Statement by Hector Torres, Alternate Executive Director for Bolivia, and Alonso Segura, Advisor to Executive Director

Bolivia’s Third Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance of Performance Criteria are discussed. The highly dollarized financial system suffered a renewed deposit run in October 2003, and conditions in the financial sector have remained fragile in 2004. Spending exceeded program targets by 0.7 percent of GDP, mostly owing to higher capital expenditure by municipalities, reflecting in part efforts to reduce social tensions. The authorities have allowed interest rates to increase in response to liquidity conditions and have been able to start placing a moderate amount of bonds.

Abstract

Bolivia’s Third Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance of Performance Criteria are discussed. The highly dollarized financial system suffered a renewed deposit run in October 2003, and conditions in the financial sector have remained fragile in 2004. Spending exceeded program targets by 0.7 percent of GDP, mostly owing to higher capital expenditure by municipalities, reflecting in part efforts to reduce social tensions. The authorities have allowed interest rates to increase in response to liquidity conditions and have been able to start placing a moderate amount of bonds.

Key points

  • As a consequence of the events in October 2003, some targets under the program were missed. Waivers for four QPCs for end-December 2004 and two SPCs, the latter met with delay, are requested. Soon thereafter, the government of President Mesa has been able to maintain the policies in course.

  • The authorities are requesting an augmentation and extension of the current SBA until the end of 2004. Policies to support the request are concentrated on fiscal issues, the banking and financial sector, and a strategy to develop the hydrocarbons sector.

  • A core element of the government’s strategy is fiscal consolidation. A fiscal adjustment of 2% of GDP is expected for 2004, with further revenue and expenditure reforms in the pipeline to guarantee the continuation of the process in the future.

  • Financial and corporate restructuring have been started and remain a key part of the conditionality under the program.

  • The government has initiated a process of direct consultations with the population and civil society in search for consensus. A National Referendum on key issues regarding the hydrocarbons sector has been set for July 18.

  • The elaboration of a new PRSP based on a national dialogue has proceeded as scheduled, and a request for a PRGF arrangement would be made before the end of the year.

Background and Overview

  • 1. We thank the staff for their hard and persistent work over the past months, which has resulted in a balanced document brought for today’s Board discussion. The government of Bolivia has been able to weather very harsh political and social conditions, which have undoubtedly impacted economic performance and still faces many risks. After having observed all quantitative performance criteria for end-September 2003, the events in October that led to a presidential change, which nevertheless followed Constitutional procedures, resulted in the nonobservance of four end-December 2003 QPCs. Two other SPCs were met, but with delay. For all these nonobservances, our Bolivian authorities request waivers. Nevertheless, the authorities have constantly demonstrated their willingness and ability to resolutely deal with the challenges facing them, within a framework of open dialogue and permanent consultation with the different social actors. With regard to the economic agenda, they have shown strong ownership of economic policies in line with the program objectives, and have repeatedly stood ready to implement any necessary corrective measures to stay in course. The current Stand-By Arrangement with the Fund has constituted a very important anchor for agents’ expectations. In this regard, my authorities regard the conclusion of the third review and the approval of the request for an augmentation and extension of the current arrangement through the end of the year as an essential support for the success of their economic policies.

  • 2. To put things in perspective, we must remember that the current government took office in the midst of the deepest crisis of the country in more than two decades. The full benefits of the reforms implemented since the mid-eighties are still to be reaped, since from the late nineties a series of shocks had subsequently affected economic performance and produced reform fatigue, social discontent, and fragmentation. In this context, the government’s efforts to build consensus and maintain fluent communication with the population has been paying off, as evidenced by the high ratings in the popularity of the President and, especially, the capacity to push through with important policy initiatives, although within a constrained degree of maneuver. As a result, the situation is more stable now, although we acknowledge that risks remain high. Given these circumstances, the program designed under the requested extended arrangement seeks to strike a balance between ensuring short-term stabilization and laying the foundations for medium-term policies aimed at supporting sustainable growth and poverty reduction.

Fiscal Policy and Debt Dynamics

  • 3. Fiscal consolidation is the cornerstone of the government’s economic policy, and the government has managed to implement significant measures despite sectorial and social pressures. Fiscal policy aims at consistently reducing the overall deficit over the medium-term. It envisages for 2004-06 a reduction of 4% of GDP, half of it in 2004, which would attempt to bring the deficit down from 8.1% of GDP in 2003 to 4.1% in 2006. In this respect, we want to acknowledge our authorities’ gratitude to the donor community that has, once again, demonstrated its commitment to support Bolivia’s stability, by increasing the amount of grants by 0.5% of Bolivia’s GDP with respect to 2003, allowing the government’s efforts to be successful in fully financing the program. Still, the reduction of the deficit net of grants for 2004 is equivalent to a sizable 1.4% of GDP.

