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
Author: International Monetary Fund
Publication Date:
29 Apr 2005
eISBN:
9781451805789
ISBN:
9781451805789
Language:
English
Keywords:
ISCR; CR; staff assessment; government; policy development; Executive Board's discussion; SDR; unviable bill; exchange rate; central bank; broad money; government paper; debt service; Government debt management; Global
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This paper discusses Bolivia’s Fifth Review Under the Stand-By Arrangement (SBA), Request for Waiver of Nonobservance of Performance Criteria (PC), and Rephasing, Augmentation, and Extension of the SBA. 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 nonfinancial public sector. Macroeconomic developments have been positive, largely reflecting the favorable global environment, although 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.

Abstract

This paper discusses Bolivia’s Fifth Review Under the Stand-By Arrangement (SBA), Request for Waiver of Nonobservance of Performance Criteria (PC), and Rephasing, Augmentation, and Extension of the SBA. 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 nonfinancial public sector. Macroeconomic developments have been positive, largely reflecting the favorable global environment, although 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.

I. political context

1. Political tensions pose serious challenges to the implementation of the authorities’ economic agenda. With difficult relations between the executive and legislative branches, Congress did not approve the new hydrocarbons framework in 2004, while the 2005 budget—which was not in line with the program—became effective on a lapse of time basis without formal congressional approval.

2. Moreover, regional pressures intensified after the authorities raised fuel prices at end-2004. In a long-delayed move, the authorities increased gasoline and diesel prices by 10 percent and 23 percent respectively, while prices of LPG remained unchanged. However, opposition by the rich oil producing eastern regions led to a reduction in the diesel price increase to 15 percent. The price increases also triggered demonstrations and calls for greater regional autonomy.

3. President Mesa has acceded to demands from different political groups. The announced, though not yet implemented, cancellation of a contract with a French firm that provided water services assuaged tensions in El Alto, but has created fears of legal stability for private investors and runs the risk of a costly legal process. Pressures are also growing for the creation of a development bank to reactivate credit flows. Demonstrations in Santa Cruz, Bolivia’s main economic center, in January, led to the authorities to agree to demands for elections of regional governors in June 2005, and a planned referendum on regional autonomy. Against this background, in early February, President Mesa swore in a new cabinet, replacing key ministers, including the Minister of Economic Development.

4. Following continuing political difficulties, President Mesa offered to resign and call early elections. The presidential offer followed steps by Congress toward approving a nonviable hydrocarbons bill and demonstrations and road blockades called by an opposition party.

5. After Congress refused to accept his resignation, President Mesa agreed to stay in office. Domestic conditions have since improved somewhat, as roads and airports have now been cleared. Congress is continuing to consider a controversial hydrocarbons bill, but the authorities has made clear that they will work toward an acceptable bill.

II. recent economic developments and program performance

6. Recent macroeconomic developments continue to be positive and the 2004 targets were largely achieved, but the economy remains vulnerable. Key economic developments are as follows:

  • Economic activity picked up in 2004. Real GDP growth in 2004 is estimated to have been in line with the program projection of 3¾ percent, buoyed by hydrocarbon and mineral exports. Twelve-month inflation reached 4.6 percent by end-year, exceeding the target of 3.5 percent, owing to high imported inflation, and larger than expected transportation costs in anticipation of fuel price increases (Figure 1).

  • The current account surplus is expected to be 3 percent of GDP in 2004, partly offset by capital outflows (Figure 2). Exports rose by about 35 percent, largely reflecting a favorable external environment for hydrocarbon products. A recovery in deposits during the second semester reduced the large capital account deficit in the first semester, and resulted in an overall balance of payments surplus of US$125 million (1½ percent of GDP).

  • Financial system deposits have recovered somewhat, but the system remains highly vulnerable (Figure 3). Deposits partially recovered from losses experienced in the context of the introduction of the financial transactions tax (FTT). Still, end-2004 deposits were 4¼ percent lower than a year earlier, while financial system liquid reserve coverage of deposits stood at 45 percent. As of February 23, 2005, deposits had declined slightly further (by less than 1 percent) relative to end- 2004.

