Bolivia: Staff Report for the 2006 Article IV Consultation
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International Monetary Fund
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Publication Date:
26 Jul 2006
eISBN:
9781451805802
Language:
English
Keywords:
ISCR; CR; state; Bolivian authorities; authority; state oil company; crawling peg; broad money; balance of payments; banking system; private sector; International reserves; Natural gas sector; policy initiative
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Despite good economic reforms, macroeconomic stability, and a major expansion of the hydrocarbon sector, Bolivia still achieved only modest gains in poverty reduction. Executive Directors stressed the importance of fiscal prudence, domestic taxation, and strengthening of public expenditure management to ensure fiscal sustainability. They commended the central bank for its monetary policy stance. They highlight the need to attain greater equity, transparency, and accountability underpinned by cautious macroeconomic policies. They underscored that Bolivia may face a competitive external environment for its nontraditional exports in the period ahead.

Abstract

Despite good economic reforms, macroeconomic stability, and a major expansion of the hydrocarbon sector, Bolivia still achieved only modest gains in poverty reduction. Executive Directors stressed the importance of fiscal prudence, domestic taxation, and strengthening of public expenditure management to ensure fiscal sustainability. They commended the central bank for its monetary policy stance. They highlight the need to attain greater equity, transparency, and accountability underpinned by cautious macroeconomic policies. They underscored that Bolivia may face a competitive external environment for its nontraditional exports in the period ahead.

I. Background

1. Despite wide-ranging economic reforms over the past two decades, the accomplishment of macroeconomic stability, and a major expansion of the hydrocarbons sector, Bolivia has achieved only modest gains in poverty reduction and inequality has remained high. The reform process, which encompassed privatizations and liberalization of the exchange and trade systems, contributed to a major decline in inflation and to an increase in growth in the 1990s. However, the growth performance deteriorated during 1999–2003 in the context of rising social tensions and political instability, and the partial recovery of the last two years has been concentrated in the highly capital-intensive hydrocarbons sector. As a result, Bolivia’s key social indicators have continued to lag (Box 1).

2. Over the past year, Bolivia has experienced major political changes, against the background of entrenched dissatisfaction with the country’s poor social indicators and weak governance. Following a protracted political crisis, the constitution was amended in June 2005 to allow early presidential and congressional elections for a new full five-year period in December 2005, together with the first direct elections for regional governors. Agreement was also reached on calling a constitutional assembly and a referendum on regional autonomy in July 2006. The elections resulted in a major renewal of Congress and in a landslide victory for Evo Morales, the first indigenous head of state in Bolivian history.1

3. The new government has inherited a favorable macroeconomic situation, associated in large measure with the extremely favorable international environment. In 2005, GDP growth was just above 4 percent and the fiscal deficit narrowed to 2.3 percent of GDP (Figures 1 and 2). Inflation was contained below 5 percent following an acceleration early in the year due to petroleum price increases, supply disruptions, and imported inflation. Financial sector stability improved as deposits and credit increased for the first time in several years, and the balance of payments remained strong with official foreign exchange reserves rising to historic highs. Financial dollarization declined, due to expectations of exchange rate appreciation as well as prudential and tax measures that have increased the cost of holding foreign currency.2 The Multilateral Debt Relief Initiative has resulted in a substantial reduction of the public debt burden.3

Figure 1.
Figure 1.

Bolivia: Key Economic Indicators

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

Source: Bolivian authorities.
Figure 2.
Figure 2.

Bolivia: Fiscal Developments

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

Source: Bolivian authorities.

4. The Bolivian authorities have partially implemented the policies recommended in the 2003 Article IV consultation, which were reflected in the design of the program supported by the recently-expired Stand-By Arrangement. Fund advice emphasized regaining fiscal sustainability and improving the efficiency of public spending, maintaining low inflation and seeking a gradual build-up of international reserves, and strengthening the corporate and financial sectors. Under the SBA, substantial progress was made in reducing macroeconomic imbalances and reducing financial sector vulnerabilities. However, important structural issues, including inefficient government spending, remain to be addressed. The 2005 Ex Post Assessment concluded that a new focus was needed on improvements in governance, with a view to strengthening management of public expenditure, rationalizing the tax system, and removing institutional impediments to growth.4

II. Report on the Discussions

5. The authorities’ key objective is to reduce poverty and inequality and achieve improvements in governance, underpinned by prudent macroeconomic management. They plan to achieve these objectives with a policy framework that calls for a greater state role in the two strategic economic sectors (hydrocarbons and mining),5 and for targeted government interventions in support of small- and medium-scale producers, notably through expanded access to credit and the redistribution of land under an extensive land reform.6 The authorities noted that their policies would be reflected in their National Development Plan, an umbrella policy document just finalized. In addition to these issues, a substantial portion of the discussions focused on the short- and medium-term impact of the May 1, 2006 decree on nationalization of the hydrocarbons sector.

6. The mission supported the government’s emphasis on maintaining macroeconomic stability and its vision of greater equity, transparency, and accountability. The staff noted, however, that a careful balance should be sought between a greater role of the state and the preservation of appropriate incentives for private investment needed to support growth and raise employment and living standards. In view of the increasing role that is being proposed for the state, the mission also highlighted the need to preserve strong and efficient public institutions. Moreover, given the objective of maintaining macroeconomic stability, close attention must be paid to the economic impact of government interventions, including their short- and medium-term fiscal cost. In this connection, the mission noted the authorities’ assurances that Bolivia’s unsuccessful experiences of the past with public enterprises and development banking would not be repeated.

Bolivia: Social and Governance Indicators

  • A substantial decline in real per capita income in the period 1999–2003, which was followed by only a modest recovery, contributed to social unrest and to the political crises of recent years. The extensive reform process of the 1980s and 1990s was accompanied by an increase in per capita income in Bolivia, improved social indicators, and some reduction in poverty. However, this trend has been reversed since the late 1990s, partly due to negative external shocks—including the Brazilian and Argentine crises. Furthermore, the economic recovery of the last few years has been concentrated almost exclusively in the hydrocarbons intensive region of Tarija. Thus, the per capita real GDP gains of the 1990s in the highlands and lowlands have been almost completely lost, with per capita income levels in 2004 similar to those of 1992.

  • Social discontent was also fuelled by increased perceptions of poor governance. As social conditions were weakening, so too were perceptions about the governance of the country. Indicators across six dimensions of governance produced by Kaufman et al. (2005)—including voice and accountability, political stability, and control of corruption—show some improvement until the late 1990s, followed by a steady deterioration across all measures.

  • While Bolivia will be able to meet some of the Millennium Development Goals (MDG), it is unlikely to halve extreme poverty by 2015. Some of the MDGs, such as universal primary education and gender equality in primary education, will likely be met. Some other goals, such us reducing child mortality, improving maternal health, combating HIV/AIDS, malaria and other diseases, and increasing access to safe and drinking water, appear within reach, although further efforts are required (Table 9). However, the objectives of reducing poverty to 34 percent and extreme poverty by half will probably not be met since they would require sustained annual growth rates of 5.5–6.5 percent through 2015.

uA01fig01

Real per Capita GDP (1992 = 100)

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

Source: Instituto Nacional de Estadisticas Bolivia

Headcount poverty indicators

(in percent of individuals 1/)

article image

Income based measures. The poverty indices express the number of individuals below the poverty line.

A. Recent Economic Developments and Short-Term Outlook

7. Thus far in 2006, the economy has kept the positive trends observed in 2005. Economic activity has been led by high export values of hydrocarbon and mining products, which have contributed to a strong external current account surplus. Inflation has continued in the low single digits, following a decreasing trend that started in the fourth quarter of 2005, and the overall fiscal position is in surplus. In particular, sub-national governments have been accumulating sizable deposits at the central bank, thereby helping sterilize the monetary impact of the rapid international reserve accumulation. Indicators of banking system soundness have been broadly stable, with high liquidity and capital adequacy ratios above mandatory levels.

8. The economic outlook for the remainder of 2006 remains positive, helped in large part by continued highly favorable external conditions, notably high energy prices. Real GDP growth is expected at just above 4 percent, with inflation in the low single digits (Table 1). The combined public sector is expected to record a near balance for the year as a whole as the temporary extra revenues accrued from the new hydrocarbons policy framework would not be translated immediately into investment spending by YPFB. Reflecting debt relief under the MDRI, the ratio of public debt to GDP is projected to decline from 71 percent at end-2005 to 51 percent by end-2006.7 Accumulation of official reserves is projected to continue, reflecting a strong external current account surplus associated with high international prices of fuels and minerals.

