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.
1. On behalf of our Bolivian authorities, we would like to thank the Executive Directors, Management, and the staff for their continuous support. The Bolivian authorities confirm their strong commitment to preserving macroeconomic stability and promoting structural reforms to achieve higher and sustainable growth, create employment opportunities, reduce poverty, and enhance social equity. They are particularly committed to creating a business environment aimed at protecting investors and enforcing contracts.
I. Background and Overview
2. Despite difficult political and social conditions, the Bolivian authorities continue to implement a solid economic program. During 2004 the program remained on track. All quantitative performance criteria were observed, with the exception of the end- September target on central bank credit to the non-financial public sector, which was marginally missed. The end-September structural performance criterion on administrative modifications to the tax code was also missed, as congressional deliberations centered on the hydrocarbons bill.
3. Macroeconomic developments were positive, reflecting a favorable global environment. Preliminary estimates for 2004 point to real GDP growth of 3¾ percent, in line with the program; 12–month inflation was 4.6 percent by end-year, exceeding the program target of 3½ percent, mainly due to imported inflation; and the current account surplus was around 3 percent of GDP, with strong growth in gas, mining, and agricultural exports.
4. Preliminary data for 2004 point to a fiscal deficit of 5.7 percent of GDP, 0.3 percent of GDP below the indicative target. Revenues were higher than programmed, as well as public investment, while current spending was in line with the program. It is important to underscore the enormous effort displayed by the Bolivian authorities to reduce the deficit to 5.7 percent of GDP in 2004, from 8.1 percent of GDP in 2003, despite mounting political pressure and social demands.
5. In 2004, net international reserves exceeded the program target by about US$193 million and reserve coverage increased to 39 percent of financial sector dollar deposits, from 31 percent in 2003. In order to reduce debt vulnerabilities, the authorities considerably increased gross placements in domestic currency and lengthened the average maturity of the debt. Nevertheless, important vulnerabilities remain, since 80 percent of the domestic debt is still dollar-dominated and US$400 million is due in 2005.
6. Even though the government does not have representation in Congress, it has been able to strengthen its political standing over the past months and recently it obtained the support of 30 representatives. While this figure is low in relation to the total number of representatives (157), the authorities are confident that this will help them to press forward with the approval of crucial reforms. In this regard, the government will attempt to pass a hydrocarbons law geared to support a substantial increase in gas exports. A bill was approved by the Lower Chamber on March 24, 2005 and is currently being discussed by the Development Commission of the Senate. Quite importantly, the government is attempting to amend the law approved by the Lower Chamber, in fact, disagreement on the approved bill was one of the main reasons for the President’s move to submit his resignation and call for early elections in March.
II. Economic Policy
7. The main challenges facing the Bolivian authorities are high unemployment, an elevated fiscal deficit, and a vulnerable financial system. In this regard, the economic program supported by a Stand-By Arrangement over the next 12–months will focus on policies aimed at reducing fiscal and financial risks. Moreover, the authorities are fully aware that the lack of job opportunities is the source of serious social conflict. A significant decrease in unemployment depends on higher and sustainable growth. In this respect, it is necessary to change the role of the state and improve the business environment. The latter is hindered by governance problems, poor infrastructure, and high costs of operating in the formal sector. These problems will need to be tackled in the context of a comprehensive medium-term program.
Fiscal Policy
8. The 2005 deficit target is 5¼ percent of GDP, consistent with a maximum net use of non-concessional financing of 1½ percent of GDP. The authorities will aim at a lower deficit, should concessional financing fall short of the assumptions under the program. To meet the deficit target, the government has taken the following steps: (i) an increase in excise taxes on fuel in January 2005, with resulting increases of 10 and 15 percent in gasoline and diesel prices, respectively; (ii) issuance of legislation to establish spending limits in the 2005 budget; and (iii) submission to Congress an amended 2005 budget with a deficit of 5¼ percent of GDP, which the authorities expect Congress to approve before the end of June 2005.
9. On the structural side, the authorities are preparing a comprehensive tax reform to enhance revenue collections and improve the fairness of the system. Among other measures contemplated is the introduction of a progressive personal income tax that will exempt 80 percent of the population. They expect to submit a bill to Congress by September, which could be approved by October. In addition, one of the authorities’ priorities is to strengthen tax and customs administrations. Regarding the latter, a comprehensive strategy towards reducing smuggling and corruption is being implemented. We thank the staff for technical assistance in the design of both reforms.
