Overview and Recent Developments
We thank the staff for a highly informative report that opens the way for the Board discussion on a program to allow Bolivia to consolidate macroeconomic stability and overcome the pressures on the financial system resulting from the recent episode of political unrest. The Stand-By program should help to establish the conditions for moving towards a medium-term oriented arrangement supported under the PRGF and aimed at confronting low growth and a high poverty level.
The Bolivian economy grew in the 1990s at an average rate above 4 percent, while inflation was sharply reduced. Macroeconomic stabilization was accompanied by a decisive drive in the implementation of structural reforms, including but not limited to, redefining the role of the state in the economy; one of the most ambitious privatization plans in Latin America; a far-reaching pension system reform; the closure of public banks and the elimination of financial repression; and the liberalization of international trade. However, over the past four years, growth has been significantly slower, averaging only 1.5 percent, in a context of continuous adverse shocks. Exogenous shocks included contagion from financial crises in countries of the region; the deterioration in terms of trade; and a significant loss of income, originated by the eradication of coca crops since 1999, which have only been partially replaced by alternative legal crops.
The confluence of several factors stemming from the weakening in economic activity has considerably deteriorated the fiscal position. The weak domestic demand depressed public sector revenues; pension costs derived from the 1997 reform rose further; and the expansion in public expenditures to confront the effects of the stagnant economy increased social expenses from 10.6 percent of GDP in 1999 to 12.4 percent in 2002. Additionally, strong political pressures made it impossible to advance a tax reform directed at partly compensating the loss of revenue and to unfreeze domestic fuel prices. Given this, the third-year PRGF arrangement went off track in the second half of 2001. As a result of an unexpected social uprising last February, the economic program had to be redefined in order to put in place a program that, while recognizing the political constraint, is still consistently aimed at stabilizing the economy and reducing the existing macroeconomic imbalances.
The economic program for 2003 includes a new attempt at fiscal consolidation based on an effort to garner a wider consensus represented in a new budget, recently submitted to Congress. The program aims at restoring stability and investor confidence as well as advancing structural reforms in the banking and corporate sectors as the basis for sustained growth. Growth under the program is projected at around 3 percent in 2003 and expected to increase to 4–5 percent in the medium term.
Fiscal Policy, Financing, and Debt Dynamics
The Bolivian authorities consider the correction of the fiscal slippages of the past two years as a priority. In that sense, the program is targeted to reduce the fiscal deficit from 8.7 percent in 2002—and a passive projection by the staff of 9.4 percent for 2003—to 6.5 percent in 2003. This adjustment would be sustained over the following two years to drive down the gap towards 3–3.5 percent by 2005, and further over the next years. This reduction, more gradual than originally considered prior to social uprising, is defined so as to protect social spending, which is targeted to rise from 12.4 percent of GDP in 2002 to 12.9 percent in 2003. Moreover, emphasis is given to poverty-related programs aimed to strengthen the safety net, as well as to public investments financed by grants or concessional loans.
The reduction in the fiscal gap is derived both from revenue and expenditure measures, as well as from increased grants. On the revenue side, the original payroll taxes and the elimination of VAT deductions are no longer considered. Instead, revenue increases rely mainly on excise taxes on fuels, aimed at a better alignment of international prices with ex-refinery prices and extending the taxable base of fuel products. Other important revenue-enhancing measures are tax regularization and strengthening of the tax administration agencies, comprising broadening or increasing some taxes (on travel and services provided by nonresidents, among others), the elimination of loopholes and tax exemptions, and the implementation of a new tax procedure code.
On the expenditure side, along with holding real wages constant and trimming down the size of the government, the main instrument is the reduction of pension costs through tighter administrative controls directed at eliminating fraudulent claims and strictly enforcing eligibility criteria (0.5 percent of GDP). It is worth noting that the pension reform enacted in 1997 implies an annual fiscal burden of around 5 percent of GDP, and that the authorities are discussing with the World Bank and the IDB possible technical assistance on the matter. Finally, additional grants totaling 0.4 percent of GDP will be secured. Nevertheless, the authorities are aware of the problems involved in attaining the targeted fiscal adjustment, and they are ready to take any necessary measures to achieve it. In this respect, the fiscal program already considers a contingency plan, which would include raising domestic fuel prices in line with the evolution of international prices, and eventually delay or reduce some low-priority investment projects to cover any arising fiscal gaps.