Table 1.

Bolivia: Selected Economic and Financial Indicators

article image
Sources: Bolivian authorities; and Fund staff estimates and projections.

Excludes reserves from the Latin American Reserve Fund (FLAR) and includes Offshore Liquidity Requirements (RAL).

Official (buy) exchange rate.

B. Hydrocarbons Policy

9. Key implementation aspects of the nationalization decree issued on May 1 remain to be negotiated over a period of six months, including the tax regime, export pricing, and compensation for the assets that are being nationalized. High-level negotiating commissions have been appointed by Bolivia and Brazil, and in parallel discussions are being held concerning natural gas exports to Argentina. The authorities emphasized that the nationalization decree was consistent with the 2004 national referendum and the 2005 hydrocarbons law, which the electoral platform of the new government had committed to implement. They also stressed that the new agreements with energy companies would all be approved by Congress, which in their view would provide for a more stable legal regime. The mission underscored the importance of reaching mutually acceptable arrangements with the concerned companies in order to ensure further development of Bolivia’s natural gas reserves and sustained export growth.

C. Fiscal Policy

10. Budget execution in the first three months of 2006 showed an overall surplus of 2.1 percent of GDP for the combined public sector (CPS).8 While expenditure was seasonally low, this surplus reflected mostly strong hydrocarbons-based revenue associated with high oil and gas prices. In particular, sub-national governments accumulated deposits at the central bank at a brisk pace, as their share of hydrocarbons-based revenue was boosted by the change in revenue sharing agreements mandated by the 2005 hydrocarbons law.

11. The overall deficit of the CPS for 2006 is now estimated at only 0.1 percent of GDP, compared with 3.0 percent of GDP projected in the budget, as higher hydrocarbons-based revenues will not be immediately spent. The revenue projection has been revised upward, mainly reflecting increased hydrocarbons prices in international markets and a new hydrocarbon take for YPFB, temporarily set by the nationalization decree at 32 percent of the value of production of gas and oil in the two largest gas fields. This would more than compensate for a significant overall spending increase, associated mainly with: (a) a higher wage bill in the wake of wage increases to the health and education sectors; (b) increased subsidies for diesel imports resulting from higher external prices; and (c) higher capital spending by subnational governments (Table 2). The substantial public enterprise surplus in 2006 reflects mainly the fact that the new revenue accruing to YPFB is not likely to be translated immediately into project spending.

Table 2.

Bolivia: Operations of the Combined Public Sector

(In percent of GDP)

article image
Sources: Bolivian authorities; and Fund staff estimates and projections.

Structural fiscal issues

12. The government is planning to take a range of structural fiscal measures, including to strengthen revenue and improve the budget process. The authorities are working on a base-broadening and equity-enhancing tax reform that would include limiting tax exemptions, rationalizing and revamping free trade zone legislation, shifting large taxpayers in special regimes to the regular regime (e.g., transportation), and bringing into the tax net activities with potentially large taxpayers such as gambling. The authorities also indicated that they will abolish the financial transactions tax (FTT) on boliviano deposits and make it permanent for short-term dollar deposits above US$2,000 in order to retain fiscal revenues while creating an incentive for dedollarization. A reform of mining sector taxation And modifications to the tax refund system are also being considered, as are changes to the pension law aimed mainly at reducing the replacement rate required to retire under the private system (to facilitate for retirement at ages 55 for men and 50 for women, instead of at age 65 for both). The draft budget framework law is expected to be reviewed and resubmitted to parliament,9 and an improved balance between expenditure responsibilities and resources across levels of government will be sought.

Bolivia: Nationalization of Hydrocarbons

Background

  • The 1996 “capitalization” (privatization) process granted a majority stake and managerial control of public enterprises to private investors. At that time, ten companies in telecommunications, electricity, transport and hydrocarbons were divested in favor of foreign investors and the Bolivian population. Foreign firms acquired a 50 percent stake and complete managerial control of those companies in return for investment commitments. Some shares were also distributed among workers. The remaining shares (about 49 percent) were used to create a fund, the Fondo de Capitalización Colectiva (FCC), whose management was assigned to the private pension funds. The dividends on these shares were earmarked to pay the Bonosol—a minimum pension payment (currently set at Bs. 1800) to all Bolivians who were 21 years or older at end-1995, collectable annually after reaching 65 years of age.

  • The authorities believe that the capitalization process in the hydrocarbons sector has not been beneficial for Bolivia and that it has breached the constitution. In particular, they feel that the bulk of the gains from the expansion of the hydrocarbons sector has been captured by the foreign energy companies. Moreover, they argue that the current contracts with those companies are not valid because they were not ratified by parliament as would be required under the constitution.

The current nationalization initiative

  • The May 1 nationalization decree reverses the “capitalization” process in the hydrocarbons sector. It has mandated a return to a state majority stake and managerial control over hydrocarbons companies, which is facilitated by the return of management of the FCC’s shares in hydrocarbons companies to the state. With FCC shares under state management, effective control over the capitalized enterprises could be accomplished by buying additional equity from workers and the foreign stakeholders. In this connection, the authorities will undertake an audit of the capitalized companies to determine their cost structure, profitability and whether they have fulfilled their investment commitments. In addition to stipulating that YPFB must regain control of the natural gas companies Chaco and Andina, and the pipeline company Transredes, YPFB must also acquire a controlling stake in the two oil refineries and a logistics company owned by the Brazilian company Petrobrás and by a German-Peruvian consortium, respectively. However, it is not clear that the foreign companies affected by the decree will agree to terms for selling their shares.

  • The mission emphasized the importance of maintaining efficient and independent management in the enterprises that are targeted to revert to state control. The mission also expressed concern about the possible implications of changes in the status of FCC funds for the financing of BONOSOL payments.

13. The mission suggested ways to improve the tax system and cautioned about the cost of changes in the pension system. To spread the tax burden more fairly, the mission discussed with the authorities the possibility of introducing a personal income tax, which could exclude the lower 80 percent of the income distribution. The authorities stated that they were not considering such a tax at this stage. On the FTT, the mission reiterated past staff advice that the tax should be totally removed in the context of the forthcoming tax reform and suggested that dedollarization efforts should be supported, instead, by financial sector regulations. In addition, the mission urged the authorities to ensure that increased tax take in the mining taxation regime would be consistent with continued investment in the sector. Regarding the tax refund system, the mission supported efforts to reduce fraud while ensuring timely refunds to exporters. On pension reform, the mission recommended that the authorities analyze carefully the fiscal costs and the implications for the budget of possible changes to the pension law, particularly if these involve bringing forward pension payments.

14. In line with an election commitment, the government has implemented a compression of salaries for senior officials. As one of his early actions, the President cut his own salary by more than half, which automatically triggered a reduction in the maximum possible salary in the public sector. As a result, public entities (including the central bank, the superintendency of banks, and the tax administration) had to cut salary scales significantly at senior levels. The mission expressed concern that this policy might give rise to outflows of qualified high level officials from those public entities, which would run counter to the envisaged greater role of the state. The authorities argued that the salary cuts were fully manageable, adding that their medium-term impact would have to be assessed within the broader context of a phased reform of the public sector’s salary structure to be implemented over the next two-three years, designed to facilitate retention of high-quality staff.

15. Rigidities in domestic petroleum pricing are giving rise to large explicit and implicit subsidies, estimated at about 7 percent of GDP. Domestic petroleum prices continue to be set administratively, without appropriate regard to changes in international prices. The explicit subsidy (1¼ percent of GDP) reflects budgetary transfers to importers to compensate them for the gap between the low wholesale price of diesel and its import cost. The implicit subsidy (5¾ percent of GDP) arises from the low domestic price of crude oil (set at US$27 per barrel) and natural gas (US$0.58 per million BTU), which support correspondingly low domestic prices of gasoline and other oil derivatives.10 There is consensus that these subsidies are inefficient, as they are captured primarily by higher income groups and give rise to smuggling, while discouraging investment and energy conservation. Accordingly, the mission suggested that subsidies be phased out by moving domestic petroleum product prices gradually to market-based levels, while using part of the substantial resulting fiscal savings to protect vulnerable groups. The authorities emphasized that a planned change in the energy matrix of Bolivia over the medium term would lead to a gradual reduction in diesel subsidies and smuggling.11 While acknowledging these plans, the mission underscored that a need would still remain to address domestic price distortions since the change in the energy matrix in itself would not necessarily reduce implicit and explicit subsidies, and the strategy for such a change had yet to be fully specified.