10. The authorities are adopting the recommendations made by the expenditure and pensions commissions to contain and improve the composition of public spending. In this regard, the government: (i) issued legislation to establish prudential norms for stopping pension fraud and is committed to implementing the recommendations of the pensions commission, which over time could reduce pension costs by up to 0.5 percent of GDP on an annual basis; (ii) intends to limit the increase in public sector wages below 3 percent and develop an action plan to reform the civil service, building on the recommendations by the World Bank-IDB Public Expenditure Review; (iii) will complete a comprehensive employment survey in the health and education sectors and set up a registry to help reduce fraud and increase accountability in this field; (iv) will limit the increase in public university subsidies to inflation in line with the recommendations by the high-level expenditure commission, given the growing spending imbalances between university and secondary education; and (v) will keep capital spending and transfers to the state oil company (YPFB) and other state agencies at their 2004 levels.
11. Due to the challenges and risks associated with decentralization and the Constituent Assembly, the authorities intend to prepare an Organic Budget Law with Fund technical assistance and to conduct an audit at the sub-national level with the purpose of taking immediate steps in reducing municipalities’ debt and improving monitoring of spending.
Monetary, Debt, and Financial Policies
12. In 2005, monetary policy will target an increase in net international reserves of the central bank, excluding deposits of financial institutions of US$40 million, thus raising reserve coverage to 41 percent of projected dollar deposits. Moreover, the authorities intend to increase their efforts to reduce debt vulnerabilities through the following actions: (i) they have established a debt management unit to improve the structure of the debt, including setting targets for reducing short-term, indexed, and dollar denominated debt, closely following up on progress towards these goals, and recommending changes to correct any deviations; and (ii) they will improve the currency composition and maturity structure of domestic debt, including through further increases in interest rates, if necessary. In addition, market conditions permitting, the authorities will reduce the Treasury’s debt with the central bank and increase central bank net international reserves.
13. Financial system policies focus on reducing liquidity and solvency risks. Specifically, (i) the Superintendence of Banks and Financial Institution (SBEF) improved its early warning systems to monitor liquidity and solvency risks; (ii) the government eliminated legislation that relaxed provisioning requirements, and the SBEF issued tight norms on loan classification and provision regulations for a gradual increases in provisions through May 2008, with the first increase to take place by end-May 2005; (iii) the government submitted to Congress an amendment to the banking law for the creation of the Financial Restructuring Fund as a legal entity, to ensure appropriate financing for bank resolution processes through end-2005 and to reinforce the SBEF’s regulatory and budgetary autonomy; and (iv) the authorities clarified that regulatory powers over the financial system lie only with the central bank and the SBEF.
14. The authorities intend to submit by September 2005 a bill creating a deposit insurance scheme, with partial deposit coverage and adequate financing; and will sell the state’s stake in NAFIBO1 bank by December 2005. Moreover, the Bolivian authorities will submit to Congress a draft legislation to improve the legal framework for corporate restructuring and bankruptcy by end-September 2005.
15. To strengthen the prudential framework and induce banks to internalize risks associated with the high level of dollarization, the central bank plans to gradually increase reserve requirements on dollar deposits. In addition, by August 2005 the SBEF will require financial institutions to assess their exposure to credit risks derived from debtors’ currency mismatches.
III. Next Steps
16. Bolivia has large gas reserves. Efficient exploitation is critical to ensure that this resource enhances growth, reduces poverty, and contributes to debt sustainability over the medium term. Despite difficulties, by end-June 2005 the authorities are expecting Congress to approve a hydrocarbons law that can facilitate the adoption of a gas export strategy. The authorities have emphasized that Bolivia needs a framework to attract investment and generate increasing revenues by eliminating tax loopholes and improving administration.
17. Finally, the participatory process with civil society to provide input for a new PRSP, embodied in the National Dialogue, was concluded in December 2004. Building on this, and after the hydrocarbons law is approved, the Bolivian authorities plan to request Fund support for the policies formulated in the PRSP through a new three-year arrangement. The authorities have been holding meetings with the international community to exchange views on a PRSP strategy, and plan to hold a follow-up Consultative Group meeting later in the year.
Nacional Financiera Boliviana (NAFIBO) is a second floor financial institution. The state and the Andean Development Corporation own 80 and 20 percent of shares, respectively.