Bolivia
Recent Economic Developments

This papers reviews economic developments in Bolivia during the 1990s. During 1992–94, real GDP grew by 3.8 percent a year on average—consistent with real per capita growth of 1.7 percent a year—despite the adverse effects of weather conditions on agricultural output and a substantial deterioration in the terms of trade in 1992. The overall deficit of the combined public sector fell from 3.2 percent of GDP in 1994 to 2.0 percent of GDP in 1995, partly reflecting a slower-than-envisaged pace of structural reforms.

Abstract

This papers reviews economic developments in Bolivia during the 1990s. During 1992–94, real GDP grew by 3.8 percent a year on average—consistent with real per capita growth of 1.7 percent a year—despite the adverse effects of weather conditions on agricultural output and a substantial deterioration in the terms of trade in 1992. The overall deficit of the combined public sector fell from 3.2 percent of GDP in 1994 to 2.0 percent of GDP in 1995, partly reflecting a slower-than-envisaged pace of structural reforms.

I. Macroeconomic Trends

1. Introduction

Sustained implementation of important structural reforms and the pursuit of prudent financial policies since 1985 has enabled Bolivia to resume economic growth and achieve considerable progress in reducing inflation and strengthening the balance of payments. During 1992-94 real GDP grew by 3.8 percent a year on average--consistent with real per capita growth of 1.7 percent a year--despite the adverse effects of weather conditions on agricultural output and a substantial deterioration in the terms of trade in 1992 (Table 1). Inflation declined from 14 1/2 percent during 1991 to 8 1/2 percent during 1994, while the balance of payments has been in surplus since 1991.

Table 1.

Bolivia: Aggregate Supply and Demand

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Sources: National Statistical Institute; and Fund staff estimates.

Goods and nonfactor services.

In 1995 economic growth is estimated at 3.8 percent compared with 4.2 percent in 1994, while inflation during the year rose to 12 1/2 percent. The growth performance was affected by the impact of a drought on agricultural output, while the higher inflation rate to a large extent reflected increases in world grain prices and the effect of the drought on food prices. The external current account deficit widened from 4 percent of GDP in 1994 to 6 percent of GDP (US$365 million) in 1995 because of a decline in official grants and a strong increase in imports, particularly of capital goods related to foreign direct investment.

The overall deficit of the combined public sector fell from 3.2 percent of GDP in 1994 to 2.0 percent of GDP in 1995 partly reflecting a slower than envisaged pace of structural reforms. Central bank credit to the nonfinancial public sector declined both in 1994 and 1995. The conduct of monetary policy was complicated by difficulties in the banking system that required the Central Bank to provide substantial liquidity support to banks in distress; policy was tightened in mid-1995 as the Central Bank stepped up its placement of open market instruments, and interest rates rose substantially. Net international reserves increased by US$115 million in 1995, and gross reserves at the end of the year were equivalent to 5.7 months of imports.

2. Aggregate supply and expenditure

Real GDP growth in 1991-92 was sustained by strong domestic demand led by public investment and private consumption. In 1993-94 the growth performance was helped by strong exports (especially nontraditional exports), which rose in real terms by 10 percent in 1993 and 20 percent in 1994. In 1995 direct foreign investment grew faster than other components of demand.

Investment rose from 13 percent of GDP in 1991 to about 14 1/2 percent of GDP in 1995, all of which is attributable to private investment, which rose from 4 1/2 percent of GDP to 6 percent of GDP during the period (Table 2). 1/ National savings rose from a little over 7 1/2 percent of GDP in 1991 to about 8 1/2 percent of GDP in 1995. The improved savings performance in 1994 permitted a decline in the use of external savings, from almost 9 percent of GDP in 1993 to 4 percent of GDP in 1994. Preliminary estimates for 1995 indicate increased use of foreign savings in financing investment of the private sector.

Table 2.

Bolivia: Macroeconomic Flows

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Sources: National Statistical Institute; and Fund staff estimates.

Excludes official transfers for debt-reduction operations.

Includes debt relief.

Includes direct foreign investment and errors and omissions.

Gas exports on payments due basis.

Includes operating results of the Central Bank.

Based on national accounts estimates. Data that appear in the fiscal accounts as capital expenditures overestimate fixed capital formation.

Includes foreign grants.

3. Production by sector

a. Agriculture

Agricultural production is highly dependent on weather conditions, especially on rainfall as only about 11 percent of the harvested area is irrigated. Strong growth in agriculture in 1991 was followed by a decline in real value added of more than 3 percent in 1992 as adverse weather conditions affected yields of major crops (Tables 3 and 4). Output grew by 2 1/2 percent in 1993 and 4 1/2 percent in 1994 as a result of increased investment in commercial agriculture. The drought in 1995 affected adversely several staple crops, especially rice, corn, and potatoes, and the growth of agricultural output slowed to less than 2 percent in 1995. As a result of this weak performance the share of agriculture in total output has declined by 1 1/2 percentage points of GDP since 1991 to about 17 percent of GDP in 1995 (Statistical Appendix Table 26).