Intergovernmental fiscal relations

16. The revenue sharing/expenditure allocation system gives rise to structural imbalances between the central government and subnational governments, which reduces the effectiveness of public expenditure and the scope for fiscal management. These imbalances will be aggravated by changes introduced in 2005. Specifically, with the full-year impact of the 2005 hydrocarbons law (which has reduced the central government’s share of hydrocarbons-based revenue to around 35 percent in 2006, from 55 percent), total tax revenue kept at the central level will be reduced by about 2 percent of GDP while spending responsibilities remain the same across government levels. The combination of higher revenue sharing with increased spending at the national level undermines the central government’s finances and, consequently, the overall fiscal position.

17. The mission therefore underscored the need to reform the intergovernmental fiscal relations system in order to reduce imbalances across levels of government. The existing revenue-sharing agreement should be reassessed in light of the capacity to generate revenue and the needs of each regional and local government, and there also needs to be a balanced allocation of spending responsibilities across the different layers of government. The mission underscored the critical importance of these reforms for the medium term fiscal outlook, and indicated that the Fund stands ready to provide technical assistance in this area, in coordination with the World Bank. The authorities agreed with the mission’s view on the importance of better allocating responsibilities to subnational governments, and on the need to improve the underlying fiscal position of the central government. They indicated that these issues are to be taken up in the context of the Constitutional Assembly.

D. Monetary, Exchange Rate, and Financial Sector Policies

18. The central bank has continued to pursue a cautious monetary policy stance, facilitated by a large increase in public sector deposits. Sustained foreign exchange inflows have boosted central bank NIR by close to US$500 million during January–May, about the same increase as in the whole of 2005. This was largely sterilized by an accumulation of public deposits at the central bank of over 4 percent of GDP. Nonetheless, the 12-month growth of base money stood at more than 40 percent reflecting a sizable carry over from 2005. Although, as suggested by decelerating inflation, much of this expansion appears to be matched by an increased real demand for bolivianos, the central bank has taken the precaution of absorbing some liquidity through open market operations, mostly in boliviano denominated instruments and at lengthening maturities (Tables 3 and 4, and Figure 3).

Table 3.

Bolivia: Monetary Survey 1/

article image
Sources: Central Bank of Bolivia; and Fund staff estimates and projections.

Stocks and flows in foreign currency are valued at the accounting exchange rate for the corresponding period.

At the beginning of 2005 Banco Los Andes was reclassified as a bank. This has led to a steep increase in the recorded levels of broad money and credit to the private sector in 2005.

Table 4

Bolivia: Central Bank of Bolivia 1/

article image
Sources: Central Bank of Bolivia; and Fund staff estimates.

Stocks and flows in foreign currency are valued at the accounting exchange rate for the corresponding period.

Figure 3.
Figure 3.

Bolivia: Monetary Developments

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

Source: Central Bank of Bolivia.

19. Looking ahead, the central bank may be called upon to step up its open market operations and/or to exercise further exchange rate flexibility as needed to forestall inflationary pressures. Monetary policy may be called upon to contain mounting expansionary pressures once the fiscal accounts shift into a deficit in the second half of the year, in the context of a continued strong balance of payments position. The mission noted that the capacity of monetary and exchange rate policies to maintain low inflation will hinge on the evolution of the non-hydrocarbons fiscal deficit. In particular, it would be very difficult for the central bank to contain the pressures that would result from a rapid unwinding of public sector deposits without resorting to sharp interest rate and/or exchange rate action.

20. The mission recommended that the authorities move toward increasing exchange rate flexibility. Over the years, the crawling peg regime has contributed to maintaining competitiveness while the small adjustments that characterize the regime have succeeded thus far in keeping the balance sheets effects manageable in Bolivia’s highly dollarized environment. The downside of this regime is that it does not allow an agile response to changes in external conditions, while it tends to discourage market participants from improving their management of exchange rate risk. There are indications that the currency is currently undervalued, as suggested by a real effective exchange rate that is well below the average level over the past 20 years despite the expansion of the hydrocarbons sector and substantial external debt reduction. While adjustment could be achieved through discrete nominal changes under the crawling peg regime, the mission pointed to the benefits of greater exchange rate flexibility in terms of allowing a more timely response to external shocks, as well as encouraging agents to internalize exchange rate risks. Moreover, the current prospect of currency appreciation in light of the underlying strength of the balance of payments should also contribute to reduce dollarization under a more flexible exchange rate regime. The mission noted that such greater flexibility, which could be achieved in the context of a managed float, would require an adjustment of the monetary policy framework (to monetary or inflation targeting).12 The transition should be carefully managed as large exchange rate fluctuations could be particularly disruptive in Bolivia’s dollarized economy.13 The authorities acknowledged the shortcomings of the current regime, and were therefore open to gradually incorporating greater exchange rate flexibility in the anti-inflation policy menu.

Financial sector issues

21. The international reserves and liquidity of the financial system are at high levels and financial sector stability has improved, but important challenges remain. Reserve coverage of banking system deposits is close to 100 percent, and some banks have completed the accounting of new loan loss provisioning requirements ahead of the schedule permitted by the relevant regulation. However, the financial system remains vulnerable to large deposits outflows and systemic risks need to be carefully monitored. Moreover, bank profitability is still low and banks are yet to internalize in full the risk posed by financial dollarization (Tables 5 and 6). For some banks, significant holdings of restructured loans, and some incidence of unprovisioned nonperforming loans, remain a source of vulnerability.14

Table 5.

Bolivia: Commercial Bank Performance Indicators

(In percent)

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Sources: Superintendency of Banks; and Financial Institutions.

Refers to the sum of NPLs and current performing restructured loans.

Table 6.

Bolivia: Financial and External Vulnerability Indicators

(End-of-period; in percent, unless otherwise indicated)

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Source:s Bolivian authorities; and Fund staff extimates.

Excludes nonbank financial institutions.

Central bank gross reserves, excluding reserves from the Latin American Reserve Fund (FLAR) and offshore liquidity requirements (RAL).

22. The mission underscored that the strengthening of the supervisory and institutional banking framework should continue.15 Further progress is still required to mitigate credit risk arising from dollar loans to non exporters, improve the regulation and supervision of financial conglomerates and market risk, introduce partial coverage deposit insurance and eliminate the option of the central bank to participate in bank resolution, and strengthen legislation on money laundering and corporate restructuring. The authorities were also advised to ensure that the transfer of the Financial Intelligence Unit to the ministry of finance does not affect its performance during the transition period and that compliance with its additional responsibility (investigation of corruption by public officials) does not detract from its main role. While the authorities were confident that existing losses in banks’ loan portfolio have been already identified, and did not see a vulnerability in the financial sector that might require immediate action, they attached importance to remain vigilant.

23. The authorities are in the process of designing a public development banking system (SINAFID) to subsidize credit for small-scale enterprises in selected sectors and facilitate the absorption of new technology. SINAFID would merge existing development financial entities (NAFIBO and FONDESIF) and maintain ownership of the state-owned Banco Union. The authorities stated that credit would be channeled through private sector financial institutions, if agreement on the conditions is reached, but did not discard the possibility of using Banco Union for these purposes (Box 2). While further details on SINAFID are yet to be determined, the mission welcomed the authorities’ assurances that sound management of these public development banks would be a priority and also their commitment to complement, rather than replace, lending activities of private institutions. However, the mission noted that, as previous experience in Bolivia16 and other countries suggests, development banking tends to be problematic as it is prone to generate solvency problems in the involved financial institutions and to create fiscal costs. Accordingly, the mission advised, inter alia, that: (i) development banking be kept as a second-tier activity; (ii) earmarking of government revenues to finance development banking be avoided, and the quasi-fiscal costs of development banking be included in the budget; (iii) participation of private financial institutions be strictly voluntary; and (iv) a comparable and prudent supervisory regime be maintained, avoiding regulatory forbearance.

E. Competitiveness

24. In recent years, competitiveness of nontraditional exports, which exclude hydrocarbon and mineral exports, has hinged on a depreciated real exchange rate, low labor costs, and preferential access to key markets. Since late 2002, the real exchange rate has depreciated steadily by more than 20 percent, and is currently at a historical low (Figure 4). Wages in dollar terms have also been the lowest in the region. Bolivia has taken advantage of the benefits provided by the Andean free trade area and customs union, in particular for soy-product exports, which now represent about 10 percent of total exports. The country has also benefited from duty-free access to the U.S. market for certain products—including apparel and jewelry—under the Andean Trade Promotion and Drug Eradication Act (ATPDEA), which account for about 7 percent of total exports.

