2011 Article IV Consultation-Staff Report; Supplement and Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Bolivia

Bolivia showed a solid macroeconomic performance in recent years, owing to its strong trade and prudent economic policies. IMF staff stressed the need to tighten monetary conditions through increasing the policy interest rate as a means to combat inflation. The Executive Board praised authorities for their sound macroeconomic management, and concurred that structural reform and increased investment will enhance economic growth. However, the crisis management framework could be strengthened with a deposit insurance scheme to protect small depositors in the event of bank liquidation.


Bolivia showed a solid macroeconomic performance in recent years, owing to its strong trade and prudent economic policies. IMF staff stressed the need to tighten monetary conditions through increasing the policy interest rate as a means to combat inflation. The Executive Board praised authorities for their sound macroeconomic management, and concurred that structural reform and increased investment will enhance economic growth. However, the crisis management framework could be strengthened with a deposit insurance scheme to protect small depositors in the event of bank liquidation.


1. Bolivia has posted a solid macroeconomic performance in recent years, on the back of strong terms of trade and prudent economic policies. Increased export volumes and prices led to a doubling of export receipts between 2005 and 2010, while real GDP growth rose from 3.1 percent in the first half of the past decade to 4.6 percent in the second half. The strength of the external and fiscal positions in recent years has allowed Bolivia to build a strong reserves cushion which has reduced macroeconomic vulnerability, while the net international investment position switched to a credit balance in 2008 and rose to the equivalent of 17½ percent of GDP in 2010.


Bolivia: Growth, Current Account and NIR

(Percentage of GDP and growth rate)

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

Source: Central Bank of Bolivia

2. At the same time, deep political and social changes have been taking place. The election of president Morales in 2006 initiated a period of strengthening of social policies and a broader role of the state in economic affairs. The new constitution (2009) is leading to profound changes in the country’s legal framework, and requires amending key economic laws, including those ruling the central bank, the financial sector, the exploitation of natural resources, and inter-governmental fiscal relations. Despite broad support for government policies, tensions persist due to longstanding social and regional disputes, which constrain the room for policy maneuver.

3. Progress has been made on improving social inclusion and income distribution. Cash transfer programs have been successful in reducing extreme poverty (from about 30 percent in 2008 to 26 percent in 2009). However, poverty, infant mortality, school desertion, and other long-standing inequalities persist, including with large disparities in access to basic services across territorial, ethnic, and gender lines. The percentage of the population living in extreme poverty is still above the average in Latin America (12.6 percent), with high levels of infant mortality and child malnutrition.

4. The authorities’ development plan envisages the expansion and industrialization of natural resource production. The plan is ambitious, particularly in the areas of hydrocarbons, mining, electricity, and infrastructure (amounting up to 100 percent of current GDP over the next few years). While strategic control of these sectors would remain in the hands of the state, the authorities favor entering into partnerships with the private sector for the implementation of the plan, with a view to improving access to modern forms of management, technology, and financing. However, the implementation of investment projects has suffered delays, while private investment remains low, reflecting in part uncertainties over the legal framework and a high tax burden in strategic sectors.


Public and Private Investment

(Percent of nominal GDP)

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

Note: (p) means projected.

5. In concluding the 2009 Article IV consultation, the Executive Board praised the Bolivian authorities for their sound macroeconomic management, and concurred that structural reform and increased investment were necessary to boost growth and reduce poverty further. Directors advised strengthening the non-hydrocarbon balance, including through the gradual withdrawal of fuel subsidies, and establishing a formal framework for the fiscal management of natural resources. Directors supported a gradual tightening of monetary conditions and considered that central bank financing to the public sector should be avoided to strengthen the independence of monetary policy; most Directors encouraged the authorities to set the stage for higher exchange rate flexibility. In the financial sector, Directors suggested to focus on pending reforms and maintaining strong financial supervision. Progress in these areas has been varied. The central bank restarted periodic adjustments in the exchange rate, though excess liquidity in the banking sector has declined only gradually. The authorities attempted to eliminate fuel subsidies upfront, but this measure was reversed in the face of social unrest. Preparations to address other fiscal issues are ongoing. In the financial sector, the authorities are working on banking legislation.

6. Exchange system and statistics. Bolivia has accepted the obligations under Article VIII, sections 2, 3, and 4. The exchange system is free of restrictions on the making of payments and transfers for current international transactions. Despite shortcomings, data provision to the Fund is broadly adequate for surveillance. Bolivia has participated in the General Data Disemination System since November 2002.


7. Despite adverse weather shocks, economic growth picked up in 2010 and the external sector strengthened further, while inflation rose significantly.

  • Real GDP grew by 4.2 percent on account of higher hydrocarbons production, with high terms of trade supporting domestic demand. Adverse weather conditions held agricultural production back, while construction grew at brisk pace. The economy is estimated to be operating at close to potential.

