IMF Executive Board Concludes 2009 Article IV Consultation with BoliviaPublic Information Notice (PIN) No. 10/09
January 21, 2010
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.
On January 15, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the 2009 Article IV consultation with Bolivia.1
In recent years, Bolivia benefited from a sharp improvement in terms of trade. Increased export volumes of gas and mining and the concurrent boom in commodities prices led to a 230 percent increase in export receipts between 2005 and 2008. Real GDP growth, which averaged 3.4 percent annually during 1996–2005, increased to an average of 5.2 percent in 2006–08, peaking at 6.1 percent in 2008. The external and fiscal positions strengthened sharply during the boom years.
Larger export receipts, coupled with higher taxation of the hydrocarbon sector and moderate rates of increase in government spending, led to substantial external current account and fiscal surpluses, which averaged 11.8 percent of GDP and 3.8 percent of GDP respectively in 2006–08. These surpluses contributed to the build-up of a comfortable reserves buffer, which—added to the debt relief obtained under Multilateral Debt Relief Initiative (MDRI) —turned Bolivia into a net external creditor in 2008. Gross public sector debt declined to less than 40 percent of GDP by 2008 and net public sector debt to only 20 percent of GDP, thanks to the accumulation of substantial deposits at the central bank. However, despite the highly favorable trends, private investment remained subdued, while the authorities have focused on expanding the social safety net and improving infrastructure.
Real output growth is projected to slow to 3.25 percent in 2009 as a result of lower export volumes, mostly due to reduced gas demand from Brazil, and weakened domestic absorption due to the negative terms of trade shock and falling remittances. Lower food prices and a slowdown in domestic demand have contributed to a sharp decline in the 12-month inflation rate, which declined to 0.3 percent by end-2009. Lower commodity exports and remittances have resulted in a sharp narrowing of the external current account surplus to about 3.5 percent of GDP, compared with 12 percent of GDP in 2008.
The combined fiscal surplus is expected to narrow by 4 percentage points of GDP to an almost balanced position in 2009, largely due to lower hydrocarbon and tax revenue (by 5 percentage points of GDP). In parallel, the central bank reduced open market operations while letting the short-term policy interest rates decline to almost zero, in the context of a decline in foreign-currency inflows that had sharply slowed money creation. This is being transmitted gradually into banks’ deposit and loan rates, which remain at record low levels (1.3 percent and 8.3 percent respectively). With regard to exchange rate policy, since October 2008 the central bank has effectively pegged the Boliviano to the U.S. dollar, following a period of negative crawl (i.e., gradual appreciation) that started in mid-2005.
The financial system has been barely affected by the global crisis owing to limited integration with international capital markets. With negligible foreign credit lines in banks’ balance sheets and lack of exposure to impaired foreign assets, banks have remained liquid, profitable, and well capitalized. The strengthening of economic fundamentals and measures to induce voluntary Bolivianization of financial assets have led to a significant decline in dollarization. Nonetheless, the authorities have increased marginal reserve requirements on dollar deposits to build up a higher foreign-currency liquidity cushion for banks, and also have tightened provisioning requirements, including through higher provisioning for dollar-denominated loans.
Real GDP growth is expected to pick up to 4 percent in 2010, reflecting mainly a recovery of hydrocarbon exports and public investment, and still favorable terms-of-trade, with inflation projected to rise to about 4 percent. The external current account surplus is expected to narrow moderately to 2½ percent of GDP, as a result of increased domestic absorption, while the overall balance of payments is projected to remain positive, leading to a further accumulation of international reserves.
Executive Board Assessment
Executive Directors commended the Bolivian authorities for their continued sound macroeconomic management and effective policy response to mitigate the impact of the global crisis. Growth has been among the highest in Latin America and inflation has declined sharply in a context of financial stability. Fiscal policy has focused on protecting social and infrastructure spending; the temporary stabilization of the Boliviano against the US dollar has provided a nominal anchor, protecting the substantial de-dollarization already achieved; and lower interest rates have supported credit demand. Looking forward, Directors concurred that the key challenges are to maintain long-term fiscal sustainability through prudent management of the country’s natural resource wealth and to further reduce the high poverty rate by boosting growth through structural reforms and increased investment.
Directors generally supported a gradual tightening of monetary conditions as the economy rebounds. Mopping up the abundant liquidity in the banking sector would prevent excessive credit creation, foreign-exchange pressures, or a pick-up in inflation. Directors noted the staff’s assessment of no significant evidence of exchange-rate misalignment. They welcomed the authorities’ readiness to revise the rate of crawl of the exchange rate when called for by fundamentals and market conditions. Over the medium term, most Directors encouraged the authorities to set the stage for greater exchange rate flexibility, once low dollarization is entrenched and domestic financial markets have gained greater depth. A few Directors however saw no need to move in this direction, noting that the current regime has served the country well. To strengthen the independence of monetary policy, Directors considered that central bank financing of the government or public corporations should be avoided.
Directors welcomed the authorities’ sound fiscal policy, with public debt expected to continue to decline gradually over the next few years. Given the budget’s reliance on revenue from natural resources, they encouraged the authorities to strengthen the non-hydrocarbon balance to generate additional savings over the medium- and long term. At the same time, it will be important to strike a balance between ensuring intergenerational equity and addressing near-term physical and human capital needs.
Directors welcomed the fiscal reforms under consideration. They looked forward to steps to strengthen direct taxation, simplify the tax system, rebalance spending responsibilities and revenue assignments across the national and subnational levels of government, and establish a formal framework for the fiscal management of natural resources. Directors concurred that gradually phasing out fuel subsidies would create room for strengthening the fiscal position while further expanding development spending and social programs.
In the financial sector, Directors encouraged the authorities to focus on pending reforms while maintaining the existing strong financial supervision. Priorities are the creation of a deposit insurance scheme, the finalization of the preventative institutional framework for resolving insolvent financial institutions, and the expansion of the perimeter of regulation and supervision to cooperatives and other unregulated financial institutions. Directors welcomed the authorities’ interest in an FSAP update. A few Directors encouraged further strengthening of the legislation on anti-money laundering and the operations of the Financial Intelligence Unit.
Directors stressed that—along with the promotion of public-private partnerships—improving the investment climate is key to boosting Bolivia’s future growth prospects. They highlighted that the upcoming reform of the legal and institutional framework should lead to a clear and stable environment for private investment, including by introducing better procedures for enterprise restructuring to develop the domestic credit market.