  • Reflecting improving liquidity conditions, placements of government paper in local currency and at longer maturities increased in the latter part of 2004 (Figure 4 and 5). Weekly placements of government paper averaged around US$10 million from mid-July through end-2004 with: (i) the proportion of the stock of government paper in local currency increasing by 5 percentage points through 2004 to 21 percent; and (ii) the maturity on new placements lengthening from under a year at end-June, to over 1½ years by end-year.

  • While interest rates in US dollars have fallen, rates in local currency have remained steady (Figure 6). Despite a sharp increase in mid–2004, the interbank rate and the rate on one-year treasury bills in foreign currency declined by 132 and 193 basis points, respectively, in 2004. This reflected improved liquidity conditions and low international interest rates. However, the rate on treasury bills in local currency only declined by 28 basis points, increasing the spread over one-year foreign currency bonds to over six percentage points.

Figure 1.
Figure 1.

12-Month inflation

Percent change

Citation: IMF Staff Country Reports 2005, 146; 10.5089/9781451805789.002.A001

Figure 2.
Figure 2.

External current and capital account

(In millions of US dollars)

Citation: IMF Staff Country Reports 2005, 146; 10.5089/9781451805789.002.A001

Figure 3.
Figure 3.

Financial system deposits and NIR

Citation: IMF Staff Country Reports 2005, 146; 10.5089/9781451805789.002.A001

Figure 4.
Figure 4.

Stock of government paper in local currency

In millions US$

Citation: IMF Staff Country Reports 2005, 146; 10.5089/9781451805789.002.A001

Figure 5.
Figure 5.

Average maturity of treasury paper placements (TGN)

In days

Citation: IMF Staff Country Reports 2005, 146; 10.5089/9781451805789.002.A001

Figure 6.
Figure 6.

Interest Rates

In percent

Citation: IMF Staff Country Reports 2005, 146; 10.5089/9781451805789.002.A001

7. Most quantitative end-September (PCs) and end-December (indicative) targets were met. The only targets missed were: (i) the end-September PC on central bank credit to the NFPS (by less than US$2 million), owing to delays in grant disbursements; and (ii) the indicative net domestic financing target for end-December, as the authorities opted for domestic financing to compensate for external financing shortfalls.

8. The 2004 fiscal deficit target was met with some margin. Revenues were higher than expected by 0.9 percent of GDP, owing mainly to the tax regularization program and taxes on hydrocarbons exports. This was partially offset by higher capital spending of around 0.6 percent of GDP, mainly on roads. Current spending was in line with the program.

9. NIR were well above targeted levels in 2004, but have declined since. With a recovery in deposits, favorable external conditions, and the receipt of previously delayed external disbursements, NIR at end-2004 were above programmed levels by a large margin (over US$190 million) and registered an increase of US$139 million over the year. Through February 24, 2005, NIR fell by US$79 million from end-December, partly reflecting seasonal factors.

10. Progress has been made on structural reforms, although there have been some delays in important areas (see Table 2 of the MEFP). The high-level expenditure commission completed its recommendations on spending (end-September PC), but the end- September PC on congressional approval of the administrative procedures to the tax code was not met. Although the procedures law has been approved by the Upper House of Congress and received a favorable opinion from the Lower House Finance Committee, Congress as a whole has not taken up the issue given the focus on hydrocarbons issues. Nevertheless, the tax code appears to have been operating correctly. All benchmarks related to the financial sector were implemented, with the exception of that on establishing the Financial Restructuring Fund as a legal entity. Finally, the key end-October benchmark on approving an appropriate hydrocarbons law was not met. The law has been subject to a protracted and contentious debate, while the government has focused on limiting the risks of Congress adopting an inappropriate framework for the sector.

Table 1.

Bolivia: Selected Economic and Financial Indicators

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

SBA (Country Report No. 04/5).

External debt indicators reflect assistance under the original and enhanced HIPC Initiatives, and beyond HIPC relief. Domestic debt is the nonfinancial public sector debt, excluding bonds issued for the recapitalization of the central bank. End-2003 external debt reflects valuation changes.

Equal to central bank’s gross official reserves plus commercial banks’ liquid asset requirement (RAL) held overseas; excludes reserves from the Latin American Reserve Fund (FLAR).

Ratio of central bank gross disposable reserves (excluding gold holdings) plus commercial banks’ liquid assets in foreign currency to financial system deposits.

