Public Information Notice: IMF Concludes 2003 Article IV Consultation with Bolivia

August 20, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The Staff Report for the 2003 Article IV Consultation with Bolivia is also available.

On July 7, 2003, the Executive Board concluded the Article IV consultation with Bolivia.1


Economic activity has been sluggish since 1999, but has shown some signs of recovery in 2002 and early 2003. Real GDP growth averaged only 1.4 percent during 1999-2001, dampened by the regional slowdown and an appreciation of the real exchange rate, as well as the impact of the coca eradication program. Growth increased to 2.8 percent in 2002, boosted by the building of a new pipeline to Brazil as well as public works and transportation projects, although other domestic demand remained weak. Unemployment has risen in the last three years to 8½ percent, and about half of the labor force remains underemployed. As of 2002, about two thirds of the population lived below the poverty line, with one-third in extreme poverty.

The fiscal deficit increased sharply in 2001-02. The combined public sector deficit rose to nearly 9 percent of GDP in 2002 (from about 3½ percent of GDP in 2000). Fiscal revenues weakened because of sluggish domestic demand, delays in tax reforms, and a freeze on domestic fuel prices since mid-2001. The fiscal deficit also reflected an increase in net pension outlays from 4½ percent to 5 percent of GDP during this period.

Nonfinancial public sector debt increased from 58½ percent of GDP in 2000 to 61¼ percent in 2002, including substantial increases in domestic financing and in nonconcessional foreign borrowing. As a result, despite the enhanced HIPC debt relief received in June 2001 which, by itself, reduced the net present value (NPV) of external debt by 15 percentage points of GDP, the NPV of public debt as of end-2002 remained at its end-2000 level of 45 percent of GDP.

The contraction of financial system activity, which began in 1999, became more pronounced in 2001-02, contributing to a loss in international reserves. Bank credit and deposits have declined as political uncertainty and sluggish growth have weakened confidence in the banking system and resulted in more cautious behavior by banks. Since the end of 1998, bank credit has declined by more than 30 percent in U.S. dollar terms, and deposits by some 24 percent. Two episodes of heavy withdrawals of deposits (in mid-2002 and in February 2003) were halted after the central bank supplied liquidity. The coverage of broad money by gross international reserves declined from over 40 percent at end-1999 to 34½ percent at end-2002. Monetary policy was eased over 2001-02 in the face of increased government financing needs and liquidity requirements of the banking system, before being tightened in recent months.

Several years of financial disintermediation and economic stagnation have added to vulnerabilities in a highly dollarized financial system. (Around 92 percent of deposits and 97 percent of loans are denominated in US dollars.) The nonperforming loan ratio rose to 20 percent as of end-May, largely as a result of the corporate sector's weak cash flow. Banks' capital adequacy ratios exceed the minimum requirement, partly reflecting a recapitalization in December 2001 of three banks through subordinated loans guaranteed by the public sector.

The central bank stepped up the pace of currency depreciation against the US dollar to 10 percent in 2002 in response to domestic and external shocks, including the political uncertainties that prompted a 15 percent reduction in bank deposits in June-July 2002. The boliviano appreciated in real effective terms by more than 4 percent in 2002 because of the weakness of the currencies of the main regional trading partners. With the neighboring countries' currencies gaining strength in recent months, the boliviano depreciated by 11 percent in real effective terms during the first five months of 2003, while the rate of crawl against the US dollar slowed to an annual rate of 4 percent.

The authorities' economic program for 2003 focuses on stabilizing the economy and laying the basis for a higher rate of sustained growth. The program projects a gradual economic recovery, with real GDP growth reaching about 3 percent, led by an expansion of natural gas production, a strong performance in the agriculture sector, and a boost to manufacturing, particularly textiles, from the expanded preferential access to the U.S. market for the Andean countries. The external current account is projected to improve by 1½ percent of GDP as a result of higher exports on natural gas, soybean products, and textiles. The fiscal program aims to reduce the combined public sector deficit to 6.5 percent of GDP in 2003.

Executive Board Assessment

Executive Directors noted that difficult economic and political circumstances have heightened the Bolivian economy's vulnerabilities, and welcomed the government's emphasis on regaining fiscal sustainability, strengthening the corporate and financial sectors, and achieving sustained growth and poverty reduction. Directors encouraged continued efforts to secure broad political and social support for their policy agenda, and welcomed their intention to adopt a PRGF-supported program soon.

Directors expressed concern about the rising external debt and the increasing pressure toward nonconcessional borrowing. They commended the policy actions taken by the authorities to put in place a prudent fiscal framework that would set the debt ratio on a firm downward path. These actions have included politically courageous decisions to defer low-priority spending and begin the process of broadening the tax base. Directors highlighted the importance of building on these initial actions and broadening fiscal reforms to underpin medium-term fiscal consolidation.