Table 3.

Bolivia: Growth Rates of Selected Economic Aggregates

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Sources: National Statistical Institute; and Fund staff estimates.

Includes petroleum and natural gas.

Manufacturing and construction.

Table 4.

Bolivia: Indices of Output of Major Agricultural Crops

(Annual Percentage change)

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Source: National Statistical Institute.

There are three subsectors of agricultural production in Bolivia: traditional agriculture mainly in the Altiplano (La Paz, Cochabamba, Oruro, Potosí, Tarija, and Chuquisaca), where subsistence crops (potatoes, corn, rice, and wheat) are predominant and account for about 70 percent of output; export-oriented commercial agriculture (soya, cotton, sugar cane, and coffee) concentrated in the lowlands (Beni, Santa Cruz, and Pando), which accounts for about 50 percent of production; and coca production concentrated mainly in the Chapare area, which accounts for some 10 percent of agricultural production. 1/

Production of soybeans increased by an average of 22 percent a year from June 1991 to June 1995 as the harvested area expanded rapidly in response to favorable developments in world prices (Table 4 and Statistical Appendix Table 27). As a result, soya exports accounted for almost one third of Bolivia’s nontraditional export earnings in 1995.

After declining in 1992 and 1993, sugar production increased by 12 percent in 1994 and 9 percent in 1995 as favorable international prices provided an incentive to apply better technology and fertilizer which resulted in higher yields. Domestic consumption of sugar on average absorbs about 70 percent of total production and the rest is exported. 2/ Sugar exports rose from 38 thousand metric tons (US$16 million) in 1993 to 106 thousand metric tons (US$46 million) in 1994 mainly on account of strong demand in Peru and Argentina where domestic prices were higher than in Bolivia. As a result, from mid-1994 to the beginning of the next refining season in May 1995, there were sugar shortages in Bolivia and sugar prices rose by 25 percent contributing to the pickup in consumer price increase.

Wheat production has varied significantly in recent years and despite a strong rebound in 1995 was only 14 percent higher than in 1991. As domestic consumption grew by about 6 percent a year, the share of domestic wheat production in meeting domestic demand declined from 24 percent in 1991 to 15 percent in 1995. The share of donated wheat also has declined from 43 percent of consumption in 1991 to 9 percent in 1995 mainly because of the termination of donations from the United States under the PL-480 program and the replacement of food aid from the European Community with cash contributions. In all, wheat imports, including donated wheat, increased significantly from about 200 thousand tons in 1991 to 270 thousand tons in 1995.

Among other cereals grown for the domestic market, only rice production rose in the 1994/95 crop year, while the production of corn and barley declined slightly. Production of rice, which is predominantly a commercial crop on irrigated lands in Santa Cruz, rose in 1994/95 by about 6 percent mainly as a result of improved yields. Corn production, until 1994 the most important crop in terms of harvested area, was stagnant during the 1994/95 season partly as the result of poor weather conditions and the continued switch to soya cultivation in the Santa Cruz region.

b. Mining

(i) Minerals

Following several years of relative decline, the importance of the mining sector (excluding oil and gas production) increased in 1993-95 owing to increased private investment. The sector accounted for about 6 percent of GDP in 1993-95 but contributed about 40 percent of the country’s export receipts. Employment in the sector declined steadily from 2 percent of the formal labor force in 1991 to about 1 percent in 1994 as more efficient private mines increased their share in mineral production.

Mining output has grown steadily in recent years, and in 1995 it was 17 percent higher than four years earlier. However, the value of mining production declined by 13 percent in 1992 reflecting a fall in international mineral prices and did not fully recover until 1995 (Statistical Appendix Table 28). During the first nine months of 1995 the total value of mining output was 22 percent higher than in the same period of 1994, largely reflecting a recovery of mineral prices.

Production of the state-owned Bolivian Mining Company (COMIBOL) dropped by 27 percent in the first nine months of 1995 compared with the same period of 1994, thus continuing the downward trend since 1991. COMIBOL’s operations have been limited to two minerals, i.e., tin (Huanuni, Caracoles, and Colquiri mines) and zinc (Colquiri).

The production of private small- and medium-size mines has grown significantly in recent years and their share in total production rose from 56 percent in 1991 to 68 percent in 1994 and about 73 percent in January-September 1995. Private miners led the diversification of the sector away from its historical concentration on tin toward the exploration and development of zinc, silver, lead, and gold production. Foreign direct investment in the mining sector--mostly from Canada, Australia, and United States--amounted to about US$30 million in 1994 and US$40 million during the first nine months of 1995.

