Bolivia: Second Review Under the Stand-By Arrangement and Request for Waiver of Applicability and Modification of Performance Criteria—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Bolivia
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International Monetary Fund
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Publication Date:
14 Jan 2004
eISBN:
9781451805703
Language:
English
Keywords:
ISCR; CR; CPI inflation rate; September; financial system deposit; lender of last resort facilities; deficit; central bank of Bolivia; current account; U.S. dollar; banking system; debt service
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Bolivia’s pursuit of structural reforms has begun to yield results despite the difficult social and political context. The fiscal performance under the program needs to be substantially strengthened. The recent passage of the informal corporate workout law represents a substantial advance in financial and corporate restructuring. Executive Directors are in agreement with the government on the approach to reduce banking system fragility. To sustain economic growth, the pace of structural reforms has to be invigorated. Firm implementation of the program can achieve its goals.

Abstract

Bolivia’s pursuit of structural reforms has begun to yield results despite the difficult social and political context. The fiscal performance under the program needs to be substantially strengthened. The recent passage of the informal corporate workout law represents a substantial advance in financial and corporate restructuring. Executive Directors are in agreement with the government on the approach to reduce banking system fragility. To sustain economic growth, the pace of structural reforms has to be invigorated. Firm implementation of the program can achieve its goals.

I. Background and Recent Developments

1. Despite calmer social conditions, the political situation remains fragile. The conservative Nueva Fuerza Republicana party recently joined the ruling coalition, giving the government a two-thirds majority in Congress. However, the opposition remains vocal, and the popularity of the President low. Public resistance—including a recent countrywide series of strikes, demonstrations and road blocks—continues to complicate the prospects for a rapid decision on the routing of the LNG projcct.

2. Nonetheless, the authorities have made important progress in implementing their structural agenda in recent months. In August, Congress approved the new tax code—a key element of the fiscal program—and the informal corporate workout law, both of which were September benchmarks under the program. Congress also approved a tax bill that expands the tax base, including for petroleum products, and a tax regularization scheme. Consideration of the formal bankruptcy law has been delayed to 2004 as explained below.

3. The main macroeconomic developments are generally encouraging:

  • Economic activity is picking up. After a weak first quarter, partly reflecting the tragic events of February, preliminary indicators point to an acceleration of GDP growth in the second quarter consistent with the annual objective of 2.9 percent. The rebound is explained by an exceptional soybean harvest and an increase in agricultural, manufacturing, and hydrocarbon exports.

  • Inflation remains low. Despite an increase in the 12-month inflation rate to 3.8 percent in August, reflecting in part temporary increases in some prices of basic staples, inflation is expected to come down as programmed to around 3 percent by end-year.

  • The external accounts have strengthened. The current account deficit in the first half of the year narrowed to 1 percent of GDP, reflecting a 10 percent decline in imports and a modest overperformance of export growth. The drop in imports is partly explained by a real effective depreciation of the exchange rate, estimated at almost 10 percent during the first seven months of 2003 (Figure 1). The strength of exports has reflected rising agricultural exports, and favorable developments in metal and hydrocarbon prices. With neighbors’ currencies appreciating significantly, the central bank has slowed the nominal depreciation of the boliviano against the U.S. dollar to an annualized rate of crawl of 4½ percent since end-2002.

Figure 1.
Figure 1.

Bolivia: Real Exchange Rate and Quality of Bank Portfolio, 1996-2003

Citation: IMF Staff Country Reports 2004, 005; 10.5089/9781451805703.002.A001

Sources’ International Monetary Fund, International Financial Statistics; and Fund staff estimates.1/ Increase is an appreciation. Based on exchange rate data available as of end-February 2003, and staff projections for CPL2/ Weights based on trade with ten countries, excluding trade related to natural gas, in 1996-973/ Data prior to January 2000 have been adjusted to exclude loans that are less than 30-days past due, based on the average ratio of such loans to total past due loans during January-September 2000.

4. However, fiscal performance has fallen short of the program’s objectives. The deficit rose to 3 percent of GDP in the first semester, half a percentage point of GDP higher than targeted, mainly reflecting lower-than-expected imports and, hence, import-related tax revenues. As a result, the deficit and domestic financing performance criteria (PCs) for end-June were not observed. Preliminary data point to further slippages in July-August with the cumulative deviation during January-August estimated at 1 percent of GDP. Shortfalls in external financing were offset, in part, by increased recourse to domestic financing.1

5. While fiscal performance has been weak, in other respects the program has remained broadly on track. All monetary and external debt performance criteria for end-June were met with large margins. The build up in NIR. reflected improved trade performance, and commercial banks’ continued holdings of excess reserves at the central bank.

6. The financial situation has stabilized although severe vulnerabilities remain in the highly dollarized banking system. Deposits have recovered since the large withdrawals of mid-February, increasing by 4½ percent by end-August. During the same period, disposable reserve coverage of bank dollar deposits increased from 25.5 percent to 31.2 percent. Nonperforming loans remained stable at 19.3 percent at end-July (20 percent at end-March). In recent weeks, the improved conditions have been reflected in a renewed appetite for government securities at lower interest rates.

II. Policy Discussions

7. The SBA has helped to provide breathing room to develop the structural and financial reforms needed for sustained growth and poverty reduction, but major difficulties remain. Despite the implementation problems associated with the difficult political and social situation, progress has been made in establishing a stable economic and financial environment, including by approving key pieces of legislation for the fiscal and financial sectors. However, serious slippages on the fiscal front in 2003, continued social opposition to the implementation of adjustment policies, and resistance to the construction of the pipeline for LNG exports to North America constitute major obstacles for the achievement of a broader set of objectives in the context of a PRGF.

8. Discussions for the completion of the second review under the SBA centered on: (i) corrective measures to minimize the fiscal deviations in 2003; (ii) a macroeconomic framework for the medium term that would be consistent with a sustainable fiscal and external position while taking into account the continued social difficulties faced by the authorities; and (iii) the implementation of financial and corporate restructuring.

A. Medium-Term Macroeconomic Framework

9. Estimates of the fiscal and growth impact of the LNG project have been revised to reflect new information on the likely scope of the project (Box 1). The project is now expected to include a liquids as well as a gas component, implying a larger boost to output and fiscal revenues, particularly after the expected completion of the project in 2007. Foreign savings and investment are expected to increase substantially during the construction phase of the LNG project, but the impact on growth would be felt mainly after 2008 once exports begin, given the enclave nature of the project. The authorities stressed that, given the advanced stage of the negotiations with the private consortium, they expected the construction of the pipeline to begin in mid-2004. They also indicated that they would announce a port of exit once the purchase-sale agreement is reached between the investment consortium and the buyer, which is expected by end-year. A large public relations campaign has been launched to create public awareness of the benefits of the project.