External debt indicators reflect assistance under the original and enhanced HIPC Initiatives, and beyond HIPC relief; includes obligations to the Fund and debt with public guarantee. End-2003 external debt reflects valuation changes.

Official (sell) exchange rate.; August 30, 2004.

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.

III. Policy Discussions

11. As Bolivia still needs to develop consensus on medium term policies, program discussions focused on an extension of the SBA. Though the authorities would prefer a three-years PRGF arrangement with the Fund, significant uncertainty still surrounds medium term policies, including the hydrocarbons framework. The planned Constituent Assembly later this year may also have implications for medium-term structural economic issues. Against this background, the staff discussed a twelve-month extension of the SBA predicated on key prior actions (Box 1) and critical fiscal and financial reforms. The extension would help maintain macroeconomic stability during the coming year, as part of continued international efforts to assist Bolivia, while giving the authorities additional time to consolidate consensus on medium-term policies.

Key Policy Measures Adopted since November 2004 1/

Fiscal Policy

  • Increase in domestic prices of gasoline and diesel of 10 and 15 percent, respectively.

  • Issuance of a supreme decree reducing spending limits below the 2005 budget, consistent with a deficit target of the combined public sector of 5.2 percent of GDP after grants.

  • Submission to Congress of a revised budget consistent with the program deficit target and nonconcessional financing of 1.5 percent of GDP.

Financial Sector:

  • Issuance of a supreme decree to eliminate regulatory powers of the Ministry of Finance over the financial system.

  • Issuance of norms tightening loan classification and provision regulations, calling for gradual increases in provisions, with the first effective increase taking place by end-May 2005.

  • Submission to Congress of legislation establishing the Financial Restructuring Fund (FRF) as a legal entity.

1/ Except for the fuel price increase, other measures were prior actions to issue Board documents.

12. Discussions for completion of the fifth review and extension of the program centered on: (i) assessing performance through end-September and end-December, 2004; (ii) monitoring progress toward securing a 2005 budget consistent with a deficit after grants of 5¼ percent of GDP and a net nonconcessional financing ceiling of 1½ percent of GDP; and (iii) assessing alternative debt sustainability scenarios, including under different assumptions for the hydrocarbons sector. The mission also discussed: (i) the recommendations of the expenditure and pension commissions; (ii) recent FAD TA on decentralization and public expenditure management; (iii) recent MFD TA on measures to promote greater exchange rate flexibility and the use of domestic currency; (iv) debt management issues; and (v) progress on preparation of a new PRSP.

A. Fiscal Policy

13. The authorities aim to reduce the fiscal deficit to 5¼ percent of GDP after grants in 2005, and limit nonconcessional financing to 1½ percent of GDP. The authorities have already adopted a balanced package of fiscal measures for 2005, including: (i) fuel price increases; (ii) clear spending priorities to allow for the implementation of key road projects within program ceilings; and (iii) the issuance of decrees to reduce budgeted spending by 3½ percent of GDP and thus set spending ceilings in line with the program. To receive congressional endorsement of the program spending ceilings, the executive recently submitted an amended budget in line with the program. In addition, the program aims to reduce the deficit target further by one-third of any tax revenue over-performance, thus saving revenue windfalls for which there is no sharing agreement with regions.

14. Despite the loss of one time tax amnesty collections (1½ percent of GDP) in 2004, revenues would increase by 0.3 percent of GDP relative to 2004 (Table A). The staff stressed the need to compensate for the loss of temporary revenues, while incorporating appropriate safety nets to protect vulnerable groups. With the signature of agreements with Argentina on higher prices and volumes of gas exports, and programmed volume increases to Brazil, gas royalties would increase by about ½ percent of GDP. In addition, the increase in fuel excise taxes led to a fiscal yield of around 1 percent of GDP. Fuel prices still remain well below the average in Latin America (Table B). To reduce the impact on the poor, the authorities maintained LPG subsidies, despite their high costs to the budget, and strengthened their employment program (PLANE) targeted on rural and poor areas.

Table A.

Fiscal accounts

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Source: Bolivian authorities and staff estimates
Table B.

