Bolivia: 2008 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Bolivia
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2008 Article IV consultation with Bolivia, the following documents have been released and are included in this package:
The staff report for the 2008 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on November 5, 2008, with the officials of Bolivia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 11, 2008. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A staff supplement on the joint IMF/World Bank debt sustainability analysis.
A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its January 14, 2009 discussion of the staff report that concluded the Article IV consultation.
A statement by the Executive Director for Bolivia.
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
Prepared by the Staff Representatives for the 2008 Article IV Consultation with Bolivia
Approved by José Fajgenbaum and Alan MacArthur
December 11, 2008
Discussions. Article IV consultation discussions were held in La Paz during September 16–26 and November 3–5 with, among others: finance minister Arce, planning minister Villegas, central bank presidents Garrón (in September) and Loza (in November), and representatives of the financial sector. The mission teams comprised Messrs. Furtado (head), Sosa, Valencia, and Vesperoni (resident representative) (all WHD); Cortavarria-Checkley (MCM); and Tolosa (SPR).
Political setting. Following a protracted period of political tensions, agreement was reached on holding a national referendum on a new constitution, to be held on January 25, 2009. However, the political environment remains very complex in light of entrenched regional and social polarization. If the new constitution is approved as expected, early presidential elections will be held in December 2009; President Evo Morales will be allowed to run for a new full term through 2014.
Economic setting. The current global crisis will affect Bolivia mainly through declines in commodity prices given its very limited integration with international capital markets. While macroeconomic performance has been supported by booming hydrocarbons and mining exports in recent years, real GDP growth is projected to decline to 4 percent in 2009 and the fiscal and external current accounts to shift into small deficits as export earnings decline.
Key policy recommendations. As inflation remains in the double digits despite a recent deceleration in food prices, there is a need for a more active monetary policy. To guard against a further deterioration in the external environment and ensure intergenerational sharing of hydrocarbons wealth beyond its depletion point, the authorities need to restore a fiscal surplus of at least 3 percent of GDP over the medium-term. To underpin medium-term growth, steps are needed to reduce remaining financial sector vulnerabilities and to improve the investment climate.
Fund relations. Bolivia has accepted the obligations of Article VIII, sections 2, 3, and 4. The exchange system is free of restrictions on current international payments and transfers, and there are no significant controls on capital flows. The last Article IV consultation was concluded on July 13, 2007. The latest Fund arrangement expired on March 31, 2006.
I. Economic and Political Setting
II. Report on the Discussions
A. Developments in 2008
B. Outlook for 2009
C. Financial Sector Issues
D. Supply Side and Social Issues
E. Medium-Term Outlook
III. Staff Appraisal
1. Main Inflation Drivers
2. Structural Fiscal Issues
3. Exchange Rate Assessment
1. Selected Economic and Financial Indicators
2. Operations of the Combined Public Sector (In millions of Bolivianos)
3. Operations of the Combined Public Sector (In percent of GDP)
4. Central Bank of Bolivia
5. Financial System Survey
6. Balance of Payments
7. Alternative Medium-Term Scenario
8. Selected Vulnerability Indictors
9. Millennium Development Goals
1. Summary of Annexes
In recent years, Bolivia experienced an export boom led by hydrocarbons and mining. The positive external shock supported an improvement in the growth performance and a strengthening of the external and fiscal positions, but inflation has accelerated and investment—despite a recent pickup—has remained low in the context of persistent political tensions.
The current global crisis affects Bolivia mainly through declines in commodity prices and remittances. Given the adverse external environment, GDP growth will slow markedly in 2009 while the fiscal and external current accounts would shift into deficits. At the same time, further reductions in food prices would help lower inflation.
The overall fiscal position is projected to shift from a surplus of 3.5 percent of GDP in 2008 to a deficit of 0.5 percent in 2009. In the event of a further deterioration in exports and related fiscal revenue, the authorities would implement cuts in government capital expenditure—where they see scope for streamlining while preserving critical investments and social spending.
A more active monetary policy would help speed up the decline in inflation to the single digits. The central bank is encouraged to conduct open market operations in a manner consistent with bringing about higher interest rates on non-indexed bonds, which are negative in real terms. This would also help eliminate incentives for indexation.
While the financial sector appears to be stable and highly liquid, efforts to reduce vulnerabilities should continue. The staff welcomes plans to fully adopt international accounting standards and the ongoing efforts to improve risk management practices in banks. The authorities are encouraged to introduce prudential regulations to mitigate credit risks from dollarization and market risk.
The exchange rate of the Boliviano is broadly appropriate. While standard estimates suggest a mild overvaluation, and indeed the current account deficit could be significant in 2009, the outlook points to a subsequent improvement in the external current account. Looking forward, greater exchange rate flexibility would help absorb possible external shocks, such as those stemming from adverse movements in commodity prices.
For the medium term, the authorities need to target a reduction in the non-hydrocarbons deficit by about 3½ percentage points of GDP. This would reduce dependency on volatile export-based revenue and lead to greater inter-generational equity in the use of hydrocarbons wealth. The authorities could consider, in this context, a gradual reduction of explicit and implicit hydrocarbons subsidies while using part of the resulting fiscal savings to protect vulnerable groups. In addition, there is scope to further strengthen Bolivia’s fiscal position through well-designed structural reforms.
Improving the investment climate remains a top priority for Bolivia, as its private investment rate remains significantly below the levels observed in the past decade and well below the regional average.
Front Matter Page
INTERNATIONAL MONETARY FUND
Staff Report for the 2008 Article IV Consultation—Informational Annex
Prepared by the Western Hemisphere Department
December 11, 2008
1. Fund Relations
2. Relations with the World Bank
3. Relations with the Inter-American Development Bank
4. Statistical Issues
Front Matter Page
INTERNATIONAL MONETARY FUND
Prepared by the staff of the International Monetary Fund1
Approved by Jose Fajgenbaum and Alan MacArthur
December 11, 2008
Following MDRI debt relief, the sustainability of Bolivia’s public debt has continued to improve as a result of overall fiscal surpluses. Debt ratios continue to display ample margins with respect to risk thresholds, and are expected to decline further under baseline policies. Given the predominantly long maturities of remaining stocks of both domestic and foreign debt, debt service is projected to remain low. The path of debt ratios would reach an inflexion point and take on an upward trend under standard stress tests, but would remain within manageable bounds over the medium- and long run.