Bolivia: Staff Report for the 1999 Article IV Consultation and Request for Second Annual Arrangement Under the Poverty Reduction and Growth Facility

A considerable degree of macroeconomic stability was achieved by Bolivia, and by the steadfast implementation of structural reforms, most of the distortions that adversely affected the economy in the early 1980s were removed. The Bolivian authorities are committed to fighting poverty. Executive Directors urged the authorities to proceed decisively with the envisaged reform of labor regulations in 2000 to enhance external competitiveness, make Bolivia’s regulations complaint with the norms of the International Labor Organization, and broaden the coverage of the formal economy.

Abstract

A considerable degree of macroeconomic stability was achieved by Bolivia, and by the steadfast implementation of structural reforms, most of the distortions that adversely affected the economy in the early 1980s were removed. The Bolivian authorities are committed to fighting poverty. Executive Directors urged the authorities to proceed decisively with the envisaged reform of labor regulations in 2000 to enhance external competitiveness, make Bolivia’s regulations complaint with the norms of the International Labor Organization, and broaden the coverage of the formal economy.

I. Introduction

1. A staff mission1 visited La Paz and Santa Cruz during October 12-30, 1999 to conduct the Article IV consultation discussions, collect information for a new debt sustainability analysis for the enhanced HIPC Initiative, and negotiate the program for the second annual PRGF arrangement (described in the attached Memorandum of Economic and Financial Policies). The mission met with the Vice President of the Republic; the Ministers of Finance, Agriculture, Economic Development, Justice, Labor, the Presidency, and Trade; the President of the Central Bank; representatives of foreign donors, the private sector, and the banking community; and members of civil society, including officials of the Catholic church and representatives of trade unions and nongovernment organizations.

2. Bolivia is on the 12-month consultation cycle. At the conclusion of the last Article IV consultation on September 18, 1998 (EBM/98/100), Directors commended the authorities for their solid track record since 1985 and welcomed the shift in priorities of their structural reform program, with emphasis given to strengthening education and health reform, managing fiscal decentralization better, and improving governance. Directors expressed concern, however, that, despite the strong economic performance, little progress had been made in alleviating poverty and improving social conditions. Bolivia has accepted the obligations of Article VIII, sections 2, 3, and 4 of the Fund’s Articles of Agreement.

3. The current three-year PRGF arrangement, in an amount of SDR 100.96 million (80 percent of quota), was approved by the Executive Board on September 18, 1998, and the midterm review under the first annual arrangement was completed on June 16, 1999 (relations with the Fund are presented in Appendix I). In September 1998 Bolivia reached the completion point under the HIPC Initiative, and the net present value (NPV) of its end-1997 public and publicly guaranteed external debt was reduced by US$448 million, thus lowering the ratio of NPV to exports to 218 percent, compared with an estimated 252 percent without relief.

II. Background AND Performance Under THE Program

4. The program supported by the current three-year PRGF arrangement sets out an overall medium-term strategy aimed at achieving high economic growth and distributing the benefits of growth more equitably. Public savings are to rise gradually, as the government phases in measures to cover the fiscal costs of structural reforms (including pensions) and progressively returns the fiscal deficit to a level that can be entirely financed by external resources by 2002. For 1999, the program initially aimed at limiting inflation to 5.5 percent and narrowing the external current account deficit to 7.2 percent of GDP (from 7.9 percent in 1998), under the assumption of real GDP growth of 4½-5 percent. The overall deficit of the combined public sector was projected to remain broadly unchanged from its level in 1998 (3.9 percent of GDP), and the rate of crawl of the exchange rate was to be stepped-up to achieve a modest depreciation of the boliviano in real effective terms.

5. With Latin America suffering the impact of the financial crisis, the rate of economic growth in Bolivia has slowed significantly in 1999. Following an average annual rate of growth of4½ percent during 1996-98, real GDP is estimated to have grown by only 1½ percent in the first half of 1999 (compared with the same period of 1998), as output declined in the mining, hydrocarbon, and construction sectors. In the agricultural sector, traditional crop output recovered from the impact in 1998 of El Niño while the production of export crops (primarily in the Santa Cruz region) declined, reflecting lower export prices and competition from Brazil. The economy is thought to have been gathering some momentum in the second half of this year, and is estimated to grow by about 2 percent for 1999 as a whole. Inflation has been lower than anticipated, in part because of falling food prices, as agricultural output recovered from last year’s effects of El Niño. The 12-month rise in the CPI moderated from 4.4 percent in December 1998 to 2.5 percent in November 1999, and is expected to be 3 percent at year-end (Table 1 and Figure 1).