The role of tin in Bolivia’s export earnings has continued to decline mainly reflecting the downsizing of COMIBOL and, until 1994, falling world prices. COMIBOL continued to reduce its operations and tin output declined by about 10 percent to 11 thousand metric tons during January-September 1995 compared with the same period in 1994 (Statistical Appendix Table 29). The Government has prepared plans to privatize the state tin and antimony smelter through the capitalization program (Appendix II) and two mines will be offered for joint ventures (or leasing options). Zinc production which declined from 144 thousand metric tons in 1992 to 100 thousand metric tons in 1994 rose by 36 percent in January-September 1995, compared with the same period of 1994. Increased output came mainly from existing small- and medium-size mines.

Gold production has increased almost four-fold during the last five years, from 3 1/2 thousand kilograms in 1991 to almost 13 thousand kilograms in 1994. In January-September 1995 it increased by 13 percent compared with the same period of 1994. This expansion is attributable mainly to the Inti Raymi mining facility that started operations in March 1993 and accounted for approximately 60 percent of total gold production in 1995.

(ii) Petroleum and natural gas

The hydrocarbon industry accounted for about 4 1/2 percent of GDP a year in the past five years, but it has been one of the most important sources of government revenue. The hydrocarbon sector supplies two markets, Argentina, which takes about two thirds of the gas production; and the domestic market, which takes most of the petroleum production.

Natural gas, accounting for some 80 percent of Bolivia’s hydrocarbon reserves, is exported by pipeline to Argentina and is increasingly being used domestically for electricity generation and the production of liquified gas (Statistical Appendix Table 30). The registered production of natural gas is determined by the capacity of the pipeline to Argentina and the pace of increase of domestic consumption. Actual production until 1995 was about double the registered sales, but about one half was flared for lack of pipeline and markets. YPFB was able to increase its sales of gas by almost 10 percent in the first three quarters of 1995 compared with the same period of 1994 as a new domestic pipeline in the department of Cochabamba began to supply gas for a large electricity plant. 1/

Petroleum and natural gas production has been dominated by the state-owned Bolivian Petroleum Corporation (YPFB), although foreign-owned companies have been allowed to produce on a contract basis for YPFB. These contractors accounted for about 47 percent of gas production in 1991, but their share of production declined to 41 percent in 1994 as additional investment was constrained by the lack of additional market outlets (Statistical Appendix Table 31). Investment by private companies picked up in 1995, as the Government prepared the way for the capitalization of the hydrocarbon sector. Private investment amounted to about US$80 million in the period January-September 1995 compared with about US$50 million in the same period of 1994 (Statistical Appendix Table 33).

After averaging about 8 million barrels a year in 1991-93, petroleum production increased by 15 percent to over 9.4 million barrels in 1994 and increased by an additional 10 percent during the first three quarters of 1995 compared with the same period of 1994. These increases resulted from the more intensive exploitation of fields with higher proportions of oil in relation to gas.

c. Manufacturing

The manufacturing sector contributed some 15 percent of GDP and accounted for 18 percent of urban private sector employment in 1994. With the exception of processing of some mineral products, most of the output of the sector is for the domestic market, with food, beverages, and textiles and clothing accounting for almost two thirds of the total in 1995. Manufacturing has contributed about 20 percent of economic growth during the last three years, and during 1995 attracted more than US$50 million in foreign investment--mainly by Chilean investors in food processing activities. Beverages, textiles and clothing were the sectors that contributed the most to the expansion of manufacturing in recent years (Statistical Appendix Table 34).

d. Construction

After growing by about 12 percent a year in 1993-94, construction activity slowed markedly and output increased by only 1.3 percent in 1994. There was an oversupply of business space and housing and vacancy rates increased, particularly at the higher-priced end of the scale. In 1995 the construction sector grew by 5 percent in response to a rebound in private demand and large infrastructure investment by local governments.

4. Prices, wages, and employment

a. Prices

The rate of increase in consumer prices declined steadily from 14 1/2 percent in 1991 to 8 1/2 percent in 1994 (Table 5 and Chart 1), helped by strong import growth in 1992-93 and a favorable agricultural harvest in 1993. The easing of price pressures continued through August 1994 as the 12-month rate fell to a just under 7 percent. Subsequent problems with the supply of agricultural products, together with uncertainties in domestic financial markets, contributed to a pickup in the rate of price increase to 8 1/2 percent at the end of 1994.

Table 5.

Bolivia: Consumer Prices 1/

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Source: National Statistical Institute.

Index for La Paz, Santa Cruz, Cochabamba, and El Alto.

