Inflation is projected at about 5 percent in 2012, assuming that food prices continue to trend down, with the strength of domestic demand representing some upside risks. A concern is that the upward trend in consumption and real estate growth would not be curbed early enough. Measured at constant prices, domestic demand has grown consistently above GDP in recent years, leading to declining net exports. And despite broadly similar terms of trade to those in 2008 (the previous peak), the external current account surplus has narrowed significantly since then (a drop of about 10 percentage points of GDP). Unemployment is now at record low levels (5½ percent), wages are rising—wages are up 8 percent and this year the minimum wage will increase by 22 percent—and shortages, albeit temporarily, have surfaced in the distribution of electricity.

Demand Side Components

(In percent of GDP)

10. In the near term, downside risks from a more adverse external environment are mitigated by the strong financial buffers that Bolivia has built up in recent years. Staff estimates that the first round effect of a decline in commodity prices—of around 20 percent for oil and minerals, and somewhat less for food3—would result in a deterioration of 5½ percentage points of GDP in the external current account balance and 2 percent of GDP in the overall fiscal balance. Bolivia’s international reserves and government deposits at the central bank—equivalent to 50 percent and 20 percent of GDP, respectively—would be more than adequate to buffer such a temporary adverse external shock. Moreover, external public debt has declined sharply in recent years and remains low at 14 percent of GDP, and a decline in gas export prices would take time to materialize, since existing contracts with regional partners follow international fuel prices with a lag of about six months.

Net International Reserves

(In percent of GDP)

11. Prospects over the medium term are also favorable, and risks to the outlook are mainly associated with high commodity dependency and low levels of private investment. Under staff’s baseline scenario, the economy will grow slightly above its observed long-term trend, assuming the maintenance of policies steered to anchor low level of inflation and maintain a small fiscal surplus—consistent with the government’s track record since 2006. But this scenario is subject to risks:

  • Commodity dependency is high, accounting for roughly 90 percent of exports and 30 percent of fiscal revenue. As a result, Bolivia is vulnerable to a sustained fall in commodity prices. In addition, gas exports could decline later this decade if new fields are not developed, which would require a prompt increase in exploration activity. If prices or volumes of commodity exports (especially hydrocarbons) were to be affected significantly on a sustained basis (tail risk), policy adjustments, possibly in the form of a stronger non-hydrocarbon fiscal balance and a weaker real exchange rate, would be required. Financial sector developments would need to be carefully monitored in this scenario, given the significant increase in the size of the banking sector in recent years.

  • Private investment is still low, compared with other countries in the region, conspiring against sustained economic growth, due to an uncertain business climate and longstanding goods and factor markets inefficiencies. Is spite of some improvements in recent years, mostly on the back of stronger macroeconomic policies, Bolivia still ranks low in World Bank’s Doing Business Indicators (153/183) and World Economic Forum’s Global Competitiveness Index (103/142). It is possible, however, that official data do not fully capture private sector investment, particularly in the informal sector of the economy. If this part of investment turned out to be significant, it is conceivable that long-term growth could be higher than estimated at present.

Commodity Dependency in 2011

Private Investment

(In percent of GDP)

12. The authorities disagreed with the balance of the risks presented by staff and stressed that their policies were aimed at mitigating other key risks. In the short-term, they viewed the deterioration of the external environment as the key risk. They agreed that financial cushions are ample enough and stressed that the 2008-09 experience had shown the resilience of the Bolivian economy and demonstrated its low exposure to global financial sector distress. They believed that, in the current context, overheating would be highly unlikely, including because their policies would expand supply. The authorities also underscored that their policies were aimed at mitigating medium-term downside risks, including through the additional public investment to expand gas and mineral production and to develop these sectors downstream. They also expressed confidence that recent incentives to spur private sector investment in the hydrocarbon sector (see below) would contribute to higher growth and lower commodity dependency.

Bolivia: Selected Economic Indicators
Real GDP (percent change)
CPI (end of period percent change)
Overall fiscal balance (percent of GDP)
Of which: Non-hydrocarbons fiscal−7.5−10.3−8.1−8.7−9.4
balance (percent of GDP)
Current account balance (percent of GDP)

Policy Discussions

Discussions focused on the appropriate policy mix for 2012 and on medium-term challenges to achieving strong, sustained, and inclusive growth. Staff recommended the adoption of policies aimed at reducing overheating risks in the short-term and noted that Bolivia is in a solid position to sustain economic growth and poverty reduction over the medium term, through an increase in private investment and the efficient implementation of ambitious public investment plans.

A. Fiscal Policy

13. To reduce upside risks to inflation and maintain strong financial cushions, staff suggested aiming at a somewhat higher fiscal balance in 2012. Over the past few years, fiscal policy has been appropriately geared to smoothing out the effects of external shocks. However, the output gap is estimated to have closed, and some fiscal impulse (½ percent of GDP) is projected for 2012. The authorities considered that this modest impulse was appropriate, given the risks of a slowdown in activity. They highlighted that public investment would remain high, as required for the development of infrastructure and the process of industrialization based on natural resources.

Output Gap and Fiscal Impulse

(SB-Non Hydrocarbon)

14. Risks on the spending side call for an improvement in the non-hydrocarbon fiscal balance over the medium term. The non-hydrocarbon fiscal balance4 is projected to reach a deficit of 9½ percent of GDP in 2012, consistent with public spending equivalent to 35½ percent of GDP. Based on staff’s projections, the non-hydrocarbon fiscal deficit would decline below 8 percent of GDP over the medium-term, as higher interest rates on net international reserves would boost government revenue. Staff noted that this fiscal scenario is subject to risks on the spending side, as ambitious investment plans in various ministries may not be consistent with the objective of maintaining investment at about 13 percent of GDP over the medium term. In addition, there is a need to strengthen incentives to private domestic oil production (see paragraph 25), which will require adjusting prices paid to producers by the state-owned oil company or reducing high taxes on oil production. The authorities agreed that investment could rise beyond the projected levels but emphasized that macroeconomic stability was high among government priorities and that the sustainability of fiscal policy would not be compromised. Staff recommended financing additional capital spending through further improvements in the non-hydrocarbon fiscal balance.

15. A gradual reduction in energy subsidies would strengthen the non-hydrocarbons fiscal balance. To offset additional outlays related to investment or current expenditure,5 staff suggested a gradual reduction in fuel subsidies.6 Guided by international experience in that area, staff considered that, to be successful, such a reduction would need to be accompanied by better targeting of social policies to protect the most vulnerable groups and/or special policies for public transportation.7 Staff also noted that, in line with earlier technical assistance work, there was some space to strengthen direct taxation as well. The authorities, however, indicated that social resistance to both reducing fuel subsidies and increasing direct taxation were likely to prevent changes to policies in these areas.

16. The authorities plan to diversify financing sources. The authorities intend, conditions permitting, to issue sovereign debt in the international markets in an amount of US$500 million in the coming months. While financing needs are not pressing in 2012, the authorities’ objective is to develop a financing alternative for investment over the medium term. While supporting the diversification of financing sources, staff encouraged the authorities to develop a debt and investment strategy in the context of a medium-term fiscal framework, including with integrated scenarios of public investment and financing needs. Staff also noted that the issuance of an international bond would help establish a benchmark for access to foreign financing by the private sector. To reduce the carrying cost of debt and make public sector cash management more efficient, staff and the authorities agreed that efforts to mobilize the savings of subnational governments (now earning no interest on deposits at the central bank) should continue, including through the voluntary placement of central government paper.

