Bolivia and the IMF
Press Release: Press Release: IMF Completes Third Review of Bolivia's Stand-By Arrangement, Approves US$16 Million Disbursement and Extension of Arrangement
June 10, 2004
Country's Policy Intentions Documents
Free Email Notification
of Intent, Supplementary Memorandum of Economic and Financial Policies, and Supplementary Technical
Memorandum of Understanding
Ms. Anne Krueger
Dear Ms. Krueger:
Our program supported under a Stand-By Arrangement (SBA) was on track until September 2003 and all September quantitative performance criteria (PCs) were observed. However, the disruptions in October resulted in the nonobservance of some end-December PCs. In particular, we are requesting waivers for the nonobservance of the quantitative PCs on the fiscal deficit, domestic credit, central bank credit to the nonfinancial public sector (NFPS), and NDA. We are also requesting waivers for the non observance of the structural PCs on the adoption of a plan to deal with weak banks and the approval of the implementing regulations of the tax code. Both actions were taken by February 2004 and the macroeconomic program for 2004 includes measures to address the fiscal slippages in 2003.
In support of our policies described in the attached Memorandum of Economic and Financial Policies (MEFP), the Government of Bolivia requests the completion of the third review under the SBA. We also request an extension of the SBA through December 31, 2004, with an increased access level in an amount equivalent to SDR 42.88 million (25 percent of quota), and the rephasing of the available purchases into two disbursements, based on the observance of quantitative PCs for end-June and end-September 2004 and structural PCs (Tables 1 and 3 of the MEFP).
The tragic events of October 2003 highlighted the imperative need to address entrenched social grievances resulting from poverty and income inequality. An overarching objective of the new administration is therefore to foster a national dialogue aimed at reaching a consensus on medium-term reforms critical to enhancing growth and reducing poverty. We are pleased to inform you that the national dialogue on Bolivia's medium-term framework has been proceeding well and we expect to finalize a new PRSP by October 2004.
The Government believes that the policies set forth in the attached MEFP are adequate to achieve the objectives of its program, but it will take any further measures that may become appropriate for this purpose. Bolivia will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund's policies on such consultation.
1. Despite difficult social and political conditions, we have made significant progress in the implementation of our economic agenda. Unfortunately, the October events affected negatively economic performance in 2003, which led to several important targets not being observed. However, since the new government took office we have put together and started implementing a solid macroeconomic program, which we describe below. Congress supports our agenda, as recently highlighted in a letter of its President.
2. The program will continue to be guided by the macroeconomic and structural reform policies described in the Memorandum of March 21, 2003, and modified by the Supplementary Memoranda of June 20, 2003 and September 24, 2003.
3. The fourth review will focus on the preparation of the 2005 budget, including the recommendations of an expenditure commission, and steps toward tax reform. Test dates for the fourth and fifth reviews would be end-June and end-September, 2004.
A. Macroeconomic Framework
4. The economy grew by 2½ percent in 2003 and is projected to grow by 3½ percent in 2004, compared with 3 percent and 4½ percent respectively under the program. The downward revision in 2003 reflects the disruptive impact of the October events and lower-than-expected hydrocarbon-related foreign investment. Real growth in 2004 is expected to be driven by exports, reflecting improved regional prospects and higher export prices, but also by some recovery in domestic demand. Inflation rose to 3.9 percent in 2003 reflecting mainly disruptions to supplies, but has started to decline and is expected to be below 3.5 percent by end-2004. The 2003 current account ended with a ¼ percent of GDP surplus as a result of higher exports, particularly soybeans, and lower-than-anticipated imports, owing to slower growth and a depreciation of the real effective exchange rate. For 2004, the external current account is expected to remain in a small surplus, reflecting strong growth in gas, minerals, and agricultural exports, partially offset by a recovery in imports.
B. Fiscal Policy
5. The fiscal deficit of the combined public sector after grants in 2003 was 8.1 percent of GDP (1.1 percent of GDP higher-than-programmed), and 11.1 percent of GDP before grants. This was explained by a deterioration in the last quarter of 2003, largely because of the October events. The higher deficit also resulted in higher-than-programmed net domestic financing and central bank credit. Moreover, we had to delay issuing the implementing regulations of the tax code (November 2003 performance criterion (PC)) to January 2004, as we needed to obtain broader support for its approval.