  • The external current account surplus rose to 4.8 percent of GDP, due to higher commodity prices and natural gas export volumes. Net international reserves currently stand at 50 percent of GDP and 80 percent of broad money, keeping external vulnerabilities low.

  • Twelve-month inflation rose sharply, to 7.2 percent in December and 11 percent in March 2011, on the back of higher food commodity prices and some de-anchoring of expectations following a failed attempt at raising fuel prices last December (Box 1), and amid ample liquidity in the banking sector.1

8. Monetary policy has remained accommodative, while an unexpected decline in public capital spending in 2010 acted as a drag on growth.

  • Despite central bank actions to remove the monetary stimulus since the second half of 2010, monetary policy remains lax. Nominal short-term interest rates for deposits are near zero, liquidity is ample (banks’ excess liquidity amounts to 8 percent of deposits), and both the money supply (M1) and bank credit are growing at near 20 percent.

  • After about two years of maintaining the boliviano pegged to the dollar, the central bank has let the currency gradually appreciate (around 1 percent since late 2010), to reduce external inflation pressures. The de-jure exchange-rate regime remains a crawling peg without pre-announcement of future adjustments. De facto, the currency has been stabilized against the U.S. dollar.

  • The overall public sector surplus rose to 2.0 percent of GDP, from 0.3 percent in 2009. This resulted largely from a significant under-execution of investment plans, associated with political transition in sub-national governments and delays in public enterprises. The central government is estimated to have registered a deficit of 2 percent of GDP and the rest of the public sector a surplus of 4 percent of GDP.

9. Financial sector indicators are strong, but banks have experienced episodes of deposit volatility in recent months.

  • In the context of higher credit growth fueled by low interest rates, banks have remained profitable, well capitalized, and their nonperforming loan ratios (NPLs) are low. Progress on de-dollarization of balance sheets has continued, with boliviano-denominated credit and deposits standing at about 55 percent of the total.

  • Bank runs in June and December 2010 reflected a new sensitivity of depositors. These runs were seemingly fueled by false rumors about the state of a bank and about government policy intentions, respectively. The December run was strong, systemic, and brief—it affected all types of institutions, and deposits fell 3.5 percent (mostly U.S. dollar) in three days. Since then, deposits have started to recover.

10. Congress has approved a road map for fiscal decentralization and a reform of the pension system. The decentralization law sets the stage for a discussion of revenue assignments and spending responsibilities across different levels of government, a process which is likely to take time to be fully implemented (Annex I). The pension reform creates a semi-contributory regime with stepped up benefits for low-income households, funded with higher contributions from employers and employees. It also introduces a lower retirement age (58 years for men and 55 for women), and nationalizes the administration of the pension funds (Annex II).


11. With a broadly-supportive external environment, short-term growth prospects are favorable, and inflation is expected to decline gradually.

  • Assisted by growth in the region, favorable terms of trade, and an expected fiscal impulse linked to higher public investment, real GDP growth is projected at 4.5 percent in 2011. The external current account would remain in surplus (4 percent of GDP) and the fiscal surplus would narrow to below 1 percent of GDP.

  • Inflation is projected to remain high in the coming months and decline gradually, to 8 percent by end-2011. Achieving this objective contains downside risks, given domestic pressures on the economy, which is operating at close to potential. In addition, higher international food prices, a possible adjustment in transportation fares, and wage costs increases associated both with the pension reform and salary increases (in the 10–20 percent range) will have a negative bearing on inflation.

12. The medium-term outlook has balanced upside and downside risks. The staff’s baseline scenario is for economic growth to stabilize at 4.5 percent, or slightly above the observed long-term trend to take into account the tail winds associated with high commodity prices over the projection period. The economy can grow at faster rates, provided that the government effectively implement its major investment projects and investment in the private sector accompanies the rising trend in public investment. Downside risks to growth are associated with possibly lower commodity prices and export volumes, and with adverse domestic market sentiment, should inflation continue rising.

13. The authorities’ views on short-term and medium-term prospects are more optimistic. They considered that inflation expectations were gradually abating and that current policies would allow inflation to decline to 6 percent this year, while growth would reach 5 percent, spurred by public investment. They are also more sanguine about upside risks to growth, resulting from the implementation of their development program.

Selected Economic Indicators

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14. Discussions focused on the short-run policy mix, reforms to strengthen the policy framework, and policies to sustain high and stable growth over the medium-term.

  • With low macro-financial risks in the short term, the policy priority is to secure a return to low inflation.

  • Given the importance of commodities in GDP, exports, and fiscal revenue, Bolivia would benefit from a policy framework that reduces macroeconomic volatility and ensures a sustainable fiscal policy.

  • As financial intermediation grows, a key challenge will be to preserve the health of the financial system—discussions in this area benefited from the FSAP-Update.

  • Achieving sustained and high growth would require overcoming constraints that have held back private investment.

