This 2016 Article IV Consultation highlights Bolivia's substantial economic and social progress, boosted by the commodity boom. Growth has been strong, averaging about 5 percent since 2006, and poverty has fallen by a third. During this time, the authorities built up sizable buffers and largely dedollarized the financial system. Real GDP growth is projected at 3.7 percent in 2016, which is still relatively strong by regional standards. In the medium term, growth is expected to converge toward 3.5 percent, consistent with the new commodity price normal, amid persistent twin deficits.

Abstract

This 2016 Article IV Consultation highlights Bolivia's substantial economic and social progress, boosted by the commodity boom. Growth has been strong, averaging about 5 percent since 2006, and poverty has fallen by a third. During this time, the authorities built up sizable buffers and largely dedollarized the financial system. Real GDP growth is projected at 3.7 percent in 2016, which is still relatively strong by regional standards. In the medium term, growth is expected to converge toward 3.5 percent, consistent with the new commodity price normal, amid persistent twin deficits.

Context and Recent Developments

1. After a decade of substantial economic and social progress, underpinned by sound macroeconomic management, Bolivia is being challenged by low commodity prices. Growth averaged around 5 percent per year over the last decade (2006–15), while the poverty ratio declined by a third to less than 40 percent. The authorities built up sizable international reserves and fiscal buffers while considerably de-dollarizing the financial system. But the global outlook has changed, and commodity prices have been on a trend decline since 2011, stabilizing only very recently, albeit at significantly lower levels compared to their peak. As one of the most commodity-dependent countries in Latin America (Box 1), Bolivia has suffered a massive decline in commodity terms of trade over the last few years, which has led to a reduction in income of close to 14 percent of GDP (charts). A period of lower commodity prices is expected over the medium term, posing significant challenges in making further progress towards the targets set out in the authorities’ Patriotic Agenda 2025, including eradication of extreme poverty, better access to health and education, and state-led industrialization. To achieve these targets, the government is anchoring policies on a 5-year Plan de Desarollo Economico y Social (PDES) that scales up public investment projects to sustain high growth. As a result, the sizable fiscal and external current account surpluses generated over a decade have now turned into large twin deficits.

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Decline in Commodity Terms of Trade, 2014Q2-2016Q2

(In percent of GDP)

Citation: IMF Staff Country Reports 2016, 387; 10.5089/9781475561982.002.A001

Source: Gruss (2014).
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Real GDP Growth and Oil Price

Citation: IMF Staff Country Reports 2016, 387; 10.5089/9781475561982.002.A001

Source: Haver Analytics, Inc

2. Political challenges have grown. While Movimiento al Socialismo holds a ⅔ majority in Congress, President Morales lost a referendum in February 2016 that would have allowed him to stand for reelection (for a fourth consecutive term) in 2019. Protests by miners that led to the death of the Deputy Interior Minister, strikes by truck drivers and the handicapped, and requests for bailouts from subnational governments have added to the challenges. In light of slowing growth, the government announced that the second monthly Christmas bonus would not be paid in 2016.

Impact of Oil and Gas Production in LAC and Bolivia

There exists a strong positive long-run relationship between real GDP per capita and the real value of hydrocarbons production in Latin American and Caribbean (LAC) oil and gas producers. Panel co-integration analysis for the period 1980–2014 suggests that a 100 percent increase in the value of oil and gas production increases the level of GDP by 14 percent on average. The relationship is particularly pronounced in Trinidad and Tobago and Venezuela while for Bolivia it is close to the LAC average. Between 2000 and 2014, the real value of oil and gas production per capita in Bolivia increased by about 370 percent, while real GDP per capita increased by 43 percent. The developments in Bolivia over the recent boom period are thus very close to what one would have expected based on this general relationship.

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GDP per Capita and Hydrocarbons Production per Capita in Bolivia

Citation: IMF Staff Country Reports 2016, 387; 10.5089/9781475561982.002.A001

At the provincial level in Bolivia, real GDP per capita in the main gas producing region (Tarija), increased nearly 150 percent during the boom in the 2000s. The huge gas fields discovered in Bolivia in the late 1990s are located in the southern province of Tarija, which now produces about 70 percent of all Bolivian gas. The massive growth in the extractive sector and the related fiscal windfall (with Tarija receiving more revenues than all other 8 provinces combined in 2014) does not seem to have produced important spillovers to other sectors. The only sector besides the oil and gas one which grew substantially more in Tarija than in the rest of Bolivia was construction.

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Departmental Real GDP Per Capita

Citation: IMF Staff Country Reports 2016, 387; 10.5089/9781475561982.002.A001

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Real GDP Growth in Ta rija and the Rest of Bolivia (2001-2014)

Citation: IMF Staff Country Reports 2016, 387; 10.5089/9781475561982.002.A001

The gas boom and associated fiscal windfall reduced poverty in producing municipalities. Data from the 2001 and 2012 population censuses indicates that the large gas discoveries were associated with significant reductions in poverty of around 10 percentage points (as measured by population without access to basic necessities) in directly affected municipalities. Gas producing municipalities also experienced a very large increase in public sector employment (more than 1 standard deviation) as well as important increases in construction and manufacturing employment. In municipalities with mining—which is more labor intensive but generated a smaller fiscal windfall—a larger reallocation of labor away from agriculture, a positive migration effect, but a smaller reduction in poverty was observed.