A01ufig01

Bolivio: NPV of debt as a ratio of GDP

Citation: IMF Staff Country Reports 2004, 005; 10.5089/9781451805703.002.A001

A01ufig02

Bolivia: DSA with Future Pension Liabilities (NPV of debt as a percent of GDP)

Citation: IMF Staff Country Reports 2004, 005; 10.5089/9781451805703.002.A001

10. The authorities have set a strategic objective of reducing the fiscal deficit to 4 percent of GDP by 2007. This is a more gradual adjustment than envisaged in the first review. The adjustment path during 2004-06 would be consistent with this objective. Senior officials indicated that a more rapid adjustment was not feasible in light of the fiscal deviations in 2003 and the difficult social context. The staff believes that this revised deficit projection would still be consistent with a sustainable fiscal and external position, provided that it is financed on largely concessional terms and in the context of the timely construction of the gas pipeline. Under this scenario, the public debt to GDP ratio, in NPV terms, would stabilize in 2005 and decline steadily thereafter, particularly once gas exports to North America would come on stream 2 Moreover, after including the stock of pension obligations into the stock of debt, the decline in public debt is even more apparent and immediate.3 4 However, as discussed in Appendix V, in the absence of the LNG project, the public debt indicators would not be sustainable.

11. The authorities will request strong support from the international community for their medium-term program at the upcoming CG meeting. In addition to requesting sufficient concessional resources (some 1 ½ percent of GDP per year) to finance the bulk of their deficit, they plan to request some 1½ percent of GDP in annual external grants to fund pro-poor programs that would place Bolivia in a position to meet the millennium initiative goals by the year 2015. Under this scenario, poverty-reducing spending would reach around 16 percent of GDP by 2006, well above the targets until recently envisaged, notwithstanding the shortfalls observed until 2003.

Table A.

Macroeconomic Framework

(In percent of GDP, unless otherwise indicated)

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Sources: Ministry of Finance; and Fund staff estimates.

The projections include (i) a large mining project (San Cristobal) which will start operations in 2006, and (ii) the LNG project for gas exports to North-America, which will start operations by mid-2008.

Imports associated with private hydrocarbon investments. From 2008 onwards, LNG exports start.

End of period.

B. Fiscal Policy

12. The authorities have recently taken a number of important actions aimed at containing the deficit at a maximum of 7 percent of GDP in 2003 (compared with a targeted deficit of 6½ percent) and set the basis for continued fiscal adjustment in 2004. With firm implementation, these measures should yield 0.6 percent of GDP during 2003, sufficient to compensate for a large part of the fiscal overruns that have occurred so far this year, and have a significantly larger impact in 2004 (with an expected yield of 1.0 percent of GDP). However, the deficit for 2003 as a whole would still be 0.6 percent of GDP higher than envisaged at the time of the first review, given the observed deviations during the first half of 2003 and the continued adverse impact of high international oil prices on revenues and lower imports.

13. Revenue measures include the following:

  • The tax code, a key element of the reform agenda, was approved in August 2003. The new tax code significantly strengthens the enforcement capabilities of the tax and custom agencies (yield of 0.3 percent of GDP in 2004). In particular, the tax code (i) facilitates the prompt resolution of tax disputes through administrative procedures, with legal recourse available only after compliance with tax obligations (currently disputes typically end up unresolved for several years in the court system); (ii) significantly stiffens penalties for tax evasion; (iii) allows the seizure of illegally imported merchandise in the interior of the country (currently this procedure can only be applied at the ports of entry); and (iv) provides for the prompt sale of seized merchandise. These added enforcement powers are expected to be instrumental for the successful implementation of several administrative improvements planned for the rest of 2003 and in 2004, including new anti-counterfeit invoice requirements and the introduction of a new tax payer registry. Supporting regulations are scheduled to be issued in November (PC) for the third review, 90 days after the tax code’s publication in the official gazette.

  • A tax regularization scheme was approved in August 2003. The scheme involves regularization of illegal vehicles and a tax amnesty that forgives past penalties if tax payers subscribe to one of three payment options. This scheme is expected to yield 0.6 percent and 0.1 percent of GDP in 2003 and 2004, respectively. While the staff expressed concerns about the magnitude of the yield of this scheme and possible moral hazard problems, the authorities expressed confidence that, together with the new tax code, it would raise revenues in 2003-04 above the estimated yields, without unduly jeopardizing prospects for tax compliance in the future. The issuance of the supporting regulations are a prior action.

  • A set of modifications to the tax bill (Law 843) was also approved in August 2003. The new law (yield of 0.1 percent of GDP in 2003 and 0.6 percent of GDP in 2004) eliminates loopholes; expands tax bases (special oil tax on a broader range of oil derivatives, corporate income tax on cooperatives and other financial institutions, and on business services provided by nonresidents); limits the deduction of corporate income from the transaction tax; and authorizes the government to issue a decree limiting the deduction of VAT invoices from the payroll tax by decree. The implementing regulations are scheduled to be issued by end-September (prior action).

14. The authorities intend to take the following steps to control expenditures:

  • Contingencies to cut capital spending by about 0.4 percent of GDP during September-December would be activated (prior action). This cut is in addition to the 0.6 percent of GDP reduction in investment activated earlier in the year. As before, priority will be given to investment projects financed by grants or concessional loans, and those that are poverty reducing.

  • Pensions. The authorities are in the process of reducing pension costs through administrative efforts, controlling fraudulent claims, and strictly enforcing eligibility criteria.

15. In addition, the authorities intend to adopt measures to further contain the deficit in 2004 and beyond. On the expenditure side, they intend to constrain growth of the wage bill broadly in line with inflation. On the revenue side, they are planning to make the price of gasoline at the pump flexible in early 2004 to reflect market developments, so as to prevent potential losses should international prices be higher than anticipated. Retail prices of gasoline and diesel have been fixed in local currency since July 2000.

C. Monetary and Exchange Rate Policy

16. Monetary policy will continue to aim at strengthening the central bank’s international reserves. The authorities envisaged further increasing the disposable reserve coverage of deposits in the banking system, while containing inflationary pressures by tightening interest rates if necessary. The central bank would continue to provide collateral- based lender of last resort facilities to the financial system.

17. The authorities signaled their intention to preserve the recent gains in competitiveness. The recent gains have placed the real effective exchange rate close to its most depreciated level since 1996. Preliminary results of a joint study by the staff and the authorities suggest that at this point there is no substantial misalignment of the real effective exchange rate and that concerns about Bolivia’s competitiveness appear to be more related to structural and institutional factors, several of which are being addressed under the program (corporate restructuring, for example). Nevertheless, while the authorities intend to maintain the exchange rate crawl for now, they are developing a strategy to introduce more flexibility into the exchange arrangement over the medium term.

D. Financial and Corporate Policies

18. The recently approved corporate informal workout law is an important step toward establishing a suitable framework for financial and corporate restructuring. There are, however, several concerns, particularly whether the framework provides sufficient protection for the interests of secured creditors. The regulations, which will be issued by end- September, will address some of these concerns (prior action for completion of review). Remaining difficulties will be identified by initially applying the new informal workout procedures to a pilot sample of firms. Experience gained will provide the basis for possible amendments to the existing Commercial Code by mid-2004. The authorities believe that this approach will provide the basis for a comprehensive and modern formal bankruptcy mechanism without needing to formally approve the bankruptcy law (a structural benchmark for September), but have agreed to revisit the issue next year if warranted.