Domestic Fuel Prices 1/

(US dollars per liter)

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Brazil (December 2004); Chile (December 2004); Peru (January 2005); and Uruguay (November 2004)

15. Overall spending would decline by 0.3 percent of GDP in 2005, with cuts in nonpriority spending allowing the initiation of priority road projects. Spending has been constrained by keeping public sector wage increases below inflation, containing fuel subsidies, and maintaining capital spending at 2004 levels as a share of GDP, through improved quality and reprioritization. The resulting savings more than offset the small increase in pension costs, which reflects the regularization of eligible pensioners under the old system. The authorities also aim to mitigate the rising pension costs by implementing measures to reduce fraud, in line with the findings of the pension commission. The mission urged the authorities to further accelerate pension reform, in cooperation with the IDB.

16. Congressional approval of an amended budget in line with the program and the tax code procedures are PCs for end-June. The staff pressed for these measures before completing the review. However, in light of the difficult political circumstances, the authorities preferred to focus their political capital in early 2005 on adopting an appropriate hydrocarbons framework, before switching attention to the budget and administrative procedures to the tax code. The authorities argued that the current tax code procedures issued by decree were operating well, as evidenced by tax collection in line with the program.

17. Understandings were reached on steps to improve the tax system and implement a sustainable tax reform. Following FAD TA recommendations, the authorities are considering introducing a personal income tax that would exempt 80–85 percent of the population, and eliminating the transactions tax (combined with an increase in the VAT rate) and the various special regimes. In this connection, the authorities would prepare a tax package for submission to Congress in September (benchmark to be converted into a PC after its specific components are identified in the context of the next review), for adoption by end- October 2005 (benchmark). The authorities are also looking to strengthen customs and tax administration.

18. The authorities are taking actions to reduce significant vulnerabilities resulting from the weak budget and decentralization processes (Box 2). The authorities concurred with the diagnosis of recent FAD TA, and have begun to take measures, including by preparing (i) an audit on subnational debt, to be ready by end-September (benchmark); and (ii) a draft organic budget law, with submission and approval as benchmarks for end-June and end-October 2005 respectively.

B. Monetary and Exchange Rate Policy

19. Discussions focused on the need to continue rebuilding reserves, while gradually introducing greater flexibility to the exchange rate. Although reserves were above programmed levels by end-2004, the authorities agreed that, given the fragility of Bolivia’s highly dollarized banking system—and the NIR loss in early 2005—a further build up would be appropriate in the rest of 2005. The staff urged the authorities to follow closely the evolution of NIR and adopt prompt corrective actions should further losses compromise the agreed NIR accumulation target of US$40 million for the year as a whole. The latter would increase reserve coverage to about 46 percent by end-2005, still well below levels in comparable dollarized countries. In line with MFD TA recommendations, the staff pushed for some increased flexibility of the crawling peg regime, including by conducting foreign exchange purchases to take advantage of the positive external environment. The authorities agreed, but indicated that they would move cautiously given the risk of being misinterpreted by market participants. They intend to introduce a two-way auction—taking advantage of a new electronic platform recently introduced for open-market operations—by end-September 2005.

20. With the staff emphasizing the significant debt roll-over risks in 2005, the authorities agreed to take steps to increase further placements of government paper in domestic currency and at longer maturities. While commending the authorities for increasing debt placements in local currency in 2004, the staff noted that (i) nearly 80 percent of Bolivia’s public sector domestic debt stock was still dollar-denominated; and (ii) some US$400 million in domestic debt was falling due in 2005, making Bolivia highly vulnerable to an exchange rate depreciation and roll over risks. To mitigate these risks, the authorities intend to further increase placements of bonds in local currency and at longer maturities, allowing interest rates to increase as necessary. In addition, the authorities have recently stablished a joint Ministry of Finance/Central Bank debt management unit to improve the structure of debt, including by setting targets for reducing short-term and dollar-denominated debt, monitoring progress, and offering recommendations to correct for deviations1.

Budget and Decentralization Processes1

Fiscal policy has been hampered by weak budget and decentralization processes. This has led to soft budget constraints and poor prioritization at all levels of government. Among the main weaknesses are:

  • Based on over-optimistic revenue estimates and unrealistic spending ceilings, the budget and medium term fiscal framework lack credibility;

  • Limitations in the government financial information system (SIGMA), including the lack of a functional budget classification, make it difficult to monitor public sector spending—particularly to adequately track pro-poor and subnational governments’ operations.