A. Macroeconomic Policies

15. The authorities have responded to rising inflation by starting to withdraw the monetary stimulus and allowing the Boliviano to appreciate, while introducing trade policy measures and price agreements in agriculture. Interest rates have yet to react to higher central bank sterilization activities, and the modest appreciation of the currency in recent months (1 percent) has not significantly impacted on inflation and expectations. In response to food-security concerns, and to reduce the impact of inflation on the poor, the government has also limited exports of certain products (sugar, soybeans), reduced import tariffs (corn), and established price agreements (milk, poultry).

16. Staff expects a moderate fiscal impulse, supporting domestic demand but, possibly, preventing a faster decline in inflation. Despite higher hydrocarbon revenue, the overall surplus of the public sector is expected to fall from 2 percent of GDP in 2010 to 0.7 percent in 2011. To a large extent, this would reflect an increase in capital expenditure.2 With the output gap virtually closed, the estimated fiscal impulse for 2011—about 1½ percent of GDP—may run counter to the inflation objective of the government (Box 2).

17. Staff suggested a tighter policy mix in 2011 to contain inflationary pressures. In particular, staff noted that the central bank would need to tighten monetary conditions further—including through stepped-up open market operations and higher reserve requirements for domestic currency deposits. The envisaged fiscal impulse will also increase the burden on the central bank to withdraw liquidity and increase interest rates. Staff also suggested a faster appreciation of the boliviano, which is estimated to be moderately undervalued (Box 3).

18. The authorities reaffirmed that containing inflation is a priority for them, and they considered that the recent resurgence was temporary, warranting a gradual approach. In their view, the main driver of inflation has been external, and the gradual appreciation of the exchange rate will help moderate the effects of this factor. The authorities also believe that central bank sterilization policies will effectively absorb liquidity over the coming months and that interest rates will naturally find their equilibrium levels. They acknowledged that inflationary expectations had been temporarily de-anchored in December, but highlighted that food prices would soon decline as a result of favorable weather conditions and ongoing government policies to increase supply.

19. With gas prices at high levels and current policies, staff projects moderate fiscal surpluses in the coming years. Export prices for gas are expected to reach historic highs in 2011—about twice as high as in 2005—and remain elevated in the next few years, implying hydrocarbon revenues of about 12 percent of GDP for the public sector as a whole, or above one-third of total revenue. Spending has been projected to gradually rise to 35 percent of GDP, in line with the levels achieved in 2008-09—a projection which does not incorporate major investment projects planned by the government, as the precise phasing of these investments still needs to be decided. On this basis, the overall fiscal balance would remain in surplus (1–1½ percent of GDP), consistent with a non-hydrocarbon deficit of 9½ percent of GDP and a gradual decline in public debt to 30 percent of GDP by 2016.

20. Given the strength of financial cushions, the favorable outlook, and the prevalence of poverty and development needs, staff indicated that investment levels could rise above baseline projections without jeopardizing debt sustainability. An increase in total spending of 2 percent of GDP above baseline projections during 2012–16 would result in a stable net debt ratio by 2016, still maintaining Bolivia’s strong fiscal position. Staff noted that higher investment could benefit Bolivia in terms of economic growth if care was taken to ensure that it is accompanied by efforts to boost its effectiveness. In turn, this would require enhancing implementation capacity across all levels of government. The authorities agreed with the need to maintain current spending under control, and noted that boosting public investment was also necessary for GDP diversification.

B. Strengthening the Policy Framework

21. While the authorities should be commended for their macroeconomic management in recent years, there is room to enhance the policy framework to improve the economy’s resilience to shocks and strengthen the sustainability of fiscal policy. Bolivia has built large macroeconomic buffers thanks to a fiscal policy that has largely avoided spending the hydrocarbon-revenue windfall resulting from high gas prices. While fiscal savings have been key to limiting real appreciation pressures from the export boom, volatile commodity prices and large current account surpluses have posed challenges to monetary and exchange rate policy. Inflation has been volatile, peaking in boom years (2007–08), declining to near zero in 2009, and rising again in 2010 and early 2011. In the context of limited exchange rate flexibility, the central bank has faced challenges in sterilizing international reserve accumulation, which has led to high levels of money growth and some inflationary pressures. Against this background, a number of key issues need to be considered in improving the policy framweork, most of which are in the authorities’ agenda:

  • Medium-term fiscal framework. Taking into account Bolivia’s fiscal dependency on hydrocarbon resources, and given the plans for large public investment projects, the authorities are working on a multi-year framework to guide fiscal policy and budget planning. This framework would be sent to congress to complement annual budget discussion and align the government strategic priorities with projected resources. On the revenue side, the authorities plan to base their budget projections on prudent estimates of oil and gas prices, so as to generate savings in periods of high prices. These savings would be accumulated in a fiscal fund, for stabilization and development purposes. Staff strongly supported the authorities’ efforts in this area, which should help avoid procyclical public spending and maintain strong liquidity buffers. Staff also suggested that the authorities’ plans to create a fiscal fund would benefit from an expansion of its revenue base—at present, it only takes into account two-thirds of total hydrocarbon royalties—and from clearer rules for the use of the resources.

