Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Bolivia

July 17, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 07/80
July 17, 2007

On July 13, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bolivia.1


The economy has continued to benefit from rising natural gas export volumes, which has been compounded, over the last two years, by high hydrocarbons and mining export prices. Real GDP growth has been around 4-4½ percent, mainly driven by an expansion in hydrocarbons and mining-related activities. The external current account has recorded large surpluses, and net international reserves have risen to historically high levels. The fiscal position has improved sharply and—reflecting also debt relief under the Multilateral Debt Relief Initiative (MDRI) —Bolivia's public debt has declined markedly. Financial sector stability has improved, with comfortable levels of liquidity and full net foreign assets (NFA) coverage of deposits, although vulnerabilities remain. The key economic trends of the past year are projected broadly to continue in the period ahead, although with a somewhat lower fiscal surplus.

However, inflation has picked up in recent months, due in part to negative supply shocks but also to rapid monetary expansion. While part of the recent price increases has been associated with floods and one-time adjustments in some administered prices, both core and headline inflation have displayed an upward trend since the last quarter of 2006, driven by higher prices of nontradable goods and services. The Central Bank has responded to rising price pressures by increasing its open market operations and by appreciating the Boliviano against the U.S. dollar under the crawling peg regime.

Significant changes in hydrocarbons policy have been implemented over the last two years, resulting in a higher government tax take and a greater public sector role in the sector. Following a national referendum in August 2004, a new hydrocarbons law was enacted in May 2005 and a related decree issued in May 2006. The main effects of the new legislation have been: (a) a "migration" of the contracts with the foreign companies operating in Bolivia, from risk-sharing contracts to an arrangement whereby all production is surrendered to the state energy company YPFB, which has been made the country's sole exporter of natural gas; (b) a permanent increase in natural gas royalties, from 18 percent to 50 percent of turnover; and (c) a requirement that YPFB regain control over the five hydrocarbons companies that were privatized in the 1990s.

Following a boom in the late 1990s, which included large-scale privatization, private investment levels in Bolivia have been depressed in the past few years. While there has been significant FDI in the mining sector and public sector investment has increased, this has not been enough to overcome the fall in other private investment, notably in foreign hydrocarbons-related investment. As a result, Bolivia's overall investment-to-GDP ratio, as well as the share of private investment in total investment, are among the lowest in the region.

Even though social indicators have improved in recent years, Bolivia's levels of poverty and inequality are persistently high. In 2005, extreme poverty amounted to 37 percent of the population, while absolute poverty reached 60 percent. Also, income inequality was among the highest in the region. Although Bolivia will be able to meet some of the Millennium Development Goals (e.g., child mortality, maternal health, gender equality, and water and sanitation), achievement of other goals by 2015, such as those of eliminating extreme poverty and universal primary education, remains a significant challenge.

Executive Board Assessment

Executive Directors welcomed the continued strong performance of Bolivia's economy, with booming hydrocarbon and mining exports contributing to rapid accumulation of external reserves and a large fiscal surplus. GDP growth has been satisfactory; inflation remains moderate, albeit with some pick-up in recent months that is partly attributable to exogenous shocks; and the public debt has declined because of debt relief and an active debt management strategy.

Directors noted, however, that poverty remains high in Bolivia, in part because of the limited employment impact of growth in the hydrocarbons and mining sectors. They stressed the importance of implementing policies conducive to a recovery of private investment from its low level and to a diversification of the economy, which they saw as critical for sustained economic growth and poverty reduction in the medium term. In particular, Directors highlighted the need to improve the investment climate, including through greater legal and institutional stability and maintaining a rules-based approach toward private investment. Some Directors encouraged the authorities to re-consider their decision to exit from the World Bank's investment dispute settlement framework.

Directors commended the authorities' strong emphasis on safeguarding macroeconomic stability. A key challenge in this respect is to manage the large revenues from hydrocarbon exports in a manner compatible with price stability and maintenance of export competitiveness. In light of this, Directors welcomed the authorities' commitment to maintain a fiscal surplus, which they also saw as consistent with a prudent long-term use of the hydrocarbon resources. They stressed that this will require considerable control over expenditure, including at the subnational level. They suggested that the authorities develop a realistic medium-term expenditure framework, taking into account the country's absorptive capacity.