  • The lack of clear responsibilities for subnational governments means they have few incentives to manage spending—such as on health and education—efficiently or to raise their own revenues.

  • The complex transfer system with excessive earmarking leads to the simultaneous accumulation of deposits and growing debt at the subnational level.

A strategy to address the structural weaknesses in the budget process is needed. It should focus, in the short-term, on (i) approval of an organic budget law, to have a legal framework for an improved and effective budget process; (ii) improving information systems; and (iii) the use of a proper functional classification.

Weaknesses of the decentralization process should also be addressed, particularly in the context of the forthcoming Constituent Assembly. In particular,

  • Quality of the education and health sectors should be improved, while reducing costs, particularly the wage bill. In the short run, an audit of the number of teachers and health workers should be conducted, and clear salary rules established. In the long run, all responsibilities for teachers should be at one level of government.

  • Subnational governments should be allowed to raise their own revenues, possibly by setting surcharge rates on central taxes and having some control over local tax rates.

  • To increase equity and efficiency, a new equalization system based on revenue capacities and expenditure needs, and clearly defined tied-transfers, to meet central government policy objectives could be set up.

  • An independent audit of subnational floating debt and a debt register should be established.

1 This box relies heavily on a recent FAD TA report on budget and decentralization processes.

C. Financial Sector Policy

21. The authorities are taking a number of steps to protect the financial system and reduce liquidity, solvency, and credit risks (¶16 and 17 of the MEFP). During the last 6 months, the authorities have intervened three savings and loans institutions that failed to comply with capital adequacy requirements in 2004, repealed supreme decrees granting forbearance on loan classification and provisioning, issued a decree eliminating regulatory powers of the Ministry of Finance over the financial system, and introduced a new norm for the gradual phase-in of the additional provisions. Looking ahead, after the staff cautioned against achieving increases in reserve requirements on foreign currency deposits through large increases in marginal rates, the authorities agreed to moderate increases in average rates. This will start in April, with an increase of 2 percentage points (benchmark). The sale process for the state’s participation in banks majority-owned by NAFIBO, is also agreed as an end-December 2005 structural PC.

22. The program incorporates steps toward a properly functioning bank resolution framework. These would be crucial to strengthen supervision, and reduce risks and moral hazard problems in bank resolution. In this connection, the authorities recently submitted to Congress legislation to ensure that the Financial Restructuring Fund is established as a legal entity, and that the bank resolution process continues to function properly in 2005. In addition, a bill creating a deposit insurance scheme, with partial coverage and adequate financing, is expected to be submitted to Congress by end-September 2005 (benchmark).

23. Following staff concerns, the authorities stressed that, despite pressures, they do not intend to create a development bank. The authorities have been searching for ways to support productive activities, but they have reassured the staff that funds devoted to this would come from the reallocation of existing resources; and that activities of second-tier banks (including NAFIBO and FONDESIF) will avoid subsidies, bailouts or special treatment for specific sectors.

24. The pace of corporate restructuring initiatives has been slow. So far, only one firm has qualified for a pilot study, prohibiting any significant lessons from being drawn. Therefore, the end-November 2004 benchmark on submission to Congress of amendments to the corporate restructuring framework was missed. Against this background, and with World Bank advice, the authorities agreed to address known deficiencies of existing laws, including to appropriately protect creditor rights. The authorities intend to submit legislation to Congress improving the corporate restructuring and bankruptcy framework by end- September 2005 (benchmark).

D. Hydrocarbons

25. Given regional pressures and divisions within Bolivian society and Congress, a consensus is yet to emerge on an appropriate hydrocarbons strategy. Oil companies are concerned that the framework under discussion in Congress will increase the role of the state, weaken property rights, and significantly increase taxation on large fields. They argue that if this occurs, it would make new large investments unviable, and have threatened international arbitration. Pulling in opposite directions, some political parties are arguing in Congress for an even greater role for the state, while oil-producing regions are calling for increased autonomy and a higher share of the tax take.