17. Staff cautioned against excessive central bank financing to public corporations. So far, the central bank has been authorized to lend the equivalent of almost US$5 billion, or about 40 percent of NIRs, to public corporations and development projects. The central bank board has already approved the terms for about US$2 billion of this lending, which will be granted in local currency at fixed interest rates below 1 percent, and with at a maturity of at least 20 years. Staff noted that central bank lending for developmental purposes is strictly limited in most countries (Box 3) and expressed concern that the size and terms of these operations could result in quasi-fiscal losses for the central bank, especially under adverse external scenarios.8 In that respect, staff noted that the central bank does not have expertise in assessing commercial and industrial risks. Thus, staff urged caution in the granting of new financing and the pace of disbursement of approved loans, through a strict prioritization of public investment plans. The authorities emphasized that the level and terms of central bank lending took into consideration current economic conditions, expected risks, and the need to ensure implementation of their economic and development plans. They underscored that price stability would not be subordinated to any other objectives.

Box 2.Exchange Rate Assessment

Staff estimates based on CGER methodologies suggest that the Boliviano is currently roughly in line with fundamentals. There are some uncertainties associated with the application of these methodologies to Bolivia, since:

  • they do not fully incorporate the implications of the exhaustion of natural resources within a predictable timeframe and the associated intergenerational considerations that may drive net assets accumulation in the near term;

  • current account volatility is particularly high in Bolivia because of commodity price fluctuations, which makes it difficult to separate underlying trends from temporary changes, complicating the estimation of the underlying current account balance;

  • the Bolivian economy has experienced large structural changes in recent years and, hence, past values of fundamental variables may be poor guides of their future levels.

With these caveats in mind, on average, the CGER approaches indicate a slight overvaluation of 2 percent, well within the margin of error typical of these estimates. The result is primarily driven by the Macroeconomic Balance (MA) approach. In particular, lower commodity prices and higher imports projected over the medium term have reduced the underlying current account balance (CAB), requiring a mild weakening of the real exchange rate to close the gap with the estimated current account norm. The other two approaches indicate smaller deviations of the Boliviano from the fundamentals.

  • The Macroeconomic Balance (MB) approach indicates that a weakening of Bolivia’s real effective exchange rate (REER) would be needed to close the difference between the underlying CAB and the current account norm. This result hinges on an underlying CAB that is roughly balanced, and a current account norm estimated at 2.6 percent of GDP. The level of the current account norm reflects mainly relatively high hydrocarbon trade and fiscal balances, and low old-age dependency ratios.

  • The External Sustainability (ES) approach suggests that the Boliviano is overvalued by 1.5 percent. This assumes that Bolivia’s net foreign assets would stabilize at their end-2011 level (18 percent of GDP), requiring a CAB of 1 percent of GDP.

  • The Equilibrium Real Exchange Rate (ERER) approach points to undervaluation of about 0.3 percent. The model calculates the equilibrium REER on the basis of the terms of trade, net foreign assets, public expenditure, FDI, and relative productivity. The results of the model, however, are subject to a higher degree of uncertainty compared with the other two approaches. Firstly, the model does not take into account the significant structural changes of Bolivian economy in the estimation period, especially those associated with the production of natural gas. In addition, the specification is not fully robust, as the coefficient of the terms of trade variable has a negative sign, in contrast with the expected positive effect that terms of trade should have on the real exchange rate.

Bolivia: ER Assessment
REER Deviation from Equilibrium 1/
(In percent)
MB approach4.4
ES approach1.5
ERER approach-0.3
Source: Fund staff estimates.

Undervaluation (-), overvaluation (+)

Source: Fund staff estimates.

Undervaluation (-), overvaluation (+)

Box 3.Central Bank Lending: Bolivia and International Practices

In line with the government’s development strategy, central bank financing of public enterprises and other development projects has been authorized in recent years. Overall lending approved between 2009 and 2012, including the recently-approved establishment of FINPRO, and investment fund, is equivalent to US$4.8 billion. Of this total, only 11.5 percent has been disbursed so far. According to the terms of approved central bank loans so far, they are extended in Bolivianos at highly concessional rates (0.9 percent on average), with maturities ranging from 20-30 years.

According to a recent study,1 concessional financing by central bank to public corporations is rare. About two-thirds of the countries in the sample of 152 advanced and developing economies prohibit central bank lending to the government or restrict it to short-term loans. Most advanced economies do not allow central bank financing to the government for development purposes, while in some countries in Latin America, for example, Brazil, Chile and Guatemala; it is banned in the constitution.

Central Bank Credit to Public Corporations
USD blnPercent GDPUSD blnPercent GDP

Some developing countries permit limited, short-term financing to the government on close-to-market terms to smooth out revenue fluctuations. In those countries, the beneficiary is exclusively central government, rather than public corporations, with a few exceptions like Jordan, Nicaragua, Pakistan and Yemen. The maturity of central bank loans tends to be short (around 180 days, and up to a year in some African countries and the Caribbean). The amount of lending, if allowed, is limited and defined as proportion of the national budget (5 percent of government expenditures in Costa Rica or 25 percent of national budget in Bahrain).

1Jacome L, Matamoros-Indorf M., Sharma M. and Townsed S. 2012, ″Central Bank Credit to Government: What Can We Learn from International Practices?″, IMF Working Paper, Washington D.C.

18. Staff encouraged the authorities to advance with their plans to set up a medium-term fiscal framework (MTFF) for the exploitation of natural resources. In recent years, the authorities have conducted fiscal policy skillfully, attaining a good balance between saving part of the gas windfall and strengthening social policies and investment. Given that the risk of macroeconomic volatility from commodity boom-bust cycles is important, staff recommended that medium-term fiscal policy be guided by the objective of avoiding pro-cyclical spending while building strong buffers for insurance purposes in a stabilization fund.9 A MTFF would also help introduce intergenerational equity considerations in the design of fiscal policy, as natural resource depletion would be balanced against strong developmental needs. The authorities indicated that these objectives were consistent with their policy agenda and expected that consensus would gradually build toward these ends. They indicated that work had started to project revenues and expenditures on a multi-year basis, and that these projections would soon be attached to the annual Budget for discussion in congress.

B. Monetary and Exchange Rate Policies

19. Staff noted that keeping inflation expectations well anchored at a low level could require some monetary tightening. Interest rates remain low, and are negative in real terms for deposits. At the same time, excess liquidity in the banking sector is high, which could potentially fuel higher credit growth levels. In that context, staff recommended taking steps to reduce the monetary impulse with a view to avoid feeding too rapid consumption growth. The authorities indicated that they would be ready to tighten, if warranted by inflation or external developments, but did not think that such a tightening was needed at this stage. They also noted that inflation expectations were well anchored and that there was no strong evidence that asset prices were out of line with fundamentals. The authorities also considered that higher credit expansion would help support economic activity amid global and regional output deceleration.