Figure 4.
Figure 4.

Bolivia: Exchange Rate and Interest Rate Developments

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

Sources: Bolivian authorities; and Fund staff estimates.

25. However, these key determinants of competitiveness may shift against Bolivia in the period ahead. A continued strong balance of payments position, driven by natural gas exports, may lead to real appreciation pressures on the boliviano. In this regard, the mission underscored the need to contain these pressures through prudent fiscal and monetary policies, and continued openness of the exchange system. On the wage front, despite recent adjustments to the minimum wage—currently at US$63 per month—wages are not likely to catch up with those in the region in the near term. However, Bolivia’s wages in manufactured goods are higher than those of competitors outside the region, such as China and India. Furthermore, recent changes in the labor regime have raised redundancy costs, albeit modestly, with some impact on overall labor costs. The authorities explained that the competitiveness impact of this measure was minimal, and emphasized its benefits in terms of enhanced workers’ rights.

Bolivia: Micro-Credit Institutions

  • Though still a small part of the financial system, micro-credit institutions have been growing rapidly in recent years. These institutions, known in Bolivia as fondos financieros privados (FFPs), hold only about 7 percent of financial system deposits and credit to the private sector. However, between December 2002 and end-March 2006, their deposits increased by almost 60 percent (to US$234 million), and their loan portfolio rose by more than 50 percent (to US$270 million). Furthermore, in contrast to the banking system, FFP deposits and lending maintained a growing trend despite the political and economic turmoil of recent years.

  • Lending rates of FFPs are higher than those of the banking system due to the nature of their client pool. Micro-credit institutions provide loans to small scale clients in the informal sector. This implies that FFPs have a large number of clients (58 percent of financial system borrowers in 2005), with an average loan size less than 10 percent of the average for the financial system. Also, 40 percent of FFPs branches are in rural areas, compared to 20 percent for banks. These characteristics imply large operational and administrative costs, more than double those of banks as a percent of loan portfolio. As a result of this cost structure, average FFP lending rates are relatively high (at 38 percent for boliviano credit, and 23 percent for dollar credit) compared to an average of 12 percent for banking sector credit.

  • The government’s policy initiative to provide concessional lending to small businesses is expected to have some impact on the activities of micro-credit institutions. To jump start its initiative, the government recently channeled US$30 million, financed by a grant from Venezuela, to selected sectors at 4 percent interest and a 10-year maturity. An additional grant of US$70 million is expected in 2007. Concessional lending would continue thereafter based on other financing sources. FFPs have argued that it is impossible for them to compete on these terms and fear that, unless selection criteria and collection efforts are similar to their own, this policy could undermine credit culture. However, the envisaged concessional lending operations may also reach borrowers that are not currently serviced by FPPs.

uA01fig02

Deposits and Lending of Micro Credit Institutions

(In millions of bolivianos)

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

Sources: Central Bank of Bolivia, and Superintendency of Banks.
uA01fig03

Characteristics of Micro Credit Institutions and Banks, 2005

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

26. The mission expressed concern about the erosion of preferential access once ATPDEA expires at end-2006, and as Andean countries implement bilateral free trade agreements with the U.S. Though Bolivia has formally requested an extension of ATPDEA to the United States government, bilateral FTA agreements between the U.S. and other ATPDEA beneficiaries raised the possibility that the ATPDEA might not be extended. A free trade agreement with the United States could substitute for ATPDEA benefits, but Bolivia has not engaged in negotiations to this end. Meanwhile, the bilateral free trade agreements of Peru and Colombia with the United States may weaken Bolivia’s ability to compete in the soy market as these countries will tend to substitute Bolivian soy products with cheaper imports. The authorities stated that they are engaging with their Colombian counterparts in efforts to extend the transition period for soy duty reduction to the United States. They also indicated that they are seeking alternative markets, and that their recent trade agreement with Venezuela and Cuba would help absorb some exports.

F. Medium-Term Outlook

27. The medium-term economic outlook is characterized by both continuing favorable external conditions and major uncertainties regarding private investment and overall growth. In view of the large remaining uncertainty about the prospects for foreign investment in the hydrocarbons sector, the mission’s baseline medium-term scenario (2006–11) assumes unchanged natural gas production and exports (Tables 7 and 8, and Figure 5). On this basis, annual GDP growth would stay above 3 percent as zero growth in the hydrocarbons sector would be partially offset by the positive impact of a key mining project expected to come into production next year. Higher growth rates would require a more generalized increase in manufacturing, agriculture, and other sectors over the medium term. However, prospects for higher growth in these sectors are dampened by a host of factors, ranging from uncertainties regarding the environment for private investment to the potential loss of export markets.

Table 7.

Bolivia: Summary Balance of Payments

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

Excluding reexports.

In 2006 includes effect of MDRI debt relief from the IMF.

Table 8.

Bolivia: Comparison of Medium-Term Scenarios

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Source: Fund staff estimates and projections

As in Country Report No. 05/393.

Table 9.

Bolivia: Millennium Development Goals

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Source: Bolivian authorities
Figure 5.
Figure 5.

Bolivia: Medium-Term Scenarios

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

Sources: Bolivian authorities; and Fund staff estimates and projections.

28. The medium-term fiscal outlook is highly dependent on the evolution of hydrocarbons-based revenues. This in turn hinges on several factors, including the level of additional royalties, possible new export prices of hydrocarbons, and productivity of the nationalized natural gas fields. Since these parameters depend on the outcome of negotiations with oil companies, considerable uncertainty remains over the medium-term fiscal path. Against this background, the staff’s baseline fiscal scenario projects an initial jump in the deficit in 2007 in the absence of the exceptional hydrocarbons take for YPFB available in 2006 and as expenditures are projected to rise due to increased YPFB investments and payments for the acquisition of shares in the nationalized companies. While the increase in the deficit from the low level of 2006 will be large (3 ½ percentage points of GDP), its macroeconomic impact will be more limited because the increase in the domestic component of the deficit (i.e. the deficit excluding net payments to foreign hydrocarbon companies) will be small (0.4 percentage points of GDP). While this fiscal expansion, in itself, is unlikely to endanger macroeconomic stability—in light of the strong external position it is indeed consistent with a further increase in net international reserves (see Table 8)—it would bring the deficit to a level that is at the border of what can be regarded as appropriate from a long-term fiscal sustainability perspective. Assuming a broadly unchanged policy stance in subsequent years, the fiscal deficit is projected to remain within the range of 3–4 percent of GDP. The ratio of expenditure to GDP would gradually return to the 2006 levels by 2011, partly reflecting declining levels of public investment, pension payments, and explicit fuel subsidies as a share of GDP.17 Meanwhile, constant hydrocarbons production, relatively stable hydrocarbon prices, and a gradual decline in grants would combine to generate a roughly commensurate fall in total revenue. As a result, the public debt ratio would remain stable at about 50 percent of GDP during the projection period. While this baseline scenario would therefore appear sustainable, it should not be viewed with complacency as the projected fiscal deficit beyond 2007 would demand considerable fiscal discipline, notably a control over subnational government spending consistent with falling transfers from the center as hydrocarbons revenue declines as a share of GDP.

29. On the external front, high prices of minerals and hydrocarbons would support the continuation of substantial, albeit declining, current account surpluses. As noted, Bolivia would also benefit from an increase in exports from a new mining project expected to start production in 2007. At the same time, the prospects for some agricultural and manufacturing exports may be hindered by erosion of trade preferences. Under the baseline scenario, FDI inflows are modest and, in the hydrocarbons sector, would be aimed solely at supporting current capacity levels. Overall, the strength of the external sector would be reflected in further accumulation of international reserves over the medium term.

30. The above scenario is subject to a range of downside risks. First, substantial investment may be required just to sustain hydrocarbons production at current levels. Second, as noted, maintenance of a stable public debt ratio in the post-MDRI period will require broad-based expenditure containment. Third, as also discussed above, Bolivia’s competitiveness for nontraditional exports hinges on preferential access to the Andean Community and U.S. market, a competitive real exchange rate, and low labor costs—all factors subject to reversal. These risks are compounded by the prospect of wide-ranging institutional changes in the context of the forthcoming constitutional assembly, and the referendum on regional autonomy, which could complicate macroeconomic management and could affect financial sector stability. The mission noted that, in order to mitigate these risks, the authorities will need to keep within a prudent fiscal envelope and enhance competitiveness. In this context, it is very important to improve governance and maintain a stable legal framework, including in taxation and property rights.18 The authorities indicated that efforts will be made to minimize related policy uncertainties, particularly during the period of the forthcoming constitutional assembly.

