Bolivia and the IMF |
Country's Policy Intentions Documents
of Intent, Memorandum of Economic Policies, and Technical Memorandum of
Mr. Horst Köhler
International Monetary Fund
Washington, D.C. 20431
Dear Mr. Köhler:
1. The attached Memorandum of Economic Policies (MEP) describes the economic program and objectives of the Government of Bolivia for 2003. In support of this program, the Government requests a Stand-By Arrangement in the credit tranches from the Fund for a period of 12 months in an amount equivalent to SDR 85.75 million. We expect to request a new arrangement under the Poverty Reduction and Growth Facility from the Fund as soon as possible.
2. The Government believes that the policies set forth in the attached Memorandum of Economic Policies are adequate to achieve the objectives of its program, but it will take any additional measures that may become appropriate for this purpose. The Government will provide the Fund with such information as the Fund may request in connection with progress in implementing this program. Bolivia will consult with the Fund on the adoption of these measures, in accordance with the Fund's policies on such consultations, and it will consult with the Managing Director in advance of any revision to the policies covered by the MEP.
3. Reviews under the arrangement that assess overall performance under the program will be completed by May 15, 2003; August 15, 2003; November 14, 2003; and February 15, 2004. Quantitative performance criteria are being proposed for end-March 2003 and end-June 2003, with indicative targets for end-September and end-December 2003.
1. The government that took office in August 2002 inherited a situation of prolonged economic stagnation. Economic growth averaged only 1½ percent a year in 1999-2002. The resulting fall in per capita income and employment, and the contraction of the informal economy owing in part to the coca eradication campaign, have contributed to rising social tensions that erupted recently. Moreover, the weak economy has undermined government revenues, raised the fiscal deficit, and placed a heavy financing burden on the public sector. The prolonged economic stagnation has also weakened the financial and corporate sectors.
2. Against this background, the government has formulated an economic program for 2003 aimed at stabilizing the economy, calming social tensions, and laying the foundation for comprehensive medium-term reforms that could be supported by a PRGF arrangement. The main components of the program are: (i) the 2003 budget aimed at containing the borrowing requirement of the public sector while increasing social expenditure; (ii) a monetary program to maintain low inflation and increase international reserves; and (iii) policies aimed at banking system stability and strengthening the financial and corporate sectors.
II. Macroeconomic Policies for 2003
A. Macroeconomic Framework
3. The macroeconomic framework for 2003 is presented below. Provided macroeconomic and social stability can be quickly restored and maintained, and the external environment remains supportive, GDP growth in 2003 could rise close to 3 percent. The medium-term economic strategy that is being developed will aim at raising growth subsequently to 4½-5 percent, while improving per capita income and social inequalities. The macroeconomic framework for 2003 also aims at maintaining low inflation, reducing the external current account deficit, and gradually rebuilding international reserves.
B. Fiscal Policy and the Social Safety Net
4. The government's program for 2003 aims to put Bolivia's fiscal accounts on a sustainable path. The public sector deficit (excluding pensions) would be reduced from 3.7 percent of GDP in 2002 to 1.6 percent of GDP in 2003. This implies a target for the public sector borrowing requirement (PSBR) of 6.5 percent of GDP in 2003 for the combined public sector (including pension costs). The medium-term strategy will aim at reducing further the fiscal imbalance and strengthening debt sustainability.
5. The fiscal targets for 2003 will be met through a balanced fiscal program that has emerged from an ongoing process of deliberations within the Congress. The budget, including revenue measures, was submitted to Congress, and has already received the support of the House Finance Committee. We expect explicit support shortly for the budget and the revenue package from the President of the Lower House and this will be a prior action under the program. We anticipate passage by Congress of the 2003 budget and supporting revenue measures by end-March, 2003, but in any case by April 15 as a performance criterion.