6. The 2004 program targets a reduction of the fiscal deficit after grants to 6.1 percent of GDP and to 9.7 percent of GDP before grants, while raising the level of pro-poor spending by 0.6 percent of GDP. This fiscal consolidation will be particularly challenging in light of expected increases in several spending categories owing to (i) improved implementation capacity by local governments and upcoming municipal elections (0.4 percent of GDP); (ii) increased interest payments resulting from the buildup of domestic debt since 2001 (0.3 percent of GDP); and (iii) larger pension payments resulting mostly from the incorporation into the system of eligible pensioners that had been postponed by previous administrations (0.1 percent of GDP). Against this background, we are implementing a large revenue package. We are also putting in place strong mechanisms to closely monitor and control expenditure in line with the findings of the IDB-World Bank's ongoing Public Expenditure Review (PER) and a Poverty and Social Impact Analysis (PSIA) jointly conducted with the World Bank.
7. On the revenue side, our strategy is centered on the implementation of a package with an expected yield of around 1½ percent of GDP in 2004, which will also boost revenue in the medium term. In this connection:
8. At the core of our spending strategy, we intend to cut non-poverty reducing expenditures so as to increase pro-poor spending. These efforts aim to address some of the long-standing issues fueling social unrest and introduce well-targeted programs benefiting cities, regions, and indigenous groups with a high concentration of poverty. To this end, we are taking the following actions:
9. We will closely follow fiscal revenues and expenditures of the combined public sector, and central bank financing to the NFPS. We are committed to taking prompt corrective actions, as necessary. In particular, should deviations occur with respect to the monthly ceilings (Table), we intend to further curtail spending by the central government and other public sectors entities, including by strengthening reporting requirements of local governments.
10. The 2004 fiscal deficit reduction partially reflects exceptional support from the international donor community in the form of grants. The deficit financing relies heavily on the use of external concessional loans, so as to limit the use of net nonconcessional financing to 1.4 percent of GDP (excluding 0.2 percent of GDP from the use of deposits accumulated through external concessional disbursements received at end-2003). Net central bank credit to the nonfinancial public sector will be limited to 0.2 percent of GDP in 2004. Should by end-June the net credit from the BCB exceed the program target, we stand ready to cut spending to bring financing from the BCB in line with the program.
11. In the context of the ongoing national dialogue, we will appoint a commission of highly respected members of civil society by June 2004 (end-June benchmark) to make recommendations to improve the effectiveness and pro-poor orientation of public spending, within the ceilings of our program (end-September structural benchmark). In particular, the commission will study and make recommendations on (i) the composition, quality, and control mechanisms of public expenditures, taking into account the IDB-World Bank's PER; (ii) improvements to the definition and monitoring of pro-poor spending; and (iii) spending priorities to bring overall spending to a level of 32.1 percent of GDP in 2005, 31.0 percent of GDP in 2006, and 30.4 percent of GDP in 2007. The commission is expected to publish its recommendations by end-September, 2004, in time to incorporate its recommendations into the 2005 budget (performance criterion).
C. Monetary and Exchange Rate Policies
12. We have adopted a proactive stance to deal with the difficult conditions experienced during January-April and we will adopt additional measures, as necessary, to protect the financial system. The BCB continues to stand ready to provide liquidity to the system, with adequate collateral, while letting interest rates reflect market conditions. Interest rates have increased, including the central bank's repo rate in US dollars from 6 percent in mid-March to 8½ in mid-May and the central bank short-term paper from 2½ percent to 5 percent during the same period. Moreover, the Superintendency of Banks and the central bank have intensified the monitoring of banks' liquidity. Finally, a law clarifying triggers for bank resolutions has been approved ahead of schedule, and a clause grandfathering capital requirements for nonbanks expired on May 4.
13. Monetary policy will continue to aim at strengthening BCB's international reserves in the context of the crawling peg while containing inflationary pressures. Reflecting larger-than-programmed currency demand at end-2003, the NDA target was missed by a small margin while the NIR target was met. However, NIR declined by US$164 million during January-April 2004 to US$782 million, reflecting in part seasonal factors and, in April, large bank deposit withdrawals associated with the difficult social conditions. Although in May both deposits and NIR increased reflecting improved confidence, we will continue to closely monitor developments and stand ready to adopt corrective actions, as necessary. We intend to rebuild net international reserves by US$109 million in the last eight months of the year, reducing the loss to US$55 million for 2004. Disposable reserve coverage of banks' dollar deposits would be about 39 percent by end-2004 after additional Fund disbursements. The BCB will continue to provide lender of last resort facilities against appropriate collateral, while preserving its fundamental objective of maintaining price stability.