31. At the same time, there remains ample scope for an alternative scenario leading to sustained upside growth and poverty reduction benefits over the medium-term compared with the baseline scenario, in the context of appropriately designed policies. These could comprise: (i) ensuring that negotiations in the hydrocarbons sector lead to additional investment consistent with increased production and exports; (ii) strengthening the fiscal position through a bolder tax reform than currently contemplated that would also improve the investment climate and help promote greater equity; and (iii) more broadly, sustaining macroeconomic and structural policies that enhance the environment for private investment, and expand Bolivia’s access to external markets.

III. Debt Sustainability Analysis

32. While Bolivia’s external and public debt have declined significantly in relation to GDP in recent years, as a result of the sharp reduction in the fiscal deficit and implementation of the MDRI, the debt sustainability analysis points to the potential for some reversal of these gains over the long term. The NPV of Bolivia’s external debt is projected to fall gradually from 35 percent of GDP in 2006 to 24 percent of GDP by 2026. The public external debt service to export ratio is projected to remain at comfortable, albeit increasing levels. However, the NPV of the overall public debt shows an increasing trend in the period beyond 2011, rising by about 7 percentage points of GDP, to 51 percent of GDP by 2026. This would be driven by a slight increase in the fiscal deficit associated with declining hydrocarbon revenues as a share of GDP. These results are sensitive to standard stress tests and specific adverse shocks. In particular, a decline in natural gas production and exports of 5 percent annually over the next five years (i.e., a cumulative decline of more than 20 percent), would place the NPV debt-to-exports ratio on a steadily rising path that could bring it near the HIPC threshold at the end of the projection period. Conversely, a one-time 50 percent increase in the natural gas export prices to Brazil and Argentina relative to the baseline would bring about a declining trend in the long term path of the debt ratio.

IV. Staff Appraisal

33. Over the past year, Bolivia has experienced far-reaching political changes, which culminated in the election of a government with an unprecedented popular mandate. Given its wide base of support, and the fact that it has inherited a favorable macroeconomic situation, the new government is uniquely positioned to implement policy initiatives that are conducive to higher and more equitable growth.

34. Benefiting from a favorable external environment, the Bolivian economy displayed positive trends in 2005 and so far in 2006. This includes satisfactory GDP growth and a strong balance of payments, led by the hydrocarbons sector, low inflation, smaller fiscal deficits, and historically high levels of international reserves. Despite periods of political uncertainty, the banking system has remained stable and dollarization, although still exceptionally high, has declined somewhat. Reflecting debt relief under the MDRI, the burden of the public debt has been substantially reduced. The strong emphasis placed by the authorities on safeguarding macroeconomic stability—seen by them as a national asset of the Bolivian people and an important foundation for increased growth and higher living standards—is highly commendable.

35. Following a sharp decline in the fiscal deficit during 2003–05, the combined public sector is projected to record a near balance in 2006. However, this is partly the result of a large increase in hydrocarbons-based revenue, including exceptional revenues created by the nationalization decree that may not be maintained beyond the current year. While the higher deficits in the range of 3–4 percent of GDP projected for 2007 onwards appear manageable, they should be viewed as an upper bound beyond which Bolivia’s debt sustainability would be in jeopardy. Accordingly, aiming at a deficit close to the lower bound of this range—or below—seems more appropriate, as it would to maintain a safety margin against shocks that may otherwise lead to a rebound in the debt ratio in coming years. In any case, careful scrutiny is of the essence in spending decisions and the authorities are encouraged to strengthen expenditure management at all levels of government. In this context, the firmness displayed by the government in containing wage increases to fiscally responsible levels is welcome. However, salary cuts at the higher levels appear at odds with the government’s economic strategy, which is partly based on assigning a more strategic role for the state and may therefore require an upgrading of the management of public entities. In this connection, the plan to reform the public sector salary structure in order to facilitate retention of high-quality staff is a welcome initiative. Regarding pensions, the authorities should carefully analyze the fiscal costs and the implications for the budget of planned changes to the pension law, particularly if these involve bringing forward pension payments.

36. Rigidities in domestic petroleum pricing generate inordinately large explicit and implicit subsidies. These subsidies are inefficient and regressive, as they are captured primarily by higher income groups and give rise to smuggling, while discouraging investment and energy conservation. Accordingly, there is a need to move domestic petroleum product prices to international market-based levels, which could be undertaken gradually while using part of the resulting fiscal savings to protect vulnerable groups.

37. Despite the outlook for continued high hydrocarbons-based revenue, attention must be given to enhancing domestic taxation in order to entrench fiscal sustainability and improve the efficiency and equity of public finances. Current plans to reduce exemptions, rationalize the free trade zones legislation, shift large taxpayers in special regimes or outside the tax system to the regular regime, and modify the VAT refund system to reduce fraud, are welcome. The authorities are encouraged to revisit the scope for introducing a tax on high personal incomes, which would exclude the bulk of the population and thereby spread the tax burden more fairly. In the mining sector, where the government is considering an increased tax take, it is important that revenue measures do not discourage additional private investment.

38. Strengthening the budget process and intergovernmental fiscal relations is crucial to enhance fiscal transparency and accountability at all levels of government. The authorities are therefore encouraged to review expeditiously and resubmit to Congress for early approval the draft budget framework law, which is aimed at enhancing the budget process at all levels of government. Regarding intergovernmental relations, the current revenue sharing/expenditure allocation system gives rise to structural imbalances between the central government and subnational governments, which reduces the effectiveness of public expenditure and the scope for fiscal management. It should therefore be reassessed in light of the capacity to generate revenue at the subnational level, and consistent with an agreed allocation of spending responsibilities across the different layers of government.

39. Following many years of successful monetary and exchange rate management, including several near-crisis periods, the central bank has continued to pursue a cautious monetary policy stance. Looking ahead, while fiscal policy will play a key role in forestalling inflationary pressures, the central bank should stand ready to step up its open market operations and/or to exercise further exchange rate flexibility as needed to maintain low inflation. On the exchange rate policy front, the crawling peg regime has contributed to maintain competitiveness while keeping the balance sheets effects manageable in Bolivia’s highly dollarized environment. However, the crawling peg does not allow an agile response to changes in external conditions, and the currency may indeed be undervalued at this stage. The crawling peg also discourages market participants to improve their management of exchange rate risk. Accordingly, the staff recommends a gradual move towards greater exchange rate flexibility, which could be achieved in the context of a managed float. Such a move would require an adjustment of the monetary policy framework to monetary or inflation targeting, although in Bolivia’s highly dollarized environment, inflation targeting appears more suited as the effectiveness of traditional monetary targeting might be hampered by instability in the demand for local currency.

40. While international reserves are high and the financial sector has strengthened notably, important challenges remain. In particular, the system remains highly dollarized and vulnerable to large deposit outflows, bank profitability is still low, and banks are yet to internalize in full the risk posed by financial dollarization. Moreover, the significant holdings of restructured loans and the unprovisioned portion of nonperforming loans of some banks remain a source of vulnerability. Accordingly, the authorities are encouraged to continue with their efforts to closely monitor banks’ performance and to strengthen the supervisory and institutional banking framework. In addition, care must be taken that the proposed public development banking system (SINAFID) does not introduce distortions in the banking system, and that the related fiscal costs are clearly included in the budget. In particular, the authorities are urged to keep development banking as a second-tier activity, the participation of private financial institutions strictly voluntary, and a comparable supervisory regime free of regulatory forbearance.

41. On the structural policy front, the staff strongly supports the government’s emphasis on greater equity, transparency, and accountability. However, the parallel emphasis on an elevated role for the state is a source of serious concern as it has the potential for impacting adversely on the environment for private investment. The authorities are therefore urged to maintain a careful balance between the pursuit of a greater role for the state and the preservation of appropriate incentives for private investment needed, which remains critical to support growth and raise employment and living standards. Moreover, given the objective of maintaining macroeconomic stability, close attention must be paid to the economic impact of government interventions, including their short- and medium-term fiscal cost.

42. In the hydrocarbons sector, considerable uncertainty prevails at this stage regarding the modalities for implementing the recent nationalization decree. A key concern in this regard is that any deterioration of the relationship between the government and private investors in this strategic sector could produce serious collateral damage on the environment for domestic and foreign private investment in other areas of the economy and hurt medium-term growth prospects. The authorities are therefore urged to undertake all efforts to achieve, as soon as possible within the six-month period established by the May 1 decree, mutually acceptable arrangements with the concerned oil companies on the key issues of taxation, export pricing, and payments for the assets that are being nationalized. Moreover, the expanded role newly assigned to YPFB in the hydrocarbons sector will demand high-quality management and full transparency, consistent with international accounting and auditing standards.