19. The authorities have established a high level team to address critical issues in the corporate and financial sectors and are developing an action plan to deal with weak banks by end-October 2003 (Box 2). The plan would be guided by general principles that avoid any direct or indirect bailout to shareholders and minimizes losses associated with the use of public funds. The authorities are currently designing a framework for specific rules of access, disbursement, and accountability. The authorities aim to establish a fund to support bank restructuring by end-October with World Bank support, and a fund for corporate restructuring by end-December with support from the Andean Development Fund (CAF). Although the CAF recently approved a loan of US$75 million, progress in the establishment of these funds has been slower than planned, ruling out the assessment of the fiscal implications which had earlier been envisaged by the time of the second review.

20. Staff noted that, despite generally adequate prudential norms and practices, there were deficiencies that need to be addressed in the context of context of corporate restructuring. One particular issue concerns the approach used to upgrade restructured loans following restructuring. The staff suggested that such upgrading should take place only after a reasonable period of demonstrated payment performance (six months). In addition, the capacity of the Superintendency of Enterprises is weak and needs to be strengthened substantially to carry out workouts among a pilot sample of firms.

E. PRGF Issues

21. The authorities will issue a draft PRSP in September, ahead of the Consultative Group (CG) meeting scheduled for October 8. This draft will reflect preliminary input from civil society. The final report will include the CG outcome and further input from the consultation process started in September.

22. Discussions on 2004 and the medium term are expected to continue after the CG meeting. In particular, firm agreements on the deficit and other fiscal targets will depend on the levels of available financing, and in particular of grants and concessional loans. The need for additional fiscal measures would be assessed in this context.

F. Program Monitoring

23. Quantitative performance criteria and reviews. Quarterly reviews will continue throughout the remainder of the SBA. The authorities have requested upward revisions to the performance criteria for: (i) end-September with respect to the fiscal deficit, net domestic financing of the public sector, central bank net credit to the non-financial public sector, and net domestic assets of the central bank; and (ii) end-December with respect to the fiscal deficit and net domestic financing of the public sector. The proposed modification of PCs is consistent with the revised macroeconomic framework. Waivers of applicability are also requested for the PCs for end-September, for which data are not available.5

24. Prior actions and structural performance. Benchmarks on the approval of the tax code and the informal workout law were met ahead of the end-September date. The formal bankruptcy law is not expected to be approved by end-September. Some elements of the law are expected to be addressed through amendments to the Commercial Code in 2004 (structural benchmark). Prior actions for the second review are issuing the implementing regulations for the tax bill amending law 843, tax regularization scheme, the informal workout law, and activating spending cuts equivalent to 0.4 percent of GDP. Structural performance criteria for the third review involve issuing the tax code regulations and approving an action plan for weak banks agreed with the Fund.

G. Program Risks

25. The program remains subject to considerable risks related to the difficult political environment, the need for fiscal adjustment, and financial system fragilities.

  • Despite the recent enlargement of the ruling coalition, the absence of a broad consensus for the economic program continues to pose a major political risk. While the government has recently been successful in advancing tax legislation, there seems to be little room for additional adjustment measures.

  • Prompt implementation of the public investments cuts and the supporting regulations to the tax code and the tax bill will be critical to reverse fiscal slippages in 2003.

  • Failure to implement reform measures designed to bolster growth and to arrest fiscal slippages would seriously jeopardize prospects for growth and poverty reduction over the medium term. Most important, it will be critical to move ahead with the LNG project in a way that maximizes the long-term economic benefits to Bolivia.

  • The continued vulnerability of the banking system, and the weak financial conditions of a few banks, represent a major risk to the program both in the near and medium term, especially given the high degree of dollarization of financial intermediation.

III. Staff Appraisal

26. The Bolivian authorities’ pursuit of structural reforms has begun to yield results despite the difficult social and political context. There are indications that growth is beginning to pick up, while financial market conditions have stabilized. The approval of the tax code, legislation to broaden the tax base, and informal corporate workout law in recent months represents important progress toward restoring macroeconomic stability and establishing the basis for sustained medium-term growth.

27. Nevertheless, the fiscal performance under the program needs to be substantially strengthened. In particular, it is crucial that the agreed compensatory fiscal measures be promptly implemented to contain the deviation from the fiscal program in 2003 and provide the basis for further fiscal consolidation in 2004 and beyond. Sustained fiscal adjustment over the medium term, while protecting pro-poor spending and minimizing the use of nonconcessional resources, will be essential to ensure a viable medium-term fiscal situation.

28. The recent passage of the informal corporate workout law represents a substantial advance in financial and corporate restructuring. Issuing the supporting regulations and strengthening the capacity of the Superintendency of Enterprises to implement workouts among a pilot sample of firms will also be critical to further advance the corporate restructuring process.

29. Staff and the authorities were in broad agreement on the approach to reduce banking system fragility. To fully restore financial stability, the authorities are developing a detailed action plan to address the problem of weak banks. In parallel, the strengthening of banking supervision and prudential norms, and an enhanced capacity to comprehensively assess credit risk, are needed to minimize risks to the health of the banking system.

30. In order to sustain economic growth, the authorities will have to invigorate the pace of structural reforms and move ahead, as soon as possible, with the LNG project. The official exploitation of Bolivia’s rich hydrocarbon resources is essential for long-term growth and fiscal prospects and to lowering poverty.

31. While substantial risks to the program remain, the authorities are taking steps to address concerns. In particular, while the vulnerabilities associated with the narrow support for the program persist, the government has successfully enlarged the ruling coalition. Fiscal performance should be bolstered by the corrective measures now being implemented by the authorities. Vulnerabilities in the financial sector are being addressed, in part, by putting in place a strategy for corporate and financial restructuring.

32. Notwithstanding the risks, staff believes that with firm implementation the program can achieve its goals. The staff therefore recommends completion of the second review and the approval of the authorities’ request for waivers of applicability and modification of performance criteria for September and December.

Gas Sector Development and its Main Macroeconomic Effects

The hydrocarbons sector is of prime importance for Bolivia’s economy. Following the privatization of the sector in 1997, the gas market has received about US$2.5 million between 1997 and 2002. The investment has mainly been channeled to exploration of gas fields, extraction of gas and condensates, and construction of gas pipelines to Brazil. The exploration activities have raised Bolivia’s natural gas proven reserves from 5.7 trillion cubic feet (Tcf) in 1997 to 52.3 Tcf by 2002.

The hydrocarbons sector is an “enclave” in the sense that it uses negligible domestic resources. Its main links to the economy are through the fiscal accounts via the revenues from royalties and taxes, and through its effects on the balance of payments—similar to a foreign transfer, (i) For a growth scenario involving natural gas exports from the LNG project by mid-2008, fiscal revenues through 2015 are projected to be around 2 percent of GDP per year, (ii) The development of the gas sector will have a sizeable impact on the balance of payments. The development phase of large gas projects involves large inflows of FDI, and substantial amounts of imported capital- intensive goods; the latter tends to generate large current account deficits without significant effects on the growth performance of the economy.1 Once the projects become fully operational, rising gas and condensates exports of more than US$500 million per year would improve the current account and boost GDP growth.