20. With respect to the exchange rate arrangement, the central bank reiterated its view that the current crawling peg regime provides the flexibility needed to manage imbalances. Staff and the authorities agreed that there was no immediate need to alter the exchange rate level, given the presence of a high reserves buffer and no clear evidence of exchange rate misalignment (Box 2). Staff noted that banking sector dollarization has declined in recent years, to currently encompass less than 40 percent of deposits and 30 percent of loans. This, in staff’s view, creates favorable conditions for the introduction of a crawling band, under which additional exchange rate flexibility could be introduced while avoiding unduly high volatility. Staff also commented that the introduction of a higher degree of exchange rate flexibility over the medium term would be important in helping the economy adjust to terms-of-trade shocks. The authorities, however, did not think that conditions have matured sufficiently to justify a shift toward more flexibility. Rather, they strongly argued against changes to their current policies. They observed that exchange rate stability has been a key factor behind Bolivia’s strong economic performance as, in their view, excessive exchange rate volatility adversely affects private sector confidence.

C. Financial Sector Policy

21. With strong financial sector indicators, and in the context of high credit growth, staff and the authorities agreed that close monitoring of financial sector conditions remained important. Staff welcomed the authorities’ recent decisions to increase provisioning requirements and to continue assessing bank risks to adverse scenarios, including through stress tests.10 The authorities expressed their satisfaction for having attained a good balance between moderating inflation and ensuring continued credit expansion. Staff cautioned that credit growth might need to moderate further and suggested to continue aiming at gradual rise in short-term interest rates to increase incentives for savings.

22. To contribute to a moderation of credit growth, staff suggested the use of reserve requirements and other macroprudential measures. In particular, staff argued in favor of increasing reserve requirements on local currency deposits, now at an effective rate of 7 percent.11 This, together with other macro-prudential measures, would help strengthen buffers in the financial sector while reducing the cost of sterilization. The authorities expressed the view that the adequacy of regulations in the banking sector was assessed on a regular basis and they saw no need for changes at this stage. They noted, however, that reserve requirements on dollar deposits (currently at an effective rate of about 27 percent) are well above those on boliviano deposits and are scheduled to rise further over time, in an effort to contribute further to de-dollarization and to absorb excess liquidity.

23. Staff and the authorities discussed plans to strengthen financial sector legislation. Staff welcomed the adoption of some of the FSAP recommendations and plans to: (i) enhance the financial system safety net, with the introduction of a limited deposit insurance scheme, without direct cost to the government;12 and (ii) maintain strong capital requirements, by giving bank supervisors authority to request capital increases beyond minimum levels with a view to reducing procyclical behavior. The authorities also noted that they were exploring mechanisms to enhance access to credit for productive purposes and for low-income housing. Staff emphasized the need to avoid measures of direct control of credit or interest rates. Instead, enhanced access to credit should be delivered through special programs that transparently establish instruments and costs through the budget.

24. The authorities are working toward strengthening AML/CFT regulations, to comply with international norms. In its recent assessment, the FATF has identified areas for strengthening in the AML/CFT framework. There was agreement with the authorities that aligning domestic practices and the legal framework with international norms will be important to protect the reputation of Bolivia’s financial sector as well as its access to external financing. In this direction, a strengthened strategy for the Financial Intelligence Unit, including with the hiring of more personnel, has been launched, and work has started to address weaknesses in the regulatory framework for AML/CFT, including with technical assistance from the Fund.

D. Structural Policies

25. Staff recommended moving ahead with the enactment of key economic laws to remove deterrents to private investment, highlighting that sector policies could be enhanced to quickly spur investment. Despite the launching of a large number of initiatives to support micro and small business, a comprehensive strategy to promote investment by medium and large private enterprises still needs to be developed. With a few exceptions, the formalization of jobs and new investment has been hampered by uncertainties in the legal framework that remain unresolved (hydrocarbons law, mining law, commerce code, labor code). In addition, to ensure a level playing field in the productive sectors of the economy, there seems to be a need to better specify the scope of public sector intervention while ensuring that, at all times, the process of compensation of the former owners of nationalized companies is fair and swift. Against this background, staff made the following suggestions based on international experience: (i) in the hydrocarbon sector, gradually increase domestic fuel prices to limit the cost of subsidies; lower taxation (especially, taxes of 50 percent on the value of production) to provide better incentives for local production of oil; and approve the new legal framework to jump start private exploration; (ii) in agriculture, facilitate the adoption of new technology to improve yields and reduce uncertainties that prevent investment and bank financing; (iii) in the electricity sector, the new framework law should promptly clarify pricing policies—balancing social and developmental needs with incentives for the expansion of generation capacity through adequate cost recovery—and the scope of participation by the private sector.

26. The authorities noted that finalizing the legal framework would require more time to consult with stakeholders, and that new public sector initiatives were designed to boost private investment. In oil and gas, the state-owned holding YPFB has launched a campaign to attract investment in more than 50 exploration areas, conducting road shows worldwide that were well received. In addition, new incentives to spur additional production of liquid fuels have been enacted,13 and a number of investments are being undertaken to add value to gas production. In agriculture, financial support programs (insurance and guarantee funds) and support to small producers by the state-owned food company Emapa have helped expand production. In electricity, new generation plants have been installed to satisfy demand and energy-saving initiatives have been launched.

27. Staff recommended adopting a stronger framework for investment evaluation and to support efficiency in the operations of public corporations. The increasing role of the state in the production of goods and services through state-owned enterprises (SOEs) warrants a stronger governance framework to ensure effectiveness in their operations while minimizing fiscal risks. While the authorities have made progress with the setting up of SEDEM, an agency designed to coordinate and enhance the operations and management of small enterprises, a broader strategy is needed to encompass all public corporations. Such a strategy should include best corporate practices to reduce fiscal risks, including independent pricing and employment policies. The elaboration of reports on performance and risks—including the evaluations of scenarios simulated at lower commodity prices—and external audits of the financial statements would also help improve transparency. The authorities reported that work on a new law for Public Corporations was advancing and that it would incorporate some of these recommendations.

28. Staff welcomed progress in social policies, which has allowed Bolivia to make inroads toward achieving its Millennium Development Goals. While supporting the government strategy, staff noted that maintaining the effectiveness of social spending would require more public resources over time. In particular, social policy should aim at maintaining the real value of transfer programs (benefits have been constant in nominal terms in the last two years) and enhancing the delivery of education and health services—a priority given still-high levels of infant mortality and child malnutrition. In preparing the budget, staff encouraged the authorities to weigh the benefits of additional social spending against those of large investment projects.

Staff Appraisal

29. The Bolivian economy maintained a strong performance in 2011. Real GDP growth accelerated, on the back of strong terms-of-trade and accommodative policies. Strong demand growth led to a narrowing of the external current account surplus and, despite buoyant revenue, the fiscal surplus declined due to fiscal impulse. Net international reserves climbed to new highs, thus offering strong protection to external shocks. Bank credit continued to expand at rapid rates, amid strong financial soundness indicators.

30. The outlook for 2012 is favorable and short term downside risks are manageable. Real GDP is expected to continue growing at a fast pace, reflecting still high terms of trade and mildly expansionary policies. The external current account and the fiscal balance are expected to remain in surplus. Downside risks from an adverse external environment are limited by strong financial cushions and proven resilience of the Bolivian economy to financial shocks.

31. A shift in macroeconomic policies to a more neutral level might be required to consolidate the decline in inflation and reduce overheating risk. The envisaged fiscal impulse is modest, but a higher fiscal balance would help offset strong private demand growth. The central bank may want to absorb part of the large excess liquidity in the banking sector with a view to slowing credit growth and seeking a gradual increase in short-term and deposit interest rates.

32. Given the outlook for commodity prices, projected fiscal spending for 2012 is compatible with a sustainable fiscal position over the medium term. Under current policies, public debt will remain on a downward path over the next few years, as the nonfinancial public sector is expected to run modest surpluses.