  • Limiting central bank financing of public sector and state-owned enterprises. While the authorities have shown restraint in the use of central bank financing to date, the 2011 Budget authorizes the central bank to provide large credits to SOEs (up to 30 percent of net international reserves), in addition to US$2 billion already committed in previous years (equivalent to 20 percent of current reserves). Staff noted that such a large potential fiscal claim on the central bank risks jeopardizing confidence in the policymaking framework, compromising independent monetary policy and raising external vulnerabilities. In this context, staff suggested that the authorities strengthen the public debt strategy to identify alternative financing sources. Moreover, staff stressed that, to avoid introducing credit risk in the central bank balance sheet, more transparency would be required in the credit assessment of public corporations. The authorities indicated that, instead of being on-lent to public enterprises, part of the foreign reserves could be used to set up the envisaged fiscal fund. While the details would need to be worked out, the authorities stressed that the central bank would keep a strong reserve cushion, to ensure macroeconomic stability.

  • Reform of intergovernmental fiscal relations. Due to the imbalances between revenue assignments and spending responsibilities—as most of the natural resource revenue is earmarked to sub-national levels of governments, with low spending responsibilities and execution capacity—the fiscal position of the central government 3 has deteriorated in recent years, while sub-national governments and public corporations (mainly YPFB, the oil holding company) remain in surplus. Addressing these imbalances is important to preserve the financial strength of the central government and its ability to implement counter-cyclical fiscal policy in adverse scenarios. The revision of revenue assignments and spending esponsibilities, in the context of the road map established by the decentralization law, will take time, due to the complexity of technical and political decisions. In the meantime, the authorities have been discussing ways to tap the surpluses of subnational governments on a voluntary basis, through the issuance of central government paper to municipalities and departments. Staff commended the authorities for the provisions in the decentralization law that aim at a sustainable management of local public finances, and reaffirmed the need to avoid an increase in consolidated public spending as a result of decentralization.

  • Public enterprise reform. Staff noted that the expansion of the number and activities of state-owned enterprises (SOEs) could lead to significant fiscal risks, if not complemented with greater transparency and accountability. In particular, staff recommended that SOEs minimize their quasi-fiscal operations, address existing constraints to investment execution, and be subject to independent audits. In addition, the Ministry of Economy and Public Finance should continue to develop technical expertise about the operations of the large firms, in particular YPFB, and expand the coverage of public sector accounts to include all SOEs. The authorities broadly agreed with these recommendations and indicated that they continue to work on a framework law for public corporations, which would provide the tools for effective management and governance.

  • Exchange rate/monetary policy regime. Staff encouraged the authorities to move to a more flexible exchange rate regime over the medium term, to enhance the capacity to respond to external shocks, and to develop an independent monetary policy framework focused on keeping inflation at low levels. The authorities concurred that monetary policy should focus primarily on price stability, while allowing the exchange rate to adjust to changes in the external environment. They noted, however, that that further declines in dollarization and a deepening of domestic financial markets would, in their view, be preconditions to adopting a more flexible exchange rate regime.


Bolivia: Fiscal Balances

(Percentage of GDP)

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

Source: IMF’s staff estimates with official data.

C. Maintaining Financial Sector Soundness

22. The FSAP-Update found an important improvement in the financial sector compared to 2003 (initial FSAP). The favorable macroeconomic environment and strong growth performance of recent years have allowed banks to rebuild their capital buffers with respect to the period of distress in the early part of the decade. Capital ratios are strong and financial institutions appear broadly resilient to a range of shocks. Importantly, a significant reduction in the level of dollarization has lowered foreign-currency exposures in the financial and non-financial sectors. The banking sector was found to be fairly competitive and efficient, and profitable, despite recent declines in interest rates.

23. Against this background, a number of issues would need to be addressed to protect macro-financial stability:

  • Negative real interest rates are a source of macroeconomic risk. If maintained, negative real interest rates are likely to lead to unsound credit growth and possibly credit bubbles. 4 Staff argued that credit portfolios could deteriorate rapidly when interest rates return to more sustainable levels, as Boliviano-denominated loans are generally extended at variable rates. In light of the new inflation environment, staff encouraged the authorities to manage a soft landing, by raising rates (through open market operations) gradually but consistently, while refraining from applying moral suasion on banks to expand credit. Staff also noted that, while aggregate liquidity is abundant, it is not evenly distributed across the financial sector. The authorities took note of the concern about interest rates, but reiterated their view that the rise in inflation was temporary. They also mentioned that the liquidity framework was being reassessed to ensure the maintenance of adequate cushions.

