IMF Executive Board Concludes 2012 Article IV Consultation with BoliviaPublic Information Notice (PIN) No. 12/57
June 7, 2012
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.
Well-balanced macroeconomic policies, accompanied by an improvement in terms of trade during recent years, have allowed Bolivia to achieve very positive macro-economic results. Exports of goods tripled since 2005, thanks to increased volumes of gas, mineral, and agricultural exports, and the concurrent boom in commodity prices. Real GDP growth, which averaged 3.3 percent annually during 1996–2005, increased to an average of 4.7 percent in 2006–11. The external and fiscal positions strengthened sharply, as larger export receipts, higher taxation of hydrocarbon production, and moderate rates of increase in government spending, led to substantial external current account and fiscal surpluses. These surpluses contributed to the build-up of a comfortable reserves buffer, now at 50 percent of GDP.
In 2011, economic activity remained robust amid strong domestic demand growth, with real GDP growing by 5.2 percent. After a sharp increase at the beginning of 2011, 12-month inflation has gradually declined to 4 percent in March 2012, reflecting a softening in international food prices, price-stabilization policies in agriculture, and a gradual re-anchoring of expectations. Domestic demand grew briskly, with imports climbing over 40 percent with respect to 2010. As a result, the external current account balance narrowed to 2¼ percent of GDP, despite record-high export prices. Private investment has remained subdued, amid lingering uncertainty about the legal framework.
Economic policies have been accommodative. In early 2011, the central bank tightened monetary conditions in response to the pickup in inflation. However, since mid-2011 and in the face of renewed external uncertainty, the central bank reduced the pace of liquidity withdrawal, allowing for a resurgence of excess liquidity in the banking sector. At the same time, banks continued to expand credit to the private sector, at above 20 percent in nominal terms. The central bank let the currency appreciate only slightly, by 1.3 percent. The overall balance of the public sector registered a surplus of 0.8 percent of GDP in 2011, as revenue performance improved. Public investment picked up strongly, contributing to a fiscal impulse of about
1 percent of GDP.
Strong results have also been achieved on improving social inclusion and income distribution through cash transfer programs and investment in infrastructure. The shareof the population living under extreme poverty has halved between 2005 and 2011, from 48.5 percent to24.3 percent. At the same time, social and regional disputes have persisted, particularly in border conflicts and in the context of revenue-sharing arrangements, and location of infrastructure.
Executive Board Assessment
In concluding the 2012 Article IV consultation with Bolivia, Executive Directors endorsed the staff’s appraisal, as follows:
The Bolivian economy maintained a strong performance in 2011. Real GDP growth accelerated, on the back of strong terms-of-trade and accommodative policies. Strong demand growth led to a narrowing of the external current account surplus and, despite buoyant revenue, the fiscal surplus declined due to fiscal impulse. Net international reserves climbed to new highs, thus offering strong protection to external shocks. Bank credit continued to expand at rapid rates, amid strong financial soundness indicators.
The outlook for 2012 is favorable and short term downside risks are manageable. Real GDP is expected to continue growing at a fast pace, reflecting still high terms of trade and mildly expansionary policies. The external current account and the fiscal balance are expected to remain in surplus. Downside risks from an adverse external environment are limited by strong financial cushions and proven resilience of the Bolivian economy to financial shocks.
A shift in macroeconomic policies to a more neutral level might be required to consolidate the decline in inflation and reduce overheating risk. The envisaged fiscal impulse is modest, but a higher fiscal balance would help offset strong private demand growth. The central bank may want to absorb part of the large excess liquidity in the banking sector with a view to slowing credit growth and seeking a gradual increase in short-term and deposit interest rates.
Given the outlook for commodity prices, projected fiscal spending for 2012 is compatible with a sustainable fiscal position over the medium term. Under current policies, public debt will remain on a downward path over the next few years, as the nonfinancial public sector is expected to run modest surpluses.
To protect public investment and make room for higher social spending, a strengthening of the non-hydrocarbon balance is recommended. Increasing productive and social investment—while containing current expenditure—would require either higher revenue or reducing other spending. Reducing fuel subsidies, with appropriate compensatory measures, and strengthening direct taxation would help to make space for these additional outlays.
Reforms to the policy framework, building on the authorities’ plans, will help improve policy responses to changing economic conditions. Setting up a medium-term fiscal framework for the exploitation of natural resources would help avoid pro-cyclical fiscal spending and build buffers to insure against commodity price volatility. It will also help introduce intergenerational equity considerations in the design of fiscal policy, as natural resource depletion is balanced against strong development needs.
Limiting the role of the central bank in financing public investment would help reinforce the strength of monetary policy. In line with international experience, central bank financing for development purposes should be limited, to avoid the emergence of quasi-fiscal losses, especially under adverse external scenarios. As lower dollarization becomes more entrenched and domestic financial markets develop further, the authorities will have room to move toward greater exchange rate flexibility.
The expansion of public sector involvement in productive activities and investment should be accompanied by a stronger governance and accountability framework. A strategy encompassing all public corporations, as planned with the enactment of a new law for Public Enterprises, is needed. Elements of the legal framework should include a requirement that financial statements be externally audited; that the cost of quasi-fiscal operations be disclosed; and that reports be elaborated on the performance of companies and the risks they face. In tandem, there is a need to step up efforts to ensure the effectiveness of public spending and enhance implementation capacity across all levels of government.
Building on important improvements in the financial sector, further strengthening is needed to ensure macro-financial stability. Financial sector indicators are strong, but credit expansion needs to be monitored closely and banking sector buffers maintained. Staff welcomes the progress in the adoption of FSAP recommendations. Plans to strengthen the financial system safety net, with the introduction of a limited deposit insurance, should help consolidate the strength of the banking sector. In addition, direct controls on the price and allocation of credit should be avoided. To preserve Bolivia’s financial system integrity, the Anti Money Laundering/ Combating the Financing of Terrorism regime should be rapidly strengthened to comply with international norms.
Sustaining high and stable medium-term growth will require improvements in the business environment. A key challenge will be to adapt the legal framework for natural resources and private investment to the mandates of the Constitution in a way that ensures clear and stable rules of the game for the private sector. Clearly defining the scope of public sector operations while ensuring a fair and swift process of compensation of the former owners of nationalized companies would also contribute to reducing risk perceptions.
Progress in social policies has allowed Bolivia to make inroads toward achieving its Millennium Development Goals. Maintaining the real value of cash-transfer programs to preserve their impact and enhancing the delivery of education and health services are priorities. Appropriate incorporation of these needs in the budgetary process will be important in the period ahead.