43. While the short-term outlook is positive and the global environment for exporters of energy and minerals is expected to remain favorable, the medium-term outlook for Bolivia presents a range of challenges and risks. First, as noted, it will be critical for the country’s investment and export prospects to wrap up the strategic negotiations over hydrocarbons policy in a manner that is conducive to full development of the sector’s potential. Second, avoidance of a rebound in the public debt ratio in the post-MDRI period will require enhancing domestic taxation, containing expenditure, and strengthening intergovernmental fiscal relations. Third, key determinants of competitiveness may shift against Bolivia in the period ahead. A continued strong balance of payments position, driven by natural gas exports, could lead to appreciation pressures on the boliviano. Furthermore, recent changes in the labor regime have raised redundancy costs, albeit modestly, with some impact on overall labor costs. To counteract these effects, it will be necessary to maintain prudent fiscal and monetary policies, and continued openness of the exchange system. Finally, Bolivia faces the prospect of an erosion of its access to important markets as the ATPDEA is scheduled to expire at end-2006, and other Andean countries are expected to implement in the near future bilateral free trade agreements with the United States. The authorities will therefore need to intensify their efforts to expand Bolivia’s access to external markets. Last but not least, the medium-term outlook hinges crucially on the maintenance of a stable legal framework, notably with regard to taxation and property rights, which takes on added relevance in light of the land reform initiative and the potential for major institutional changes in the context of the forthcoming constitutional assembly.

44. Bolivia’s economic statistics are of adequate quality, timeliness, and coverage to allow the conduct of Fund surveillance.

45. It is proposed that the next Article IV consultation with Bolivia be held on the standard 12-month cycle.

Appendix I. Bolivia—Fund Relations

(As of May 31, 2006)

I. Membership Status: Joined December 27, 1945; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial Arrangements:

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VI. Projected Obligations to the Fund: (SDR million; based on existing use of resources and present holdings of SDRs):

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VII. Implementation of HIPC Initiative:

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VIII. Implementation of MDRI Assistance:

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II. Debt Relief by Facility (SDR Million)

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IX. Safeguards Assessment. Under the Fund’s safeguards assessment policy, the Central Bank of Bolivia (CBB) was subject to an assessment with respect to the April 2, 2003 Stand-By Arrangement (SBA). A safeguards assessment was completed June 27, 2003, and while no systemic risks with the CBB’s safeguards were identified, uncertainties were expressed about the de facto lack of operational independence and program monetary data. An update assessment was completed September 27, 2004 in conjunction with an augmentation of the SBA. This assessment confirmed that measures had been implemented to address all previously identified vulnerabilities, except for those requiring a change in the central bank law.

X. Exchange Arrangement. The Bolivian currency is the boliviano and the exchange rate regime is a crawling peg. The central bank holds a daily foreign exchange auction, accepting all bids that are at least equal to the central bank’s minimum price. If acceptable bids exceed the amount offered for auction, the lowest acceptable bids are prorated so as to exhaust the amount offered. The minimum price is adjusted from time to time in light of the evaluation of Bolivia’s real exchange rate with respect to Bolivia’s key trading partners. On May 31, 2006, the official selling rate was US$8.06 per U.S. dollar.

XI. Article IV Consultation. The last Article IV consultation and request for the first review under the Stand-By Arrangement was completed by the Executive Board on July 7, 2003 (Country Report No. 03/257). Bolivia is on a 12-month consultation cycle.

XII. Technical Assistance.

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XII. Resident Representative. Mr. Esteban Vesperoni took over the post of IMF resident representative in February 2006.

Appendix II. Bolivia: External and Public Debt Sustainability Analysis (DSA)

While Bolivia’s external and public debt have declined significantly in relation to GDP in recent years as a result of the sharp reduction in the fiscal deficit and implementation of the MDRI, the debt sustainability analysis points to the potential for some reversal of these gains over the long term. Bolivia’s external debt (public and private) decreased significantly and is projected to fall further in the medium to about 36 percent of GDP in 2011 and stabilize in both nominal and NPV terms in the longer term (2016–26). The public external debt service to export ratio is also projected to remain at comfortable, albeit increasing levels. However, while the NPV of total public debt (external and domestic) remains stable in the period (2006–11) at about 43 percent, it shows an increasing trend in the period (2012–26) reaching about 50 percent in 2026 driven by a gradually increasing deficit as a percent of GDP that goes from about 3.9 percent of GDP in 2011 to 4.3 percent in 2026. The gradual deterioration of the deficit is driven by broadly stable hydrocarbon prices and production which imply declining hydrocarbon revenues as a share of GDP.

The outcome seems sensitive to standard stress tests, particularly to a continuation of past historical trends, permanently lower real GDP growth and to devaluation. Solvency would be particularly compromised under adverse shocks. In particular, a decline in natural gas production and exports of 5 percent annually over the next five years (i.e., a cumulative decline of more than 20 percent), would place the debt ratio to GDP on a rising path. Conversely, debt sustainability would improve substantially under the assumption of a one-time 50 percent increase in the natural gas export prices relative to the baseline scenario. These results underscore the need of reaching mutually acceptable agreements with the private sector in the hydrocarbons sector to promote continued private investment and growth.

Main assumptions

The baseline scenario is projected for the period 2006–26. The macroeconomic framework for the period 2006–11 is detailed in the staff report tables. The baseline assumes that a negotiated agreement is reached with the nationalized companies that do not disrupt current production levels. The main assumptions for the long-term projections under the baseline scenario are:

  • Average annual real GDP growth: 3.5 percent

  • Inflation: 4 percent

  • Export growth: 5 percent

  • Gas prices: stable with a price to Brazil of 3.7 U.S. dollars per thousand cubic feet in longer term

  • Gas volumes: stable at 2006 levels

  • The average concessionality of the public sector borrowing is expected to decrease gradually and effective interest rate somewhat increase.

  • The real effective exchange rate will remain constant.

  • The evolution of domestic public debt is consistent with the path for the overall fiscal deficit percent and available domestic financing.

External debt sustainability

Bolivia is expected to maintain its external debt sustainability throughout the period in consideration. The stock of total public and private external debt-to-GDP ratio is expected to fall to about 36 percent by 2011 and stabilize at the range of 26–28 percent by 2026. At the same time, the composition of public external debt is expected to shift to less concessional sources, and therefore the speed of reduction of public external debt NPV to GDP ratio will be lower than that of the nominal debt. Also, the debt service to export ratio is expected to increase somewhat. Nevertheless, these indicators are projected to remain at comfortable levels, with NPV external public debt to GDP ratio being close to 20 percent of GDP by the end of the period.

Bolivia’s risk of debt distress is low given its debt levels and the overall rating of its macroeconomic policies According to the World Bank’s IDA Resource Allocation Index (IRAI) Bolivia is classified as a medium performer with respect to quality of policies and the related thresholds on NPV of debt-to-GDP and debt-to-exports ratios (40 and 150 percent, respectively) are met with ample margins under the baseline projections and even under stress scenarios.

The standardized stress tests show that Bolivia’s external debt would remain sustainable under several shocks and their combinations (Table 2). Bolivia NPV to GDP ratio experiences highest increase under the 30 percent devaluation shock in 2007, but nevertheless stabilizes at around 30 percent of the GDP. The stress test assuming borrowing on less favorable terms also leads to higher, but stabilizing ratios.

The prospects for external debt sustainability, however, would be compromised under alternative adverse scenario that assumes fall in gas production (5 percent fall each year in 2007–11) (Figure 2). Assuming that related shortfalls in fiscal revenues are compensated by additional external borrowing, such scenario puts the NPV of external public debt on higher and rising path and may require adjustment measures to return to stable debt ratio. On the other hand, the positive shock assuming one time 50 percent increase in gas prices in 2007 improves the external solvency with further improvement in NPV of debt to exports ratio and debt service indicators.

Public debt sustainability

While Bolivia is expected to maintain its public debt sustainability in the short to medium term (2006–11), long term prospects would crucially depend on developments in the hydrocarbons sector. While the NPV of debt is broadly constant until 2011 and the NPV of external debt is flat given the rather constant expected external financing as a share of GDP, after 2011 the overall deficit increases slowly and this implies the need accommodate this with additional domestic financing as declining pension and investment spending is not enough to compensate for the increasing interest bill and the reduction of hydrocarbon revenues as a share of GDP.