14. In line with the Safeguards Assessment, we have implemented the most important recommendations: (i) put in place an auditing system to ensure that reported figures to the Fund are consistent with program definitions; (ii) adjusted the definition of data on international reserves; and (iii) signed a memorandum of understanding between the BCB and the Ministry of Finance to set limits on BCB liquidity credits and ensure the operational and budgetary independence of the BCB. In addition, the BCB's financial accounts are being presented in line with IAS, except when otherwise required by Bolivian laws, in which case differences will be adequately highlighted.
15. We intend to preserve recent gains in competitiveness in the context of our crawling peg regime with respect to the U.S. dollar. Preliminary conclusions of a joint BCB/Fund staff study show that concerns over exchange rate competitiveness relate more to institutional weaknesses and non-price factors rather than to exchange rate level. However, we remain committed to reducing the country's vulnerabilities and promoting financial stability, including by creating the conditions for a more flexible exchange rate regime over the medium term. To this end, we are exploring several options to complement the current crawling peg system ("Bolsin") which has served Bolivia well for almost two decades, and enhance its flexibility over time-including enlarging it to cover sales and purchases of foreign currency through auctions. A study detailing recommendations will be completed by end-July; its implementation will start in the second half of the year. Moreover, with Fund technical assistance, we will complete a study to recommend measures to promote the use of the domestic currency by October 31, 2004 (structural benchmark)
16. Current conditions have highlighted shortcomings in the Treasury's liquidity management. In this connection, we have started and will continue to take specific actions to improve our bond auctions by allowing interest rates to be more responsive to changes in domestic liquidity conditions.
D. Bank and Corporate Sector Restructuring
17. A priority of the administration is to strengthen the banking system. While the PC relating to the adoption of an action plan for weak banks by October 2003 was not observed, the objectives of the PC have been achieved through a series of steps:
18. We are setting up a framework for corporate restructuring and continue to regularly assess its impact on banks. A recent decree established a fund and general principles, with IDB and CAF support. Implementing regulations for the fund will be issued in June and contracts with the international firm in charge of the evaluation of restructuring proposals will be signed by July 2004, while a few pilot cases on corporate restructuring have been already initiated. The Superintendency of Enterprises has been provided with an independent budget and we will further work to ensure a sustainable funding source over the medium term. We intend to address possible remaining deficiencies after drawing lessons from a sample of pilot firms and conduct an evaluation of the bankruptcy legislation. This will allow us to propose legislative changes by November 2004 (structural benchmark).
19. We have made progress and intend to further strengthen the prudential framework of financial institutions, with the recently requested TA from the Fund and in line with the FSSA recommendations. We have clarified the banking law triggers for bank resolution and revised the treatment of reprogrammed loans under the framework of the informal workout law to prevent their automatic classification upgrade. We intend to further strengthen the operational and budgetary independence of the Superintendency of Banks and Financial Institutions (SBEF), in the context of the budget approved by Congress and the recently signed memorandum of budgetary independence. We intend to adopt by end-October (benchmark) the following steps: (i) a norm to ensure the effective supervision of financial conglomerates; and (ii) procedures to strengthen early warning indicators and prompt corrective actions. We also intend by end-October to prepare a draft norm on loan classification consistent with international standards for discussion with banks and to submit to Congress anti-money laundering legislation.
E. Medium Term Outlook, Hydrocarbons Policy, and Progress Toward a PRGF Arrangement
20. The overarching objective of the government is to achieve sustained high growth of 4½-5 percent (about 2 percent per capita), leading to a significant reduction in poverty levels. Our policies aim at creating the conditions for private sector-led growth, in the context of a stable social and economic environment. To achieve these goals, we believe that it is essential to increase and better target pro-poor spending, make more room for the private sector by gradually reducing the fiscal deficit toward a sustainable position, and remove structural and institutional barriers to growth.