Table 1.

Bolivia: Selected Economic and Financial Indicators

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

The recording of inward transfers in the external current account (and foreign savings) was improved starting in 1997. It is not possible to compare trends in these variables before and after 1997.

Excludes grants to finance debt-reduction operations.

In months of imports of goods and services in the following year.

Debt and debt service reflect HIPC assistance, which became available beginning in 1998.

Includes obligations to the Fund and debt with public guarantee.

On public sector medium- and long-term external debt (including payments to the Fund) in percent of exports of goods and services.

New weights based on average trade, excluding trade related to natural gas, in 1996-97.

Figure 1.
Figure 1.

Bolivia: Selected Economic Indicators, 1988-2000

Citation: IMF Staff Country Reports 2000, 040; 10.5089/9781451805710.002.A001

Sources: Central Bank of Bolivia; Ministry of Finance; and Fund staff estimates.1/ December over December.2/ Since 1997, includes gold re-valuation from US$250 per troy ounce and new bank reserve requirement.

6. The external current account deficit is estimated to narrow to 6.3 percent of GDP in 1999 (1 percentage point of GDP below the level projected in the program). During the first three quarters of 1999, export receipts in U.S. dollar terms fell 8 percent below their level one year earlier due to lower prices for mining and agricultural products and soft demand from trading partners in the region (Latin America accounts for about half of Bolivia’s exports). The value of imports (excluding one-time imports in 1998 for the construction of a gas pipeline) also fell by about 8 percent, reflecting lower domestic demand and a decline in the price of imports from Brazil. In the capital account, foreign direct investment remained strong, though below the levels in 1998, but there were partly offsetting private sector flows in the form of repayments (about US$190 million) of bank short-term credits. The net foreign assets position of the central bank deteriorated by about US$30 million through end-September, or somewhat less than anticipated in the program.

7. In the public sector, the authorities maintained fiscal discipline, even though tax revenue fell substantially short of program projections, owing to the slowdown in economic activity. Tax receipts in January-September grew by 2½ percent, broadly unchanged in real terms from their level in the same period of 1998, whereas the program had assumed a real increase of 15 percent, mostly reflecting a higher rate of economic growth and the implementation of the customs reform. This shortfall was largely compensated by an increase in nontax revenue which, together with restraint on current spending, made possible meeting the program’s deficit limits at end-September. The authorities successful control of current expenditure ensured that over 90 percent of the investment program was executed, despite a US$64 million shortfall in external disbursements.

8. In the monetary area, all the end-September financial benchmarks were met (Table 2). The stock of domestic currency declined significantly (12 percent) during the 12-month period ended in September reflecting, in the context of the highly dollarized Bolivian economy, a stronger preference for the dollar associated with some volatility in domestic market sentiment during the second quarter.2 This required careful management by the central bank of its net domestic asset position, to ensure meeting the net international reserves (NIR) target, as it extended credit to the banking system in the course of resolving a failed medium-sized bank (4 percent of total bank assets). In response to pressure from the agricultural sector, faced with a shortfall in export receipts, the authorities also agreed to provide up to US$40 million for the restructuring over a 10-year period of loans from commercial banks. Compliance with the NIR target was made possible in part by a higher than anticipated increase in public sector deposits with the central bank. The interest rate on U.S. dollar denominated government paper traded in the open market has recently moved up, from 8.1 percent in early September to 8.6 percent in late November.

Table 2.

Bolivia: Financial Benchmarks and Performance Criteria: Performance Under the First Annual Arrangement Under the PRGF 1/

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Source: Data provided by the Bolivian authorities.

Program limits and targets adjustable for net proceeds from the sale of assets in excess of US$45 million, for the difference between programmed cash outlays for severance payments and actual cash outlays, and for the difference between actual interest relief from HIPC over projected interest relief

Performance criteria.

Net disbursements of public and publicly-guaranteed external debt.