  • Although the regulatory framework has improved in various aspects, the use of prudential norms to pursue developmental objectives since 2009 could weaken the financial sector’s ability to withstand shocks. The authorities have lowered provisioning and reserve requirements to spur domestic currency loans to productive sectors of the economy, which has reduced bank buffers against distress. As the economy of Bolivia is very exposed to external shocks, staff highlighted the need to preserve buffers to prevent these shocks from translating into large economic fluctuations. Staff also indicated that development policies would be more appropriately supported through the budget. In the insurance sector, a modernization of the regulatory framework is needed to strengthen corporate governance rules, information disclosure, the calculation of reserves, and restructuring powers of the supervisors.

  • Banking supervision has been strengthened, including through the adoption of a more risk-oriented approach, resulting in improvements in compliance with Basel Core Principles. Staff welcomed these developments. However, the expanded mandate of the supervisory authority (ASFI), including consumer protection and the supervision of exchange houses and other non-bank financial intermediaries will demand higher resources and institution building, including to maintain and adequate cycle of on-site inspections. The FSAP-Update noted the importance of preserving adequate independence and legal protection of staff at the central bank, ASFI, and the insurance and pensions regulator, and recommended reviewing their remuneration to avoid the emergence of large gaps with remunerations in supervised institutions.

  • A stronger crisis management framework would benefit macro-financial stability. The central bank has effective mechanisms to provide liquidity, including in foreign currency, and the bank resolution framework is in line with best practices. However, the system still lacks a deposit insurance scheme that would protect small depositors in the event of liquidation. The authorities should also develop and monitor macroprudential indicators for systemic risk.

  • To preserve Bolivia’s financial system integrity and its access to the international financial system, AML/CFT regulations and practices should comply with international norms. A number of legal reforms have been passed to strenghen the anti-money laundering framework—making money laundering an autonomous crime and adding to the penal code a number of offenses related to corruption, smuggling, and other trafficking activities. A key pending action is the passage of a law that penalizes the financing of terrorism. The authorities are also considering steps to strengthen the financial intelligence unit.

  • Managing pension funds assets will require the establishment of a specialized agency with qualified personnel and investment norms. The authorities are working on the implementing legislation of the pension law and noted that investment policies would be essentially unaltered, as the law specifies only minor changes in the intended allocation of the funds, to benefit small firms without credit ratings. Given that the funding of many banks is dependent on pension fund deposits, staff recommended carefully avoiding any abrupt change in asset allocation in the short run, while developing guidelines for the allocation of pension funds deposits across banks.

D. Enhancing Medium-Term Growth and Social Protection

24. In recent years, the external environment has presented Bolivia with a unique opportunity to initiate a period of sustained growth above historical rates. To take advantage of this environment, key challenges need to be addressed:


Private Investment

(As percent of GDP, 2009)

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

  • Strengthening the business environment. Low private investment reflects longstanding challenges in the business environment.5 Weaknesses have been identified in institutional indicators and goods-and-labor-markets efficiency indices. While FDI rose in 2010 (including in the manufacturing and gas sectors—the latter associated with a new export contract signed with Argentina last year), non-FDI private capital flows remain negative. The authorities indicated that important progress was being achieved in developing micro-enterprises and were hopeful that this progress would soon be reflected in higher investment and growth statistics.

  • Spurring private exploration in the hydrocarbon sector and mining sectors. With a few exceptions, investment in the exploration of gas, oil, and mining has declined sharply. This is explained mainly by still uncertain rules of the game for these activities, as their legal frameworks are under discussion. In the hydrocarbon sector, below-market fuel prices for domestic consumption limit the price paid to private upstream contractors to US$27 dollars a barrel; in addition, two royalties equivalent to 50 percent of the value of production further reduce the incentives to explore. As a result, private production is declining and the state-owned company need to import rising volumes of fuels (mainly diesel). While aware of the political and social restrictions, staff noted that a gradual increase in domestic fuel prices to market levels, with appropriate compensatory measures, would help provide additional fiscal space to pursue developmental and social objectives. Staff also suggested that the authorities consider revisiting taxation in the natural resources sector to spur exploration and production, particularly in smaller fields. The authorities noted that exploration activities by public corporations were ongoing, and expressed confidence that they would lead to a gradual increase in natural resources production. They noted that taxation in these sectors was unlikely to change in the near future.