CHART 1
CHART 1

BOLIVIA: CONSUMER PRICE INFLATION

(1991=100)

Citation: IMF Staff Country Reports 1996, 042; 10.5089/9781451805642.002.A001

Sources: National Institute of Statistics; and Fund staff estimates.

During 1995 the rate of price increase rose further to 12.6 percent, mainly associated with higher prices for food and beverages, which make up almost half of the consumer price index. Food price increases jumped from 10 percent in 1994 to 16 percent in 1995 as world prices of grains (especially wheat) rose sharply and a drought in Bolivia affected production of a number of basic food items. However, price increases of nonfood items also picked up, from 7 percent in 1994 to 9 percent in 1995.

b. Employment and wages

Official employment and wages statistics are of limited coverage, and should be interpreted with caution. They indicate a declining trend in unemployment and a rise in real private sector wages consistent with the growth in economic activity in recent years (Table 6 and Statistical Appendix Tables 36 and 37).

Table 6.

Bolivia: Labor Force and Employment 1/

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Source: National Statistical Institute.

Includes urban centers with 10,000 or more inhabitants.

Excludes the underemployed who work fewer than 46 hours weekly and/or earn income lower than the cost of a basic basket of goods and services.

Includes the underemployed.

As a percentage of the labor force.

As a percentage of total employment.

Urban employment in the private sector rose by 8 1/2 percent a year in 1993 and 1994. Commerce and services together accounted for 63 percent of total urban private sector employment in 1990. Employment in the manufacturing and construction sectors grew relatively rapidly and their shares in total employment increased from 16 and 6 1/2 percent, respectively, in 1990, to 18 and 9 1/2 percent in 1994, while the share of commerce and services declined to 57 percent in the same period.

The Government establishes the legal minimum wage, which also serves as a reference wage in the informal economy and a benchmark for the determination of certain pensions and bonuses in the public sector. The minimum wage was raised by 19 percent in January 1994 and by 8 percent in January 1995 and at the end of 1995 was equivalent to about US$42 a month (Statistical Appendix Table 35).

Since 1985 wages in the private sector have been determined by collective bargaining. Average real wages in the private sector increased by about 6 percent in 1993, and 9.4 percent in 1994. The wages of miners and construction workers increased more rapidly while the wages in manufacturing and commerce grew considerably less than the average during 1992-94. Developments in public sector wages are discussed in Chapter II.

II. Operations of the Combined Public Sector

1. Structure of the public sector

The combined public sector comprises the general government, the public enterprises, and the net operating balance of the Central Bank. The general government encompasses the Central Government; the Regional Development Corporations (RDCs), which implement public investment projects in the nine departments; 306 municipalities; and the social security institutions. Combined expenditure of local government (RDCs and the municipalities) accounted for about 17 percent of general government outlays in 1994 and 20 percent in January-September 1995.

The primary source of revenue for local governments is transfers made through revenue-sharing arrangements with the Central Government. Before July 1994, the municipalities and RDCs each received 10 percent of domestic nonhydrocarbon taxes and customs duties collected from the private sector. 1/ The popular participation law, which has been in effect since July 1994, increased the share of the municipalities to 20 percent and eliminated the RDCs’ share.

Further major changes in the structure of government are envisaged for 1996, based on the decentralization law approved in July 1995. In particular, the RDCs will be eliminated, with control of the remaining enterprises held by the RDCs passing to the nine departments. 2/

2. Overall trends in the combined public sector

After averaging about 4 1/2 percent of GDP a year in 1990-92, the deficit of the combined public sector rose to 6 1/2 percent of GDP in 1993 as a result of a decline in grants and an increase in expenditure in the runup to the presidential election (Table 7 and Chart 2). The deficit fe 1 to 3.2 percent of GDP in 1994 and 2.0 percent of GDP in 1995, almost entirely as a result of an increase in revenue. Reliance on domestic financing was eliminated during the period, falling from 2.1 percent of GDP in 1990 to minus 0.7 percent of GDP in 1994 and minus 1.9 percent of GDP in 1995. This has helped contain domestic interest costs at a very modest level (at about 0.8 percent of GDP a year from 1993-95), although Bolivia’s heavy foreign debt burden has kept general government interest payments at around 3 percent of GDP a year throughout the period.

Table 7.

Bolivia: Summary Operations of the Combined Public Sector 1/

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Sources: Ministry of Finance; Integrated System of Financial Administration and Government Control (SAFCO); Central Bank of Bolivia; and Fund staff estimates.

Foreign currency flows are converted into bolivianos at the average rate of Bs 3.18 per U.S. dollar in 1990, Bs 3.58 per U.S. dollar in 1991, Bs 3.89 per U.S. dollar in 1992, Bs 4.11 per U.S. dollar in 1993, Bs 4.65 per U.S. dollar in 1994, and Bs 4.86 per U.S. dollar in 1995.