The standardized stress tests show that Bolivia’s public debt sustainability is sensitive to several shocks (Table 4). Bolivia NPV to GDP ratio experiences highest increase under a historical pattern, a permanent reduction in growth and a 30 percent devaluation shock in 2007. The stress test assuming historical parameters is the one that shows the higher NPV of debt as a share of GDP in 2026 at a level of 77 percent of GDP.

While the prospects for public debt sustainability would be seriously compromised under an alternative adverse scenario that assumes fall in gas production (5 percent fall each year in 2007–11), a positive shock on gas prices would improve the outlook substantially. Assuming that related shortfalls in fiscal revenues are compensated by additional external borrowing, such scenario puts the NPV of external public debt on higher and rising path and may require adjustment measures to return to stable debt ratio. On the other hand, the positive shock assuming one time 50 percent increase in gas prices in 2007 raises the prospects for public debt sustainability with further improvement in the level of NPV of debt-to-revenue ratio and debt service indicators.

Table 1.

Bolivia: External Debt Sustainability Framework, Baseline Scenario, 2006-2026 1/

(In percent of GDP, unless otherwise indicated)

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Source: Staff simulations.

Includes both public and private sector external debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. In 2003 it reflects the inclusion of private debt in the total.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments devided by previous period debt stock

Table 2.

Bolivia: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2006-26

(In percent)

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Source: Fund staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure 1.
Figure 1.

Bolivia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2005-2026

(In percent)

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

Source: Fund staff projections and simulations.
Figure 2.
Figure 2.

Bolivia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2005-2026

(In percent)

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

Source: Fund staff projections and simulations.
Table 3.

Bolivia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2003-2026 (In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and Fund staff estimates and projections.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Coverage is for the nonfinancial public sector. Gross debt is used as a concept.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Table 4.

Bolivia: Sensitivity Analysis for Key Indicators of Public Debt 2006-2026

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Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Figure 3.
Figure 3.

Bolivia: Indicators of Public Debt Under Alternative Scenarios, 2005-2026 1/

Citation: IMF Staff Country Reports 2006, 270; 10.5089/9781451805802.002.A001

Source: Staff projections and simulations.1/ Most extreme stress test is test that yields highest ratio in 2016.2/ Revenue including grants.

Appendix III. Bolivia: Relations with the World Bank1

The World Bank’s support to Bolivia will be delivered according to the strategy spelled out in the Interim CAS, currently under preparation, to be presented to the World Bank Board on July 20, 2006. Due to the political uncertainty and risks, the Interim CAS is being designed to cover a two-year period (FY06–FY07) that will allow the Bank to implement a work program in Bolivia while these uncertainties are being clarified. It will accompany and support the new Administration that assumed power in January 2006. The Bank will seek to build a partnership with the Government to support its development strategy with lending, analytical work and technical assistance. The Interim CAS lending would include IDA resources to finance investment credits for approximately US$50 million a year. The level of assistance in the Interim CAS would be sufficient to support an average of three projects and three pieces of ESW per year. To the extent possible, these projects and programs would be designed and implemented in a collaborative fashion with donor partners that would include drawing on financial and human resources to leverage the Bank’s resources and have a greater development impact.

The World Bank’s program in Bolivia has nine projects currently being executed – seven investment projects, a GEF project and a rapid disbursement project––for a total of US$372 million. Of this amount, only US$15 million are nonconcessional funds. These projects finance interventions in various sectors including education, health, rural development, institutional strengthening and road construction. The World Bank program in Bolivia includes two trust funds: a grant for US$300,000 aimed at the institutional strengthening of the Technical Secretariat of the Constituent Assembly; and a grant amounting to US$212,000 intended for the strengthening of the Congress Budget Commission.

The Bank is discussing with the Government the possible following program for FY–07:

  • The Secondary Education pre-SWAP, for US$10 million, whose objective is to support the Government’s education strategy which aims to expand secondary education coverage and retention of disadvantaged groups, improve the quality of education services in targeted areas where secondary enrollments are particularly low, and strengthen decentralized education management.

  • The Urban Infrastructure for Poor Project, for US$30 million, which aims to increase the effective and sustainable use of infrastructure services in the cities of La Paz, El Alto and Santa Cruz. In La Paz, the project will finance a package of demand-driven local investments at the neighborhood level. In El Alto it will finance infrastructure investment for paving, drainage and measures to implement a massive transit policy. In Santa Cruz, it will finance infrastructure investment for the interconnection of water wells and the southern water pumping station.

  • The Community-Based Land Administration Project for US$15 million. This project aims to establish a decentralized beneficiary-driven land distribution mechanism that allows organized landless or poor farmers to acquire suitable agricultural lands and implement investment subprojects which puts them on a sustainable, higher-income, livelihood path.

Recent and ongoing technical assistance and economic sector work includes:

  • The Country Economic Memorandum, completed in July 2005, focuses on employment-generating economic growth and policies aimed at improving the investment climate and boosting exports. This study has been widely disseminated among the Government, the civil society, the productive sectors, and the international community.

  • The World Bank has produced Discussion Sectorial Notes on 23 different economic and social issues that will be published in Spanish and in English. These notes are a result of technical discussions that the Bank held with all major political parties starting in August 2005 and including, President Morales’s party (MAS). The Bank presented these draft notes to the Government in March 2006.

  • The Country Social Analysis, under preparation, combines a quantitative and qualitative approach besides participatory methods; it seeks to explain at the macro level the social, economic, cultural, and institutional environment for development.

  • The Institutional Governance Review, under preparation, analyses the decentralization issue. Alternative scenarios are presented and their implementation analyzed in a sequence of approximately five years.

Appendix IV. Bolivia: Relations with the Inter-american Development Bank1

As of December 31, 2005, the Inter-American Development Bank (IDB) had approved loans to Bolivia amounting to US$3.77 billion, with disbursements totaling US$3.14 billion. Bolivia’s outstanding debt to the IDB was US$1.77 billion. During the first half of the decade, net cash flows to the country were mostly positive, owing in large measure to debt relief provided by the IADB under the HIPC Initiative and other extraordinary financing disbursed in 2003. The IADB’s portfolio in Bolivia also includes active nonreimbursable technical cooperation projects amounting to US$23 million (US$15.6 million undisbursed), and US$8.3 million in credits for small and micro projects.

Sustainable poverty reduction is the overarching objective of the Bank’s country strategy with Bolivia. In pursuit of this objective, the Bank is supporting government-led efforts to overcome the country’s economic and social development challenges in three main areas: (a) improving the managerial capacity and transparency of the State, (b) supporting competitiveness and sustainable development of the private sector; (c) enhancing efficiency and equity in basic services delivery. The IADB is updating its country strategy on the basis of the priorities of the new government inaugurated in January 2006 and the policy framework envisaged for the medium term under the National Development Program that is expected to be announced next April.

The backdrop for the strategy’s implementation remains is complex, characterized by a widespread reorientation of the reform process, need for continued fiscal consolidation, weak policy implementation and institutional capacity and an over-arching political agenda dominated by the constituent assembly and the referendum for regional autonomy. In this context, the country strategy update is being conceived as a process in which the Bank, in concert with the Government and other development partners, (i) remains engaged in areas of high priority to attenuate economic risks and preserve the social gains of the last decade (pension and tax administration, microfinance), (ii) continues cooperating with the administration in improving planning, budgeting and the ongoing fiscal decentralization process, and (iii) sharpens the focus of its assistance on local/rural development and the provision of productive infrastructure.

From the operational standpoint, the Bank’s portfolio in Bolivia represents a valuable resource base from which to implement the strategy. As of March 15, 2006, undisbursed balances amounted to US$409 million. The IADB’s lending program will continue providing Bolivia in 2006 with concessional resources to support fiscal sustainability, while protecting investments that are critical for achieving the Millennium Development Goals. The proposed IADB lending program for Bolivia for FY2006 consists of three loans amounting to approximately US$100 million (in support of basic infrastructure, institutional reforms in the public sector and competitiveness).

Discussions among Bank shareholders regarding the possibility of Bank participation and the potential scope for MDRI type debt relief are ongoing. In the event that such a scheme were to be approved, additional debt relief to that already being provided by the Bank to Bolivia under the HIPC Initiative could become effective in 2007.

