IMF Executive Board Concludes 2011 Article IV Consultation with BoliviaPublic Information Notice (PIN) No. 11/65
May 27, 2011
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 May 23, 2009 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bolivia.1
Bolivia has posted a solid macroeconomic performance in recent years, on the back of strong terms of trade and prudent macroeconomic policies. Increased export volumes and prices led to a doubling of export receipts between 2005 and 2010, while real GDP growth rose from 3.1 percent in the first half of the past decade to 4.6 percent in the second half. The strength of the external and fiscal positions in recent years has allowed Bolivia to build a strong reserves cushion which has reduced macroeconomic vulnerability. While poverty and income inequality are still high, progress has been made on improving social inclusion and income distribution, as cash transfer programs have been successful in reducing extreme poverty, from about 30 percent in 2008 to 26 percent in 2009.
In 2010, real GDP grew by 4.2 percent on account of higher hydrocarbons production, with high terms of trade supporting domestic demand, and despite adverse weather shocks. The external current account surplus rose to 4.8 percent of GDP, and net international reserves currently stand at 50 percent of GDP and 80 percent of broad money. At the same time, inflation rose sharply, to 7.2 percent in December and 11 percent in March 2011, on the back of higher food commodity prices, some de-anchoring of expectations following an attempt at raising fuel prices last December, and amid ample liquidity in the banking sector. The overall public sector surplus rose to 2.0 percent of GDP in 2010, from 0.3 percent in 2009.
With the pickup in inflation, interest rates have become sharply negative in real terms. In the context of higher credit growth, banks are profitable, well capitalized, and their nonperforming loan ratios are low. Progress on the de-dollarization of balance sheets has continued, with Boliviano-denominated credit and deposits standing at about 55 percent of the total.
Congress has approved a road map for fiscal decentralization and a reform of the pension system. The decentralization law sets the stage for a discussion of revenue assignments and spending responsibilities across different levels of government. The pension reform creates a semi-contributory regime with stepped up benefits for low-income households, funded with higher contributions from employers and employees. It also introduces a lower retirement age and nationalizes the administration of the pension funds.
Executive Board Assessment
Executive Directors welcomed Bolivia’s strong economic performance, underpinned by prudent macroeconomic policies. The external current account and overall public sector balances remain in surplus, and record-high net international reserves provide strong protection against external shocks. Directors noted that the economy is expected to gather further momentum on the back of a continued recovery of hydrocarbon production, higher public investment, and favorable export prices. They highlighted that a short-term priority is to contain inflation, and that meeting development needs and making inroads into poverty reduction remain medium-term objectives.
While recognizing that higher international food prices have been a key driver of inflation, Directors saw a need for a faster exit from the monetary stimulus. They noted that a moderate appreciation of the currency would also help reduce inflationary pressures. Over the medium term, as de-dollarization and domestic financial market development continues, allowing greater exchange rate flexibility would enhance the economy’s capacity to respond to external shocks.
Directors agreed that the available fiscal space allows for additional productive and social investment to address development needs. In this regard, further efforts are needed to enhance the effectiveness of public spending and implementation capacity across all levels of government. Directors welcomed plans to introduce multi-year budgeting and a fiscal savings fund to facilitate anti-cyclical fiscal policy. They encouraged the authorities to limit fiscal claims on the central bank and enhance the transparency and accountability of state-owned enterprises.
Directors welcomed improvements in the financial sector, as highlighted by the Financial Sector Assessment Program update. In order to preserve macro-financial stability, it will be important to ensure appropriate levels of banks’ liquidity and capital buffers, avoid using interest rate policy and prudential rules for development purposes, and improve financial sector supervision more broadly. Directors considered a deposit insurance scheme as a useful element of the crisis management framework.
Directors stressed the need to improve the investment climate, particularly through further reforms of the legal framework in a way that ensures clear and stable rules of the game for the private sector. They commended the authorities for putting in place effective social policies and enhancing the delivery of health and education services. Directors called for continued efforts to improve the targeting of transfer programs, to facilitate the reduction of fuel subsidies and free price setting in agriculture.