In excess of programmed amount.

Less than programmed amount.

Shortfall of net external disbursements in relation to programmed amounts, maximum of Bs 160 million.

Difference between calculated total bank and nonbank financial institutions required reserves using the previous reserve requirements system and actual required reserves under the system introduced in 1998.

9. The economic slowdown contributed to a sharp decline in the growth of bank credit and a weakening in the quality of banks’ portfolio. From end-1998 through September 1999, private sector deposits remained broadly unchanged and, in contrast with the sharp increase recorded in 1998 (24 percent), credit to the private sector registered a small decline. The proportion of nonperforming loans to total loans rose to 7.6 percent in September 1998, from 6.0 percent a year earlier, and banks have become more cautious in their lending policy. The authorities have continued to strengthen financial sector regulations: in January 1999 improved risk assessment requirements became effective, and in September the first stage of regulations aimed at tripling provisioning requirements over a five-year period was implemented (bank provisions, equivalent to only slightly over 40 percent of commercial banks’ nonperforming loans, are still relatively low). During 1999, the authorities also eased temporarily provisioning requirements for bank refinancing of loans to the sectors of the economy affected by the slowdown in activity.

10. The authorities have continued to depreciate the boliviano in the daily foreign exchange auction (Bolsin), which is closely managed by the central bank. In nominal terms, the boliviano depreciated by close to 6 percent against the U.S. dollar during January-November. In real effective terms, however, it appreciated by 2½ percent during the first three quarters of 1999, reflecting mainly the impact of the depreciation of the Brazilian real (Brazil has an 8 percent trade weight in the computation of Bolivia’s real effective exchange rate).

11. Key structural reforms have continued to be adopted in 1999, though there were delays in the implementation of the program (Table 3). A new customs law, aimed at enhancing transparency and efficiency, was issued in July. It establishes an autonomous customs administration, with its own budget and resources, headed by a president appointed for a five-year period. In the area of privatization, the sale of the refineries of the state petroleum company YPFB was completed in mid-November. The privatization of the state smelting company Vinto, which had been postponed to resolve pending legal issues with employees, was completed on December 21, 1999. Both sales were prior actions for Board consideration of the second annual arrangement under the PRGF.

Table 3.

Bolivia: Structural Benchmarks Status of Implementation of Selected Structural Policy Measures in 1999

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III. Policy Discussions AND THE Economic Program FOR 2000

12. The discussions took place in an environment characterized by some improvement in the economic outlook. The authorities noted that, under the circumstances of the regional economic slowdown and the devaluation of the Brazilian real early in 1999, economic management during the first half of 1999 had been particularly difficult. The private sector had exerted strong pressure on the government, calling for large increases in external protection and relief on tax and interest obligations. More recently, however, such pressures have moderated, with early indications that the economic outlook was slowly improving. The authorities were hopeful that improvements in world commodity prices, together with the expected pickup in economic activity in the Latin America region, would support and help strengthen the recovery. The staff and the authorities agreed that output growth could be expected to pick up to 4 percent in 2000, while recognizing that significant downside risks existed.

13. The proposed program for 2000 aims at containing inflation within a range of 4-4.5 percent and achieving a small increase (US$15 million) in net official international reserves, while allowing for a modest widening of the external current account deficit (to 6.8 percent of GDP), as the economy recovers and imports increase. In 2000 the authorities are aiming at completing the privatization program, modernizing the tax system, flexibilizing labor regulations, and strengthening Bolivia’s external competitiveness. In the forthcoming Interim Poverty Reduction Strategy Paper (PRSP), the authorities lay out their plans for developing a comprehensive poverty reduction strategy in the context of a national dialogue with civil society, to be held during the first quarter of next year. As a follow-up to the national dialogue, they plan to prepare a comprehensive PRSP, which will serve as a basis for Bolivia’s presentation of a request for the completion point under the enhanced HIPC Initiative. The PRSP will also serve as support for the Consultative Group Meeting with foreign donors, expected to take place by mid-2000.