6. Total revenue is targeted to increase by almost 2 percent of GDP to 24.2 percent of GDP through measures designed to share more fairly the burden of adjustment across the economy. The emphasis will be on restructuring petroleum sector taxation, eliminating many tax exemptions, strengthening administration, and minimizing the reliance on new taxes at this stage. The main measures are as follows:
7. The government is preparing a more comprehensive tax reform that will improve the revenue base over the medium term. For the design of this program, which will aim at broadening the base of taxation, we will request technical assistance from the IMF. We expect to prepare this reform by midyear and seek its implementation in time for the 2004 fiscal year. Vulnerable groups will be protected.
8. Total noninterest spending would decline somewhat to 30.7 percent of GDP in 2003, while leaving room for enhanced and better targeted social spending.
Social safety net
9. The social safety net will be strengthened further. We have decided to reinstate Bonosol payments (providing payments from the Collective Capitalization Fund to all citizens over the age of 65); continue with the emergency employment program (PLANE)—with assistance from the World Bank—and orient the public investment program toward employment creation; launch an income transfer program to encourage secondary school attendance; and provide universal health coverage for pregnant women and children under five (SUMI). Also, debt relief from the enhanced HIPC initiative is helping to finance social spending in the areas of schools and lunch programs, and basic sanitation. As a result, poverty-reducing expenditure is expected to rise by 0.5 percentage point of GDP to 12.9 percent of GDP.
10. We have contingency plans for the fiscal program that will be applied if revenues and grants, or external financing are lower than projected. If cumulative quarterly revenues plus grants fall below programmed levels, then public investment would be streamlined, with priority given to protecting projects financed by external concessional loans or grants, and poverty-reducing expenditure. Also, as a contingency, retail fuel prices would be adjusted in the event that international oil prices are significantly higher than projected unless there is an offsetting overperformance of non-oil revenues or reductions in other expenditures.
C. Financing and External Policies
We expect that virtually all of the PSBR of the combined public sector
of about 6.5 percent of GDP will be met from external sources (shown
below), mainly on a concessional basis. In addition, bilateral grants
projected at US$146 million will help to limit the fiscal deficit.
12. The increase in nonconcessional external debt of the public sector will be limited (on a net basis) to US$150 million (2 percent of GDP) in 2003, with a downward adjuster for delayed disbursements in public borrowing earmarked to fund the public sector's possible contribution to bank restructuring or corporate workouts, as described below. This limit takes account of Bolivia's phased graduation from IDA and the budget financing plans summarized in the above table; and it is consistent with external debt sustainability criteria. At the time of the second review, in parallel with the government's efforts to define the role and nature of any public support to the bank and corporate restructuring process, we will reassess the likely financing need and the timing of any additional nonconcessional external borrowing by the public sector to cover the costs of public financial support for the restructuring process, taking account of the plans of multilateral development banks for additional lending to Bolivia. Consistent with prudent external debt management, external short-term borrowing would be limited to zero, on a net basis, for the year as a whole.
13. The government is actively pursuing several large projects that could come on stream over the next several years. The liquefied natural gas (LNG) project for exports to North America is expected to move forward this year on the most efficient basis.
14. We intend to maintain a liberal trade policy. In addition, we are negotiating with our trading partners to improve market access for our exports, including the removal of barriers to soybean exports to Colombia, and the design of a possible free trade agreement with Chile. Regarding trade with the United States, exporters are already taking advantage of the benefits of the recent regional trade package, and we expect this trade to expand rapidly.
15. We have signed agreements with almost all creditors that deliver relief under the enhanced HIPC Initiative, while still pursuing agreements with Brazil, China, Japan, and Taiwan Province of China.
D. Monetary and Exchange Rate Policies
16. We remain committed to a strong and independent central bank, which will continue to keep inflation low. The monetary program for 2003 will be conducted through control of the central bank's net domestic assets (NDA). This program will reduce NDA in 2003 by 7 percent (December-over-December). It incorporates a decline in central bank credit to the central government.
