Bolivia -- IMF Statement to Donors' Meeting
January 16, 2004Bolivia -- IMF Statement to Donors' Meeting
Director, Western Hemisphere Department
January 16, 2004
1. The IMF welcomes very much this first meeting of the Bolivia Support Group. Against the background of recent political and economic instability in Bolivia, and the continuing risks in these areas, this group has the urgent task of providing timely and appropriate international support for the authorities' efforts to stabilize the economic and financial situation in Bolivia and pave the way for sustained growth with reduced poverty.
2. The challenges are compelling. Bolivia is the poorest country in South America, with real GDP per capita having fallen over the past five years. Social indicators regressed over this period. Bolivia's poverty rate of almost two-thirds remains the highest in South America, with more than a third of the population in extreme poverty, especially the sizable indigenous population. Open unemployment has been rising and about half the labor force is under-employed.
3. Both external and domestic factors explain Bolivia's deterioration following the period of economic reforms and recovery in the early 1990s. A succession of external shocks in recent years combined with persisting macroeconomic vulnerabilities and stalled reforms to produce a vicious circle of economic decline, rising social discontent, reform fatigue, and political fragmentation.
4. Bolivia's new government is now trying to reverse these trends. It needs to succeed for the sake of the Bolivian population and also for the sake of regional stability. Reversing the economic and social trends, and establishing a new basis for growth and equity will take time. International support will be crucial for this process to take hold.
Experience in 2003
5. Let me begin by briefly recalling the events of 2003. Bolivia faced social and political instability in February as well as, more recently, in October. Despite these systemic events, the authorities acted quickly on both occasions to restore financial stability, helped by international support. In particular, the IMF's Stand-By Arrangement of March 2003 has provided a framework for macroeconomic stabilization, continuing reforms, and international support.
6. Thus, despite the political and social setbacks, the authorities were able to make significant progress in key economic areas. Two important reform measures were passed: a new tax code and a new law for corporate restructuring. More recently, the authorities acted quickly to resolve insolvencies in two banks, succeeding in restoring financial stability. However, fiscal pressures increased during the year, especially in the wake of the October unrest, and the fiscal deficit rose significantly above the program target to 8 percent of GDP. Nevertheless, helped by international support, macroeconomic stability has been broadly maintained-with inflation still in the low single-digit range-and growth remained positive for the year as a whole (although, at 2½ percent, below the program target).
7. However, there were important costs from the events of 2003. Fiscal distortions and pressures have increased, necessitating recourse to central bank financing. The banking system remains vulnerable. Delays associated with public opposition to a project to build an LNG pipeline to export to the U.S. market has resulted in the loss of this prospect-as the buyer has entered into a long-term contract with another country-and Bolivia will need to find new markets for its abundant natural gas reserves to assure medium-term viability.
The Government's Objectives and Strategy for 2004
8. Fund staff is now discussing with the Bolivian authorities the policies and objectives for 2004 that could be supported by an extension of the SBA through September 2004. The extension of the SBA is intended to provide a framework to catalyze urgent external assistance, while giving the authorities time to develop a full set of medium-term policies that could be supported by a new three-year PRGF arrangement-whose timeframe, structure, and concessionality are better suited to addressing Bolivia's needs.
9. The key goals for 2004 include further progress toward fiscal consolidation at a pace calibrated to take account of the serious political constraints on the government while giving increased priority to pro-poor spending; further progress toward corporate restructuring; and establishing a viable framework for the exploitation of Bolivia's hydrocarbon resources.
10. The fiscal program for 2004 aims at lowering the fiscal deficit to below 7 percent of GDP-current projections are based on a deficit of 6¾ percent of GDP. The authorities recognize the need to raise the fiscal effort in a carefully sequenced way. Revenues in 2004 will benefit from the full-year effects of legislation approved in late 2003, including the new tax code and law 843 (which expanded the tax base of hydrocarbon products), and the tax regularization scheme. In addition, the authorities will seek approval of revisions to the hydrocarbons' law aimed at addressing social concerns about the appropriate level of taxation of oil and gas production, while maintaining Bolivia as an attractive environment for foreign investors. The program also builds in phased increases in excise taxes and increased taxation of the wealthy, with some measures expected to take place in the weeks ahead.
11. On the spending side, the 2004 program aims at increasing pro-poor spending by at least 0.6 percent of GDP to about 12¾ percent of GDP, while containing nonpoverty-related spending. It will be particularly important to improve the prioritization and effectiveness of public spending, given that expenditure levels are already high compared with other PRGF-eligible countries. In this context, the authorities intend to appoint a commission to conduct a comprehensive review of expenditures to improve their poverty orientation. Efforts to reduce spending in 2004 would include a temporary wage freeze in the civil service; improved targeting of subsidies; and a major reprioritization of public programs. Reductions in overall spending, however, would be difficult to accomplish because of increases in some components, including: (i) interest payments, owing to the high domestic financing in 2003; (ii) local government spending as implementation capacity improves; and (iii) pension payments, as remaining eligible pensioners are incorporated into the system. As such, despite the planned economies, total spending is projected to remain at about 33 percent of GDP in 2004. Financing of the deficit is discussed below.