Developing agricultural production. Staff noted that Bolivia still lags behind in agricultural productivity and that, as opposed of developments in neighboring countries, harvested areas have been stagnant throughout the food-price boom of recent years. Investment and access to credit remain constrained due to uncertainties about property rights, as legislation establishes harsh penalties—including seizure—in case of violations of social, labor, or use-of-land prescriptions. Staff argued for policies to facilitate the adoption of new technology to improve yields and eliminate uncertainties that prevent bank financing to the sector. Staff also noted that the prolonged use of food-price controls or agreements could adversely affect the domestic supply of goods, including by encouraging smuggling. The authorities explained that their strategy to expand agricultural production was rooted in empowering small farmers through the support of EMAPA, a public corporation that lends to farmers (mostly in kind, and at subsidized rates) and buys their production. They noted that while still small, this program was having great success in economic and social terms. At the same time, the authorities indicated that new loan programs by public banks (i.e., for sugar cane producers) would include incentives to increase productivity.


Agricultural Production Yield

(Index, average 2005-2009, relative to Bolivian harvest yield=100)

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

25. The government’s social policies have allowed Bolivia to make important inroads toward achieving its Millennium Development Goals. The government cash-transfer programs—for the elderly, schooling, and pregnant mothers and early childhood—have been a pillar of this success. These are being complemented with plans to enhance the delivery of education and health services—a priority given the still high levels of infant mortality and child malnutrition. Staff commended the authorities for this success, while noting the need to ensure the sustainability of these plans in adverse scenarios. 6 Moreover, staff recommended developing capacity to enhance targeted social policies, which would facilitate the reduction of fuel subsidies and minimize the use of price controls in agriculture.

26. The pension reform introduces progressivity and could improve participation in the system, but also gives rise to a number of challenges. In the absence of actuarial calculations, staff was unable to judge the fiscal impact of the reform. In the short run, the new solidarity fund is expected to register a surplus, but over the medium-term there are actuarial risks, especially given the reduction in the retirement age. Staff noted that low income earners and workers close to retirement would have higher incentives to participate in the system in light of the new guaranteed pension. At the same time, higher contribution rates may reduce incentives for labor formalization overall. The authorities agreed that the medium-term challenge is to secure higher participation rates in the system, and explained that stronger penalties on evasion and the introduction of innovative modalities to facilitate contributions by self-employed workers would contribute to that objective.


27. Despite adverse weather shocks, the Bolivian economy performed well in 2010. Real GDP growth rose, supported by favorable terms-of-trade and higher hydrocarbon production and exports. The external current account and public sector balances remained in surplus, and net international reserves climbed to new record highs, providing strong protection to face external shocks. The financial sector remains sound, with low nonperforming loans and adequate provisioning.

28. However, there has been a resurgence of inflation that will require policy adjustments to bring it back under control. While higher international food prices have been a key driver of inflation, easy monetary conditions have contributed to more generalized price increases. With the fiscal impulse envisaged for 2011, the central bank should exit faster from the very strong monetary stimulus provided over the past two years. A more rapid appreciation of the currency, which is estimated to be moderately undervalued, would also help reduce external inflationary pressures.

29. The growth outlook for 2011 is favorable. Real GDP growth is expected to gather further momentum, reflecting the continued recovery of hydrocarbon production, higher public investment, and very favorable export prices. The external current account and the fiscal balance are expected to remain in surplus.

30. Given the strength of public financial cushions and the favorable outlook for gas prices, there is fiscal space to undertake additional public investment, provided that efforts continue to boost its effectiveness. Staff projects that, under current policies, public debt will be on a downward path over the next few years. As Bolivia’s cushions are already strong, the authorities could take the opportunity to increase productive and social investment—while containing current expenditure—to address development needs. This will require stepping up efforts to ensure the effectiveness of public spending and enhancing implementation capacity across all levels of government.

31. The authorities are encouraged to continue their reforms to the policy framework to improve policy responses to changing economic conditions. Multi-year budgeting will strengthen fiscal policy and improve investment planning. The establishment of a fiscal savings fund should proceed expeditiously, as it would facilitate anti-cyclical fiscal policy. At the same time, it would limit risky fiscal claims on the central bank, which is an important precondition for credible and effective monetary policy. As lower dollarization becomes more entrenched and domestic financial markets develop further, the authorities should move towards greater exchange rate flexibility.

32. The FSAP update has revealed important improvements in the financial sector, although further strengthening of macro-financial stability will require policy actions. The authorities need to manage a soft landing from historically-low interest rates while ensuring that appropriate levels of bank liquidity are maintained. Capital buffers need to be sustained through regulation focused on risks faced by banks rather than on developmental objectives. Further efforts are needed to align resources, capacity, and processes to the growing responsibilities of the financial sector supervisor, while ensuring its adequate independence. The central bank has effective mechanisms to provide liquidity and the bank the resolution framework is in line with best practices. However, the crisis management framework could be strengthened with a deposit insurance scheme to protect small depositors in the event of bank liquidation. AML/CFT regulations and practices should be strengthened to comply with international norms.

33. Sustaining high and stable medium-term growth will require improvements in the investment climate. Bolivia has yet to reverse the drop in private investment levels that began in the early 2000s. Key challenges include the adaptation of the legal framework for natural resources and private investment to the mandates of the Constitution in a way that ensures clear and stable rules of the game for the private sector.