A01box01ufig01

Bolivia. Real GDP Growth

Citation: IMF Staff Country Reports 2004, 005; 10.5089/9781451805703.002.A001

A baseline scenario would include the following export-oriented hydrocarbon projects for the period 2003-15 (note that all projects are measured in millions of cubic meters of natural gas per day, MMm3/day): (i) exports to Brazil, currently at around 16MMm3/day, will reach 30MMm3/day by 2010 and remain at that level thereafter, (ii) exports to Argentina and additional exports to Brazil (Madrejones and Cuiaba), currently at 1.1MMm3/day, will reach 5.8MMm3/day by 2008 and rise to 19MMm3/day by 2015; remain at that level thereafter, (iii) the LNG project begins exports in mid-2008, reaching full scale by 2009 at 26.5MMm3/day.

The Pacific LNG project will develop the Margarita field for natural gas and condensates exports to North America, and will construct pipeline capacity to ship the gas to the Pacific coast. The total cost of the project, including shipping and reception facilities in Mexico, is on the order of US$5.1 billion. The most likely scale of operations is 25MMm3/day of gas exports, and 35 million barrels per day (MMBbl/day) of condensate. Exports are expected to start by mid-2008 and full export capacity should be reached by 2009. Over the 20-year contract term, the project should produce 8 to 10 Tcf of gas (20 percent of Bolivia’s current proven and probable reserves), and up to 50GMMBbl of associated liquids (condensate and LPG) for exports to the Asian market.

1 The construction and development of large gas projects are highly capital intensive generating little employment and using limited national inputs. Some domestic industries related to exploration activities and business services will grow at a relatively faster pace during the development and construction phase of the projects.

Corporate and Financial Restructuring

The Bolivian financial sector has been under stress for a number of years, with a deterioration in the loan portfolio reflecting the poor ability of highly indebted corporations to generate cash-flow. The recent FSAP study found that banks’ balance sheets had been adversely affected by a decline in deposits arising from deposit runs and a deterioration in credit quality linked to insolvency problems in the corporate sector. In order to address these problems, Congress approved, in August 2003, a law on informal corporate workouts that facilitates out-of- court resolution through creditor committees. In addition, the authorities are developing a framework, in collaboration with the World Bank and Andean Development Corporation, for the use of public funds for bank restructuring and corporate workouts. Bolivia’s action plan for the banking system will be guided by the following general principles;

  • Inclusion of broad criteria for the operation of a bank restructuring fund using publicly guaranteed resources;

  • Identification of viable and unviable banks based on stress tests that examine the impact on solvency and key financial indicators over a three year period;

  • Prohibition on the use of public funds for the direct or indirect bailout of a bank’s shareholders;

  • Limits on the use of public or publicly guaranteed resources to undercapitalized but viable banks, and to support the resolution of unviable banks as envisioned by the banking law, including through purchase and assumption operations;

  • Developing a contingency component to address an unforeseen systemic liquidity run and/or the failure to attract an interested party when a purchase and assumption operation is being arranged;

  • Avoiding undue delay of action on unviable banks to reduce the risk of increasing the fiscal cost of the solution, reduction in asset value, and increasing the chances of a deposit run;

  • Communicating to the public in a transparent manner, whenever the use of public resources is required—coupled with a clear accountability framework;

  • Developing alternative solutions to unviable banks that are consistent with the current legal framework—clearly identifying the fiscal implications; and

  • Developing options for the strengthening of viable but undercapitalized banks, combined with a timetable for implementation.

Table 1.

Bolivia: Selected Economic and Financial Indicators

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

Proposed program for 2003.

Includes, actual and anticipated assistance under the HIPC initiative, using the HIPC accounting convention. External financing for 2002 includes a US$ 100 million (1.3 percent of GDP) transfer of foreign liabilities from the central bank to the central government in 2002.

External debt indicators reflect assistance under the original and enhanced HIPC Initiatives, and beyond HIPC relief; includes obligations and debt with public guarantee. Domestic debt is the nonfinancial public sector debt, excluding bonds issued for the recapitalization of the cent.

Yields are those of the latest auction held; July 30 (July 24 for the commercial bank lending rate in U.S. dollars) for 2003.

Includes grants for debt-reduction operations in effect prior to July 2000 and rescheduling operations under the original HIPC framework.

Equal to central bank’s gross official reserves plus commercial banks’ liquid asset requirement (RAL) held overseas; excludes reserves from Reserve Fund (FLAR), End-2002 figures reflect an increase of US$45 million in the valuation of holdings of gold; import coverage for the folic.

Ratio of central bank gross disposable reserves (excluding gold holdings) plus commercial banks’liquid asset requirement (RAL) held over to dollar deposits in the banking system.

Official (sell) exchange rate,; September 12 for 2003.

Weights based on average trade, excluding trade related to natural gas, in 1996-97. Preliminary estimates for December 2002. Data for 20 refers to July (on average January-July) based or) exchange rate data available as of September 12, and Fund staff CPI projections.

Positive variation is an appreuialion.

According to Previons accounting conventions (before HIPC).

Table 2.

Bolivia: Operations of the Combined Public Sector

(In percent of GDP)

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

Includes a US$100 million (1.3 percent of GDP) transfer of foreign liabilities from the central bank to the central government.

Preliminary data for 2001, estimates for 2002, and projections for 2003-06.

Table 3.

Bolivia: Sumrnary Balance of Payments

(In millions of U.S. dollars, unless otherwise noted)

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

Reflects lower scheduled debt service, starting in 1998, owing to original HIPC assistance in the form of stock.

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

Commercial banks’ liquid asset requirement (RAL) held overseas added to central bank gross official reserves.

Before any assistance under the HIPC Initiative.

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

Table 4.

Bolivia: Monetary Survey 1/

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

Flows in foreign currency are valued at the accounting exchange rate for the corresponding period. The banking system compare central bank, commercial banks, the National Financial Institution of Bolivia and FONDESIF, which are state-owned second-tic.

Includes special certificates of deposits (CDDs) issued by the central bank during the liquidation of failed banks.

Includes deposits and credits in bolivianos that are indexed to the U.S. dollar.

Table 5.

Bolivia: Medium-Term Macroeconomic Framework

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

Based on balance of payments figures from the Central Bank of Bolivia, and Fund staff estimates and projections.

Based on information from the Ministry of Finance, and Fund staff estimates and projections.

Table 6.

Bolivia: Debt Sustainability Analysis Debt Service Indicators

(In percent)

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Source: Fund staff estimates and projections.

ANNEX I: Bolivia - Financial Position in the Fund

As of August 31,2003

I. Membership Status: Joined: December 27,1945; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Latest Financial Arrangements:

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VI. Projected Payments to Fund (Expectations Basis) 1 (SDR Million; based on existing use of resources and present holdings of SDRs):

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Projected Payments to Fund (Obligations Basis)2 (SDR Million; based on existing use of resources and present holdings of SDRs):

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VII. Implementation of HIPC Initiative:

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Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts can not be added.

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

Decision point - point at which the IMF and the World Bank determine whether a country qualifies for assistance under the HIPC Initiative and decide on the amount of assistance to be committed.

Interim assistance - amount disbursed to a country during the period between decision and completion points, up to 20 percent annually and 60 percent in total of the assistance committed at the decision point (or 25 percent and 75 percent, respectively, in exceptional circumstances).