A. Macroeconomic Policies

14. In the discussions, the staff commended the authorities’ strenuous efforts to restrain expenditure in the first three quarters of 1999, and stressed the importance of sustaining this effort. The authorities stated that they remained firmly committed to fiscal discipline. They were hopeful that tax revenue would improve during the last quarter of 1999, as the reform of customs was being progressively implemented. They expressed confidence that they would meet the overall combined public sector deficit target for 1999,3 but noted that net foreign disbursements would be lower than initially envisaged under the program (by close to US$80 million). The staff recognized that the shortfall was partly beyond the control of the authorities, and agreed to recommend a modest revision (about half of the shortfall) in the year-end benchmarks on the ceiling of the net domestic financing of the combined public sector and the target for the NIR of the central bank.4

15. The overall deficit of the combined public sector (after grants) is projected to narrow from 4.2 percent of GDP in 1999 to 3.7 percent in 2000 (Table 4) The fiscal program aims at a slight improvement in the revenue-to-GDP ratio of the general government, despite the revenue loss arising from the completion of the legalization program of cars previously imported as contraband.5 Achievement of the fiscal objective for next year will require significant efforts on both the revenue and the expenditure sides:

Table 4.

Bolivia: Operations of the Combined Public Sector 1/

(In percent of GDP)

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

In January 1998, coverage was enlarged to include 65 provincial municipalities (the 10 largest cities had already been included) and the operating outlays of Fondo de Desarrollo Regional and the Viceministry for Public Investment.

Not including pension related revenue and expenditure.

  • The ongoing reform of customs is projected to help boost value-added tax (VAT) and import duty receipts by ½ percent of GDP in 2000. Important steps have been taken in recent months, but attainment of the revenue objectives for 2000 will require further steady progress. In particular, there is a need to move forcefully with the establishment of a professional staff at customs, coordinate better the provision of foreign technical assistance, and implement promptly the computerized control system. In addition, it is important to issue the implementing regulations of the customs law early next year, as scheduled.

  • As regards domestic taxes, the authorities plan to adopt during the first quarter of next year the new tax procedures code that strengthens the legal base for tax enforcement. They also intend to take steps in 2000 to introduce a career civil service to depoliticize the staff and reorganize the Internal Revenue Service while granting it financial autonomy.

  • To ensure achievement of the program targets for 2000, a tight lid will continue to be required on current expenditure, including the wage bill. The mission noted that it would be prudent to wait until the customs reform has begun to generate additional revenue before agreeing on a wage increase for 2000. The authorities believed that delays in agreeing on the wage increase (generally granted at the beginning of each year) would disrupt social peace, and stated that they would aim at keeping the general wage increase below 4 percent.

  • Finally, it will be important to closely monitor developments in local and regional governments, particularly in view of the recent experience of debt and debt-servicing limits established by the treasury having been exceeded by large margins in some municipalities. To ensure better enforcement, in October the Bolivian Congress approved a law reducing local government current outlays from 60 percent to 40 percent of their own revenue. The process of fiscal decentralization is expected to be reassessed in the context of a World Bank loan presently under preparation.

16. The monetary program for 2000 assumes that currency issued will grow broadly in line with nominal GDP, and contemplates a small increase in the net domestic assets of the central bank, consistent with the inflation and NIR objectives of the program (Table 5). Within the context of the monetary program, the authorities expect to provide up to US$25 million for the restructuring of bank loans, mostly to the agricultural sector. The program includes a downward adjustment in the NIR target (up to US$35 million) in the event of further weakness in the behavior of domestic currency (measured by the difference with program assumptions).

Table 5.

Bolivia: Monetary Survey

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

Stocks measured at each year’s accounting exchange rate.

Includes National Financier a Boliviano.

M3 includes special certificates of deposits (CDD) held by the depositors of two banks closed in November 1994, and credit lo the private sector includes that of two liquidated banks. Since 1998, M3 includes CDDs and loan portfolio from the bank liquidated in December 1997.

Weighted average; on U.S. dollar instruments.

Denominated in U.S. dollars, which account for more than 90 percent of bank deposits and loans to the private sector.