Directors underscored that structural reforms should make the budget a more effective developmental and poverty-reducing tool. They encouraged the authorities to consider reducing the large and poorly targeted hydrocarbon subsidies, while introducing properly designed measures to protect the poor. Improvements of the tax system, intergovernmental relations, and the budget process should also be a priority. These reforms would release fiscal resources for financing development and poverty-reducing spending.

Directors noted the modest nominal appreciation of the Boliviano over the last two years under Bolivia's current exchange rate regime. Given the upward pressure on the equilibrium exchange rate stemming from the rapid growth of Bolivia's energy exports and indications that the currency may be undervalued, many Directors welcomed the authorities' intention to exercise greater exchange rate flexibility within the crawling peg regime in the period ahead. They believed that greater flexibility will also help reduce dollarization and forestall the adverse distributional impact that would result from allowing inflationary pressures to take hold. Over the medium term, this increased flexibility could be followed by a gradual and properly sequenced transition to a more flexible exchange rate regime, for which Fund technical assistance could help provide a roadmap. Some Directors, however, expressed concern about a move toward greater exchange rate flexibility, pointing to the impact on competitiveness of the non-hydrocarbon sectors of a currency appreciation, as well as to balance-sheet, inflation, and dollarization risks that would arise from increased volatility under a more flexible exchange rate system. Directors also encouraged the authorities to use open market operations more actively to tighten monetary conditions and reduce inflationary pressures.

Directors commended the authorities' success in maintaining financial stability, while encouraging further action to implement the 2003 Financial Sector Assessment Program recommendations in order to address remaining vulnerabilities. Key issues include closer monitoring of banks' loan provisioning and solvency; introducing prudential regulations to mitigate credit and market risks, particularly credit risks arising from dollarization; amending the legislation governing corporate bankruptcy and restructuring; strengthening the Financial Intelligence Unit and legislation against money laundering; and elimination of the financial transactions tax because of its adverse effect on financial development. Directors welcomed the authorities' intention to subject the recently created development bank to standard prudential requirements, while stressing the need to prevent undue competition with the microfinance sector.

In the hydrocarbons sector, Directors considered that the new operating contracts with the foreign energy companies constitute an important step towards a more favorable investment climate. However, they observed that the authorities now face the challenge of securing the major additional investments that will be needed to fulfill their export commitments to Argentina while satisfying rising local demand. Directors encouraged the authorities to continue to seek mutually acceptable arrangements with foreign investors.

Bolivia: Selected Economic Indicators

2003 2004 2005 2006 2007

(Annual percentage changes)

Income and prices


Real GDP

2.7 4.2 4.0 4.6 4.0

GDP deflator

6.3 8.0 5.1 12.2 7.4

CPI inflation (period average)

3.3 4.4 5.4 4.3 6.6

CPI inflation (end-of-period)

3.9 4.6 4.9 4.9 6.5
(In percent of GDP)

Combined public sector


Revenues and grants

24.1 26.8 31.3 35.2 32.3

Of which:


Royalties on hydrocarbons

2.8 3.4 6.6 9.7 9.3


32.0 32.3 33.6 30.6 31.3

Overall balance

-7.9 -5.5 -2.3 4.6 1.0

Total public debt

74.1 76.7 70.0 45.8 34.8

External sector


Current account

1.0 3.8 6.5 11.7 8.9

Merchandise exports

19.7 24.4 29.5 34.4 32.6

Of which: Natural gas

4.7 7.0 11.5 14.9 14.8

Merchandise imports

20.0 20.9 24.7 25.0 24.9

Gross international reserves 1/


In millions of U.S. dollars

1,266 1,474 2,042 3,385 4,646

In percent of broad money

42.0 49.6 57.8 79.7 90.9
(Changes in percent of broad money at the beginning of the period)

Money and credit


NFA of the financial system

3.2 2.9 20.7 31.3 22.6

NDA of the financial system

-1.9 -4.3 -6.6 -12.9 -5.4

Of which: Credit to the private sector (in percent of GDP)

47.6 42.3 39.6 34.7 34.2

Broad money

1.3 -1.4 14.1 18.5 17.1

Interest rates (percent, end-of-period)


Yield on treasury bills in local currency

10.9 9.6 7.9 6.4 ...

Yield on treasury bills in U.S. dollars

6.2 5.8 7.4 4.0 ...

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

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

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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