Completion point - point at which a country receives the remaining balance of its assistance committed at the decision point, together with an additional disbursement of interest income as defined in footnote 2 above. The timing of the completion point is linked to the implementation of pre-agreed key structural reforms (i.e., floating completion point).

VIII. Safeguards Assessments:

Under the Fund’s safeguards assessment policy, Central Bank of Bolivia (CBB) is subject to a full assessment with respect to the arrangement, which was approved on April 02, 2003 and is scheduled to expire on April 01,2004. The on-site assessment was completed on June 27, 2003 and found no systemic risks in the safeguards of the CBB. The assessment identified, however, a few anomalies in the CBB’s reporting and control system and made recommendations, as reported in Supplement 2 to EBS/03/90. Implementation of the recommendations needs to be monitored by staff.

The previous assessment, which was limited to the external audit assessment, was completed on October 19, 2000.

IX. Resident Representative: Mr. Simon Cueva starts his assignment August 31, when Mr. Gerardo Peraza leaves the post as resident representative.

ANNEX II: Bolivia: Relations With the World Bank

Recognizing Bolivia’s current difficulties, the World Bank’s strategy has been to help the country with actions that balance the need to respond to the February crisis with the need to continue with medium-term development objectives. By the end of August, the Bank expects the Government to have revised its PRSP, which would form the basis for the World Bank’s Country Assistance Strategy (CAS) over the next four years. The Consultative Group meeting planned for October 2003, that will be supported by the Bank, will also provide input for the CAS. Provided the Government is indeed able to complete this task, the World Bank would be able to present the CAS to the Board on December, 2nd.

Recent actions

In June the WB Board approved three projects. One is this Social Cushion SAC aimed at keeping the situation from deteriorating further. This project focuses on budget protection of key social sector interventions and includes measures to ensure that the budget will be executed as planned. The project also supports the temporary employment programs. The second project is the Decentralization Programmatic Structural Adjustment Credit (PSAC) aimed at deepening the reforms in decentralization and to help control the build-up of municipal debt. The third project is an investment APL that will increase electrification and telecommunications in the rural areas. The APL has a strong emphasis on helping to develop adequate policies to accelerate coverage rates in these important areas.

Additional WB actions aimed at helping the Government achieve medium-term objectives

  • Prepare its CAS that would be based on revisions to Bolivia’s PRSP (which will take place after the third National Dialogue planned sometime in August). The CAS will be prepared jointly with the IFC, which is expected to take on a larger role in promoting more effective private sector development. Work on the CAS has already begun. Two lending projects will accompany the CAS, that, as indicated will be presented at the Board in December: the Poverty Reduction Strategy Credit (PRSC) and the Banking and Corporate Restructuring Project (FSAL).

    • The PRSC will be an important instrument to support Bolivia’s PRSP. Current plans for the PRSC are to have three main components that support: (a) pro-poor growth; (b) achievement of MDGs; and (c) participatory monitoring and evaluation of the PRSP, with a heavy focus on tracking results;

    • The FSAL aims at helping the Government with its planned banking and corporate restructuring. This project is potentially risky and would only go forward after a careful analysis of the benefits and risks of operating in this area.

  • Help the Government manage more effectively the existing stock and future flows of donations from bilateral agencies and credits from multilateral agencies so as to finance their initiatives to get out of the crisis. There are approximately US$ 1.6 billion in undisbursed funds in existing projects and a yearly flow of approximately US$ 700 million that is expected to be provided to Bolivia over the next four years. Currently, these resources are not adequately aligned to current needs. The World Bank is working with the Government and other donors to bring about a more effective alignment. This will undoubtedly require some restructuring on the part of several donors and the restructuring options will be discussed at a Consultative Group meeting scheduled for early FY04.

  • Prepare a Public Expenditure Review (PER) to be discussed with the Government by September 2003. In this PER there will be an update of the analysis of the fiscal sustainability of the existing major reforms, including the pension reform, institutional reforms that modified civil service salaries and education and health reforms. While some analysis of the sustainability of the reforms was carried out at the moment when they were launched, the situation has changed with the drop in the rate of growth and the unexpected outcomes of negotiations with different sectors. The PER will also provide guidance on implementation of a Medium-Term Expenditure Framework and will review the efficiency, equity and sustainability of government programs in health, education, social protection and infrastructure.

  • Update the 2001 Poverty Report. Given the likely emphasis that Bolivia’s revised PRSP will place on improving the productive capabilities of the poor, the update will include an expanded treatment of the problems of generating pro-poor growth.

The Bank’s work on the CAS, PRSC and PER will provide inputs for budget negotiations that will take place in Bolivia from late October to the middle of December. The Government will attempt to use these negotiations to reach agreement with different sectors on the direction that Bolivia will take not only for 2004, but for the next 3-4 years.

Bank-Fund collaboration in specific areas

As part of its overall assistance to Bolivia, the Bank has strengthened its close collaboration with the Fund. Specific examples of joint work for the near future cover the following areas:

Overall Financial Sector Assessment This assessment was presented at the IMF Board in July. As a complement, the Bank prepared a Report on the Observance of Standards and Codes (ROSC) focusing on insolvency and creditor rights systems, contingent on government approval.

Poverty and Social Impact Analysis (PSIA): The Bank and the Fund are supporting the completion of a PSIA through its policy analysis unit, UDAPE.

Joint Staff Assessment (JSA) of the Government’s PRSP Progress Report. The Bank and the Fund will reviewed the authorities’ PRSP progress report.. The JSA will be prepared on the basis of the final version of the PRSP progress report.

Governance issues: The transition from one government to another has put significant stress on the institutional reform process and there has been some concern with regard to future progress. Recently, the new government reassured the Bank that reforms will continue. Therefore, the Bank will continue to lead institutional reform efforts in close coordination with the Fund. The agenda states the need to consider starting reforms in the judicial area.

Medium-term strategy on dollarization and exchange rate policy issues: The Fund will take the lead in this area in close coordination with the Ministry of Finance and the Central Bank and with continuous dialogue with the Bank. A first MAE technical assistance report has already been completed and made available to the authorities.

Prepared by World Bank staff.

Questions may be addressed to Mr. Vicente Fretes-Cibils, Lead Economist at 473-1969.

ANNEX III: Bolivia: Relations with the Inter-American Development Bank

Background

As of July 15, 2003, the Inter-American Development Bank (IDB) had approved loans to Bolivia amounted to US$3.2 billion, of which cumulative disbursements amounted to US$2.3 billion. Bolivia’s outstanding debt to the IDB was US$1.5 billion.

The lending program

The IDB’s lending program for Bolivia is aimed at supporting the government’s efforts to reduce poverty, as reflected in the Poverty Reduction Strategy Paper presented to the IDB on June 2001. This strategy, focuses on: (i) promoting sustained growth and increased employment opportunities in the productive infrastructure sectors, micro enterprise, and rural development; (ii) supporting direct actions to improve access to the basic social services; and (iii) governance. The impact of the regional crisis on Bolivia’s economic performance since 1999, has weakened growth in labor intensive sectors pushing unemployment to 11.9 percent and increasing poverty incidence in urban and rural areas. The economic slowdown together with higher than expected pension related fiscal deficit and increased fragility of the financial system, has amplified the exposure of the country to an extended period of economic, social and political distress. In this context, the Bank assistance in 2003 will focus on supporting efforts to stabilize the economy, protect investments in key sectors from further deteriorating (roads and basic infrastructure), continue programs that are in the critical path to achieve the Millennium Development Goals, and create better conditions for rural and urban development.