33. To protect public investment and make room for higher social spending, a strengthening of the non-hydrocarbon balance is recommended. Increasing productive and social investment—while containing current expenditure—would require either higher revenue or reducing other spending. Reducing fuel subsidies, with appropriate compensatory measures, and strengthening direct taxation would help to make space for these additional outlays.

34. Reforms to the policy framework, building on the authorities’ plans, will help improve policy responses to changing economic conditions. Setting up a medium-term fiscal framework for the exploitation of natural resources would help avoid pro-cyclical fiscal spending and build buffers to insure against commodity price volatility. It will also help introduce intergenerational equity considerations in the design of fiscal policy, as natural resource depletion is balanced against strong development needs.

35. Limiting the role of the central bank in financing public investment would help reinforce the strength of monetary policy. In line with international experience, central bank financing for development purposes should be limited, to avoid the emergence of quasi-fiscal losses, especially under adverse external scenarios. As lower dollarization becomes more entrenched and domestic financial markets develop further, the authorities will have room to move toward greater exchange rate flexibility.

36. The expansion of public sector involvement in productive activities and investment should be accompanied by a stronger governance and accountability framework. A strategy encompassing all public corporations, as planned with the enactment of a new law for Public Enterprises, is needed. Elements of the legal framework should include a requirement that financial statements be externally audited; that the cost of quasi-fiscal operations be disclosed; and that reports be elaborated on the performance of companies and the risks they face. In tandem, there is a need to step up efforts to ensure the effectiveness of public spending and enhance implementation capacity across all levels of government.

37. Building on important improvements in the financial sector, further strengthening is needed to ensure macro-financial stability. Financial sector indicators are strong, but credit expansion needs to be monitored closely and banking sector buffers maintained. Staff welcomes the progress in the adoption of FSAP recommendations. Plans to strengthen the financial system safety net, with the introduction of a limited deposit insurance, should help consolidate the strength of the banking sector. In addition, direct controls on the price and allocation of credit should be avoided. To preserve Bolivia’s financial system integrity, the AML/CFT regime should be rapidly strengthened to comply with international norms.

38. Sustaining high and stable medium-term growth will require improvements in the business environment. A key challenge will be to adapt the legal framework for natural resources and private investment to the mandates of the Constitution in a way that ensures clear and stable rules of the game for the private sector. Clearly defining the scope of public sector operations while ensuring a fair and swift process of compensation of the former owners of nationalized companies would also contribute to reducing risk perceptions.

39. Progress in social policies has allowed Bolivia to make inroads toward achieving its Millennium Development Goals. Maintaining the real value of cash-transfer programs to preserve their impact and enhancing the delivery of education and health services are priorities. Appropriate incorporation of these needs in the budgetary process will be important in the period ahead.

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

Bolivia: Risk Assessment Matrix
Nature/Source of Main RisksLikelihood of Realization in the Next Three YearsExpected Impact on Economy if Risk is Realized
  • Staff assessment: Medium.

  • The output gap is estimated to have closed and domestic demand is growing above production.

  • Sustained strength in terms of trade and expansionary policies could continue keeping demand above production.

  • Staff assessment: Low

  • Although inflation may temporarily increase, past experiences in Bolivia show that inflation can come down quickly when policies are adjusted accordingly.

A substantial and prolonged decline in global commodity prices
  • Staff assessment: Low.

  • A softening of global growth could lower commodity prices, while possible supply disruptions in Middle East could raise oil prices.

  • Even if global commodity prices were to decline substantially, the prices of Bolivian gas exports would not fall immediately given that existing contracts with regional partners follow international fuel prices with a lag.

  • Staff assessment: Medium to High.

  • Bolivia is highly dependent on commodity exports, especially on hydrocarbons.

  • External and fiscal balances would deteriorate, and public investment could possibly decline.

  • Financial sector could amplify shock.

  • Large international reserves create some buffers.

Natural gas production decline in Bolivia
  • Staff assessment: Low to Medium

  • Exploration remains low.

  • High level of taxation, domestic pricing policies, and the absence of final legal framework is deterring private investment.

  • Incentives are about to be implemented to increase local fuel production

  • State-owned company just launched international campaign to attract investments.

  • Staff assessment: Medium to High

  • Natural gas exports are equivalent to 50 percent of total exports.

  • Hydrocarbon revenue represents about 30 percent of total public sector revenue.

A worsening of global liquidity and financing conditions
  • Staff assessment: Medium to high.

  • Risks in Eurozone continue to be important, with possible spillover effects over the global financial system.

  • Staff assessment: Low.

  • Foreign banks participation in the financial sector is low and loans are funded domestically. Private capital inflows are low.

  • Dollarization may increase slightly in response, but Bolivia has successfully reduced the amount of financial dollarization in recent years.

  • Exports to Europe are less than 10 percent.

Weak private investment
  • Staff assessment: High.

  • Weaknesses in the business environment are longstanding in Bolivia.

  • Revisions to key economic laws have been slow, adding to legal uncertainty.

  • Government intervention could extend beyond strategic sectors, reducing incentives for private sector participation.

  • Staff assessment: Medium.

  • Medium-term growth could fall back to pre-boom levels.

  • Risk may be mitigated by higher public sector investments..

Table 1.Bolivia: Selected Economic and Financial Indicators
(Annual percentage changes)
Income and prices
Real GDP6.
Real GDP excluding hydrocarbons6.
GDP deflator10.4−2.48.814.
CPI inflation (period average)
CPI inflation (end-of-period)
(In percent of GDP)
Investment and savings
Total investment17.617.017.019.619.419.419.519.519.519.6
Public sector9.89.59.510.511.511.511.611.611.611.6
Private sector (includes stockbuilding)
Gross national savings29.022.925.026.123.322.622.021.421.221.1
Public sector14.
Private sector14.912.813.914.710.810.
Saving/investment balances 1/
Public sector4.
Private sector7.
Combined public sector
Revenues and grants38.935.833.235.436.435.835.736.036.335.9
Of which:
Hydrocarbons related revenue13.411.310.211.211.810.910.310.210.09.7
Capital 2/11.112.610.713.
Overall balance after nationalization costs3.
Of which:
Balance before nationalization costs5.
Non-hydrocarbons balance, before nationalization costs−7.5−10.3−8.1−8.7−9.4−9.1−8.3−8.1−7.6−7.8
Total net NFPS debt20.623.118.414.
Total gross NFPS debt37.240.038.533.934.533.432.631.630.629.3
External sector
Current account 1/−0.1−0.1
Merchandise exports39.328.432.333.935.334.333.432.431.630.9
Of which: natural gas19.011.314.115.817.817.617.216.315.714.6
Merchandise imports30.626.
Terms of trade index (percent change)4.6−23.014.412.4−2.1−2.6−2.8−2.2−1.0−0.6
Net Central Bank foreign reserves 3/4/
In millions of U.S. dollars7,9678,6169,79912,07412,86014,56216,02317,37518,81020,241
In percent of broad money88.780.180.783.478.481.281.580.881.481.4
Exchange rates 5/
Bolivianos/U.S. dollar (end-of-period)6.976.976.956.86
REER, period average (percent change)14.310.2−3.64.2
Money and credit(Annual percentage changes)
NFA of the financial system10.160.6−4.5−19.030.512.011.911.59.69.8
NDA of the financial system19.819.312.718.013.312.
Credit to private sector (percent of GDP)31.534.
Broad money (percent change)19.919.712.517.713.212.011.911.59.69.8
Interest rates (percent, end-of-period)
Deposits (effective rate)
Lending (effective rate)
Memorandum items:
Nominal GDP (in billions of U.S. dollars)16.617.519.824.
Oil prices (in U.S. dollars per barrel)97.061.879.0104.0114.7110.0102.897.293.391.0
Sources: Bolivian authorities and Fund staff estimates and projections.