34. Social policies have been effective and Bolivia has made inroads towards achieving MDGs. Going forward, while strengthening current programs and enhancing the delivery of health and education services, there is a need to improve the targeting of transfer programs. In particular, success in removing generalized fuel subsidies and allowing prices signals to stimulate agricultural production will depend upon the ability of the state to deliver adequate compensatory measures to the most vulnerable groups.

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

Bolivia: Recent Trends in Inflation and Inflation Expectations

Twelve-month inflation rose in recent months, to 10 percent in February. Measures of core and underlying inflation, at 9.8 percent and 8.4 percent respectively, are above the official inflation objective for 2011 (6 percent). To some extent, the current inflationary trend reflects global factors—the increase of food and commodity prices—and, as in many other emerging markets, the relatively large share of food products in the consumer basket. There have also been some one-off effects associated to supply shocks in agriculture, due to adverse weather, and social unrest, which led to temporary price hikes in certain regions.


Food Prices

(y/y percent change)

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

CPI Inflation

(By categories, annual change in percentage)

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Source: Instituto Nacional de Estadisticas de Bolivia (INE)

The increase in inflation has been sharp and is becoming generalized. Monthly inflation averaged 1.4 percent during October-February, well above the monthly average for the first half of 2010 (0.1 percent). Food prices, which account for 27 percent of the CPI basket rose 17 percent year-over-year in February, explaining 48 percent of total inflation. While, historically, there has been a relatively small pass through from world to domestic food prices (20–25 percent), recent developments point to a faster and stronger impact, possibly explained by domestic demand conditions and supply shocks. Measures of inflation that exclude the impact of food, such as core (which excludes some food items and administratively set prices) and underlying inflation (which excludes the ten most volatile items of the CPI basket), also rose, indicating a somewhat generalized trend. Some sub-indices of the CPI (clothing, furniture and domestic articles, services, and restaurants and hotels, representing altogether 31 percent of the basket) have all risen above 6 percent in the last twelve months.

Inflation expectations have increased in tandem with actual inflation. While this is not a new development, since survey-based expectations have followed outturns for some time, it indicates that there is a risk of inflation becoming more entrenched in the coming months, requiring a more aggressive policy response than what would be the case otherwise.


Actual and Expected Inflation

(y/y percent change)

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

Estimating fiscal impulses for Bolivia

The Cyclically Adjusted Balance (CAB) and the Structural Balance (SB) are fiscal measures to assess a country’s fiscal stance. By removing the effects of the economic cycle (the impact of automatic stabilizers), the CAB measures the direction and size of discretionary fiscal policies. The SB, which is an extension of the CAB, also seeks to gauge whether or not fiscal policies are becoming expansionary or contractionary. It is a more suitable indicator for commodity exporting countries, as it takes into account the impact of commodities on public sector accounts and on the economy as a whole. As Bolivia’s economy and its fiscal position are greatly affected by the performance of hydrocarbon activities, public sector revenues and expenses have been adjusted by deducting hydrocarbon-related items (tax collections on hydrocarbon production and the operating surplus of YPF, on the revenue side, and the investments undertaken by YPFB on the expenditure side).

Estimating the CAB and the SB requires computing several key economic variables. These include: potential output—or the long run level of GDP, the output gap, and the elasticity of revenues and expenditures to potential output. For the SB, this means estimating non-hydrocarbon potential output and the output gap in non-hydrocarbon activities. The first step, however, is to adjust fiscal accounts by one-off items.

One-off items are non recurrent budgetary factors-expenditures or tax forgiveness programs which temporarily affect the fiscal position while at the same time have some limited impact on the domestic economy. For Bolivia, spending was adjusted for the nationalization costs paid during 2007-2010.

Potential output or the long run level of GDP can be estimated applying different statistical and economic methods. These include univariate filters and multivariate methods. The output gap is the difference between actual output and potential GDP. In the case of Bolivia, the HP filter was used to calculate potential output. Over the last 22 years, potential growth has averaged around 4 percent.


Output Gap and Fiscal Impulse

(SB-Non Hydrocarbon, in percent of Potential GDP)

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

Elasticities on budget components are required to estimate the level of structural revenues and expenditures. In line with OECD guidelines (2001), an aggregated revenue elasticity of 1 was applied; this means that revenues respond one-to-one with the business cycle. In addition, on the expenditure side, it was assumed that all spending is structural such that the elasticity of expenditure to output is zero.

The results show that fiscal policy contributed to sustain demand and GDP growth in 2008-09 even though non-hydrocarbon GDP was slightly above potential. Results also indicate a strong negative stimulus in 2010—mostly on account of underexecution of public investment—while for 2011, the fiscal impulse is estimated at about 1½ percent of GDP.