17. The monetary program anticipates strengthening the central bank's net international reserves, by US$65 million, to a level of US$875 million—thereby raising coverage of dollar deposits in the banking system from the end-2002 level of 31½ percent of disposable international reserves (excluding gold holdings but including banks' liquid asset requirement held abroad) to 35 percent at end-2003. Broad money in U.S. dollar terms is assumed to recover gradually; at end-2003, it would still remain somewhat lower than at end-2001.
18. In recent years, we have been making exchange rate policy more flexible within the crawling-peg exchange rate regime, and this policy will continue in 2003. Our aim will be to maintain and preserve competitiveness. Looking ahead, the central bank will undertake a study, in consultation with IMF staff, on recent trends in the real effective exchange rate, external debt sustainability, and competitiveness. This study will be completed by September 2003; it should allow us to consider additional options for external policies designed to maintain Bolivia's competitiveness, and to consider a possible move to an inflation targeting framework over the medium term.
III. Financial and Corporate Sector Policies
19. The government is committed to taking all steps needed to maintain and enhance confidence in the domestic banking system. Recently, the central bank responded promptly to deposit outflows by assuring banks of necessary liquidity support and raising dollar interest rates. These measures have helped stabilize the situation and central bank liquidity support is almost fully unwound. Thus, recent episodes of instability have clearly demonstrated the central bank's capacity to respond effectively and quickly restore more normal conditions. If necessary, central bank reserves could be supplemented through access to lines of credit from the Latin American Reserve Fund (FLAR) and other sources.
20. Nevertheless, we recognize the need to strengthen the banking system and have adopted key measures to improve the regulatory framework for bank supervision and advance plans for bank resolution. The main steps to be implemented during 2003, in consultation with Fund staff and in line with the recent FSAP mission's findings, are as follows:
21. In addition, the government is developing a comprehensive strategy for the financial and corporate sectors, since the strengthening of both sectors needs to be addressed at the same time. The aim is to restore the profitability of viable private firms while ensuring the financial system's stability and development. The strategy will be formulated by mid-2003, consistent with the findings of the recent FSAP mission. Meanwhile, the initial steps, prepared in consultation with Fund staff and consistent with the recent FSAP mission's findings, are as follows:
IV. Medium-Term Objectives and Policies
22. Our medium-term strategy aims at real GDP growth of 4-5 percent in the medium term, with the main sources of growth being the following: (i) gas and oil exploitation; (ii) exports of manufactures that should benefit from expanded U.S. trade preferences for the Andean region; (iii) some large mining projects; (iv) development of the tourism sector; and (v) a gradual recovery of domestic demand based on increased employment and investment opportunities.
23. The medium-term program will aim at a significant further reduction in the fiscal deficit through fiscal reforms. Ongoing reforms of the two tax agencies are designed to, inter alia, improve coordination between the agencies and overhaul support for key tax administration systems, including through an update of the registry of taxpayers in the National Tax Service that will help enhance revenue buoyancy. Public investment will focus on poverty-related and priority areas identified in the government's program, Plan Bolivia. The government's plans for enhancing the efficiency of expenditure include better tracking of pro-poor spending, developing a medium-term expenditure framework, cutting inefficient capital expenditure, and reducing pension costs. These reforms will be developed in close consultation with the IMF, the World Bank, the IDB, and the CAF.
24. Other elements to the government's medium-term strategy are as follows:
25. We aim to complete the formulation as soon as possible of a medium-term economic program, based on our poverty reduction strategy. In this light, we expect to replace the stand-by arrangement by an arrangement under the Poverty Reduction and Growth Facility.
V. Program Monitoring
26. Implementation of the program supported by the Stand-By Arrangement will be monitored through quarterly reviews that should be completed by May 15, August 15 and November 14, 2003 and February 15, 2004. Quantitative performance criteria for end-March and end-June 2003, and indicative targets for end-September and end-December 2003, are shown in Table 1. Prior actions and structural performance criteria and benchmarks are listed in Table 2 and described in detail in the technical memorandum of understanding.