The discrepancy between the current account and the savings-investment balances reflects methodological differences. For the projection years, the discrepancy is assumed to remain constant in dollar value.

Includes nationalization costs and net lending.

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

All foreign assets valued at market prices.

Official (buy) exchange rate.

Sources: Bolivian authorities and Fund staff estimates and projections.

The discrepancy between the current account and the savings-investment balances reflects methodological differences. For the projection years, the discrepancy is assumed to remain constant in dollar value.

Includes nationalization costs and net lending.

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

All foreign assets valued at market prices.

Official (buy) exchange rate.

Table 2.Bolivia: Operations of the Combined Public Sector(In percentage of GDP)
IDH and royalties8.
Direct taxes4.
o/w: Corporate income tax3.
Indirect taxes15.513.914.014.915.3
o/w: VAT7.
o/w: Excise tax on fuel2.
Other revenue9.
Nontax revenue3.
Public enterprises operating balance4.
Central bank operating balance1.20.1−
Compensation of employees8.710.
Purchases of goods and services2.
Social benefits 1/
Other expense1.
Nationalization cost1.
Net acquisition of nonfinancial assets11.112.610.713.013.1
o/w: Public Enterprises2.
Gross operating balance14.612.812.413.814.0
Net lending/borrowing (overall balance)
Net financial transactions3.
Net acquisition of financial assets 2/0.80.0
Net incurrence of liabilities-2.8-0.2-1.7-0.8-0.9
Other external0.00.00.0−0.1−0.1
Banking system−5.4−0.2−5.3−3.5−4.5
Central Bank−5.0−0.4−4.9−2.6−4.5
Commercial banks−0.40.2−0.4−0.90.0
Pension funds0.
Other domestic1.3−
Memorandum items:
Primary balance5.
Overall balance before nationalization5.
o/w Non-hydrocarbon balance 3/−7.5−10.3−8.1−8.7−9.4
Overall balance of the central government 4/−2.2−1.2−1.8−3.9
Overall balance of the central administration−0.3−0.8−0.3−4.0
Overall balance of subnational government0.5−
Hydrocarbon related revenue 5/13.411.310.211.211.8
Hydrocarbon balance 6/13.410.19.89.610.3
Nonfinancial public sector gross public debt37.240.038.533.934.5
o/w gross foreign public debt14.515.615.414.416.7
Nominal GDP in billions of Bolivianos120.7121.7137.9169.9185.2
Sources: Bolivian authorities and Fund staff estimates.

Includes pensions and social transfers.

Includes net lending.

Overall balance minus hydrocarbon related balance.

IMF staff’s definition: overall balance excluding subnational governments, public enterprises and the Central Bank.

Hydrocarbon related revenues are defined as IDH, royalties, and the operating balance of YPFB.

Hydrocarbon related revenues minus YPFB capital expenditures.

Sources: Bolivian authorities and Fund staff estimates.

Includes pensions and social transfers.

Includes net lending.

Overall balance minus hydrocarbon related balance.

IMF staff’s definition: overall balance excluding subnational governments, public enterprises and the Central Bank.

Hydrocarbon related revenues are defined as IDH, royalties, and the operating balance of YPFB.

Hydrocarbon related revenues minus YPFB capital expenditures.