Before transfers from and to public enterprises.

Following program accounting conventions, loan repayments are excluded.

Before transfers from and to general government. Gas exports are recorded on an accrual basis.

Includes capital expenditure other than fixed capital formation of the General Government and public enterprises. Expenditure measured before transfers to public enterprises.

Includes floating debt, bond financing, change in arrears to foreign oil contractors, and other net domestic financing.

CHART 2
CHART 2

BOLIVIA: COMBINED PUBLIC SECTOR OPERATIONS

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 042; 10.5089/9781451805642.002.A001

Source: Ministry of Finance; and Fund staff estimates.

Current revenue has been strengthened since 1992 by an improvement in the central bank operating balance, which shifted from a deficit of 0.7 percent of GDP in 1990-91 to surpluses of 0.7 percent of GDP in 1994 and 0.9 percent of GDP in 1995. Before 1992 the Government paid below-market interest rates on its borrowing from the Central Bank, contributing to a negative position in the operating balance of the Central Bank. This situation was corrected with the recapitalization of the Central Bank by the Treasury at the end of 1991, and the requirement thereafter that the Government borrow at market rates. In recent years the central bank operating balance has also been buoyed by increased interest earnings on net international reserves. The stronger operating balance of the Central Bank has been somewhat offset by lower operating surpluses by the public enterprises, due to severance payments associated with enterprise reform. Revenue has been enhanced by an increase in the tax effort, as a result of increases in domestic tax rates and improved tax administration.

Total expenditure of the combined public sector has risen from 27 1/2 percent of GDP in 1990 to 30 1/2 percent of GDP in 1994 and 31 percent of GDP in 1995. General government current expenditure increased from 18 1/2 percent of GDP a year in 1990 to about 21 percent of GDP in 1993-94 and 22 percent in 1995, mainly on account of a rising wage bill. Capital expenditure of the combined public sector has also increased on account of an increase in general government investment. Public enterprise capital expenditure, however, has fallen as a share of GDP, especially that of the state oil company (YPFB)

3. Overall trends in general government

The overall deficit of the general government increased steadily from 2 1/2 percent of GDP in 1990 to 5 1/2 percent of GDP in 1993, before declining to 3 1/2 percent of GDP in 1994 and 2 1/2 percent of GDP in 1995 (Table 8). Combined revenue and grants increased throughout the period, from 21 percent of GDP in 1990 to 26 1/2 percent of GDP in 1995. Expenditure rose more quickly, however, with increases in both current and capital outlays as a share of GDP. Most of the financing of the general government has come from external sources.

Table 8.

Bolivia: Summary Operations of General Government 1/

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Sources: Ministry of Finance; Integrated System of Financial Administration and Government Control (SAFCO); Central Bank of Bolivia; and Fund staff estimates.

Includes the operations of the Central Government, Social Security Institutions, Regional Development Corporations, and Municipalities.

Includes payments to war veterans and severance payments.

Interest on external debt on a payment-due basis.

Includes unidentified expenditures.

The tax effort improved markedly between 1990 and 1995, rising from 16 1/2 percent of GDP in 1990 to over 18 1/2 percent of GDP in 1994 and 19 1/2 percent of GDP in 1995 (Table 9). This occurred despite the weakening of hydrocarbon revenue, which declined from over 9 percent of GDP in 1991 to about 6 percent of GDP in 1995. The decline in hydrocarbon revenue through 1993 reflected the weakening of international prices for natural gas exports. Developments in the domestic market, on the other hand, accounted for the fall in receipts relative to GDP in 1994-95, in particular the absence of an adjustment to the nominal consumer price of gasoline and diesel. In addition, the substitution of imported diesel (at a lower tax rate) for domestically produced diesel oil also reduced hydrocarbon taxes, while boosting YPFB’s operating surplus. 1/

Table 9.

Bolivia: General Government Revenue and Grants

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Sources: Ministry of Finance; Integrated System of Financial Administration and Government Control (SAFCO); and Fund staff estimates.

Includes value-added and transactions taxes paid by the state oil company (YPFB).

Value added and transaction tax figures for 1990-93 are estimated on the basis of data for the combined total of these taxes.

Includes all value-added tax paid by public enterprises (except YPFB).

Includes all transaction taxes paid by public enterprises (except YPFB).

Comprises social security contributions paid by the private sector and public enterprises.