Bolivia: Exchange Rate Assessment

Staff estimates, based on CGER methodologies, suggest that the Boliviano is moderately undervalued when compared with fundamentals. There are however, uncertainties associated with the application of these methodologies to Bolivia, since: (a) they do not fully incorporate the implications of the exhaustion of natural resources within a predictable timeframe and the associated intergenerational considerations that may drive net assets accumulation in the near term; (b) current account volatility is particularly high because of commodity price fluctuations, which makes it difficult to separate underlying trends from temporary changes, complicating the estimation of the underlying current account balance; and (c) the Bolivian economy has experienced large structural changes in recent years and, hence, past values of fundamental variables may be poor guides of their future levels.

All three CGER approaches point to undervaluation of the Boliviano, averaging 8.5 percent:

• The Macroeconomic Balance (MB) approach indicates that an appreciation of Bolivia’s real effective exchange rate (REER) of 4.6 percent would be needed to close the difference between the underlying current account balance (CAB) and the estimated equilibrium current account (current account norm). This result hinges on an underlying CAB of 4 percent of GDP and a current account norm estimated at 2.8 percent of GDP. The level of the current account norm reflects mainly relatively high petroleum trade balances and low old-age dependency ratios.

• The External Sustainability (ES) approach suggests that the Boliviano is undervalued by 12.3 percent. This assumes that Bolivia’s net foreign assets would stabilize at their end-2009 level (18 percent of GDP), which would require a CAB of 0.9 percent of GDP.

The Equilibrium Real Exchange Rate (ERER) approach points to undervaluation of 8.6 percent. The model explains the REER on the basis of the terms of trade, net foreign assets, public expenditure, FDI, and relative productivity.


Actual and Equilibrium Real Effective Exchange Rate

(REER index 2005=100)

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

Source: IMF staff calculations.

Bolivia: ER Assessment

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Source: Fund staff estimates.

Undervaluation (-), Overvaluation (+)

Figure 1
Figure 1

Bolivia: Real Sector Developments

The Bolivian economy has emerged from last-year’s slowdown, albeit at a slower pace than neighboring countries, with GDP growth estimated at 4.2 percent in 2010. Inflation has picked up significantly), reflecting higher food prices and easy monetary conditions.

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

Sources: National Authorities and IMF staff calculations.
Figure 2
Figure 2

Bolivia: External Developments

Current account surplus reflected strong trade balance driven by higher exports. The capital account is driven by slightly increasing FDI while the rest of private capital flows remain negative. Central Bank’s foreign reserves reached historic highs of 50 percent of the GDP.

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

Sources: National Authorities and IMF staff calculations.
Figure 3
Figure 3

Bolivia: Fiscal Developments

The fiscal position strengthened in 2010 on the back of lower current and capital expenditures. Public sector debt resumed its downward trend and domestic debt vulnerabilities have been reduced.

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

Sources: National Authorities and IMF staff calculations.
Figure 4
Figure 4

Bolivia: Monetary Developments

Monetary policy remains accommodating with short-term rates at virtually zero. Central bank resumed the appreciation adjustments of the Boliviano under the crawling peg.

Citation: IMF Staff Country Reports 2011, 124; 10.5089/9781455272525.002.A001

Sources: National Authorities and IMF staff calculations.
Table 1

Bolivia: Selected Economic and Financial Indicators

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

The investment-savings balance, as measured in national accounts, differs from that in the balance of payments due to methodological differences.

Includes nationalization costs and net lending.

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

All foreign assets valued at market prices.

Official (buy) exchange rate.

Table 2

Bolivia: Operations of the Combined Public Sector

(In percent of GDP)

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Sources: Bolivian authorities and Fund staff estimates.

In 2007 the expenditure on universities was reclassified from other spending into its functional classification, increasing wages and salaries in that year.

Non-hydrocarbon revenue minus overall expenditure plus YPFB capital expenditure.

IMF staff’s definition.

Hydrocarbon related revenues are defined as IDH, royalties, and the operating balance of YPFB.

Table 3

Bolivia: Operations of the Combined Public Sector

(In Millions of Bolivianos)

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Sources: Bolivian authorities, and Fund staff estimates.

In 2007 the expenditure on universities was reclassified from other spending into its functional classification, increasing wages and salaries in that year.

Non-hydrocarbon revenue minus overall expenditure plus YPFB capital expenditure.

IMF staff’s definition.

Hydrocarbon related revenues are defined as IDH, royalties, and the operating balance of YPFB.

Table 4

Bolivia: Summary Balance of Payments, 2006–2016

(In millions of U.S. dollars, unless otherwise indicated)

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

In 2006 includes effect of MDRI debt relief from the IMF and the World Bank equivalent to US$ 1804.3 million.

  • In 2007 includes effect of MDRI relief from IADB equivalent to US$ 1099 million.

Includes SRD allocation in 2009.