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Impact of Resource Boom on Local Economic Development

Citation: IMF Staff Country Reports 2016, 387; 10.5089/9781475561982.002.A001

3. The economic expansion continues, but fiscal and external imbalances are growing:

  • Economic growth in Bolivia remains among the highest in Latin America, but has slowed (chart). While real GDP growth over the last 12 months to June 2016 was 4.4 percent, this masks a significant slowdown recently, with 2016Q2 growth of 3¼ percent (y-o-y). This outcome partly reflects temporary supply shocks in the hydrocarbons and agriculture sectors, with the latter due to a drought linked to the La Niña climate phenomenon. Consumption growth has been strong given solid real wage increases, but unemployment has increased slightly to 4.4 percent (Table 1 and Figure 1). Inflation has remained moderate (3.5 percent y-o-y in October 2016), despite rapid monetary growth (Table 2 and Figure 2), due in part to falling import prices and stable administered prices.

  • While public debt remains moderate, fiscal imbalances are growing. The fiscal deficit reached 6.9 percent of GDP in 2015 due to sharply lower hydrocarbon revenues and large increases in spending. This was mainly financed by Central Bank of Bolivia (BCB) net credit (either the use of the government deposits or direct credit to SOEs). There has been a broad decline in tax collections through June 2016, reflecting also falling imports and corporate profits, but the shortfall has been partly offset by restraint in current expenditures. Gross public debt remains moderate at 43 percent of GDP in August 2016, while net debt is lower at 28 percent of GDP (Table 3 and Figure 3). At the subnational level, the financial positions of several administrations that rely heavily on hydrocarbons-related revenues have significantly worsened.

  • Reserves remain substantial, but the current account deficit has widened. After being in surplus for over a decade (2003-14), the current account registered large deficits of 5.8 percent of GDP in 2015 and about 7 percent of GDP in 2016Q1.1 This reflects a marked drop in export prices (and some weakness in hydrocarbon export volumes), which have been only partly offset by import compression. Given the widening current account deficit, reserves have dropped sharply, by US$2.1 billion in 2015 (about 6 percent of GDP) and an additional US$2.3 billion through mid-October 2016 (Table 4 and Figure 4). Nevertheless, at 32 percent of GDP, reserves remain more than adequate by any metric.

  • The fall in hydrocarbon prices is putting pressure on the financial health of public enterprises. Over the past several years, public enterprises have been ramping up their spending, particularly investments. This had been sustained by vigorous revenues, supported by relatively high global hydrocarbon prices (chart). However, the increase in spending, combined with the sharp fall in hydrocarbon prices has tipped their financial balance into negative territory over the past couple of years, which has largely been financed by the central bank.

Table 1.

Bolivia: Selected Economic and Social Indicators

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Sources: Ministry of Economy and Public Finances, Central Bank of Bolivia, National Institute of Statistics, UDAPE, and Fund staff calculations.

The discrepancy between the current account and the savings-investment balances reflects methodological differences. For the projection years, the discrepancy is assumed to remain constant in dollar value.

Includes nationalization costs and net lending.

Public debt includes SOE’s borrowing from the BCB but not from other domestic institutions.

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.

Figure 1.
Figure 1.

Bolivia: Real Sector Developments

Citation: IMF Staff Country Reports 2016, 387; 10.5089/9781475561982.002.A001

Sources: National Institute of Statistics, Central Bank of Bolivia, Haver Analytics, Inc., SEDLAC, World Bank, and Fund staff estimates.
Table 2.

Bolivia: Financial System Survey 1/

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Sources: Central Bank of Bolivia, and Fund staff calculations.

The financial system comprises the central bank, commercial banks and nonbanks, and the Banco de Desarrollo Productivo (BDP), which is a state-owned second-tier bank.

Figure 2.
Figure 2.

Bolivia: Monetary Developments

Citation: IMF Staff Country Reports 2016, 387; 10.5089/9781475561982.002.A001

Sources: Central Bank of Bolivia, National Institute of Statistics, and Fund staff estimates.
Table 3.

Bolivia: Operations of the Consolidated Public Sector 1/

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Sources: Ministry of Economy and Public Finances and Fund staff calculations.

The operation of mixed-ownership companies, primarily in the telecommunications, electricity and hydrocarbon sectors, are not included.

Includes incentives for hydrocarbon exploration investments in the projection period.

Includes pensions, cash transfers to households, and social investment programs (previously classified as capital expenditure).

The authorities’ programs of social investment, including school breakfast, recurrent costs on basic sanitation and social management are reclassified to currentspending.

Primary balance before nationalization costs minus hydrocarbon related balance.

Hydrocarbon related revenues are defined as direct hydrocarbon tax (IDH), royalties, and the operating balance of state oil/gas company (YPFB).

Hydrocarbon related revenues minus YPFB capital expenditures.

Public debt includes SOE’s borrowing from the BCB but not from other domestic institutions.

Figure 3.
Figure 3.

Bolivia: Fiscal Developments

Citation: IMF Staff Country Reports 2016, 387; 10.5089/9781475561982.002.A001

Sources: Ministry of the Economy and Public Finances, Central Bank of Bolivia and Fund staff estimates.1/ The fiscal impulse is calculated as the change in the cyclically-adjusted and non-hydrocarbon primary fiscal balance.
Table 4.

Bolivia: Summary Balance of Payments

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

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Sources: Central Bank of Bolivia, National Institute of Statistics and Fund staff calculations.
Figure 4.
Figure 4.

Bolivia: External Sector Developments

Citation: IMF Staff Country Reports 2016, 387; 10.5089/9781475561982.002.A001

Sources:Banco Central de Bolivia and Fund staff estimates and calculations.1/ Value for 2016 based on cumulative year/year growth rate for January-May.
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