17. In the discussion about the financial position of the banking system (Table 6 and Figure 2), the authorities remarked that most of the recent deterioration in the ratio of nonperforming loans to total loans had taken place during the first half of 1999, and that the ratio had remained broadly stable in the most recent months. There was agreement that particularly strong prudential ratios were needed in the Bolivian banking system, given its high degree of dollarization.6 Although banks generally maintain a long position in foreign-denominated net assets, most customers are not hedged: about two-thirds of credit in foreign currency is estimated to have been extended to borrowers with no regular source of income in foreign currency. Therefore, it would be prudent over time to raise provisioning requirements on these loans above the requirements that apply to other loans. In any event, the authorities were confident that steady implementation of the five-year program initiated in September 1999 to raise provisioning requirements on all loans will go a long way toward strengthening the banking system. To consolidate the banking system further, the authorities have introduced in congress a draft financial sector law, aimed at establishing a comprehensive bank resolution framework and a deposit insurance scheme covering deposits up to US$10,000. This proposed legislation is expected to be enacted by March 2000.

Table 6.

Bolivia: Commercial Bank Performance Indicators

(In percent)

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Source: Superintendency of Banks.
Figure 2.
Figure 2.

Bolivia: Monetary and Financial Sector Indicators, 1994-1999

Citation: IMF Staff Country Reports 2000, 040; 10.5089/9781451805710.002.A001

Sources: International Financial Statistics and Central Bank of Bolivia.

18. The authorities intend to continue depreciating the boliviano against the U.S. dollar in 2000, with a view to reversing the small real effective appreciation that has occurred this year (Figure 3) and achieving an additional 3 percent real effective depreciation. The authorities noted that the high degree of dollarization of the economy limits the effectiveness of exchange rate policy as an instrument for improving external competitiveness. They are also concerned that too rapid a pace of depreciation would adversely affect the financial position of the banking system. The authorities concurred with the staff that flexibility in wage determination was essential to help the economy adjust to macroeconomic shocks, particularly in the context of Bolivia’s present crawling peg regime, and to that effect they intend to proceed with a reform of labor regulations in 2000 (see below). The staff also noted that it was important to refrain from granting large increases in the minimum wage (in recent years, the minimum wage has been raised by 10 percent a year on average).

Figure 3.
Figure 3.

Bolivia: Indicators of External Vulnerability, 1990-1999

Citation: IMF Staff Country Reports 2000, 040; 10.5089/9781451805710.002.A001

Source: International) Financial Statistics and Fund staff estimates.1/New weights, based on trade 1996-98.

19. On external trade policy, the staff commended the authorities for firmly resisting the calls for increased protection that mounted in the wake of the devaluation of the Brazilian real. Bolivia maintains an open exchange and trade system, with tariffs of 5 percent on capital goods and 10 percent on all other goods, and virtually no nontariff barriers. It has a rating of 4 on the Fund’s Index of Aggregate Trade Restrictiveness (the index ranges from 1 to 10, with 10 for the most restrictive countries). The main impediment to a more transparent trading system has been the existence of cumbersome customs administration procedures, and the ongoing reform is expected to significantly help improve the flow of goods through customs. Bolivia is a member of the Andean Group and an associate member of MERCOSUR, although it does not apply the common external tariff of either of these trading arrangements.

B. Structural Reforms and Poverty Reduction Strategy

20. The authorities are committed to deepening their structural reforms in 2000. The main reforms to be undertaken involve completing the privatization program, modernizing the tax system, introducing more flexibility in labor regulations, and improving transparency as follows:

  • Completing the privatization program. Following the sale of the YPFB refineries in November 1999, the government intends to privatize the remaining assets of YPFB, including the storage and distribution facilities and the service stations, during 2000. It also plans to sell its small remaining assets in the electricity, mining, and food processing sectors. As noted, the sale of the state smelting company Vinto was completed in December 1999, and the program also includes benchmarks for further privatization in 2000.

  • Modernizing the domestic tax system. In line with the recommendations of FAD technical assistance, the authorities intend to introduce a personal income tax, with two rates and broad coverage (minimum income threshold set at about four times the minimum wage); eliminate the cascading transaction tax; raise the nominal VAT rate by 2-3 percentage points from its present level of 13 percent; and establish a tax on gross assets creditable against the corporate income tax. The authorities intend to request additional FAD technical assistance to help design and implement the reform, including in the drafting of the tax bill and regulations. The draft reform law is expected to be introduced in congress in October 2000 for implementation by January 1, 2001.