Table 3.Bolivia: Summary Balance of Payments(In millions of U.S. dollars, unless otherwise indicated)
Current account1,991746969537419316209705033
Trade balance1,4444151,01166832223755−139−262−325
Exports, f.o.b.6,5254,9606,3908,3329,5199,92310,22510,54010,95111,448
Exports, c.i.f.7,0585,4536,9579,16710,33410,71910,98511,26711,65212,126
Natural gas3,1591,9682,7983,8854,8125,0985,2775,2925,4595,426
Of which: To Brazil2,8501,5872,3532,8993,3283,2263,1383,0372,9682,921
volume (mmm3 p/day)30.522.226.926.929.529.530.
price ($/mmbtu)
To Argentina3073804459861,4841,8722,1392,2552,4922,505
volume (mmm3 p/day)
price ($/mmbtu)
Soy - related340481496636615635650664679695
Imports, c.i.f.−5,081−4,545−5,380−7,664−9,197−9,686−10,170−10,679−11,213−11,773
Services (net)−200−209−263−322−226−247−258−269−260−248
Income (net)−536−674−860−986−947−988−954−949−945−950
Transfers (net)1,2841,2131,0811,1771,2691,3141,3661,4271,5161,556
Capital and financial account383-199-401,6231,6161,3721,2751,3101,3841,386
Capital transfers10111−76000000
Direct investment (net)5084266728599451,0149199761,0411,112
Gross investment1,3026879159541,2951,3641,1691,2261,2911,362
Disinvestment and investment abroad−789−264−293−180−350−350−250−250−250−250
Portfolio investment (net)−208−15490156000000
Public sector231382269536936491515511529490
Fin system net foreign assets, excl. liquid asset requirement0−285125−243−303−172−198−215−224−255
Nonbank private sector loans−21−88−213−60000000
Other, including errors and omissions−136−591−773369383838383838
Errors and omissions4−392−96394949494949494
Overall balance2,3745479292,1602,0351,6881,4841,3801,4341,419
Memorandum items:
Current account (percent of GDP)
Merchandise exports (percent of GDP)39.328.432.333.935.234.233.432.431.630.9
Merchandise imports (percent of GDP)−30.6−26.0−27.2−31.2−34.0−33.4−33.2−32.8−32.3−31.8
Net official reserves (end-of-period)7,9678,6169,79912,07414,10915,79717,28118,66120,09421,513
(In months of imports of goods and services)16.519.618.316.517.018.018.719.219.720.1
Foreign direct investment (percent of GDP)
GDP (in millions of U.S. dollars)16,60217,46419,81024,60427,01228,98030,64632,54834,70237,073
Capital account (percent of GDP)2.3−1.1−
Errors and omissions (percent of GDP)0.0−2.2−
Export value growth46.4−24.727.932.514.
Export volume growth18.
Export prices growth23.4−27.124.927.50.7−0.9−2.3−1.7−0.9−0.4
Import value growth47.1−12.721.342.520.
Import volume growth24.7−7.811.125.616.
Import prices growth17.9−
Sources: Central Bank of Bolivia and Fund staff estimates and projections.1/ Includes SDR allocation in 2009.
Sources: Central Bank of Bolivia and Fund staff estimates and projections.1/ Includes SDR allocation in 2009.
Table 4.Bolivia: Central Bank
(Flows in millions of Bolivianos, unless otherwise indicated)
Net international reserves13,4834,5297,94914,82013,962
Flows in millions of U.S. dollars)2,4136501,1832,2752,035
Net domestic assets−8,6692,747−4,918−5,629−8,094
Net credit to the nonfinancial public sector−3,829−221−6,923−4,199−8,300
Net credit to financial intermediaries−8,1054,1412,758−1,788416
Of which: Open market operations (increase -)−7,7034,3852,869−1,59041
Net medium- and long-term foreign liabilities (increase -)50−1,500−135352
Other items (net)3,214327−618322−212
Base money4,8147,2763,0319,1916,124
Currency in circulation2,9401,8495,6933,9994,499
Bank reserves1,8735,427−2,6635,1911,625
Legal Reserves9345,916−2,7494,669821
(Stocks in millions of Bolivianos, unless otherwise indicated)
Net international reserves55,52860,05768,00582,82596,787
(Stocks in millions of U.S. dollars)7,9678,6169,79912,07414,109
Net domestic assets−33,258−30,511−35,429−41,058−49,153
Net credit to the nonfinancial public sector−12,213−12,434−19,357−23,556−31,856
Net credit to financial intermediaries−13,253−9,112−6,354−8,142−7,725
Of which: Open market operations−15,254−10,869−8,000−9,591−9,549
Net medium- and long-term foreign liabilities−440−1,940−2,075−2,040−2,038
Other items (net)−7,352−7,026−7,643−7,321−7,533
Base money22,27029,54632,57641,76747,891
Currency in circulation17,04318,89224,58628,58533,084
Bank reserves5,22710,6537,99113,18214,807
Legal Reserves3,1899,1056,35611,02511,845
(End of period percent change)
Net international reserves32.
(Stocks in millions of U.S. dollars)
Net domestic assets35.3−8.316.115.919.7
Net credit to the nonfinancial public sector45.71.855.721.735.2
Net credit to financial intermediaries157.5−31.2−30.328.1−5.1
Of which: Open market operations102.0−28.7−26.419.9−0.4
Net medium- and long-term foreign liabilities−10.2341.27.0−1.7−0.1
Other items (net)−30.4−4.48.8−4.22.9
Base money27.632.710.328.214.7
Currency in circulation20.910.830.116.315.7
Bank reserves55.9103.8−
Legal Reserves41.4185.5−
Sources: Central Bank of Bolivia and Fund staff estimates.
Sources: Central Bank of Bolivia and Fund staff estimates.
Table 5.Bolivia: Consolidated Commercial Banks and Non-Bank Depository Institutions
(Flows in millions of Bolivianos, unless otherwise indicated)
Foreign assets6023,994−476−1,9232,500
(Stock in millions of U.S. dollars)154573−62−263364
Net domestic assets7,8486,8463,85213,76413,001
Net credit to the public sector−6361,250−564−1,4550
Credit to the private sector2,6323,4008,25811,42311,505
Net position with the central bank6,8812,438−3,2116,8991,312
Foreign liabilities−937−3398967230
Other items (net)−9298−1,528−3,826−1,281
Local currency deposits7,7595,1887,43613,98412,336
Foreign currency deposits−2465,314−3,164−1,4213,073
(Stocks in millions of Bolivianos, unless otherwise indicated)
Foreign assets6,58910,58310,1078,18410,684
(Stock in millions of U.S. dollars)9451,5181,4561,1931,557
Net domestic assets43,02549,87153,72367,48780,488
Net credit to the public sector1,1802,4291,866411411
Credit to the private sector38,01041,40949,66861,09072,595
Net position with the central bank13,68116,11912,90919,80821,120
Foreign liabilities−2,745−3,084−2,188−1,465−1,465
Other items (net)−7,101−7,003−8,531−12,357−13,638
Local currency deposits22,01127,19934,63548,61960,955
Foreign currency deposits24,85830,17227,00725,58728,660
(End of period percent change)
Foreign assets10.160.6−4.5−19.030.5
(Stock in millions of U.S. dollars)19.560.6−4.1−18.130.5
Net domestic assets22.315.97.725.619.3
Net credit to the public sector−35.0105.9−23.2−78.00.0
Credit to the private sector7.48.919.923.018.8
Net position with the central bank101.217.8−19.953.46.6
Foreign liabilities51.812.4−29.1−33.00.0
Other items (net)1.3−1.421.826.231.4
Local currency deposits54.423.627.340.425.4
Foreign currency deposits−1.021.4−10.5−5.312.0
Memorandum items:
Credit to private sector (percent of GDP)31.534.
Deposits (percent of GDP)38.847.144.743.748.4
Broad money (percent of GDP)51.961.661.258.560.7
U.S. dollar and dollar-indexed deposits (in percent of total deposits)53.052.643.834.532.0
U.S. dollar and dollar indexed credit (in percent of total credit)59.349.538.630.729.5
Sources: Central Bank of Bolivia and Fund staff estimates.
Sources: Central Bank of Bolivia and Fund staff estimates.
Table 6.Bolivia: Financial System Survey 1/
(Flows in millions of Bolivianos, unless otherwise indicated)
Net short-term foreign assets14,0858,5247,47212,8977,893
(Flows in millions of U.S. dollars)2,5671,2231,1212,0111,151
Net domestic assets−3,6933,8281,9252,0365,254
Net credit to the public sector−4,4651,028−7,487−5,654−8,400
Credit to the private sector2,6323,4008,25811,42311,505
Net medium and long-term foreign liabilities (increase -)−887−1,8397617582
Other items (net)−9731,239393−4,4912,147
Broad money10,39312,3529,39814,93313,147
Liabilities in domestic currency10,6397,03812,56216,35410,074
Foreign currency deposits−2465,314−3,164−1,4213,073
(Stocks in millions of Bolivianos, unless otherwise indicated)
Net short-term foreign assets62,11770,64078,11391,00998,902
(Stocks in millions of U.S. dollars)8,91210,13511,25513,26714,417
Net domestic assets5164,3446,2708,30613,560
Net credit to the public sector−11,033−10,005−17,492−23,145−31,545
Credit to the private sector38,01041,40949,66861,09072,595
Net medium and long-term foreign liabilities−3,184−5,024−4,263−3,505−3,503
Other items (net)−23,276−22,037−21,644−26,134−23,987
Broad money62,63374,98584,38299,315112,462
Liabilities in domestic currency37,77544,81357,37573,72883,802
Foreign currency deposits24,85830,17227,00725,58728,660
(Changes in percent of broad money at the beginning of the period)
Net short-term foreign assets27.013.610.015.37.9
Net domestic assets−
Net credit to the public sector−8.51.6−10.0−6.7−8.5
Credit to the private sector5.05.411.013.511.6
Net medium and long-term foreign liabilities (increase -)−1.7−
Other items (net)−−5.32.2
Broad money19.919.712.517.713.2
Liabilities in domestic currency20.411.216.819.410.1
Foreign currency deposits−0.58.5−4.2−1.73.1
Sources: Central Bank of Bolivia; and Fund staff estimates and projections.