Appendix V. Bolivia: Statistical Issues

The timeliness and coverage of economic statistics in Bolivia is generally adequate for monitoring purposes. Significant advances have been made in recent years, but improvements are still needed in a number of areas, as noted below. Many national agencies, including the National Institute of Statistics (INE), post statistical information on the Internet. Bolivia has participated in the GDDS since November 2000 and plans to subscribe to the SDDS in FY07 are in the advance stages.

I. Real Sector

  • National accounts. The INE plans to initiate in 2006 a thorough revision of the national accounts statistics, including a revision of the base year. This process is expected to be completed over the next 3 years. A 2002 STA mission on national accounts statistics found that efforts to improve the quality of the real sector statistics were hampered by an inadequate statistical law and insufficient resources to undertake censuses and surveys.

  • Labor market. The quality of the household and employment surveys has deteriorated in the last few years, due mainly to financial constraints. The Survey of Improvement in Living Conditions (MECOVI), which replaced earlier household surveys, was last conducted in November 2002. In addition, some important surveys have been discontinued such as the annual manufacturing survey (in 2001) and the employment survey (in 2003), leading to a lack of quarterly information on employment and wages. However, plans to reestablish these surveys are underway.

  • Prices. The consumer price index (CPI) covering the four largest cities has a base year of 1991, and was revised on the basis of a household budget survey that was conducted over a 12-month period that began in June 2, 2003. Industrial producer price indices and external trade unit values are compiled by INE, but are in need of revision as regards their coverage, product breakdown, and base year (1990=100).

II. Fiscal Sector

The Ministry of Finance (MoF) provides timely information on revenue, current and investment spending, and financing for the consolidated general government (central government and decentralized entities), public enterprises and the central bank, with appropriate disaggregation, on a monthly basis. The MoF also provides annual data to STA on the operations of the consolidated central government, and regional and local governments for publication in Government Finance Statistics Yearbook. However, these data do not cover all operations of decentralized agencies and operations channeled through special funds. The ongoing implementation of a comprehensive financial management system, with funding from the IDB, will help ensure proper monitoring of public sector financial operations including local debt and social spending.

III. External Sector

The Central Bank of Bolivia (BCB) provides data on balance of payments and international investment position statistics to STA for publication in the Balance of Payments Statistics Yearbook and the International Financial Statistics (IFS). The classification of accounts is broadly in accordance with the fifth edition of the Balance of Payments Manual. Although quarterly balance of payments data are available before the end of the year, these data are submitted to STA only once a year. The BCB also provides monthly trade data to the Fund, but the import data are only available with a lag. Upon request, Fund staff has access to more detailed and timely balance of payments and debt data.

The authorities are working on a data base on gross flows of short and medium-term private debt. However, there is some concern about the quality of private capital flows as the foreign direct investment survey was discontinued in the third quarter of 2004.

IV. Monetary Sector

Monetary data are provided on the balance sheets of the central bank, commercial bank, nonbank financial institutions, and two state-owned second-tier banks, Nacional Financiera Boliviana (NAFIBO), and Fondo de Desarrollo del Sistema Financiero (FONDESIF). Data on the monetary survey are available with a short lag. Commercial bank data are collected by the Superintendency of Banks and they become available with a lag of six to eight weeks. The coverage of banks in the monetary survey is comprehensive. A STA mission in April 2006 found that the central bank has implemented most of the recommendations of the 2001 STA advisory mission, and monetary statistics are now broadly in line with the Monetary and Financial Statistics Manual. The mission found weaknesses in data provided by deposit institutions, which could be improved with the implementation of the new standardized report forms.

Bolivia: Indicators Required for Surveillance

(As of June 9, 2006)

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Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Monthly frequency for goods only.
1

The new government has a majority in the lower house and strong support in the senate, in sharp contrast with the weak congressional position of previous governments. However, it faces opposition by a majority of the newly elected regional governors.

2

Since May 2005, dollar deposits are subject to higher reserve requirements than boliviano deposits. Also, a financial transaction tax was introduced in mid-2004 that affects sight and savings dollar deposits, as compared to only sight boliviano deposits.

3

The combined contributions from the IMF and the World Bank reduced Bolivia’s external public debt by about US$1.8 billion, or from about 50 percent to about 30 percent of GDP.

4

According to the indicators of Kaufmann, Kraay and Mastruzzi, over the last decade Bolivia’s governance declined across four of the six dimensions measured. By 2004, in all areas except regulatory quality, Bolivia was below the average for South America and ranked in the bottom half of all countries sampled. On political stability and corruption, Bolivia ranked in the bottom third of the sample.

5

The government intends to strengthen its role in the mining sector through a revival of the state company Corporación Minera de Bolivia (COMIBOL). Large private mining operations will be allowed to proceed, but under as yet unspecified higher taxation.

6

The government has announced a land reform that would involve redistribution of significant extensions of land in the next five years. Although the land currently targeted for redistribution is owned by the Bolivian state, the government has indicated that it will eventually seize and redistribute privately-owned land that is unproductive, was obtained illegally, or is being used for speculation.

7

The implementation of the MDRI has released fiscal resources equivalent to about 0.5 percent of the GDP per year over 2006-11.

8

The CPS comprises the nonfinancial public sector and the central bank.

9

The law would aim, inter alia, to avoid spending increases without congressional approval, require that the budget be prepared within a medium-term framework, strengthen rules on subnational government debt, and adopt a functional classification consistent with international standards.

10

An adjustment in downstream prices to market levels would benefit the budget (about 1¼ percent of GDP in reduced expenditure and 4 percent of GDP in additional IDH and royalties); and oil companies (whose revenue before profit tax would increase by about 1¾ percent of GDP).

11

The change in the energy matrix would involve the replacement of some oil derivatives (i.e., diesel) by derivatives from natural gas.

12

The mission noted that, in Bolivia’s highly dollarized environment, the effectiveness of traditional monetary targeting might be hampered by instability in the demand for money. Key policy recommendations from a 2004 MFD technical assistance report on enhancing the use of local currency and the flexibility of the exchange rate have already been implemented, including improved prudential supervision, issuance of inflation-indexed bonds, and raising liquidity requirements on dollar deposits.

13

However, if the exchange rate were to appreciate, as suggested by the strong balance of payments position, banks would stand to benefit from the reduced credit risk from unhedged borrowers.

14

The proposed land reform could impact the banking system, particularly to the extent that it involved the redistribution of foreclosed properties or land collateralizing loans without fair and immediate compensation.

15

In this regard, the strengthening of the independence of the SBEF and recent measures to improve the monitoring of the banks’ liquidity risk are welcome.

16

Four development banks were closed during the 1990s due to solvency problems.

17

Declining explicit fuel subsidies would reflect the authorities’ plan to change the energy matrix towards increased use of natural gas.

18

For example, the government’s initiative in the area of land reform will need to be carefully managed, especially because it incorporates the possibility of redistribution of private land. Aside from its potential impact on confidence in property rights, this initiative may affect the financial system, particularly if it involves foreclosed properties or properties that have been used as collateral..

1

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts can not be added.

2

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

3

The Multilateral Debt Relief Initiative (MDRI) provides 100 percent debt relief to eligible member countries that are qualified for the assistance. The debt relief covers the full stock of debt owed to the Fund as of end-2004 which remains outstanding at the time the member qualifies for such debt relief. The MDRI is financed by bilateral contributions and the Fund’s own resources, as well as the resources already disbursed to the member under the HIPC Initiative (see Section VII above).

1

Prepared by World Bank staff.

1

Prepared by IDB staff.

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Cover IMF Staff Country Reports
Bolivia: Staff Report for the 2006 Article IV Consultation
Author:
International Monetary Fund
Volume/Issue:
Volume 2006: Issue 270
Publisher:
International Monetary Fund
ISBN:
9781451805802
ISSN:
1934-7685
Pages:
72
DOI:
https://doi.org/10.5089/9781451805802.002
Figure 1.

Bolivia: Key Economic Indicators
Figure 2.

Bolivia: Fiscal Developments

Real per Capita GDP (1992 = 100)
Figure 3.

Bolivia: Monetary Developments
Figure 4.

Bolivia: Exchange Rate and Interest Rate Developments

Deposits and Lending of Micro Credit Institutions

(In millions of bolivianos)

Characteristics of Micro Credit Institutions and Banks, 2005
Figure 5.

Bolivia: Medium-Term Scenarios
Figure 1.

Bolivia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2005-2026

(In percent)
Figure 2.

Bolivia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2005-2026

(In percent)
Figure 3.

Bolivia: Indicators of Public Debt Under Alternative Scenarios, 2005-2026 1/