12. The authorities are committed to prudent monetary and exchange rate policies. Monetary policy will continue to be geared to ensuring low inflation, while rebuilding international reserves and supporting a continued return of confidence in the banking system. The authorities are confident of maintaining competitiveness in the context of Bolivia's crawling peg regime.
Financial and Corporate Policies
13. In coordination with the World Bank, the IDB, and the CAF, as well as the Fund, the Bolivian authorities are developing a strategy to address corporate and financial balance sheet problems, while avoiding public bailouts of shareholders or unviable institutions. In this connection, a new decree is expected to be issued in the weeks ahead, formally creating a fund which will strengthen the solvency of the financial system by assisting banks in merger or acquisition operations, as well as in debt-workout processes. The authorities anticipate applying the new corporate workout framework in a number of key cases.
Exploitation of Natural Gas Reserves
14. Against the background of the setback on the LNG pipeline, the authorities are developing an alternative strategy to develop Bolivia's rich hydrocarbon reserves. Following the revisions to the hydrocarbons' law that the government intends to submit to Congress in the weeks ahead, a referendum on gas exports is expected to be held by end-March. Discussions are also underway with a number of other potential buyers on the possibility of alternative energy projects.
Financing Requirements in 2004 and Debt Sustainability
15. Based on the fiscal framework outlined above, and after exhausting available non-inflationary sources of domestic financing, Bolivia faces a net external budgetary financing need of at least US$462 million, above that of 2003 (see attached Table 1). This estimate assumes upfront implementation of revenue measures and, for that reason, should be regarded as a minimum estimate, given the risks that the authorities are weighing before deciding on the precise sequencing of the implementation of the revenue measures. Given scheduled amortization of US$222 million, our best estimate of required gross disbursements in 2004 is, therefore, at least US$684 million. Of this amount, about US$579 million has already been identified, leaving a minimum of US$105 million still to be secured. Needless to say, given Bolivia's debt situation, the remaining financing need should be met as far as possible on highly concessional terms, preferably in the form of grants.
16. The importance of increased levels of grant financing is underlined by Bolivia's highly indebted situation and the prospects for achieving medium-term sustainability. Against the background of recent setbacks, these prospects will depend critically on Bolivia putting together a strong domestic consensus to exploit its abundant gas reserves, as well as finding alternative markets for such exports.
17. At this stage, we have revised our medium-term projections based on a cautious assumption on the likely scale of such gas exports. On this preliminary basis, Bolivia's public debt is projected to increase further in net present value terms from 48.4 percent of GDP at end-2003 to almost 55 percent of GDP by 2008, before beginning to decline steadily over the medium term to below 50 percent of GDP by 2015. The results are highly dependent on three critical assumptions: (i) a steady reduction of the fiscal deficit to 4 percent of GDP by 2007 (in part through the implementation of an expenditure reform, starting in 2005) and to about 1-2 percent in the outer years of the projection; (ii) financing the bulk of the fiscal deficit with highly concessional resources; and (iii) implementing energy projects that generate additional fiscal revenues of about 1 percent of GDP by 2008.
18. Before closing, let me discuss briefly a number of significant risks to the program mainly associated with the highly fragile social and political conditions. In particular,
· High expectations on the part of large segments of the population for rapid progress in addressing social grievances and turning around the economy may easily be disappointed in a context of significant financial constraints.
· Moreover, the authorities' limited political support in congress could complicate the implementation of the reform agenda.
· There are also risks associated with the exploitation of Bolivia's hydrocarbon resources, which is critical for medium-term viability. A negative outcome of the referendum on gas exports cannot be ruled out. Moreover, even with a positive outcome, having lost the California market, the authorities will face significant challenges to create the conditions for large energy projects to be implemented in the next few years.
19. Addressing these risks will require that the government reach out to the Bolivian people through a process of national dialogue to explain their program, including the importance of fiscal discipline and the efficient exploitation of the country's natural resources to pave the way for a sustained revival of the economy. It will also be important for the government to intensify its efforts to strengthen social safety nets and to prioritize pro-poor spending. The provision of external financing that would provide room for the government to carefully phase in adjustment measures would also reduce the political risks associated with the program.
20. The Fund remains committed to working with the Bolivian authorities and international donor community to put in place a program that would ensure fiscal sustainability, growth, and poverty reduction. The Bolivian authorities are making their best efforts to implement an ambitious program in a very difficult political environment. Strong support by donors is urgently required to support such a program. At a minimum, US$105 million is required to meet financing needs in 2004, and a higher amount would provide some necessary latitude for the authorities to phase the adjustment in more gradually, thus reducing risks. Based on sufficient indications of financing forthcoming at today's meeting and good progress in implementing the necessary measures, the Fund would be able to complete the next review and program extension and augmentation by end-February.