The proposed IDB lending program for Bolivia for 2003 consists of ten loans for a total of US$219.0 million, of which US$100.0 million will support policies to promote fiscal sustainability and competitiveness. The IDB Board of Directors has assigned US$229 million in concessional resources for Bolivia for the period 2002-03, US$18.8 million of which were approved in the year 2002.

Recent economic and sector work

The Board of Directors approved the Country Paper for Bolivia, which outlines the Bank’s strategy with the country, in June 9, 1999. The IDB is currently working on a new strategy for the period 2003-07. Economic studies have been completed on fiscal sustainability, HIPC debt relief and poverty, pension reform and descentralization.

IDB nonreimbursable technical cooperation and small projects

The IDB portfolio also includes active projects for US$27.0 million in nonreimbursable technical cooperation, and US$1.9 million in non-reimbursable small projects.

Bolivia: Relations with the Inter-American Development Bank

(in millions of U.S. dollars)

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Approved.

Source: Inter-American Development Bank.

ANNEX IV: Bolivia: Debt Sustainability Analysis

Bolivia’s debt indicators are less favorable than envisaged in the staff report for the first review of the SBA (EBS/03/90) and much less favorable than envisaged in 2001 at the completion point under the Enhanced HIPC Initiative.

  • Historically, this reflects the large increases in the fiscal deficit in 2001-02 that were financed by domestic and nonconcessional external borrowing. Despite the enhanced HIPC debt relief received in June 2001, the NPV of nonfinancial public sector debt returned to its end-2000 level of about 45 percent of GDP in 2002, compared with a sharp drop to 34 percent of GDP that was envisaged under the enhanced HIPC Initiative.

    For the medium term, this reflects a more gradual fiscal adjustment to take into account the difficult political situation. Public sector debt is now projected to decline over the medium term more gradually than envisaged in EBS/03/90, but still requires substantial fiscal adjustment. If the LNG project fails to materialize the NPV of the debt would continue rising to over 60 percent of GDP in 2015 making the debt unsustainable.

Medium-term stress tests

The stress tests presented in EBS/03/90 were repeated to analyze the impact of the more gradual fiscal adjustment.1 The critical assumption in the baseline scenario is that the higher fiscal deficit is mostly financed by concessional resources (see text box).

The sensitivity of the debt path to selected stress tests is quite similar to that discussed in EBS/03/90, As in EBS/03/90, the stress tests show that debt could become unsustainable in the absence of a fiscal adjustment, but also that debt indicators are sensitive to low growth rates, current account adjustments, export prospects, and an exchange rate depreciation.

In the program projections, the net present value (NPV) of public debt relative to GDP peaks in 2005, but falls subsequently and the ratios of debt service and interest to revenue improve (Figure 1, top right and bottom panels). Stress tests show the following results (Figure 2 and Table 2):

  • A “GDP shock” (stress test 3), which reduces the growth rate to the historical average of five years (2.4 percent) minus two standard deviations (one standard deviation is 1.7 percent) in 2003 and 2003, has the least impact.

  • Under a “fiscal shock” (stress test 4), the fiscal program goes off track by one standard deviation (2,1 percent of GDP) in each year through 2008. In this case, the debt to GDP ratio rises to over 80 percent, but levels off in the medium term.

  • A large shock to the debt stock would come from the “status quo” stress test (stress test 1) assuming that the real interest rate, the real GDP growth rate, and the primary balance would remain in 2003-08 at their average of the past five years. In this case, public debt would continue to rise, exceeding 90 percent of GDP by 2008.

  • In an “exchange rate shock” stress test, the exchange rate depreciates by 30 percent in 2003 (stress test 6). Since 95 percent of public debt is denominated in foreign currency, this shock has a large impact on the debt to GDP ratio, which rises to 89 percent in 2005.2 The ratio subsequently falls, assuming that the program’s fiscal adjustment path is achieved, but remains high at 82 percent in 2008.

  • A picture similar to that with the “exchange rate shock” emerges from a stress test that assumes that the debt ratio in 2003 would rise by an additional 30 percent of GDP (stress test 7). While the debt stock would still stand at about 92 percent of GDP in 2008, it would decline from over 100 percent in 2004 and 2005.

Similar stress tests were applied to the external debt projections (Table 1).

  • If natural gas exports remain constant at the level of 2003, rather than expanding as projectcd in the baseline (stress test 1), the ratio of the NPV of debt to exports in 2007 would increase from 133 percent in 2003 to almost 180 percent in 2008, rather than falling to about 150 percent under the program projection. The nominal external debt to GDP ratio would increase from 53 percent in 2003 to 57 percent in 2008 (compared with 54 percent in the program), reflecting the impact of lower exports on GDP.

  • If interest rates, growth, inflation, the non-interest current account, and non-debt flows remain during 2003-08 at the average of the past five years (stress test 2), the nominal debt to GDP ratio increases sharply from 49 percent in 2003 to almost 70 percent in 2008, with the increase mostly due to the non-adjustment of the current account.

  • If real GDP growth in 2003-4 is set to the average of the preceding five years (2.4 percent) minus two standard deviations (one standard deviation is 1.7 percent) (stress test 3), the debt to GDP ratio increases to 64 percent in 2005, but then falls to 59 percent in 2008.

  • If the current account deficit excluding interest in 2003-04 is set to the program projection minus two standard deviations (one standard deviation is 1.4 percent of GDP) (stress test 4), the debt to GDP ratio falls from 2005 onward, but remains high at 60 percent in 2008 compared with 56 percent in 2003.

  • A 30 percent depreciation in 2003 enlarges the ratio of debt to GDP (stress test 5), peaking at 76 percent in 2004, but debt remains sustainable and falls to 69 percent in 2008.

Annes IV Table 1.

Bolivia: External Sustainability framework, 2000-08

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Coverage consists of medium- and long-term debt of the public sector. The projection assumes that US$70 million nonconcessional borrowing for financial and corporate restructuring takes place In 2004, although the program ceiling would allow it to take place in 2003.

Annex IV Table 2.

Bolivia: Public Sector Debt Sustainability Framework, 2000-08

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Coverage consists of the nonfinancial public sector including pensions, excluding bonds Issued for the recapitalization of the central bank.

Defined as: r=interest rate; p = GDF deflator, growth rate; g = real GOP growth rate.

Real appreciation is approximated by nominal appreciation against US dollar plus increase in domestic GDP deflator

ATTACHMENT I

La Paz, Bolivia

September 24, 2003

Dear Mr. Köhler:

Our program supported by a Stand-By Arrangement (SBA) has been successful in calming social tensions and stabilizing the economy. We are conducting a national dialogue to develop a broad national consensus on medium-term reforms to enhance growth and reduce poverty. The strategy will be laid out in a new PRSP and presented in a Consultative Group meeting in October. In this letter, we report on progress made under the SBA in the last quarter and supplement the understanding specified in our letters of March 21 and June 20,2003.