1. This technical memorandum sets forth the definitions of the performance criteria referred to in the Memorandum of Economic Policies under the Stand-By Arrangement. The quantitative targets and limits described below for 2003 will be measured as cumulative flows from December 31, 2002 (Table 1). Monthly updates for fiscal and monetary information will be provided at most 25 calendar days after the end of each month. Further definitions of quantitative performance criteria and adjusters are provided in Table 2.
Quantitative performance criteria
2. The deficit of the combined public sector (CPS) is the sum of the net external financing of the nonfinancial public sector (NFPS) and the net domestic financing of the CPS (see definitions in Table 2). The domestic floating debt of the NFPS comprises the liabilities incurred for goods and services received but not yet paid for, excluding claims on and liabilities to other entities within the NFPS. The floating debt with respect to public sector wages at the end of each month will include (i) unpaid wage increases and (ii) wages for work performed in a previous month but not yet paid. Floating debt will include the floating debt of the departmental capitals, El Alto and those municipalities having subscribed an adjustment program (PRF) with the government as of December 31, 2002; will be reported semiannually, with at most a 90-day lag; and will be included in the floating debt figures as soon as available.
3. The net domestic assets of the central bank (BCB) are defined as the currency issue less the net international reserves (NIR) of the BCB (defined in Table 2). Medium- and long-term external liabilities of the BCB and net credit to the NFPS from the BCB exclude net disbursements of foreign loans administrated by the BCB as trust funds for the NFPS. NIR and external liabilities will be valued at the accounting exchange rate of Bs 7.73 = US$1 in 2003.
4. External debt has the meaning set forth in point No. 9 of the Fund's Guidelines on Performance Criteria with Respect to Foreign Debt, adopted on August 24, 2000, and will include any public debt instruments held by foreign official institutions. The amounts of nonconcessional and short-term external debt will be evaluated at the end-2002 U.S. dollar exchange rates of 0.9536 Euro = US$1,119.90 Japanese yen = US$1, and for other currencies according to the corresponding end-2002 exchange rates published in the IMF's International Financial Statistics.
5. The BCB assets and liabilities denominated in foreign currencies other than U.S. dollars will be converted to U.S. dollars at the market exchange rates for the respective currencies in effect at the date of measurement except for: (i) gold, to be valued at the accounting rate of US$300 per troy ounce; and (ii) SDR holdings and the net Fund position which will be converted into US$1.35952 = SDR1. The change in NIR of the BCB will be measured by differences in stocks. In consolidating the BCB cash operating result (see Table 2) with the NFPS accounts, transfers to the treasury in lieu of operating profits will be excluded from expenditures.
Adjusters to the program
6. HIPC debt relief includes that provided under the original and enhanced initiatives from the reduction in amortization arising from stock of debt reduction operations and rescheduling. As indicated in Table 1, the limit on the deficit of the CPS shall be reduced (increased) by the shortfall (excess) between actual and projected HIPC debt relief. The limits on the net domestic financing of the NFPS will be adjusted upward by the difference between projected and actual cumulative net external financing to the NFPS, excluding HIPC debt relief, up to the designated ceiling. Beyond HIPC refers to debt relief granted by HIPC creditors beyond that agreed within the enhanced HIPC framework.
7. The limits on the net domestic financing of the CPS and on the net domestic assets of the BCB will be adjusted downward, and the target for NIR of the BCB will be adjusted upward, by the amount of any overdue obligations to foreign official creditors. The target for NIR of the BCB will be adjusted downwards for shortfalls relative to the projected currency issue, up to the designated ceiling indicated in Table 1.
8. Loans for financial and corporate restructuring for purposes of the adjuster to the limits on net nonconcessional foreign debt indicated in Table 1 comprise CAF credits of US$35 million and IBRD credits of US$35 million for restructuring that are included in the financing figures in the table in para. 12 of the MEP. The limit on net nonconcessional foreign debt shall be reduced by the amount of the shortfall between actual and projected external financing for financial and corporate restructuring, up to the designated ceiling.
