Bolivia and the IMF

Press Release: IMF Completes First Review of Bolivia's Stand-By Arrangement, Approves US$15 Million Disbursement
July 7, 2003

Country's Policy Intentions Documents

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BoliviaLetter of Intent, Supplementary Memorandum of Economic and Financial Policies
La Paz, Bolivia, June 20, 2003

The following item is a Letter of Intent of the government of Bolivia, which describes the policies that Bolivia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Bolivia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

On April 2, 2003, the Executive Board approved a stand-by arrangement for Bolivia. This letter informs you of progress made and supplements the understanding specified in our letter of March 21, 2003. We remain fully committed to the economic program for 2003 aimed at stabilizing the economy, calming social tensions, and laying the foundation for comprehensive medium-term reforms.

In support of the policies described in our supplementary memorandum of understanding, the Government of Bolivia requests the completion of the first review under the Stand-By Arrangement. All quantitative performance criteria for end-March 2003 and the continuous performance criterion were met. Also, two structural performance criteria were met through the submission to Congress of the tax code and draft laws on bankruptcy and the corporate debt workout mechanism. Two other structural performance criteria were implemented with a technical delay of one week, for which we request waivers. The structural performance criterion concerning the consistency of the budget with the fiscal program was not met, since approval of revenue measures has been delayed. We describe in our memorandum the actions we have taken to meet the fiscal objectives of the program, and we request a waiver for the nonobservance of this performance criterion.

We stand ready to take additional measures necessary to keep the program on track, including additional revenue and spending measures. We are actively working on a medium-term economic program that would allow us to request a new arrangement under the Poverty Reduction and Growth Facility from the Fund before the end of October.

To raise domestic confidence and ensure full transparency, we intend to publish the attached memorandum.

Sincerely yours,


Javier Comboni
Minister of Finance
  Juan Antonio Morales
President, Central Bank of Bolivia

Supplementary Memorandum of Economic Policies of the Government of Bolivia First Review Under the Stand-By Arrangement

1. The government continues to be guided by the macroeconomic and structural reform program described in our memorandum of March 21, 2003. Our policies since then have been successful in calming social tensions, containing the fiscal deficit, rebuilding deposits in the banking system, and advancing banking and corporate sector reforms. We have also initiated a national dialogue to discuss medium-term reforms to enhance growth and reduce poverty.

2. The macroeconomic framework for 2003 is being maintained. We still expect GDP growth of almost 3 percent, led by the hydrocarbon and manufacturing sectors and a boost to agriculture from a large soybean harvest.

3. All quantitative performance criteria for end-March 2003 were met and we are implementing policies consistent with meeting the end-June quantitative performance criteria. We propose setting performance criteria for end-September and end-December 2003 identical to the existing indicative targets (Table 1).

A. Fiscal Policy

4. The 2003 budget was approved on April 3 with a deficit of 6.5 percent of GDP, in line with the program. Subsequently, however, we revised downward our projection of public revenue by about 0.4 percentage point of GDP, owing to lower import-related taxes and the impact of higher than expected international oil prices on fuel excise taxes. Also, some tax measures that were included in the budget as modifications to Law 843 have not yet been approved (yield of 0.4 percentage point of GDP).

5. To ensure consistency of the 2003 budget with the deficit target of 6.5 percent of GDP, a number of actions are being taken:

  • To reduce current spending, compared with the original fiscal program, we have curtailed outlays on goods and services, particularly on contracted services (0.15 percent of GDP).

  • We have cut/delayed low-priority public investment amounting to about 0.65 percent of GDP through a systematic identification process that gives priority to projects that are already underway, aims at reducing poverty, and is tied to concessional financing. We are maintaining our objective of increasing poverty-reducing expenditure in 2003 relative to GDP.

6. We remain committed to securing the approval of the tax bill now in Congress, which will raise revenue by adjusting the tax base for fuel excises and increasing the taxation of business services. We will take administrative measures to broaden the coverage of taxes such as on alcoholic beverages and hydrocarbon products. Together, these measures are expected to raise revenues by 0.15 percent of GDP, compared with the original tax bill's yield of 0.4 percent of GDP. Once these revenue measures are passed, there would be room for a somewhat higher level of public investment spending.

7. The tax procedures code was submitted to Congress on April 30. To ensure that the tax regularization scheme is approved at the same time as the tax code, it was included as part of the same legislative package. The tax regularization scheme would be approved only in combination with the tax code.