26. The authorities acknowledged the importance of approving an appropriate hydrocarbons law consistent with increased foreign investment and medium-term debt sustainability. The staff welcomed President Mesa’s commitment to veto any inappropriate hydrocarbons law. In the Bolivian legal framework, the veto could be selective and cover only inappropriate provisions. The authorities assured staff that they were committed to working with Congress to secure an appropriate law by end-June 2005 that balances the concerns of the population for a higher tax take, while maintaining an environment conducive to increased investment (benchmark). The staff, in collaboration with the World Bank, will continue to assess progress toward the development of a viable hydrocarbons strategy, taking into the account the findings of the commission of international experts, which were reported to the authorities at end-2004.

E. PRSP and Medium-Term Agenda

27. The National Dialogue was completed by December 2004 and a draft PRSP is under preparation. The National Dialogue discussions concluded that any sustainable poverty reduction strategy needed to increase employment of the poor. Reflecting this, the PRSP is expected to focus on employment generation, as well as improvements in social indicators and infrastructure. The authorities assured the staff that they would not give in to pressures to include populist policies—such as greater state intervention in the economy—in the PRSP. The staff noted that the PRSP should also present sustainable sources of fiscal revenue, well-targeted social safety nets, and clear priorities for national spending, consistent with fiscal sustainability. A follow-up Consultative Group meeting could take place later in the year.

28. Debt sustainability analysis highlights the critical need for further fiscal consolidation coupled with a viable hydrocarbons bill (Box 3). The baseline scenario conservatively assumes increased gas exports only to regional markets, and continued fiscal consolidation. This projection points to a debt to GDP ratio below 48 percent of GDP in net present value terms by 2015. An alternative scenario, based on gas exports remaining at their 2005 levels (Figure 7), shows that debt dynamics deteriorate significantly. Stress tests to the baseline scenario illustrate that debt sustainability is highly vulnerable to a variety of shocks and to policy inertia. In particular, a lack of fiscal consolidation and a large real exchange rate depreciation—given a highly dollarized public debt stock and financial system—would worsen debt dynamics considerably (Figure 8).

Figure 7.
Figure 7.

Alternative Gas scenarios

NPV of public debt (% of GDP)

Citation: IMF Staff Country Reports 2005, 146; 10.5089/9781451805789.002.A001

Figure 8.
Figure 8.

Stress Tests

NPV of public debt (% of GDP)

Citation: IMF Staff Country Reports 2005, 146; 10.5089/9781451805789.002.A001

Medium Term Sustainability of Public Sector Debt

Despite Bolivia’s current high level of public sector debt—around 54 percent of GDP in NPV terms—debt sustainability can be achieved provided a hydrocarbons framework conducive to further investment is adopted and further fiscal consolidation is implemented. Because of the macro-critical nature of the hydrocarbons sector and the significant uncertainty surrounding the new hydrocarbons bill, two alternative scenarios were considered, with high and low hydrocarbons exports. The low hydrocarbons export scenario demonstrates that even to keep debt stable, a high degree of fiscal adjustment is needed. Stress tests further reveal that Bolivia’s debt dynamics are vulnerable to various shocks, particularly an exchange rate depreciation and lack of fiscal adjustment.

Hydrocarbons scenarios (Table 10)

  • Baseline scenario. While Bolivia has large natural gas reserves, this scenario only assumes gas exports to regional markets. The scenario envisages an increase in gas exports to Brazil—as already contracted—and the firming up of talks to extend and augment the contract to export gas exports to Argentina, that is due to expire at end-2005. Even with the projected increase in gas exports, fiscal consolidation is essential to reduce debt. The budget deficit is assumed to decline by 5 percentage points from 2004–2015. The NPV of debt declines from 54 percent of GDP in 2003 to 47 percent of GDP by 2015.

  • High exports scenario. With a more favorable investment climate, Bolivia’s gas reserves are exploited more intensively, with further exports to Brazil or North America as possibilities. The significantly higher exports lead to higher GDP and a lower fiscal deficit, resulting in a bigger decline of NPV of debt to GDP ratio to less than 40 percent by 2015.

  • Low exports scenario. This assumes that Bolivia adopts a hydrocarbons law that is not conducive to continued investment, with gas exports to Brazil and Argentina remaining at 2005 levels and no new projects coming on stream. A higher fiscal deficit and lower GDP lead to the NPV of debt rising to about 63 percent by 2015.