9. External financing for social spending for purposes of the adjuster indicated in Table 1 comprises: a Poverty Reduction and Social Credit from IDA (US$50 million); an IBRD loan to support the social safety net (US$25 million); a social sector credit from the IDB (US$20 million); and a loan to support the employment program (US$25 million) from the CAF. One or more of these loans could be replaced by alternative loans with similar financial conditions and for similar purposes, after consultation with Fund staff. The limit on the deficit of the CPS shall be reduced by the amount of the shortfall between actual and projected external financing for social spending, up to the designated ceiling.
10. An automatic adjustment mechanism for the prices of oil refined products will be implemented on January 1, 2004. Domestic retail prices of refined petroleum products would be increased during 2003 if the three conditions detailed in Tables 2 and 3 hold. In such a case, the price adjustment will be implemented within the following seven days. The amount of the adjustment will be determined in a way that leaves the excise tax rate no lower than the level existing after the first three adjustments of the reference price effected after January 25, 2003.
11. The 2003 budget that has been submitted to Congress will be supplemented by a draft tax law that increases the taxation of certain alcoholic beverages, travel, and business services. The consistency of the draft legislation with the limit on the combined public sector deficit indicated in Table 1 will be confirmed with Fund staff. The consistency of the 2003 budget approved by Congress as a performance criterion for the first review will be confirmed with Fund staff in view of any other fiscal legislation that may have been approved by Congress.
12. The new tax procedures code will provide that (i) disputes over tax liabilities will proceed through an administrative procedure prior to the final recourse of judicial review; (ii) tax fraud and similar violations will be subject to criminal penalties; (iii) sworn tax declarations will be a sufficient legal basis for pursuing tax collection; and (iv) the rules for applying the statute of limitations (interrupción del período de prescripción) will be specified.
13. The roles of the different institutions with oversight over the financial sector will be clarified by supreme decree. In particular, (i) the CONAPFI (Consejo Nacional de Política Financiera) shall formulate its recommendations for general norms and regulations for the financial system on the basis of technical and legal reports prepared for this purpose by the relevant superintendency; (ii) the Superintendency of Banks and Financial Institutions (SBEF) shall have the authority to issue regulations including accounting rules for the proper valuation of assets, conduct onsite inspections, take corrective or emergency actions contemplated by Law 2297 of December 2001, and take actions consistent with the resolution mechanisms established by this law and its regulations; and (iii) consistent with the policies established by the executive branch, the areas of banking regulation that will remain under the purview of the SBEF include the fields of liquidity, risk diversification, market risks, securities, interest rate risk, equity investments, loan classification and provisioning, and internal control systems. Limits on open foreign exchange positions will be set by the central bank.
14. Regulations to be issued for bank resolution and prompt corrective action mechanisms should include, in particular, (i) the triggers and procedures for regularization, voluntary liquidation, and intervention of financial institutions (Articles 112-123 of the Banking Law amended by the Law 2297 of December 2001) ; and (ii) the resolution procedures for financial institutions (Articles 124-132 of the Banking Law amended by the Law 2297 of December 2001).
15. The bankruptcy law to be submitted to Congress will provide a legal framework for corporate insolvency, which will include in particular the following principles: (i) a swift liquidation system for nonviable firms designed to maximize recoveries; (ii) the rehabilitation of viable enterprises to minimize economic losses; and (iii) an efficient system for enforcing both unsecured and secured credit claims. Important progress has already been made in incorporating comments to the draft law from World Bank staff on earlier versions.
16. The law on corporate workout mechanisms to be submitted to Congress will provide a legal framework for a debtor enterprise to reach an out-of-court agreement with its creditors on a restructuring plan, including a business reorganization plan and a restructuring of claims on the debtor enterprise. The main principles of the mechanism include: (i) the agreement would be between the debtor enterprise and its creditors; (ii) a group of creditors would decide whether to accept a plan, following an independent review of the debtor's proposal and prospects; (iii) creditors would be treated no worse under the agreement than in a formal bankruptcy proceeding; and (iv) there would be recourse to formal bankruptcy proceedings if a qualified majority of creditors do not reach agreement on a plan.