  • Making labor regulations more flexible. The authorities intend to submit new draft labor legislation to congress by October 2000. The new law will aim at modernizing labor regulations, which currently are excessively complex; increase the cost of labor through high hiring and separation costs, excessive mandatory overtime pay, and lack of flexibility in the use of fixed-term contract; and discriminate against women.

  • Improving transparency. Several actions are being implemented to improve transparency and reduce corruption. The ongoing reform of customs is expected to go a long way toward reducing political patronage and introducing greater transparency in that area. Also, in October 1999, congress approved a new statute of the civil servant aimed at promoting professionalism, including through the establishment of a recruitment and promotion system based on merit, and discouraging absenteeism. Further progress is also being made in the reform of the judicial system, as described in paragraph 26 of the memorandum of economic and financial policies.

21. The authorities recognized that, although they had intensified their efforts in the fight against poverty in recent years, much remained to be done in this area, and therefore indicated their intention to strengthen and re-focus their strategy (Box 1). The discussions centered on the following points:

  • Despite tight budget constraints, social spending has risen in recent years (from 12½ percent of GDP in 1995 to over 16 percent in 1999) and is projected to rise further in 2000 (Table 7). However, the authorities recognized that a significant part of the increase registered in recent years reflected the rise in pension outlays, and that other categories of social spending had risen only moderately (from 11 percent of GDP in 1995 to l2½ percent in 1999).

  • Progress has been made under the social indicators agreed upon in the context of the HIPC Initiative. Preliminary data indicate that in 1998 the outcomes under half of the social indicators were met, and there was progress toward most of the others (Table 8). The authorities noted that some of the indicators had been poorly defined, and they made suggestions for changes, which are expected to be incorporated in the design of the indicators under the enhanced HIPC Initiative.

  • In 2000 and over the medium term, the authorities intend to step up the fight against poverty. One of the challenges is to ensure a budgetary reallocation away from tertiary education and toward primary and secondary education, which will require raising the tuition fees charged by universities. The authorities also intend to adopt policies specifically aimed at reducing poverty in the Altiplano and other poverty- stricken areas of the country, including in the form of programs for alternative crop development in areas formerly under coca cultivation.7 The authorities believe that, to reinforce the fight against poverty, emphasis needs to be placed inter alia on road building and maintenance, to ensure better transportation links between the various parts of the country and with neighboring countries, thus facilitating export growth and economic development. As stated in the most recent Public Expenditure Review of the World Bank, there is also a need for an internal reorganization and a sustained increase in resources allocated to health care.

  • To ensure a more targeted fight against poverty, a household survey is being conducted with World Bank support, the results of which are expected to become available in January 2000. This information would help the authorities better define priorities, in the context of the national dialogue they plan to conduct with civil society in early 2000.

Bolivia: Poverty Assessment

Despite the steady implementation of macroeconomic stabilization and structural adjustment programs since 1985, poverty remains widespread in Bolivia.

  • Household surveys conducted in 1993 and 1995 showed that 70 percent of the population was living under poverty conditions (with monthly income of less than US$56 per person), with 50 percent living under extreme poverty conditions. This represented some improvement compared with 1976, when a census indicated that 86 percent of the population lived in poverty conditions. A new survey is being conducted to assess progress in recent years, and its results are expected to become available in January 2000.

  • The poverty situation is particularly severe in rural areas, which account for three-fifths of the country’s poor (nearly 90 percent of the population living below the poverty line and 80 percent living in extreme poverty). The large majority of the poor rural population belongs to indigenous groups.

  • Income distribution is highly skewed, with the top 20 percent income group accounting for 53 percent of total income and the bottom 20 percent accounting for just 5 percent in 1997, only a slight improvement from 1990.

The causes for high poverty rates include still relatively low real GDP growth, low levels of education, and a lack of redistributive public policies.

  • Although annual real GDP growth averaged 4.2 percent over the past decade, the average annual per capita real GDP growth rate was only 1.8 percent. Insufficient infrastructure and labor market flexibility have hindered competitiveness and dampened private sector investment. Investment rates remained low during 1986-96 (14½ percent of GDP on average), but have risen to about 20 percent in recent years, reflecting foreign direct investment in the newly capitalized state enterprises and in the mining and energy sectors.

