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.

The information below, which has become available following the issuance of the Staff Report, does not alter the thrust of the staff appraisal.

1. Elections for the constitutional assembly and referendums on regional autonomy. In the elections held on July 2, the governing party Movimiento al Socialismo (MAS) obtained 51 percent of the vote, and as a result will be represented by 137 of the 255 delegates to the constitutional assembly. As a two-thirds majority is required to approve constitutional reforms, consensus building with other political groups will be needed. In the regional referendums, four of the nine departments favored autonomy. The specific modalities whereby greater autonomy will be granted to these departments will be defined by the constitutional assembly, which will begin deliberations on August 6 and is also expected to consider a wide range of possible institutional changes in the political and economic areas, including with respect to the economic role of the state, land tenure, and property rights.

2. National Development Plan. The government has finalized the National Development Plan (NDP), which is aimed at raising growth and reducing poverty and inequality, and sets out policies towards these objectives. The main points include:

  • Key objectives. For the period 2006-11, the NDP targets an average real GDP growth of 6.3 percent; a 9 percentage point reduction in poverty (to 50 percent); and a sharp decline in the unemployment rate, to 4 percent.

  • Policy approach. In line with the views advanced by the authorities during the Article IV discussions, the NDP advocates a greater state role in the economy and support for small- and medium scale producers, including through development banking. Regarding the role of the state in the economy, the government would recover control of all the enterprises privatized in the mid-1990s (except the former national airline), which implies that—although no related legislation is yet in place—the nationalization process for the hydrocarbons sector described in the Staff Report would eventually be extended to the telecommunications, electricity, and water sectors. The independent regulatory agencies would be abolished, except for the superintendency of banks. A new framework for FDI would introduce new requirements regarding financial information, technology transfer, minimum employment creation, and use of local inputs and services.

  • Macroeconomic framework. The higher growth rates than in the staff’s baseline scenario would come from projections of strong growth in the hydrocarbons sector (as opposed to unchanged production in the staff’s scenario) and larger public investment and FDI. Under the additional assumption of much higher hydrocarbons-based revenues, the fiscal deficit would trend downwards beyond 2008. However, the external current account would be somewhat weaker than under the staff’s scenario due to stronger import growth. The NDP expresses a firm commitment to macroeconomic stability, also reflected in low projected inflation, and vows continued openness in the exchange system under an unchanged exchange rate regime. A special fund would be created to absorb extraordinary hydrocarbons revenues.

  • Sectoral policies. The NDP envisages employment programs, increases in public investment, and improvements in public services. It specifies detailed sectoral policies in education; health and sanitation; justice and security; culture and technology; social safety net and community development. In addition, the plan outlines industrial policies for hydrocarbons, mining, manufacturing, telecommunications, power, transport, agriculture, housing, and tourism. Land reform is expected to expand access to land by small-scale farmers. In the trade area, the NDP would support export promotion policies and selective import restrictions to promote domestic industries.

Bolivia: Medium-Term Scenarios

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Sources: Bolivian authorities and Fund staff estimates and projections.

3. Natural gas exports to Argentina. The governments of Bolivia and Argentina have reached understandings on an increase in the price of natural gas, from US$3.63 to US$5.00 per million British Thermal Units (BTU)—with effect from July 15, 2006, and up to an export volume of up to 7.7 million cubic meters per day (currently, Argentina imports 5.5 million cubic meters per day).

  • Bilateral negotiations. The governments will designate representatives for the purpose of negotiating, by December 31, 2006, a 20-year agreement whereby the export price would be updated annually (with effect from January 1), according to a formula to be specified, and the volume could increase to up to 27 million cubic meters per day by 2026. The understandings envisage joint investments to support the higher export volumes as well as production in Bolivia of natural gas derivatives and gas-based electricity.

  • Economic impact. In 2006, the higher natural gas price to Argentina is expected to yield additional fiscal and export revenues amounting, respectively, to 0.5 and 0.8 percent of GDP. Over the medium term, the revenue impact will hinge on the extent to which the joint investments materialize, but is likely to at least double reflecting the full-year effect. The associated long-term paths of the ratios of the external and public debts to exports and GDP would likely fall within the range associated with the positive shock (across-the-board 50 percent price increase on all exports of natural gas) assumed in the debt sustainability exercise.