  • 4. On the revenue side, measures that would raise fiscal revenues by approximately 2% of GDP have already been implemented. A new Tax Code (0.3% of GDP) was approved by Congress in late 2003. A complementary Law to protect administrative procedures introduced by such Law has already been included into the Legislative Agenda; this was a necessary step following a ruling by the Constitutional Court, and its approval is a PC under the program. A revised Tax Bill (Law 843) expanding the coverage of taxes on hydrocarbons was also enacted last year (0.3% of GDP) and the tax regularization scheme (0.8% of DGP) has been instrumental in supporting tax revenues during the first half of the year. Additionally, a financial transactions tax (FTT) with a rate of 0.3% on debits and credits, has been introduced and will be applied starting in July (0.6% of GDP). Given its suspected distortionary effects, the authorities recognize the second-best nature of such a tax and hence it will have a two-year transitory nature at a decreasing rate (0.25% for the second year).

  • Additional reforms to the tax system are envisioned, aimed at replacing temporary tax measures and further increasing the tax revenue. A personal income tax is one of the options explored, which is why technical assistance has been requested to the Fund. In addition, a new Hydrocarbons Law, depending upon the referendum results, would result in higher taxes starting in 2005.

  • 5. Overall expenditures will be slightly reduced (by 0.2% of GDP), despite expected increased expenses beyond the government’s control, for an equivalent to 0.8% of GDP. The wage bill is being reduced by 0.2% of GDP, with wage restraint being a key element. Poverty reduction outlays are being prioritized and would increase by a significant 0.6% of GDP. Strong efforts will be devoted to improving the quality of expenditures in the medium-term, particularly those aimed at poverty reduction, as well as identifying priorities to enable the reduction in overall spending gradually through 2007 (PC). To such end, as part of the consensus building strategy of the government, a high-level commission of members from the civil society will be formed shortly in order to analyze and propose recommendations to such end. Such a commission would use the inputs provided by the recently concluded Public Expenditure Review by the IDB-World Bank.

  • 6. The success of the fiscal program relies significantly not only on the increased amounts of grants and concessional financing pledged by bilateral donors and IFIs after successive rounds of meetings during the year, but also on the timely arrival of such resources, given the tightness of the Treasury cash flow at certain times of the year. Overall non-concessional financing would be limited to 1.6% of GDP, while net domestic financing would be capped at 1.9% of GDP, mainly through Treasury bond placements in the domestic market, which by the way have significantly pickedup in the last weeks, reaching its expected average levels for the year. As indicated in the staff report, net Central Bank financing would be limited, and any recourse to the Central Bank would be of transitory and exceptional. Finally, the authorities will remain attentive to any changes in market sentiment in order to provide the necessary responses to ensure adequate policy flexibility.

  • 7. The analysis on debt sustainability updated by the staff continues to show, under the baseline scenario, a sustainable medium-term path, supported by fiscal consolidation efforts, a continuation of concessional financing, and increased hydrocarbons production either through an LNG or alternative projects. It is important to note, however, that any single shock considered under the stress scenarios would not be sufficiently strong to drive public debt indicators into an unsustainable path. For that to happen, a combination of several negative factors over a protracted period of time would have to take place. Such scenario, considered under Stress Test 1, is highly unlikely, since it would imply no policy reaction throughout the medium-term. Nevertheless, we want to reaffirm that the authorities are aware of the high levels of public debt levels, and therefore, of the importance of adequate policy implementation and prevention to avert undesired consequences.

Structural Reforms, Framework for Hydrocarbons and PRGF Request

  • 8. The Bolivian authorities have continued to focus on the delicate situation of the banking and corporate sectors. With regards to the former, as indicated in the staff report, the action plan to deal with weak banks has been almost fully implemented, and the evolution of institutions is being closely monitored. Only one bank required of action by the government, taken within a sensible framework, including a proper due diligence process to determine the value of the institution, and a clear plan to reprivatize the institution within a two-year time frame. The creation of the public fund to strengthen the financial system, with World Bank support, and under a transparent set of rules will be an important element on the road forward to help preserve confidence in the system and deal with weak institutions in the future. Implementation of the FSSA recommendations has also proceeded smoothly. And, the establishment of a framework for dealing with corporate restructuring has gone forward. The Superintendence of Enterprises has been strengthened and pilot cases to test and improve the current legislation, where necessary, are being prepared in order to submit any proposals to Congress during the fourth quarter of the year, as part of the conditionality of the program.

  • 9. The government has carefully designed a strategy to gain ample support for its hydrocarbons strategy, aimed at developing a fair and sustainable framework for the exploitation of those exhaustible resources in Bolivia. A National Referendum will be held in July 18, where the population will be directly consulted for authorization to proceed with the exploitation and exportation of those resources as well as to the convenience to pass a new hydrocarbons law. This bill would be submitted to Congress after the July referendum, including inputs from a commission of international experts and the World Bank, in order to guarantee the passage of the law that would ensure a sensible development of the Bolivian hydrocarbon resources, including the appropriate taxes to apply to the sector. Finally, on the path towards a PRGF arrangement, my authorities are finalizing a medium-term policy framework to sustain such a request. The national dialogue launched in November 2003 and expected to conclude by October 2004 has been proceeding according to schedule, and would enable to finalize a new Poverty Reduction Strategy Paper (PRSP) before year-end. The definition of the hydrocarbons policy and the results by the commission of experts on how to improve the efficiency of public expenditure are the other key elements conforming such a medium-term framework. My authorities plan to make such a request before the end of the year.