The 2003 program remains broadly on track, except for a deviation in the fiscal area. All monetary and external debt performance criteria (PCs) for end-June 2003 were met. Deviations with respect to the fiscal deficit and domestic financing PCs for end-June 2003 equivalent to about ½ percent of GDP, are mainly explained by lower-than-projected tax revenue resulting largely from sluggish imports. While we have taken additional strong corrective measures on both the expenditure and revenue side, we expect the fiscal deficit to exceed the 2003 program target as a result of continued revenue weaknesses during the second half of the year. “We are developing an action plan for banks that avoids any bailout of shareholders (PC).

In support of the policies described in the supplementary memorandum of understanding, the Government of Bolivia requests the completion of the second review under the SBA and modifications (upward revisions) to the performance criteria (Table 1 of the attached Supplementary Memorandum of Economic Policies) for: (i) end-September with respect to the fiscal deficit, net domestic financing of the public sector, central bank net credit to the non-fmancial public sector, and net domestic assets of the central bank; and (i i) end-December with respect to the fiscal deficit and net domestic financing of the public sector. We also request a waiver of applicability for the PCs for end-September, since the relevant information will not be available at the time the Board completes the second review.

Table 1.

Bolivia: Quantitative Pfirformamie Criteria Under the SBA 1/ 2/

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Source: Data provided by the Bolivian authorities.

Revised targets for the deficit and the net domestic financing of the combined public sector by end-September and end-December and for the central bank net credit to the NPFS and NDA by end-September; revised programmed levels for the net external financing of the nonfinancial public sector and for financing through HIPC and beyond-HIPC debt relief by end-September and end-December. The other projections for calculation of adjusters to the program are unchanged from the TMU; the TMU footnotes apply.

Program limits and targets adjustable for the shortfalls in currency issue, any oveidue obligations to foreign official creditors, net external financing shortfalls and actual cumulative net external financing, subject to a maximum, and for the difference between actual interest relief from HIPC over projected interest relief.

NIR will be adjsuted upwards by the amount of any overdue obligations to foreign official creditors.

The debt limit will be reduced by the amount, if any, of the shortfall between actual and projected disbursements of loans for financial and corporate restrcuturing.

Does not include the HIPC debt relief through rescheduling or the amortization component of stock of debt reduction operations under HIPC Initiative and beyond HIPC.

Comprises refinancing and the amortization component of stock of debt reduction operations under the HIPC Initiative and beyond HIPC, both for the financial and nonfinancial public sector.

We remain determined to meeting the program objectives, but stand ready to take additional measures in consultation with the IMF if necessary. To strengthen private sector confidence and enhance transparency, the government agrees to publish this letter and the attached memorandum.

Sincerely yours,

Table. Bolivia: Public Sector Cumulative Monthly Fiscal Targets

(In millions of Bolivianos)

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Includes pension costs

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Mr. Horst Köhler

Managing Director

International Monetary Fund

Washington, D.C. 20431

USA

Attachment: Supplementary Memorandum of Economic Policies

Supplementary Memorandum of Economic Policies of the Government of Bolivia Second Review Under the Stand-By Arrangement

September 24, 2003

1. The program continues to be guided by the macroeconomic and structural reform policies described in our Memorandum of March 21, 2003 and modified by the Supplementary Memorandum of June 20, 2003. Despite difficult economic and social conditions, social tensions have gradually eased, allowing us to increase the government’s majority in Congress and broaden support for the program. Our policies have helped to rebuild deposits in the banking system, advance banking and corporate sector reforms, and adopt legislation to rein in the fiscal deficit. We are conducting a national dialogue to develop consensus on medium-term reforms to enhance growth and reduce poverty, which will be incorporated into an updated PRSP.

2. The macroeconomic framework for 2003 remains broadly on track. GDP growth is expected at 3 percent, led by hydrocarbon and manufacturing sectors and a large soybean harvest, while inflation would remain at about 3 percent. Following a large real effective depreciation of the boliviano in 2003, the current account is expected to narrow below 2 percent of GDP, reflecting both higher exports and Iower-than-programmed imports.

A. Fiscal Policy

3. During the last few months, we have made substantial progress in fiscal reform (Table 2). Notably, a new tax code, the cornerstone of our medium-term tax reform agenda, was approved by Congress in August (benchmark for September). The code provides the tax and customs authorities with strong enforcement powers and facilitates prompt resolution of tax disputes. A new tax bill (modifying law 843), also approved in August, is expected to raise revenue, among other things, by adjusting the tax base for fuel excises and increasing the taxation of businesses.

Table 2.

Bolivia: Status of Structural Conditionality Under the Stand-By Arrangement, 2003 1/

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References in the table arc to the relevant paragraphs of the Technical Memorandum of Understanding (TMU) or to the Supplementary Memorandum of Economic Policies of September 24, 2003.

4. We are taking strong actions to contain the fiscal deficit at 7 percent of GDP in 2003 (2,1 percent of GDP excluding pension costs), compared to 6.4 percent under the program. The target for the first semester was exceeded by 0.4 percent of GDP, mainly due to lower- than-projected tax revenue resulting from sluggish imports. Moreover, we expect further revenue shortfalls of ¾ percent of GDP during the second semester, reflecting lower import taxes and higher international oil prices. Thus, to achieve the revised fiscal target, we have activated expenditure cuts equivalent to 0.4 percent of GDP and enlarged the scope of the previously planned revenue measures to yield additional revenues of ¼ percent of GDP (0.6 percent of GDP in 2003, compared with 0.4 percent of GDP in the program). Specifically, we have adopted or will adopt prior to the Board discussion of the second review the following actions, to enhance the fiscal performance in 2003 and provide a stronger base for the following years:

  • We will issue in September the regulations to the amendments to law 843 (prior action) enlarging the base of certain taxes. This is expected to yield 0.1 percent of GDP in 2003 and 0.6 percent of GDP in 2004.

  • We have issued by mid-September the regulations of the tax regularization scheme (prior action)—approved jointly with the tax code—which was broadened to include individual taxpayers and illegally imported vehicles. Revenues are expected to be 0.5 percent of GDP in 2003, 0.2 percent higher than in the program, and 0.1 percent of GDP in 2004. These projected yields, however, remain conservative in view of historical experience.

  • We will issue the regulations of the tax code by early November 2003 (performance criterion). The added tax enforcement power for the domestic tax authorities will enhance the effectiveness of ongoing complementary actions. These actions are expected to yield 0.3 percent of GDP in 2004 and include switching to the general tax regime large taxpayers previously registered under the simplified regime. Also, we will enhance invoice security features so as to reduce fraud.

  • We have activated additional contingency cuts in public investment (prior action) of at least 0.4 percent of GDP in 2003 (beyond the 0.6 percent of GDP cuts already effected). In making these cuts, we have continued to observe the agreed selection criteria, which protect projects that are already under way, aim at reducing poverty, or are tied to concessional financing.

  • We are adopting measures to contain pension costs. We have aligned the minimum pension closer to the minimum wage for those employees that may still retire under the old pay-as-you-go scheme. We have also taken administrative measures to reduce pension costs by controlling fraudulent claims and enforcing strictly streamlined eligibility criteria. A special unit in charge of these actions is being strengthened with IDB support.