Nonhydrocarbon taxes rose from 8 percent of GDP in 1990 to about 12 1/2 percent of GDP in 1994 and 13 1/2 percent of GDP in 1995, lead by strong gains in indirect taxes. Revenue generated by the value-added tax (VAT) more than doubled as a share of GDP during the period. These gains can be attributed to an increase in the VAT rate from 10 percent in 1990 to 13 percent in 1992 (boosting revenue by 0.9 percent of GDP on an annual basis); and improvements in tax administration, especially since 1994. 2/ The increase in receipts for direct taxes, in particular the complementary value added tax (which generated revenue of 0.6 percent of GDP in 1995), is also linked to the increase in the VAT rate in 1992. 3/

A number of additional tax measures were taken in 1995 to bolster the revenue effort, including an increase in the transactions tax from 2 percent to 3 percent (effective in February); and increases in the excise tax rate for automobiles (from 10 to 18 percent) and beer, both effective in August. As a result, revenue from the transactions tax increased from 1.8 percent of GDP in 1994 to 2.4 percent of GDP in 1995.

Important changes in income and property taxes also came into effect in 1995, including the elimination of the tax on the net worth of enterprises (IRPE), and its replacement with a 25 percent corporate income tax. 4/ Given that payment of these income tax liabilities can be credited against transactions tax obligations, no net revenue is expected from the introduction of the income tax over the next three years.

Improvements in tax administration account for a substantial share of the increase in revenue achieved during the 1990s. 1/ During 1990-93 the most important of these efforts included the modification of the tax code in 1992 that increased penalties for tax evasion, and stricter application of penalties for noncompliance. A number of new measures were initiated in 1994, including the strengthening of information management at the large taxpayers’ unit; tighter control of the use of credit invoices for the VAT and complementary VAT; and increased auditing, resulting in additional revenue through tax reassessments and penalties. Customs revenue was aided by administrative actions in 1994, including the collection of tax liabilities on previously undocumented automobiles. In 1995 improvements in domestic tax administration focused on improving auditing, with an increase in the number of taxpayers audited and an increase in the taxpayer base; and continued implementation of measures related to the control of credit invoices initiated in 1994.

Current expenditure of the general government as a share of GDP has increased during the 1990s, from 18 1/2 percent of GDP in 1990 to 21 1/2 percent of GDP in 1994 and 22 percent of GDP in 1995. Two thirds of this increase came from a higher wage bill, which rose by almost 2 percentage points of GDP during this period to 10 percent of GDP a year in 1994 and 1995. The higher wage bill resulted mainly from rising real wages in the general government, rather than increased public sector employment. 2/ The higher wage bill resulted from high budgeted wage increases, extraordinary increases after the budget, and wage drift.

Military expenditure averaged 3.5 percent of GDP a year from 1990-93, before rising to 3.6 percent of GDP in 1994. Military spending is estimated to have declined to 3.2 percent of GDP in 1995, as a result of declining expenditure financed by foreign grants. 3/

Combined transfers to the public enterprises and the private sector have increased as a share of GDP, from 2.8 percent of GDP a year in 1991 and 1992 to 3.2 percent of GDP in 1993 and 4.7 percent of GDP in 1994. Some of the increase was to cover retrenchment costs at the National Railway Company (ENFE) in 1993 and the Bolivian Mining Company (COMIBOL) in 1994. Transfer expenditure includes rebates on indirect taxes paid by exporters, which amounted to 0.3 percent of GDP in 1993. To reduce the indirect tax burden on exporters, a new system of tax rebates was implemented in 1994, resulting in an increase in rebates to the equivalent of 1.2 percent of GDP. These rebates, however, were found to exceed estimated taxes actually paid, implying a subsidy element. The Government took steps to eliminate the subsidy component in late 1994. As a consequence rebates declined to 0.9 percent of GDP in 1995.

General government capital expenditure has risen steadily during the 1990s, from 5 percent of GDP in 1990 to over 7 percent of GDP in 1995. The share of public sector investment devoted to the social sectors and infrastructure has continued to increase from 45 percent in 1990 to 68 percent in 1994 and 76 percent in 1995. 1/

4. Developments in general government by sector

a. Central Government

The Central Government comprises the Central Administration and decentralized agencies, including the national road authority and the social investment fund. The trend in the central government deficit has been similar to that in the general government as a whole. The deficit of the Central Government rose from 2.1 percent of GDP in 1991 to 5.2 percent of GDP in 1993, before declining to 3.7 percent of GDP in 1994 (Statistical Appendix Table 44). More than half of the Central Government’s capital expenditure is executed by decentralized agencies (which rely heavily on foreign grants and transfers from the Central Administration for their funding). Capital expenditure of the Central Government increased by about 2 percentage points of GDP between 1991 and 1994, led by higher investment by the national road authority.

b. The rest of general government

The overall balance of the rest of general government (social security institutions, RDCs, and municipalities) has strengthened since 1991, from a deficit of 0.7 percent of GDP to balance in 1994 (Statistical Appendix Table 45).

