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© 2004 International Monetary Fund
July 2004
IMF Country Report No. 04/193
Bolivia: Third Review Under the Stand-By Arrangement, Request for Waiver of Nonobservance of Performance Criteria, and Augmentation and Extension of the Stand-By Arrangement—Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Bolivia
In the context of the third review under the Stand-By Arrangement, request for waiver of nonobservance of performance criteria, and augmentation and extension of the Stand-By Arrangement with Bolivia, the following documents have been released and are included in this package:
the staff report on the third review under the Stand-By Arrangement, request for waiver of nonobservance of performance criteria, and augmentation and extension of the Stand-By Arrangement, prepared by a staff team of the IMF, following discussions that ended on May 20, 2004, with the officials of Bolivia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 2, 2004. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its June 10, 2004 discussion of the staff report that concluded the Article IV consultation.
a statement by the Executive Director for Bolivia.
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INTERNATIONAL MONETARY FUND
BOLIVIA
Third Review Under the Stand-By Arrangement, Request for Waiver of Nonobservance of Performance Criteria, and Augmentation and Extension of the Stand-By Arrangement
Prepared by the Western Hemisphere Department
(In consultation with other departments)
Approved by Caroline Atkinson and Michael Hadjimichael
June 2, 2004
Stand-By Arrangement. The current arrangement was approved on April 2, 2003, for a 12-month period in an amount equivalent to SDR 85.75 million (50 percent of quota), of which SDR 64.32 million (37.5 percent of quota) has been drawn. On October 6, 2003, the Executive Board completed the second review. The arrangement was extended on April 1, 2004, until June 15, 2004, to allow more time to complete the third review.
Discussions. The review discussions were held in La Paz from November 25 to December 11, February 12–24, and May 12–20; and at headquarters during December 15–17, April 19–23, and May 5–10. The mission met with Mr. Javier Cuevas, Minister of Finance; Mr. Juan Antonio Morales, Central Bank President; and other senior officials. The team comprised: M. Piñón (Head), A. Aisen, R. Balakrishnan, and O. Williams, (all WHD), A. Giustiniani, S. Heysen, and L. Jácome, (all MFD); M. Guin-Siu, and P. Medas, (both FAD); and K. Kostial, (PDR). The mission was assisted by S. Cueva (Resident Representative). S. Calvo and C. Mollinedo, (both IBRD) joined the mission. A. Segura (OED) also participated in the discussions.
Program. In the accompanying Letter of Intent and Memorandum of Economic and Financial Policies, the authorities describe their policies and prospects for 2004. An extension of the arrangement until end-year and an increase in access of 25 percent of quota are requested. SDR 10.7 million would become available upon completion of the third review.
Economic and policy developments. Real GDP growth in 2003 was lower than programmed due to the October unrest. The performance criterion (PC) on NIR for end-December was met with a margin but the PCs on the fiscal deficit, domestic financing, central bank financing to the nonfinancial public sector, and NDA of the central bank were not met and the authorities request waivers. Waivers are also requested for nonobserved structural PCs on the tax code, and the action plan for weak banks (both subsequently implemented).
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Executive Summary
I. Political Context
II. Developments Under the Program
III. Policy Discussions
A. Fiscal Policy
B. Monetary and Exchange Rate Policies
C. Financial and Corporate Policies
D. Hydrocarbons Sector
E. PRGF and Medium-Term Issues
F. Program Monitoring
G. Program Risks
IV. Staff Appraisal
Text Boxes
1. Key Policy Measures Adopted since October 2003
2. Fiscal Measures for 2004 and Medium-Term Strategy
3. Public Expenditures—Trends, Composition, and the Way Forward
4. Medium Term Scenario for the Hydrocarbons Sector
Tables
1. Selected Economic Indicators
2. Operations of the Combined Public Sector
3. Summary Balance of Payments
4. Monetary Survey
5. Medium-Term Macroeconomic Framework
6. Schedule of Purchases Under the Extension of the SBA
7. Indicators of Fund Credit, 1999–2009
8. Debt Sustainability Analysis Debt Service Indicators, 2002–15
9. Millennium Development Goals
Figures
1. Contributions to Growth
2. 12–Month Inflation
3. External Current Account and FDI
4. Real Exchange Rate
5. Financial System Deposits and NIR
6. Selected Interest Rates
7. NPV of Debt-to-GDP Radio
Appendices
I. Fund Relations
II. Relations with the World Bank
III. Relations with the Inter-American Development Bank
IV. Debt Sustainability Analysis
Attachments
I. Letter of Intent
II. Supplementary Technical Memorandum of Understanding (TMU)
Annex
Memorandum of Economic and Financial Policies of the Government of Bolivia
Executive Summary
Background
Completion of the review has been subject to delays. Discussions were protracted due to the need to reduce implementation risks, and to secure external financing assurances.
Economic activity is gradually picking up. Although the events of October negatively affected economic performance in 2003, economic activity in 2004 is gradually recovering, led by hydrocarbons and soybean exports. Growth in 2004 is projected at 3½ percent, one percentage point higher than in 2003. Inflation remains in low single digits. The strengthening of the external current account in 2003, which registered a small surplus, is expected to continue in 2004 owing to strong export performance.
Several quantitative and structural performance criteria (PCs) were missed. Owing largely to the October events, the end-December 2003 PCs on the fiscal deficit, domestic financing, NDA of the central bank, and central bank credit to the nonfinancial public sector were missed. PCs on NIR of the central bank, nonconcessional external borrowing, and short-term debt were met. Two structural PCs were also not observed, but were subsequently implemented.
Policy discussions
Program discussions focused on appropriate corrective measures and strengthened policies that could support completion of the review and an augmentation and extension of the SBA. Understandings were reached on a four-pronged strategy: (i) a budgetary framework to contain the fiscal deficit to available financing; (ii) securing financing assurances to avoid central bank financing and minimize nonconcessional credits; (iii) measures to strengthen the financial and corporate sectors; and (iv) a process toward implementing a viable hydrocarbons policy.
The fiscal deficit after grants is to be reduced to 6.1 percent of GDP in 2004. This will be achieved by a large tax package (1½ percent of GDP) based on measures introduced in late 2003 and the recently approved financial transactions tax. Nonpriority spending will be reduced through two austerity decrees in order to increase pro-poor spending.
External financing of the program is now in place. Bilateral and multilateral donors have pledged grants and concessional loans in line with programmed external financing needs. Nonconcessional financing is limited to 1.6 percent of GDP.
Monetary policy will aim to strengthen NIR, within the existing crawling peg arrangement. The program targets an accumulation of US$109 million during May-December, limiting the annual decline to US$55 million.
Risks to the program remain substantial. Social and political conditions remain tense, especially ahead of the scheduled July referendum on gas exports, and the government has limited political support in Congress. The fiscal program is subject to spending pressures and domestic debt roll-over risk. The financial system remains highly vulnerable. Finally, uncertainties remain about the future of hydrocarbons policy, which is critical for medium-term sustainability.
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Press Release No. 04/113
FOR IMMEDIATE RELEASE
June 10, 2004
International Monetary Fund
Washington, D.C. 20431 USA
Washington, D.C. 20431
Telephone 202-623-7100
Fax 202-623-6772
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June 9, 2004