5. To further ensure the observance our revised fiscal program for 2003, we have taken steps to enhance our monitoring of fiscal performance during the last months of the year. Specifically, we have set indicative monthly targets for September-December for both fiscal revenue and expenditure (Table), so as to be in a position to adopt corrective measures on a timely basis, if necessary, to meet the fiscal objectives.

B. Monetary and Exchange Rate Policies

6. Monetary policy will continue to aim at strengthening the central bank’s international reserves by US$65 million in 2003 and to contain inflationary pressures. The current coverage of the dollar liabilities in the banking system with gross international reserves will increase to 36.9 percent. The BCB would continue to provide lender of last resort facilities to solvent financial institutions against appropriate collateral. Regarding Safeguard Assessment recommendations, we have now excluded restricted deposits from the BCB’s reserves and have reclassified liabilities to Brazil and Argentina. Discussions between the BCB and the Ministry of Finance regarding budgetary independence of the central bank are ongoing.

7. In the context of the current exchange rate crawl with respect to the U.S. dollar, we intend to preserve the recent gains in competitiveness. The boliviano has depreciated by about 10 percent in real effective terms since the beginning of the year, mainly owing to a strengthening of the currencies of our main regional trading partners. This depreciation has more than offset the real effective appreciation of the boliviano in 2002 and brought it to its lowest level since 1996.

C. Financial and Corporate Sector Restructuring

8. Good progress is being made to put in place a viable framework for corporate restructuring. In August, Congress approved a law on voluntary corporate workouts, which will expedite procedures by moving responsibilities from the judicial to the administrative sphere and allowing flexible out of court workouts centered on creditor committees. We have issued in September the regulations to the law and set up the administrative bodies. We expect to carry out pilot cases of corporate restructuring, which should highlight the benefits of this approach as well as any remaining shortcomings. Drawing lessons from the pilot cases, we will amend the Commercial Code in mid-2004 as needed to ensure a modern and efficient formal framework for bankruptcy procedures. On this basis, we believe that the current insolvency law would not need to be amended.

9. Under the leadership of the high-level team established in June 2003:

  • the government will complete an assessment of the impact of corporate restructuring on banks by end-October 2003; and

  • the government will adopt by end-October 2003 a clearly-defined plan of action to deal with weak banks (structural performance criterion). This plan will be guided by the following general principles: (i) identify viable banks, based on stress tests that provide for the reclassification and the full provisioning of loans as required by current regulations on loan classification; (ii) provide new funds only to viable banks, as defined above; (iii) avoid direct or indirect bailouts and other forms of rescuing owners, including by injecting capital to banks prior to a thorough cleanup of the balance sheet; (iv) safeguard the accountability and transparency of the public funds; and (v) any public funds involved will be included and monitored in die public debt.

10. We are developing a framework, in collaboration with the Inter American Development Bank (IDB) and the Andean Development Corporation (CAF), for the use of public or publicly-guaranteed funds for corporate workouts. This framework will be guided by the following general principles: (i) provide new funds only to viable corporations; (ii) avoid any bailouts and other forms of rescuing owners; (iii) safeguard the accountability and transparency of the public funds; and (iv) any public funds involved will be included and monitored in the public debt.

D. Medium-Term Policies and Progress toward a PRGF Arrangement

11. The government will soon finalize a new PRSP based on a broad dialogue with domestic stakeholders and discussions with the donor community. On this basis, we intend to reach understandings with the Fund staff on a policy framework for the next three years and request a new PRGF arrangement before year-end. The strategy will be presented to donors at a Consultative Group meeting in October 2003, with a view to mobilizing sufficient concessional financing, including grants from bilateral donors, to ensure a sustainable debt path while increasing pro-poor and investment spending.

12. The government will implement a sound macroeconomic and structural strategy aimed at reaching a sustainable fiscal and external position and removing barriers to growth. Our medium-term strategy seeks to reduce poverty levels in Bolivia by achieving sustained growth rates of about 4 percent per annum (after a few years of higher growth boosted by large energy projects), and implementing pro-poor policies. Specifically, we intend to adopt policies so as to ensure an important reduction of the fiscal deficit in 2004 while limiting the use of nonconcessional external resources in net terms.

13. We intend to further strengthen the financial system, including by the adoption of the FSAP recommendations and proposed timing regarding prudential norms. We plan to foster private agreements for corporate restructuring and we will monitor and report progress in these areas while disclosing any use of public funds for banking or corporate restructuring.

14. We are committed to facilitating the implementation of the large energy projects, which we consider essential to our medium-term strategy. Negotiations with a private consortium are at an advanced stage, and we expect the construction phase of the largest of these projects, an LNG pipeline that would allow exports of natural gas to North America, to begin in mid-2004, with exports starting in 2008.
1

The shortfall in external financing in part reflected delays in disbursement related to poor implementation capacity.

2

Net nonconcessional resources per year are assumed to be below 1¼percent of GDP during 2004-08 and the construction of the gas pipeline is assumed to begin in mid-2004.

3

As a result of pension reform, obligations resulting from previous contributions (under th e old system) are explicitly recognized as a government liability. The stock of such obligations dccline over time as pensions are paid to those covered under the old system

4

The sustainability scenario assumes disbursements of US$70 million in 2004 for corporate restructuring and does not incorporate contingent liabilities from efforts to address weaknesses in the banking system.

5

As the Board discussion is scheduled after end-September, it is necessary to request waivers of applicability for end-September PCs, for which data would not be available. Completion of the second review is conditional on performance for end-June.

1

This schedule presents all currently scheduled payments to the IMF, including repayment expectations where applicable and repayment obligations otherwise. The IMF Executive Board can extend repayment expectations (within predetermined limits)upon request by the debtor country if its external payments position is not strong enough to meet the expectations without undue hardship or risk (see repayment schedules and IMF lending for details).

2

This schedule is not the currently applicable schedule of payments to the IMF. Rather, the schedule presents all payments to the IMF under the illustrative assumption that repayment expectations-except for SRF repayment expectations- would be extended to their respective obligation dates by the IMF Executive Board upon request of the debtor country (see repayment schedules and IMF lending for details). SRF repayment expectations can be extended by a maximum of one year, to either a new expectation date or an obligation date. Therefore, SRF repayments are shown on their current expectation dates, unless already converted to an obligation date by the IMF Executive Board.

1

It is assumed that a loan of $70 million is contracted in 2004 to finance banking and corporate restructuring.

2

The assessment excludes the contingent liabilities related to the impact that a depreciation would have on the banking system.

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Cover IMF Staff Country Reports
Bolivia: Second Review Under the Stand-By Arrangement and Request for Waiver of Applicability and Modification of Performance Criteria—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Bolivia
Author:
International Monetary Fund
Volume/Issue:
Volume 2004: Issue 005
Publisher:
International Monetary Fund
ISBN:
9781451805703
ISSN:
1934-7685
Pages:
53
DOI:
https://doi.org/10.5089/9781451805703.002
Figure 1.

Bolivia: Real Exchange Rate and Quality of Bank Portfolio, 1996-2003

Bolivio: NPV of debt as a ratio of GDP

Bolivia: DSA with Future Pension Liabilities (NPV of debt as a percent of GDP)

Bolivia. Real GDP Growth