8. We are aiming to reduce pension costs through administrative efforts, control of fraudulent claims, and strict enforcement of streamlined eligibility criteria. As part of our efforts to reduce pension costs, we have brought the minimum pension into closer alignment with the minimum wage for new retirees under the old pension system. In addition, in early June we set up an agency for the oversight of the pay-as-you-go pension system; the objectives are to control costs and improve administration.

9. To protect the fiscal program, we have identified an additional list of public investments, following the same selection criteria as described in paragraph 5, which would be cut on a timely basis if needed to achieve the deficit target. The revenue-sharing mechanism currently in place also provides for lower spending of local governments in the event that revenue falls behind projections.

10. We are continuing to consider approaches to strengthen public debt management. We have requested technical assistance from the IMF to evaluate the impact and appropriateness of a possible operation involving a change in the currency denomination of the central bank's holdings of Series A and B Treasury bonds from foreign to domestic currency. Any financial impact associated with such a change would need to be consistent with the monetary program under the stand-by. We will not take any decision in this regard until after taking account of the recommendations of the IMF's technical assistance report.

B. Monetary and Exchange Rate Policies

11. Monetary policy, while ensuring adequate liquidity for the financial system, remains consistent with the targeted gradual buildup of international reserves. A modest but steady rise in bank deposits since late February has led to an increase in international reserves in line with the program. The central bank's benchmark interest rate in U.S. dollars has been maintained at a rate that is intended to encourage a preference for the domestic currency, and the yield on 3-month dollar-denominated treasury bills has risen by more than 230 basis points since late January, to just under 4 percent. Inflation has remained contained, but we continue to stand ready to raise rates further if there are any signs of rising inflationary pressures. Regulations for the liquidity support of banks were issued on April 29, 2003 by the Board of the Central Bank.

12. The boliviano has depreciated in real effective terms in recent months, owing to a strengthening of the currencies of our main regional trading partners. We intend to preserve the recent gains in competitiveness, which have more than offset the small real effective appreciation of the boliviano in 2002. The real effective exchange rate is currently at its most competitive level since 1996.

C. Financial and Corporate Sector Restructuring

13. The regulatory framework of the financial sector has been substantially strengthened in recent months.

  • The government issued a supreme decree on May 6, 2003 that clarifies the roles of the different institutions with oversight over the financial sector, and defines the areas of banking regulation that should be determined by the banking superintendency.

  • The banking superintendency on May 9, 2003 issued the final regulations for the bank resolution and prompt corrective action mechanisms. These new regulations have already been applied with the successful intervention and transfer of liabilities of a small savings and loans institution in mid-May.

14. The draft laws on corporate bankruptcy and informal debt workout mechanisms were submitted to congress, as expected, by end-April. They are designed to expedite procedures by moving responsibilities from the judicial into the administrative sphere. Since the drafts were sent to congress, we have explained the content and objectives of the laws to creditors, debtors, lawyers, and other stakeholders. This process has allowed us to gain support, and we will evaluate and include suggestions from stakeholders — including the possibility of framing these legal changes within the existing Commercial Code — and also incorporate changes to address the possibility of dissenting creditors challenging the constitutionality of the draft laws. The drafts of the corporate bankruptcy and informal workout laws have been included in the agenda for the second extraordinary congress, which started on June 3, and are expected to be approved by September 30, 2003.

15. Based on the rules for provisioning requirements that took effect by end-March and that do not allow for any regulatory forbearance, we have analyzed the solvency situation of individual financial institutions and will continue to monitor them closely. The government remains committed to taking all steps needed to maintain and enhance confidence in the financial system.

16. A high-level management team was formed in April to coordinate the strategy for the corporate and financial sectors. Under the guidance of the team, which meets weekly:

  • We have assembled a comprehensive database on the liabilities of large corporations, including debts to financial institutions, tax and customs administration, and pension funds. Over the next few weeks we plan to further improve the database and complete a preliminary diagnosis of the impact of corporate restructuring on banks, and to deepen such analysis in the coming months with World Bank technical assistance.

  • We are developing a comprehensive strategy — which is being discussed both at the technical and political levels — to strengthen the corporate and financial sectors, while ensuring the stability of the payments system and minimizing fiscal costs.

17. We are developing a framework, in collaboration with the World Bank, for the use of public funds for bank restructuring or corporate workouts that will be ready by the time of the second program review. Once congress has approved the bankruptcy and informal workout laws, we will promptly issue the relevant regulations and set up the needed administrative bodies to accelerate the corporate restructuring strategy.