Likewise, it is worth pointing out that fiscal financing for the 2003 program has already been secured from a combination of net external financing from multilateral sources (World Bank, Inter-American Development Bank, and Andean Development Corporation, totaling US$ 248 million), bilateral sources (US$ 131 million), and external grants (US$ 146 million, including an additional US$ 30 million obtained after the events in February). Taking into consideration sustainability issues, the program would limit the increase in net nonconcessional external debt to USS 150 million in 2003.
The envisaged fiscal path over the medium term would render a sustainable public debt path. Even though external debt indicators are higher than anticipated when the decision point under the Enhanced HIPC Initiative was reached, due to the higher than expected fiscal gap over the past years and lower growth, still it is worth noting that the ratio of the NPV of debt to exports remains below the threshold level of 150 percent. We regard the inclusion of Annex IV on Debt Sustainability Analysis as extremely useful, and, as the staff points out, the Bolivian authorities are aware of the risks that are pinpointed in the stress tests. My authorities remain confident, however, that the assumptions regarding GDP and export growth—which include projected liquid natural gas (LNG) exports to the U.S.—and the evolution of the currency are reasonable.
Monetary and Exchange Rate Policy
As noted by the staff, the monetary program in 2003 includes targeting a buildup of US$ 65 million in net international reserves. The authorities emphasize the high liquidity of the Central Bank (gross international reserves exceed 6 months of imports) which, if needed, could resort to the back-up lines from the Latin American Reserve Fund (FLAR) for an additional US$ 190 million. The Central Bank has proved its commitment and effectiveness in tackling adverse developments, notably the political transition period in June 2002 and in the February events.
The Bolivian authorities are aware of the risks associated with the crawling peg exchange rate system in effect, and agree on the benefits of gradually moving towards a more flexible exchange regime. However, given the high dollarization of assets and liabilities of economic agents, a steep depreciation of the currency is to be avoided, as it would result in large adverse effects on the balance sheets of corporations and banks. In this regard, they intend to gradually induce a de-dollarization process, with the promotion of the new inflation-indexed unit of account (UFV) as an initial step. Most importantly, measures will be implemented, aiming at strengthening the position of corporations and banks, as will be stressed below, as a pre-condition to consider a change in the exchange rate regime. Nonetheless, as noted by the staff, the Central Bank will undertake a study in the near future, with their assistance, in order to lay the foundation for a guideline in this respect.
Medium-Term Policy Framework and Structural Reforms
The authorities are aware of the importance of strengthening the corporate and banking sectors, severely weakened by the last four years of low growth. They are committed to the implementation of measures in line with the findings of the FSAP mission, several of which, in fact, constitute performance criteria and benchmarks under the requested program. In the banking sector, the provisioning requirements have already been met (as of March 2003), under a previously issued decree. Moreover, further regulations to strengthen and clarify competences for supervisory institutions will be enacted in the next few weeks. On the corporate front, as part of a comprehensive strategy, draft laws for bankruptcy and a corporate debt workout mechanism involving out-of-court settlements are on their way to Congress. These are centerpieces of the corporate restructuring process that will allow corporations and financial institutions to restore profitability and jumpstart the growth and credit cycle.
The economic program for 2003 is the first piece of a medium-term strategy designed by the Bolivian authorities to lay the foundation for sustainable growth and poverty reduction. As part of this strategy, a PRSP progress report has been drafted for broad-based discussion. A gradual but continuous reduction of the fiscal gap is a central element of this strategy, which considers shifting resources towards poverty-reducing programs. The feasibility of the projected fiscal path relies on further fiscal, expenditure and tax reforms, beyond one-off measures. An important element in the development strategy will be a timely and efficient implementation of the project to exploit vast reserves of gas and oil. In this sense, it is necessary that the LNG project for the U.S. market reaches a satisfactory solution on the basis of efficiency criteria. Finally, regarding the pension system, work remains to be done in order to limit the fiscal burden incurred by the reform. The authorities, together with a mission from the World Bank, are devoting efforts to this task.
The Bolivian authorities recognize the importance of correcting the fiscal slippages to guarantee a sustainable path of public debt and foster high growth and reduction of poverty. They also recognize the crucial importance to press ahead with pending structural reforms, both in the fiscal, banking and corporate sectors and are aware of the risks and severe challenges they face, along with the stiff opposition to market-oriented programs coming from certain political and social fronts. However, despite the risks they remain committed to an ambitious reform program that holds the key out of the current conditions. We believe that Bolivia’s sound track record on economic reform and the authorities’ commitment to their program are strong reasons to deserve Fund support under a Stand-By Arrangement.