The social security system includes the basic pension fund (FOPEBA), 35 complementary funds, and the National Health System. 1/ Contributions to FOPEBA are set at 9 percent of the wage bill. Contributions are shared by the employee (2.5 percentage points), the employer (5 percentage points), and the public sector (1.5 percentage points). Contributions to the complementary funds vary from 4.5 to 18 percent. The financing of health insurance is provided entirely by an employer contribution of 10 percent of the wage bill.

The overall position of the social security institutions shifted from balance in 1990-91 to a surplus of 0.2 percent of GDP a year between 1992-94. FOPEBA’s revenue base expanded significantly in 1994, as efforts to collect payroll taxes from rural teachers helped increase the number of contributors from 415,000 in 1993 to 451,000 in 1994. Revenue rose concomitantly, from 3.1 percent of GDP in 1993 to 3.5 percent of GDP in 1994. Expenditure in 1994 reached 3.2 percent of GDP, of which about 60 percent represented payments to beneficiaries. Despite positive balances in recent years, the Government recognizes that the current system suffers from a number of problems: the coverage of the system is limited, administrative costs and payroll tax rates are high, and the funds are not financially viable over the medium term. A reform of the social security system is planned to begin in 1996, in connection with the capitalization program for public enterprises (see Appendix II).

As a group the RDCs experienced deficits ranging between 0.2 and 0.7 percent of GDP a year between 1990 and 1994, as receipts from revenue-sharing arrangements were insufficient to cover fixed capital expenditure of 1.7 percent of GDP a year during the period. 2/ RDC operations were scaled back in 1994, with fixed capital expenditure declining from 1.8 percent of GDP in 1993 to 1.4 percent of GDP. Employment in the RDCs declined significantly in 1994 and some 900 employees received severance payments amounting to 0.2 percent of GDP.

The municipalities recorded a balanced financial position during 1990-94, as increased revenue from revenue-sharing arrangements permitted an expansion of fixed capital investment from 0.7 percent of GDP in 1993 to 1.4 percent of GDP in 1994 and 2.0 percent of GDP during January-September 1995. Current expenditure of the municipalities has also increased, from 1.3 percent of GDP in 1993 and 1994 to 1.5 percent of GDP in January-September 1995. The popular participation law has also led to an increase in revenue for municipalities in the poorer departments, with resources increasing from just Bs 3 million in 1993 to Bs 45 million (0.2 percent of GDP) in 1994 in the municipalities of Potosí, Beni, and Pando.

5. Developments in the public enterprises

The operating surplus of the public enterprises averaged 2 1/2 percent of GDP a year during 1990-92 and then declined to around 1 1/2 percent of GDP a year in 1993-94, before rebounding to 2 1/2 percent of GDP in 1995 (Table 10). Much of the deterioration in performance in 1993 and 1994 reflected a weakening of revenue, while expenditure was raised by severance payments of 0.7 and 1.1 percent of GDP in 1993 and 1994, respectively. The strengthened position in 1995 reflected a slowdown in the pace of the labor restructuring program at COMIBOL and a higher operating surplus of the national oil company YPFB.

Table 10.

Bolivia: Summary Operations of the Nonfinancial Public Enterprises

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Sources: Ministry of Finance; Integrated System of Financial Administration and Government Control (SAFCO); Centeral Bank of Bolivia; and Fund staff estimates.

Excludes revenue from the recovery of loans.

Capital expenditure of the enterprises declined from 4.5 percent of GDP in 1992 to 2.9 percent of GDP in 1994 and 2.4 percent of GDP in 1995. The largest reductions in investment occurred at YPFB, the national telephone company (ENTEL), and the national electricity company (ENDE). The reduction in capital expenditure since 1993 contributed to a reduction of the overall deficit of the enterprises, from about 1 1/2 percent of GDP a year in 1990-93 to less than 1/2 percent of GDP thereafter.

The downward trend in capital expenditure by the public enterprises in recent years reflected efforts to reduce the role of state enterprises in the economy. ENDE and ENTEL, as well as the national railway (ENFE) and the national airline (LAB), were transferred to the private sector through the capitalization program in 1995. 1/ The Government’s privatization program has included the enterprises held by the RDCs, with 30 enterprises sold or liquidated in 1995. Employment in the public enterprises has fallen sharply from a peak of 32,400 in 1991 to 16,000 in December 1995 in part as a result of the capitalization/privatization program.

