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© 2005 International Monetary Fund

April 2005

IMF Country Report No.05/146

Bolivia: Fifth Review Under the Stand-By Arrangement, Request for Waiver of Nonobservance of Performance Criteria, Rephasing, Augmentation, and Extension of the Stand-By Arrangement—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Bolivia

In the context of the Fifth Review Under the Stand-By Arrangement, Request for Waiver of Nonobservance of Performance Criteria, Rephasing, Augmentation, and Extension of the Stand-By Arrangement, the following documents have been released and are included in this package:

  • the staff report for the Fifth Review Under the Stand-By Arrangement, Request for Waiver of Nonobservance of Performance Criteria, Rephasing, Augmentation, and Extension of the Stand-By Arrangement, prepared by a staff team of the IMF, following discussions that ended on February 9, 2005, 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 March 25, 2005. 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 staff statement of April 8, 2005 updating information on recent developments.

  • a Press Release summarizing the views of the Executive Board as expressed during its April 8, 2005 discussion of the staff report that completed the review.

  • a statement by the Executive Director for Bolivia.

The documents listed below have been or will be separately released.

  • Letter of Intent sent to the IMF by the authorities of Bolivia*

    Memorandum of Economic and Financial Policies by the authorities of Bolivia*

  • *May also be included in Staff Report

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.

Copies of this report are available to the public from

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International Monetary Fund

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INTERNATIONAL MONETARY FUND

BOLIVIA

Fifth Review under the Stand-By Arrangement, Request for Waiver of Nonobservance of Performance Criteria, Rephasing, 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 T. Hadjimichael

March 25, 2005

  • 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). It was extended on April 1, 2004, until June 15, 2004. On June 10, 2004, the arrangement was augmented by SDR 42.88 million (25 percent of quota) and extended through end-2004. On December 27, 2004, the arrangement was extended again through end-March 2005.

  • Discussions. The review discussions were held in La Paz from October 25-November 11, 2004, January 24-February 9, 2005, and in Washington during December 6-8, 2004. The mission met with President Carlos Mesa; Mr. José Galindo, Minister of the Presidency; Mr. Horst Grebe, Minister of Economic Development; Mr. Javier Cuevas and Mr. Luis Carlos Jemio, successive Ministers of Finance; Mr. Juan Antonio Morales, Central Bank President; Mr. Fernando Calvo, Superintendent of Banks and Financial Institutions; and other senior officials. The team comprised: M. Piñón (Head), R. Balakrishnan, P. López Murphy, E. Vesperoni, O. Williams (all WHD); S. Dodzin (PDR); S. Heysen (MFD); and P. Medas (FAD); and was assisted by S. Cueva (Resident Representative). H. Franken and J. Cuevas (OED) also participated in discussions. The mission overlapped with EPA, FAD TA missions, and a visit by the Managing Director.

  • Program. In the attached Letter of Intent and Memorandum of Economic and Financial Policies, the authorities describe their policies for 2005 and medium-term macroframework. An extension of the arrangement until end-March 2006 and an increase in access of 25 percent of quota are requested. An amount equivalent to SDR 9.66 million (5.63 percent of quota) would become available upon completion of the fifth review.

  • Economic and policy developments. Macroeconomic developments have been positive, with real GDP growth in 2004 expected to be in line with the program. Most quantitative PCs were met, with the exception of the end-September 2004 PC on central bank financing to the NFPS, which was marginally missed. The authorities request a waiver for this and for the nonobserved structural PC on the tax code procedures.

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  • Executive Summary

  • I. Political Context

  • II. Recent Economic Developments and Program Performance

  • III. Policy Discussions

    • A. Fiscal Policy

    • B. Monetary and Exchange Rate Policy

    • C. Financial Sector Policies

    • D. Hydrocarbons

    • E. PRSP and Medium-Term Agenda

    • F. Ex-Post Assessment (EPA) of Longer-Term Program Engagement (LTPE)