18. Finally, in line with these changes, the President has nominated a Special Appointee to promote judicial reforms, including the strengthening of the judicial system's ability to deal with the complexities of bankruptcy and corporate workout procedures.

D. Preparation for PRGF

19. The government will conduct a national dialogue in June-August, which will feed into Bolivia's new PRSP. As a basis for discussion, we have prepared a preliminary PRSP progress report, which analyzes the shortcomings of our 2001 PRSP. We are also preparing a document outlining possible strategies for increasing growth and reducing poverty. These documents together with an updated macroeconomic framework will be combined in a final version of the PRSP Progress Report by early August, which could provide the basis for a PRGF arrangement. We will then finalize the new PRSP, reflecting the results from the National Dialogue, which we intend to have ready by the time of the Consultative Group meeting programmed to take place by the beginning of the fourth quarter of 2003.


Table 1. Bolivia: Quantitative Performance Criteria, 2003 1/
  End-Mar. 2003
      2003 Performance Criteria
  Perf. Crit. Adj. Target 2/ Actual Margin End-June End-Sep. End-Dec.

(Cumulative amounts from December 31, 2002 in millions of bolivianos)
Deficit of the combined public sector 800 831 718  113   1,450 2,250 3,793
Net domestic financing of the combined public sector
500 650 608 42 -200 -25 73
(Cumulative changes from December 31, 2002 in millions of bolivianos)
Net domestic assets of the central bank 725 725 262 463 250 -500 -245
   Of which: central bank net credit to the nonfinancial public sector 350 350 311 39 175 -325 -82
(Cumulative changes from December 31, 2002 in millions of U.S. dollars)
External debt of the public sector with maturities up to one year 15 15 6 9 10 10 0
Nonconcessional external debt of the public sector (net) 15 15 -44 59 50 100 150
Net international reserves of the central bank 3/ -170 -170 -110 60 -90 0 65
External arrears, stock at end of period (continuous performance criterion) 0 0 0 0 0 0 0

1/ All definitions and adjusters provided in the Technical Memorandum of Understanding signed on March 21, 2003 and its attached Table 1 are applicable.
2/ Adjusted according to the provisions of the Technical Memorandum of Understanding signed on March 21, 2003.
3/ Excluding restricted deposits, which increased from US$34.0 million on December 31, 2002 to US$35.5 million on March 31, 2003.

Table 2. Bolivia: Structural Performance Criteria for the First Review of the 2003 SBA1
Policy Measure Original date Status

Public Sector Reform and Financing
Approval of 2003 budget, which together with the proposed revenue measures described in para. 11 of the TMU is consistent with a combined public sector deficit equal to or less than 6.5 percent of GDP. April 15, 2003 Budget approved on April 3, 2003 but tax bill was delayed. Alternative measures to meet the fiscal target have been taken. Waiver requested.
Submission to congress of a tax procedures code consistent with para. 12 of the TMU. April 30, 2003 Met.

Financial Sector and Corporate Sector
Issuance of the final regulations for the bank resolution and prompt corrective action mechanisms introduced by the financial sector law of 2001 consistent with para. 14 of the TMU. April 30, 2003 Implemented on May 9, 2003. Waiver requested.
Issuance of supreme decree(s) (i) clarifying the roles of the different institutions with oversight over the financial sector (includes ensuring a technical basis for issuing prudential norms), and (ii) defining certain areas of banking regulation that should be determined by the superintendency consistent with para. 13 of the TMU. April 30, 2003 Implemented on May 6, 2003. Waiver requested.
Submission to congress of draft bankruptcy law and draft law for corporate debt workout mechanism, prepared in consultation with Fund staff and consistent with paras. 15 and 16 of the TMU. April 30, 2003 Met.

1/ References in the table are to the relevant paragraphs of the Technical Memorandum of Understanding signed on March 21, 2003.

Table 3. Bolivia: Structural Conditionality Under the Stand-By Arrangement,
July-December 2003 1/

Condition Policy Measure Timetable for Implementation 1/

Public Sector Reform and Financing
Benchmark Approval by congress of a tax procedures code consistent with para. 12 of the TMU September 30, 2003

Financial Sector and Corporate Sector
Benchmark Approval by congress of law on corporate workout mechanism consistent with para. 16 of the TMU September 30, 2003
Benchmark Approval by congress of bankruptcy law consistent with para. 15 of the TMU September 30, 2003

1/ References in the table are to the relevant paragraphs of the Technical Memorandum of Understanding signed on March 21, 200.