YPFB. the largest public enterprise, accounts for most of the extraction of oil and gas and the production of petroleum products in Bolivia. The overall deficit of YPFB remained at about 1 percent of GDP a year during 1990-93, but strengthened in 1994 and 1995 on account of reduced capital expenditure and an improved operating balance. The improvements in performance, which resulted in a surplus of 1 1/4 percent of GDP in 1995, reflected lower labor costs and lower tax payments on sales of imported diesel, whose share of the market has increased in recent years. 2/

The Bolivian Mining Company (COMIBOL) has reduced considerably its operations during the 1990s, with the closing of several mines and the transfer of activities to the private sector through leasing arrangements and joint ventures. The operating balance fell from a small surplus in 1990 to a deficit of 0.2 percent of GDP in 1992 and 1993, primarily on account of retrenchment costs and lower export prices in 1993. An acceleration of the employment restructuring program and the associated severance payments resulted in an increase in the operating deficit to 0.7 percent of GDP in 1994. The operating balance shifted to a small surplus in 1995, reflecting greatly reduced labor costs. Employment has been reduced steadily during the period, from 6,300 in December 1991 to 1,400 in December 1995.

The Bolivian Smelting Company (ENAF) purchases ore (especially tin and zinc) from COMIBOL to be processed and exported. Its operating surplus averaged less than 0.1 percent of GDP in 1990-93, before rising to 0.3 percent of GDP in 1994 on account of higher export sales.

The operating surplus of the State Electricity Company (ENDE) remained at about 1/2 percent of GDP during 1990-94. Capital expenditure increased from an average of 1/2 percent of GDP in 1990-91 to 1 percent of GDP in 1992, before falling to an average of 1/2 percent of GDP in 1993 and 1994.

The operating balance of the National Railway Company (ENFE) fell from a surplus of 0.2 percent of GDP in 1992 to a deficit of 0.5 percent of GDP in 1993, as a result of declining revenue and severance payments of 0.2 percent of GDP. ENFE’s operating deficit declined to 0.1 percent of GDP in 1994, before rising to 0.4 percent of GDP in 1995. Part of the operating losses have been covered by subsidies in the form of tax certificates (that can be used to pay tax obligations). Central government transfers to ENFE (including subsidy payments) averaged 0.3 percent of GDP a year from 1991-94.

The National Telephone Company (ENTEL) was the state monopoly in international telecommunications prior to capitalization. ENTEL averaged an operating surplus of 0.7 percent of GDP a year in 1990-95. Capital expenditure averaged 0.4 percent of GDP a year in 1990-93, before declining to 0.2 percent of GDP in 1994 and 0.1 percent of GDP in 1995. ENTEL has regularly remitted profits to the Central Government; from 1990 through 1994, these transfers averaged 1/2 percent of GDP a year.

Enterprises of the Regional Development Corporations recorded an operating surplus of 0.1 percent of GDP a year on average from 1990 through 1993. Investment by RDC enterprises averaged 0.2 percent of GDP a year during the period. The wage bill fell substantially in 1994, with a corresponding improvement in the operating balance to 0.3 percent of GDP.

The rest of public enterprises comprise the airport company (AASANA), the water and sewage services, and the post office (ECOBOL). AASANA derives the majority of its income from routing services, airport tolls, and passenger fees. The water and sewage companies levy user fees, which are approved by the municipalities. These enterprises recorded a combined operating surplus of 0.1 percent of GDP a year in 1990-93, with capital expenditure in the 0.2-0.3 percent of GDP range during the five years through 1994. Foreign grants have helped finance sanitation projects.

III. Financial Intermediation

1. Overall developments

The Central Bank pursued a tight credit policy in 1993 to help offset the impact of a large increase in its credit to the nonfinancial public sector. The policy stance was eased somewhat in 1994 in the wake of a strong improvement in the fiscal performance (Tables 11 and 12). As a result, the average interest rate on U.S. dollar-denominated bank loans declined from about 18 1/2 percent in 1993 to 16 1/2 percent in 1994. Toward the end of the year the Central Bank’s claims on the rest of the banking system rose sharply as it closed and took over the portfolio of two commercial banks. Currency in circulation grew somewhat faster than nominal GDP in 1992-93, but rose sharply in 1994 when the Central Bank provided cash compensation to the small depositors of the two closed banks and did not sterilize the monetary impact of a strong balance of payments performance in the last quarter of the year.

Table 11.

Bolivia: Summary Indicators of the Financial System

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Source: Central Bank of Bolivia.

Foreign currency flows valued at an accounting exchange rate.

Includes official capital and surplus; intersectoral flows; allocations of SDRs and Andean pesos; and other net unclassified assets.

Flows expressed in percent of liabilities to the private sector at the beginning of the year.

Twelve-month change to end of period, stocks valued at end of period exchange rates.

Table 12.

Bolivia: Summary Indicators of the Central Bank

(Change in percent of currency issue at the beginning of year) 1/

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Source: Central Bank of Bolivia.

Foreign currency asset and liability flows valued at accounting exchange rates.

Includes official capital and surplus; blocked accounts; intersectoral flows; allocations of SDRs and Andean pesos; and other net unclassified assets.

Currency and bank reserve deposits, including reserve deposits on U.S. dollar denominated deposits.

Including the year-end valuation adjustments.