Directors saw room for further improving the efficiency of public spending and its targeting to support poverty alleviation. They commended the authorities' plans for deepening tax reform and improving tax administration through a modern tax procedures code, and urged the authorities to work at building public support in these endeavors, and to continue efforts to secure congressional approval of revenue measures. Controlling pension reform costs and enhancing the effectiveness of fiscal decentralization also were seen as key to achieving fiscal sustainability. While supportive of steps to promote inflation-indexed savings instruments, Directors concurred on the need to reduce reliance on pension funds for government financing. A few Directors felt that the use of inflation-indexed bonds would lead to a better matching of assets and liabilities and the greater use of market interest rates.

Directors supported the policy of gearing monetary policy towards maintaining low inflation and a gradual build-up of international reserves, and welcomed the recent stability of deposits in the banking system. They noted that a shift toward monetary tightening would be needed if inflation pressures were to develop. Directors noted with concern the constraint on policy-making and risks to the financial system stemming from high dollarization, and supported steps toward gradual and voluntary de-dollarization. These would include consistent monetary policy implementation to make clear the government's commitment to low inflation; and implementation of measures to promote boliviano-denominated savings, including bringing small depositors into the banking system. Directors stressed the importance of maintaining the central bank's financial strength. They therefore expressed concern about the authorities' proposal to alleviate the treasury's cash flow position through increased transfers of central bank profits to the treasury. They encouraged consultation with the Fund before proceeding with these transfers.

Directors welcomed the authorities' support for an independent central bank, and the authorities' prompt response in having begun to address the weaknesses identified in the safeguards assessment. They commended the authorities' efforts to combat money laundering and terrorism financing, and encouraged further action, such as strengthening the financial intelligence unit. Directors were also impressed by the performance of microfinance institutions noting their low non-performing loan ratio and their significant contribution to financial deepening and poverty reduction in disadvantaged areas.

Directors believed that the depreciation of the boliviano in real effective terms since late 2002 would help to bolster Bolivia's competitiveness. They supported the authorities' strategy to move toward a more flexible exchange rate regime in the medium term but stressed that the transition should be handled carefully in view of the high degree of dollarization and the related financial and corporate vulnerabilities. Directors agreed that the central bank should maintain a high level of international reserves to strengthen its lender-of-last resort capability.

Directors welcomed the progress made in developing a comprehensive strategy for restructuring the financial and corporate sectors. Regulations governing bank resolution and corrective action for banks with problems have been issued, along with a decree that clarifies the roles of the different institutions charged with oversight of the financial sector. Directors also endorsed the authorities' plan to implement a new corporate bankruptcy law and a voluntary restructuring framework as soon as they receive congressional approval. They encouraged continued momentum on financial and corporate restructuring through development of a framework for the use of public funds for restructuring, putting in place procedures for responding to bank failures, and refining the draft legislation.

Directors supported the government's plan to develop a medium-term economic program aimed at fostering a higher rate of sustained growth and poverty reduction. Such a program should focus on removing the obstacles to growth in Bolivia, including inefficient infrastructure, labor market rigidities, inadequate investment in human capital, and governance problems. Directors welcomed the coca eradication program, and stressed that alternative employment opportunities and a social safety net need to be provided for the former coca farmers. Directors urged the authorities to move quickly on large natural gas projects, including by building a public consensus for proceeding with the LNG export project on economic grounds, which would be important for realizing Bolivia's growth potential. Directors encouraged steps to reduce corruption in order to promote foreign direct investment. They also encouraged firms to take advantage of U.S. preferential access for Andean countries to boost export growth.

Directors noted the authorities' intention to request the IMF's support through the PRGF for their medium-term program in the coming months. They expressed satisfaction that the authorities are addressing the shortcomings of the 2001 Poverty Reduction Strategy Paper (PRSP), particularly with regard to the participatory process. They stressed that the Congress should play a more central role in the participatory process of the PRSP, and welcomed the authorities' consensus-building strategy to gain greater country ownership of the economic strategy.

Bolivia: Selected Economic Indicators
















(Annual percentage change, unless otherwise indicated)

Income and prices


Real GDP






Real domestic demand






CPI (end of period)






Bolivianos/U.S. dollar (end of period) 1/






REER (percentage change during year) 2/







(In percent of GDP)

Investment and savings


Gross domestic investment






Gross national savings






External savings







Combined public sector


Nonpension balance






Pension-related balance






Overall balance






External financing






Domestic financing






Nonfinancial public sector debt






(Annual percentage change)

Money and credit


Broad money (in U.S. dollars at current exchange rates)






Credit to private sector (in U.S. dollars at current exchange rates)







External sector (US$ million)


Current account






(Percent of GDP)






Capital and financial account






Of which: foreign direct investment






Overall balance






Exceptional financing






Gross international reserves 3/


(Months of imports of goods and services)






(In percent of broad money)













Sources: Central Bank of Bolivia; Ministry of Finance; and IMF staff estimates.


1/ Official (sell) exchange rate; July 4 for 2003.


2/ Weights based on average trade, excluding trade related to natural gas, in 1996-97. Positive variation is an appreciation.


3/ Equal to central bank's gross official reserves plus commercial banks' liquid asset requirement (RAL) held overseas; excludes reserves

from the Latin American Reserve Fund (FLAR). End-2002 figures reflect an increase of US$45 million in the valuation of holdings of gold;

import coverage for the following year.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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