  • High poverty rates coincide with low levels of education. Only about half of entering students complete the full primary cycle. Adult illiteracy remains high by regional standards, especially in rural areas. Substandard levels of education and high drop-out rates perpetuate low labor skills and low productivity.

  • Public policy has done little to smooth income distribution. The tax system lacks progressivity (there is no personal income tax in Bolivia) and much of government social spending fails to reach the poorest groups of society. A disproportionate share of public spending on education goes to universities. The government’s present policy agenda (Plan Operativo de Acción 1997-2002), however, places greater emphasis on poverty reduction.

Movements in a variety of social indicators suggest that some progress has been achieved in poverty reduction in recent years.

  • Between 1994 and 1998, infant and child mortality rates fell by 10 percent and 20 percent, respectively, with the implementation of programs aimed at providing basic care at birth, early childhood vaccinations, and treatment for respiratory disease.

  • Primary and secondary school enrollment rates have been rising in recent years (gross enrollment in primary and secondary schools rose from 76.9 percent in 1990 to 89.7 percent in 1998), as well as the share of homes with access to electricity and basic sanitary services.

  • Spending on education has roughly doubled as a share of GDP during the 1990s, mainly reflecting increased teachers’ salaries, and now compares favorably with regional standards. However, a disproportionate share (one- fourth) is still directed toward universities.

Over the near to medium term, the higher investment to GDP ratios should help foster stronger economic growth and reduce poverty. Also, with the ongoing migration to urban centers, the costs of providing social services should be lowered, as the provision of social services in rural areas is costly, particularly in the Altiplano, where habitat is very dispersed.

Table 7.

Bolivia: Social Spending1/

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Source: Ministry of Finance.

Includes public expenditure on education, health, rural development, basic infrastructure, and pensions.

Teachers’ salaries.

Includes government contributions to the National Housing Fund and private pension funds, and social spending by regional governments.

Table 8.

Bolivia: Selected HIPC Social Policy Actions and Outcome Indicators, 1997-2000

(In percent, unless otherwise indicated)

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Source: Unidad de Analisis Politico Econdmica

All targets for 1997-2000 were established in September 1997, at the time of the decision point for the intial HIPC initiative.

In the framework of the Mother and Childhood National Insurance Program (SNMN).

Mostly vaccinations for polio, DPT, measles, and BCG.

C. Balance of Payments and Medium-Term Outlook

22. As noted, the external current account deficit is projected to widen to 6.8 percent of GDP in 2000(Table 9). This is based on an increase in imports of 7 percent, as economic activity and domestic demand pickup. Exports in U.S. dollar terms would rise by over10 percent, mainly due to an increase in the volume of gas exports to Brazil as the pipeline comes into full operation, and to an increase in the price of gas under existing contracts with Brazilian importers. Net factor income outflows are projected to rise in 2000, reflecting the repatriation of profits on investments undertaken in recent years. In the capital account, foreign direct investment inflows are expected to continue at levels comparable to those in 1999, and would be related mainly to commitments for investment projects in the petroleum and mining sectors.

Table 9.

Bolivia: Summary Balance of Payments, 1995-2000

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

Excludes grants for debt reduction operations.

Includes private transfers and other services. Beginning in 1997, includes communication services for which data were previously not available.

Includes portfolio investments, commercial bank short-term capital flow’s, and other private capital flows.

In months of imports of goods and services in the following year.

Official transfers and loans to public sector, excluding HIPC debt relief

23. Medium-term projections prepared by the staff, which assume the maintenance of prudent financial and macroeconomic policies, point to a strengthening external current account position (Table 10). The overall position of the combined public sector is projected to improve over the medium term, to help free resources for the private sector and thus contribute to the development of private sector activity and of the domestic capital market. This will require improving civil service efficiency while modestly raising general government revenue over the medium term, to help accommodate new social expenditure and the costs associated with the reform of the civil service undertaken with World Bank assistance

Table 10.

Bolivia: Medium-Term Balance of Payments, 1998-2006

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

Excludes grants for debt reduction operations

Includes private transfers and other services.

Includes portfolio investments, commercial bank short-term capital flows, and other private capital flows

In months of imports of goods and services in the following year.

Official transfers and loans to public sector, excluding HIPC debt relief.