    • G. Program Financing

    • H. Program Monitoring and IFIs Role

    • I. Program Risks

  • IV. Staff Appraisal

  • Text Boxes

  • 1. Key Policy Measures Adopted since November 2004

  • 2. Budget and Decentralization Processes

  • 3. Medium-Term Sustainability of Public Sector Debt

  • Tables

  • 1. Selected Economic and Financial Indicators

  • 2. Operations of the Combined Public Sector

  • 3. Summary Balance of Payments

  • 4. Monetary Survey

  • 5. Medium-Term Macroeconomic Framework

  • 6. Commercial Banks Performance Indicators

  • 7. Schedule of Purchases Under the Extension of the SBA

  • 8. Millennium Development Goals

  • 9. Indicators of Fund Credit, 2001–2009

  • 10a. Scenarios for Public Debt Sustainability Framework

  • 10b. Scenarios for Public Debt Sustainability Framework

  • 10c. Scenarios for Public Debt Sustainability Framework

  • 11. Debt Sustainability Analysis—Stress Test

  • Figures

  • 1. 12-Month Inflation

  • 2. External Current and Capital Account

  • 3. Financial System Deposits and NIR

  • 4. Stock of Government Paper in Local Currency

  • 5. Average Maturity of Treasury Paper Placements (TGN)

  • 6. Interests Rates

  • 7. Alternative Gas Scenarios

  • 8. Stress Test

  • Appendices

  • I. Fund Relations

  • II. Relations with the World Bank

  • III. Relations with the Inter-American Development Bank

  • Attachments

  • I. Letter of Intent

  • II. Supplementary Memorandum of Economic and Financial Policies of the Government of Fifth Review under the Stand-By Arrangement, Request for Waiver of Nonobservance of Performance Criteria, and Rephasing, Augmentation and Extension of the Stand-By Arrangement

  • Annex

  • I. Supplementary Technical Memorandum of Understanding

EXECUTIVE SUMMARY

Background

Completion of the review has been subject to delays. Discussions were protracted due to the need to reduce implementation risks and bring public spending in line with the program.

Macroeconomic developments have been positive, largely reflecting the favorable global environment, though the economy is still vulnerable. Real GDP growth is estimated to have reached 3¾ percent in 2004 and is projected to reach 4.5 percent in 2005. Inflation has increased, but remains below 5 percent. The current account registered a surplus of around 3 percent in 2004 and is expected to remain in surplus in 2005.

The 2004 program was on track. All quantitative PCs were met, with the exception of the end-September PC on central bank credit to the NFPS, which was marginally missed owing to delays in grant disbursements. The end-September structural PC on the administrative procedures to the tax code was also missed as congressional discussions centered on the hydrocarbons bill.

Policy discussions

Program discussions focused on policies that could be supported by a twelve-month extension and augmentation of the SBA. On fiscal issues, the staff reached understandings on a program that contains the deficit, and on financing assurances to minimize the use of central bank credit, and, more generally, nonconcessional financing. On the structural side, reforms to the tax system and to expenditure management (including changes to budget preparation and execution) were agreed. The staff also reached understandings on measures to strengthen the financial and corporate sectors, and improve debt management. Medium term prospects under alternative scenarios for the hydrocarbons sector were also discussed, and the staff agreed with the authorities on steps toward implementing an appropriate hydrocarbons policy.

The fiscal deficit after grants is to be reduced to 5.2 percent of GDP in 2005. This will be achieved by already adopted fuel price increases, higher gas export royalties, and the full year impact of the financial transactions tax. Cuts in nonpriority spending will allow the initiation of high priority road projects.

Monetary policy will aim to strengthen NIR further, while gradually introducing greater flexibility to the exchange rate. The program targets an NIR accumulation of US$40 million, the enhancement of debt management practices, and the introduction of a two-way foreign exchange auction in 2005.

Measures are being taken to reduce risks in the still-fragile financial system. These include the gradual phase-in of additional loans provisions; moderate increases in average reserve requirements on foreign currency deposits; and the preparation of a draft law on a deposit insurance scheme, which will be submitted to Congress later in the year.

Risks to the program remain substantial. The social and political situation remains fragile, while domestic consensus is weak and calls for regional autonomy are growing. Fiscal and financial risks remain high, with a high level of domestic debt to roll over, and the highly dollarized financial system vulnerable to deposit runs. Considerable uncertainty also surrounds hydrocarbons policy.

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April 8, 2005

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Press Release No. 05/78

FOR IMMEDIATE RELEASE

April 8, 2005

International Monetary Fund

Washington, D.C. 20431 USA

Telephone 202-623-7100

Fax 202-623-6772

www.imf.org

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April 8, 2005