Stress tests (Table 11)

The following stress tests to the baseline were considered:

  • A lower oil prices test assumes that the crude petroleum price falls below the WEO baseline by US$15 in 2005 and US$10 each year thereafter. The reduced revenues from oil exports and lower GDP lead to an increase in NPV of debt to GDP to about 60 percent by 2015.

  • A higher nonconcessional financing test assumes (i) a gradual fall in grants to zero by 2010; (ii) an increase in net non concessional borrowing of 3.1 percent of GDP on average starting in 2005; and (iii) that each 1 percent fall in grants leads to only a 0.7 percent increase in the primary deficit, because the fall in grants will lead to the discontinuation of some externally financed projects. The NPV of debt to GDP reaches 65 percent by 2015.

  • A higher interest rate test assumes that interest rates on nonconcessional external and domestic borrowing increase by 3 percent points each year starting in 2005. The NPV of debt to GDP rises to more about 52 percent by 2015. This likely provides only a lower bound of the impact on debt, as the scenario looks at the passive impact of higher debt service costs on nonconcessional debt and not the negative effect of higher interest rates on economic activity, especially on the financial sector.

  • An exchange rate devaluation test models a 30 percent devaluation in 2005, which remains permanent. The NPV of debt to GDP rises sharply to 80 percent in the aftermath of devaluation, but subsequently gradually falls to 68 percent by 2015. Again, this is likely to be a lower bound as it does not include the potentially debilitating impact of the devaluation on the financial system and hence on economic activity.

  • A higher earmarking test assumes 100 percent earmarking of the revenues from the hydrocarbon tax envisaged under the new hydrocarbons law. The NPV of debt to GDP rises initially until 2009, but thereafter declines to 55 percent by 2015.

  • An unchanged primary balance test assumes that the primary balance stays at the level of 2004 (a -2.7 percent primary deficit) throughout 2005–2015. The NPV of debt to GDP rises to the highest level—83 percent—by 2015 and becomes unsustainable. This result underscores that a lack of fiscal adjustment is the most serious risk.

Table 3.

Bolivia: Summary 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.

Revised SBA (Country Report No. 04/5).

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 HIPC 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 comprises the central bank, commercial banks, the National Financial Institution of Bolivia and FONDESIF, which are state-owned second-tier banks.

Includes special certficates 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.

Due to some changes in classification, central bank credit to the public, financial and other sectors has been revised in 2002/3.

At the beginning of 2005 Banco Los Andes was reclassified as a bank.

This has led to a step increase in the levels of broad money and credit to the private sector in 2005.
Table 5.

Bolivia: Medium-Term Macroeconomic Framework

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Sources: Central Bank of Bolivia; and Fund staff estimates and projections.
Table 6.

Bolivia: Commercial Banks Performance Indicators

(In percent)

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Source : Superintendency of Banks
Table 7.

Bolivia: Schedule of Purchases Under the Extension of the SBA

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Source: Fund staff estimates.
Table 8.

Bolivia: Millenium Development Goals

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Source: World Development Indicators database, April 2004Note: In some cases the data are for earlier or later years than those stated.Goal 1 targets: Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day. Halve, between 1990 and 2015, the proportion of people who suffer from hunger.Goal 2 target: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling.Goal 3 target: Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels of education no later than 2015.Goal 4 target: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate.Goal 5 target: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.Goal 6 targets: Have halted by 2015, and begun to reverse, the spread of HIV/AIDS. Have halted by 2015, and begun to reverse, the incidence of malaria and other major diseases.Goal 7 targets: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. Halve, by 2015, the proportion of people without sustainable access to safe drinking water. By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers.Goal 8 targets: Develop further an open, rule-based, predictable, non-discriminatory trading and financial system. Address the Special Needs of the Least Developed Countries. Address the Special Needs of landlocked countries and small island developing states. Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term. In cooperation with developing countries, develop and implement strategies for decent and productive work for youth. In cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries. In cooperation with the private sector, make available the benefits of new technologies, especially information and communications.
Table 9.

Bolivia: Indicators of Fund Credit, 2001-2009

(On obligation basis)

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Sources: Central Bank of Bolivia; International Monetary Fund, Treasurer’s Department; and Fund staff projections.

Gross financing needs are defined as the sum of the external current account deficit, scheduled amortization, repayments to the fund, changes in gross international reserves of the central bank, change in arrears, and net private capital flows.