21. We continue to view the efficient exploitation of Bolivia's rich hydrocarbon resources as vital to sustained growth over the medium term. In this connection:
22. In light of the loss of the LNG project, we have developed a new medium-term macroeconomic framework including possible alternative energy projects and steeper-than-earlier anticipated fiscal adjustment to maintain debt sustainability. Specifically, we intend to reduce the 2005 fiscal deficit (after grants) to 5.4 percent of GDP (the submission to Congress of the 2005 budget law will be a structural benchmark for end-October 2004) and further to below 2 percent of GDP from 2010 onward, while limiting the use of nonconcessional financing.
23. In preparation for a new PRSP, the government launched a national dialogue in November 2003, which involves a participatory process with civil society through October 2004. We also plan to ensure that the PRSP encompasses a broad-based consensus on fiscal issues, by agreeing on sustainable sources of fiscal revenue, well-targeted social safety nets, and clear priorities for national spending. On this basis, we plan to request Fund support for our policies formulated in the PRSP through a new PRGF arrangement before end-2004. We also intend to hold a follow-up Consultative Group meeting by October 2004, which we hope will allow us to mobilize sufficient concessional financing to ensure a sustainable debt path while increasing pro-poor and investment spending.
Table 3. Bolivia: Structural Conditionality For the Extension of the Stand-By Arrangement 20041
1. This technical memorandum supplements the technical memorandum of understanding of March 21, 2003. It also sets out the definitions for new indicative targets on pro-poor spending and pro-poor spending without wages under which Bolivia's performance under the program supported by Stand-By-Arrangement will be assessed. Monitoring procedures and reporting requirements for the new performance criterion and the indicative targets are also specified.
II. Amendments to Existing Quantitative Targets
2. The quantitative targets and limits described in the TMU of March 21, 2003 have been set as performance criteria for June 30, 2004 and September 30, 2004 and as indicative benchmarks for December 31, 2004. They will be measured as cumulative flows from December 31, 2003 (Table 1).
3. Valuation changes.
4. Adjuster to the ceiling on net nonconcessional foreign debt. Loans for financial and corporate restructuring for purposes of the adjuster to the limits on net nonconcessional foreign debt indicated in Table 1 and described in the TMU of March 21, 2003, comprise CAF credits of US$62 million and IBRD credits of US$20 million (¶8 of the TMU of March 21, 2003). The ceiling 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 (which is equal to the projected financing for financial and corporate restructuring).
5. The funds for corporate and bank restructuring would be guided by the following principles: (i) All parties agreed on guideline for the Corporate Restructuring Fund(s) to be structured in accordance to market based principles, consistent with those governing the creation of the fund for supporting the financial system (FASF); (ii) Only viable companies (based on financial fundamentals and future business plans and prospects) with strong restructuring plans are eligible to participate; (iii) The Funds' Boards reaching these decisions must be safeguarded from political influences; (iv) Government to provide safeguards from claims, in case a company ultimately fails; (v) The operation of the funds must be well coordinated with the regulations governing the voluntary workout law; (vi) The provision of funds should not constitute subsidies in the long run; and (vii) The funds are to be managed by international managers with demonstrated expertise.
6. Adjusters to the deficit of the nonfinancial public sector.
New adjuster. If actual grants exceed projected program grants,2 the limits on the deficit of the nonfinancial public sector will be adjusted downward by the difference between actual and projected program grants (i.e., grants not earmarked for projects or "transferencias de libre disponibilidad"). The adjustment will be limited to the shortfall in actual concessional program loans from the projected concessional program loans.
III. New Ceilings on the Pro-Poor Spending of the Nonfinancial
7. Indicative targets for quarterly pro-poor spending and pro-poor spending without wages of the NFPS have been established for June 30, 2004, September 30, 2004, and December 31, 2004, which are measured cumulatively from December 31, 2003.
8. The pro-poor spending of the NFPS includes current and capital spending on health (excluding payments to "beneméritos") and education (excluding universities); and capital spending on basic sanitation, urban development and rural development (including spending on PLANE). It excludes pension outlays.
IV. Reporting Requirements on the New Performance Criterion and Indicative Targets
9. A quarterly estimate of pro-poor spending and pro-poor spending excluding wages of the NFPS will be provided at most 90 calendar days after the end of each quarter. (reporting agency: Fiscal Programming Unit of the Ministry of Finance (UPF)).
1 References in the table are to the relevant paragraphs of the Technical Memorandum of Understanding (TMU) of March 21, 2003, June 20, 2003 and September 24, 2003.
2 The EU grant for water and sanitation is classified as a program grant as corresponding spending had already been in the budget.