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

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

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

Table 7.Bolivia: Selected Vulnerability Indicators
Reserve adequacy(In millions of U.S. dollars, unless otherwise indicated)
Net international reserves7,9678,6169,79912,074
NIR coverage, in percent of:
Dollar deposits223.4199.1252.2323.7
Total deposits118.5104.7110.3111.6
Broad money88.780.180.683.4
In months of imports of goods and services16.519.618.316.5
Net foreign assets of the financial system5521,0761,139979
NFA coverage, in percent of:
Dollar deposits15.524.929.326.3
Total deposits8.
Broad money6.
Debt ratios(In percent of GDP)
Total gross NFPS debt37.240.038.533.9
Total net NFPS debt20.623.118.414.1
Private external debt7.
Net International Investment Position9.318.116.817.8
Commodity dependency
Hydrocarbon revenue (in percent of total revenues)1/34.536.330.731.6
Non-hydrocarbon fiscal balance (in percent of GDP)1/−7.5−12.1−8.1−8.7
Gas exports (in percent of total exports)
Mining exports (in percent of total exports)30.137.637.441.1
Banking sector indicators
Nonperforming loans (in percent of total loans)
Restructured loans (in percent of total loans)
Nonperforming and restructured loans (in percent of total loans)
Capital adequacy ratio13.713.311.912.3
Profits after tax (in percent of equity)20.319.917.220.5
Cash and short-term investments as percent of total assets43.448.039.037.6
Composition of bank deposits(In percent)
Dollar deposits53.052.643.834.5
Local currency deposits47.047.456.265.5
Memorandum items:
Fiscal balance (in percent of GDP)
Total financial system deposits (US$ million)5,6466,7248,2558,986
Sources: Central Bank of Bolivia and Fund staff estimates and projections.
Sources: Central Bank of Bolivia and Fund staff estimates and projections.

Annex I. Bolivia: Advances and Challenges in Social Policies1

A. Most Recent Development in Social Indicators

1. Higher economic growth has allowed materializing important improvements in the social front. Since 2006 the Bolivian economy has doubled in size and by 2011 constitutes a nominal GDP of USD24.6 billions. In turn, GDP per capita has reached USD2,200 in 2011 increasing from USD1,200 5 years before. In 2005, 60.6 percent of the population was living under moderate poverty conditions and 38.2 percent was experiencing extreme poverty. In 2011 these indicators have fallen to 48.5 and 24.3 percent, respectively.

2. Bolivia has maintained social expenditure roughly constant in terms of GDP since 2005. In 2011 expenditures in education, social protection, health and housing added up to 12.5 percent of output. Education is the largest item in this total (51 percent), followed by social protection (33 percent), health (14 percent) and housing (2 percent). Investment related to social policies has also been important. Investment in the areas of health and social security, education and culture, basic sanitation and urbanism and housing represented 28 percent of public investment in 2007 and are expected to constitute 24 percent of the total in 2012.

3. Social programs have been introduced with the objective of benefiting the most vulnerable sectors of the population. Some of them have taken the form of cash-transfers and others have been implemented thorough subsidies.

4. The main programs that encompass Bolivia’s social safety net include:

  • a. Bono ″Juancito Pinto,″ which aims to increase school attendance and basic education completion rate by providing an annual USD30 financial assistance to students attending public schools for grades 1 through 8.

  • b. Bono ″Juana Azurduy,″ aimed to reduce child and maternal mortality by providing up to a total of USD50 in prenatal and post delivery care as well as around USD225 for early childhood care, over a two year period for pregnant women not covered by the social security system.

  • c. Universal pension benefit ″Renta Dignidad″, which provides a USD30 monthly transfer to persons over age 60 not covered by the pension system. The pension is reduced to 75 percent of the monthly amount if the person receives other pension income.

  • d. A pension reform that introduced a semi-contributive pillar, which complements contributive pensions that are below certain thresholds.

  • e. Generalized fuel subsidies, with domestic fuel prices representing on average 40 percent of international prices in 2011.

  • f. An electricity subsidy equivalent to 25 percent of the regular tariff is assigned to homes consuming less than 70 kwh/month.

Table A1.Bolivia: Main Social Indicators and Social programs(In percent, number of beneficiaries, and percentages of GDP)
Social indicators
1. Relative poverty, (national)60.659.960.156.650.6
2. Extreme poverty, (national)38.237.737.729.926.1
3. GDP per capita in PPP3,7724,0114,2464,5314,6934,849
4. Gini coefficient0.600.590.560.520.500.50
5. Life expectancy at birth66.
Unemployment rate8.
Social programs coverage and costs
1. Bono ″Juancito Pinto,″ (Education)
Beneficiaries (thousands)1,0851,3221,6811,7481,6481,688
Cost (percent of GDP)
2. Bono ″Juana Azurduy,″ (maternity-early childhood care)
Beneficiaries (thousands)282479683
Cost (percent of GDP)
3. ″Renta Dignidad,″ (pension benefit)
Beneficiaries (thousands)688772838896
Cost (percent of GDP)1.341.41.31.1
4. Fuel subsidies (percent of GDP)
5. Electricity subsidy
Households benefited (percent of residential consumers)41.641.443.646.648.5
(Percent of GDP)
Sources: Udape, World Bank, and Fund staff calculations.
Sources: Udape, World Bank, and Fund staff calculations.

B. Progress Towards Achieving the Millennium Development Goals1

5. Between 2000 and 2007 public expenditure in social programs targeted to improve the MDG indicators increased from USD548 million to USD968. In 2007, this expenditure represented 7.4 percent of GDP. This spending has been prioritized towards achieving universal primary education, reduce child mortality and improve maternal health, and ensure environmental sustainability.

Public spending in MDG by Millennium Development Goal

Source: Udape.

6. The efforts concentrated in reducing the under-five mortality rate and improving maternal health have been particularly successful. At the national level, the under-five mortality rate halved between 1989 and 2008. The authorities are confident that if this trend were to be maintained, the MDG in this area would be reached. In turn, the proportion of deliveries attended by skilled health personnel has increased significantly from 33 percent in 1996 to 67 percent in 2009, very close to the MDG of 70.

Under-five mortality rate

(Per one thousand born)

Source: Udape.

Deliveries attended by skilled health personnel

(In percent)

Source: Udape.

7. Cash-transfers have had an impact on poverty reduction. Estimations of their impact developed by Udape (social evaluation office) indicate that these programs might be responsible for a 2 percentage point reduction in the extreme poverty rate.

8. Bolivia is facing challenges to capitalize progress in the MDG related to universal primary education and HIV/AIDS prevalence. Even though targeted programs have allowed reducing the primary school attrition rate among children (dropouts fell from 6.4 percent to 2.9 percent between 2006 and 2010), enrollment rates have fallen from 94.3 percent in 2001 to 90 percent in 2008 (compared with a MDG) of 100 percent of 2015). Similarly, prevalence of HIF/AIDS cases increased from 20.9 per million in 1996 to 513.8 in 2009.

Extreme proverty estimates with the inclusion of bonds

(In percent)

Source: Udape.

Primary education coverage

(In percent)

Source: Udape.

Prevate of HIV/AIDS

(Number of cases per million

Source: Udape.

C. Social Challenges

9. Bolivia remains among the poorest countries in the Latin American and Caribbean region. Furthermore, there are important differences among indigenous and non indigenous groups. At 58 percent, the poverty rate for indigenous groups is higher compared to national levels (53.1 percent). Extreme poverty rate affects 34 percent of the latter compared to 26 percent for non-indigenous people.

10. Bolivia Bolivia’s health indicators remain below neighboring countries. Despite improvements, child and maternal mortality rates remain high and water and sanitation coverage are low, especially in the rural and poor-marginal urban areas. More unfavorable conditions reflect the fact that large part of the rural population live in remote areas with limited access to basic services. According to the World Bank, only two thirds of the population in rural areas has access to water and 9 percent to sanitation services.

Table A2.Bolivia: Millennium Development Goals
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)34.538.237.737.729.926.124.1
Target 2: Halve, between 1990 and 2015, the proportion of people suffering hunger
Prevalence of child malnutrition (percent of children under 5)41.7 (1989)32.527.220.9
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)94.6 (1998)94.495.294.2100.0
Percentage of cohort reaching grade 855.4 (1992)79.577.875.674.777.3100.0
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)−14 (1990)−3.3−1.8−0.3−1.10.0
Gender disparities at completion of secondary education (percent)3.4 (1992)−0.4−1.5−1.40.0
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)122.1 (1990)69.866.763.961.559.056.754.240.0
Immunization against measles (percent of children 12-23 months)53 (1990)
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)510 (1990)220180128
Proportion of births attended by skilled health personnel (percent)43.2 (1989)71.170.0
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)
Incidence of tuberculosis cases cured (percent of diagnosed)66 (1994)
Target 10. Halve by 2015 proportion of people without access to safe drinking water
Access to potable water (percent of population)57.5 (1992)72.371.773.175.574.678.5
Access to improved sanitation facilities (percent of population)28 (1992)41.643.555.748.464.0
Goal 8. Develop a global Partnership for Development
Target 18. Make available new technologies, especially information and communications
Mobile and fixed-line telephone subscribers (per 100 people)2.9 (1991)27.033.538.141.660.674.480.8
Internet users (per 100 people)0.1 (1995)
Sources: Bolivian authorities and World Bank Development Indicators.
Sources: Bolivian authorities and World Bank Development Indicators.

Annex II. Bolivia 2011 FSAP Update Main Recommendations and Authorities’ Response

RecommendationsAuthorities Response
Macro Prudential
Keep real lending rates positive to avoid unsound credit growth.Real interest rates remain negative on deposits and positive on credit. Interest rates have increased moderately in real estate lending.
Supervisory Framework
Enhance independence of the financial regulatory agency: avoid interim appointment of the executive director of ASFI and specify the conditions for dismissal in the law.ASFI’s Interim Executive Director was appointed in 2011. ASFI staff commented that they perceive ASFI to be sufficiently independent and to be able to coordinate with the Central Bank and the Ministry of Finance.
Align ASFI’s internal capacity and resources with their growing workload and responsibilities.ASFI is planning to hire about 30 additional staff, especially in the FIU unit and is in the process of obtaining the budget for that purpose.
Commercial Banking Sector
Ensure that classification and provisioning requirements are based solely on credit risk considerations.Provisioning requirements are partially based on credit risk considerations and partially reflect government’s policy to direct credit to productive sectors away from consumption and real estate. Overall, ASFI increased the requirement of cyclical provisions in the course of 2011, strengthening the coverage of risks in bank portfolios. In particular, it raised provisions on credit for consumption and reduced provisions for credit to productive sectors.
Eliminate limits on total foreign investments as a share of capital.According to ASFI, commercial banks are allowed to invest abroad up to 50 percent of their capital. This limit has not been changed or eliminated.
Add market risk (interest rate and forex) to capital requirements.Revisions of the capital requirement regulations implemented in 2011 added market risk to capital requirements. However, it did not distinguish between forex and interest rate risks.
Complete work on operational and interest rate risk guidance.Risk guidance is work in progress and is expected to be completed by June 2012. It will include separate regulations for overall and operational risks.
Make the financing of terrorism a criminal act; provide the FIU (financial intelligence unit) with adequate resources and establishing clear cooperation mechanisms between the FIU and ASFI.Law 170 on terrorism financing was passed by Parliament in September 2011 and decree on sanctions (Decree 910) was issued. FIU has prepared a strategy that includes four components: (i) Aligning the law on terrorism financing with international standards; (ii) increasing supervising power of FIU, (iii) aligning the law with the Resolution 1373 of the UN security council on freezing of assets; (iv) increasing capacity of FIU and of the heads of financial institutions on the issues related to AML/CFT through training.
ASFI should increase the intensity, frequency, and coverage of supervision in financial institutions, including formalizing the on-site inspection cycle.A draft new manual formalizing inspection and supervision practice is ready for approval. ASFI is working on a risk matrix, to increase supervision on riskier entities. ASFI’s current on-site supervision is annual with semi-annual stress testing; however, flexibility has been increased to allow for more frequent inspections if problems are detected.
Improve the operations of the credit bureaus.New department in charge of Credit Bureau supervision (Direction of Auxiliary Services) has been created in ASFI in 2011. The department has begun to inspect the credit bureaus and create a system to strengthen information.
Promote partial credit guarantee schemes, registries for movable assets.ASFI is working on a new regulation to establish the guarantees in terms of percentage of the capital of the enterprise rather than in nominal terms. Microcredit is currently guaranteed with nominal limits of Bs. 84,000 and of Bs. 112,000 for productive activities.
Carry out financial literacy and promotion campaigns.In 2011, ASFI and the Central Bank organized enhanced public information campaigns on financial services through seminars on TV and radio advertisements. ASFI has also funded additional agencies in rural areas.
Payment System
Enact a Payment system law and formalize cooperation with ASFI.Partially implemented. New regulation of Services of Payment was enacted by the Central Bank (BCB-RD N121/11). Regulation defines the scope of services under the payments system as well as functions, operations, and duties of companies that provide the service.
Supervise all institutions offering money-transfer services.ASFI enacted the Regulation for the Constitution, Incorporation, Operation, Dissolution and closing of the Exchange Houses (ASFI N 672/11). ASFI is currently working to expand the regulation to other money-transferring institutions.
Safety Nets
Include a deposit insurance scheme in the financial regulatory framework.Deposit insurance will be considered in the new banking law.
Update the legal framework and increase the frequency of on-site inspection to a one-year cycle.Not yet implemented.
Conduct a study on adequacy of reserves and reinsurance arrangements.Not yet implemented.
Strengthen selection criteria standards for public pension fund directors and maintain the current strong investment framework.Regulations are being drafted.
Auction all insurance risk to insurance providers.Not yet implemented.

Following standard practice in commodity exporting countries, the fiscal impulse is computed as the change in the cyclically–adjusted non-commodity primary balance.

Calculated using HP filters.

As modeled in the 2011 Fall WEO’s adverse scenario.

The non-hydrocarbon balance is defined as the total balance minus the hydrocarbon balance (hydrocarbon revenue, minus investment by the state-owned oil and gas company).

A larger role of the State in economic activity may give rise to higher current spending, and social spending may also need to increase.

If fully eliminated, staff estimates that net public sector revenue could increase by 4-6½ percent of GDP, depending on demand elasticity.

Subsidy reforms accompanied by a strengthening of social policies include the cases of Indonesia (2005, 2008), Iran (2010), Jordan (2005), and Mozambique (2008).

Risks are currently limited, since reserve accumulation is expected to continue and most of central bank liabilities are in local currency and at zero rates (government deposits and monetary base are equivalent to about US$11.2 billion). But both factors could change significantly in different macroeconomic circumstances.

The 2010 Decentralization Law contains provisions for the set up of a stabilization and development fund, broadly along these lines.

The central bank and the bank supervisor conduct credit risk and liquidity risk stress tests, with the central bank focusing on effects on the aggregate system and the supervisor on individual institutions.

The statutory rate on boliviano-denominated deposits is 12 percent, but banks face reduced requirements if they have increased their loan portfolios.

A deposit insurance function would be added to the existing Fund for bank resolution, which is funded through fees paid by commercial banks.

If the incentives are successful, the costs to the budget may be very small or negative, since imports of diesel (heavily subsidized domestically) are expected to decline.

Prepared by Francisco Arizala and Manuel Rosales.

An in depth analysis is only possible up until 2009, as microeconomic information is only available with a lag.

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