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Press Release No. 98/41
September 18, 1998
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Three-Year Arrangement Under the ESAF for Bolivia

The International Monetary Fund (IMF) today approved a three-year loan under the Enhanced Structural Adjustment Facility (ESAF)1 equivalent to SDR 100.96 million (about US$138 million), to support Bolivia’s economic program for 1998–2001. The first annual loan of SDR 33.65 million (about US$46 million) will be disbursed in two equal semiannual installments, the first of which is available immediately.

The Executive Board of the IMF also agreed today that Bolivia has met the requirements for receiving from the IMF US$29 million out of a total package of US$448 million in debt relief from its official external creditors, under the Initiative for Heavily Indebted Poor Countries (HIPC).2

Background

Since 1985, economic policy in Bolivia has sought to return the country to high rates of sustainable economic growth, with a steady reduction in poverty, following the economic crisis of the early 1980s that led to hyperinflation in 1984–85 and to a 10 percent cumulative decline in real GDP in 1980–85. Four successive governments have carried out the reform strategy.

By 1997, Bolivia had achieved strong gains on the inflation and external fronts. Twelve-month inflation, which had fallen from its peak of 23,500 percent in September 1985 to 18 percent in December 1990, declined further to less than 7 percent by end-1997; the external debt burden—while still high—had improved; and the international reserve cushion had reached reasonably comfortable levels. Economic growth was somewhat slower than expected, with economic activity rising at 4.2 percent in 1997 and only slightly faster than the average for this decade.

Medium-Term Strategy

The government’s program for 1998–2001 seeks to achieve a significant reduction in poverty through faster economic growth and stronger social programs. Economic growth under the program should increase from 4.5-5 percent in 1998 to 5.5-6 percent by 2000, while gross international reserves should remain at about 6½ month of imports, and inflation should decline to 6 percent in 1999 and 5.5 percent in 2000.

The combined public sector deficit is expected to rise to 4.1 percent of GDP in 1998 because of high costs of structural reforms as well as unexpected temporary expenditures fordisaster relief (the El Niño phenomenon and an earthquake in May 1998). It should decline, however, to 3.6 percent of GDP in 1999 and 2 percent of GDP by 2002. The nonpension fiscal balance should benefit substantially from improved tax administration and expenditure restraint. The external current account deficit is projected to remain above 8 percent of GDP in 1998, and then reflecting a surge in foreign direct investment in the export sector, to decline to 7 percent in 1999 and 4 percent in 2002.

Structural Reforms

The cornerstone of the authorities’ program is structural reform, with a new emphasis on improvements in social expenditure, fiscal decentralization, and governance. In addition, while financial supervision has improved considerably in recent years, the authorities want to complete the process of reform to create full confidence in the financial system. The government plans to privatize all remaining public enterprises, including those owned by the armed forces. The most important action is to privatize the state oil company YPFB’s refineries by June 1999.

Other reforms will include deepening the domestic capital markets and making labor markets more flexible through changes in the labor law that eliminate disincentives to employment in the formal sector. To seek a consensus for that reform, national dialogue with key business, labor, and political groups has begun .

Improvements in governance are also being sought through the establishment of three legal institutions—the Judicial Council, the Ombudsman, and the Constitutional Court—and through a comprehensive customs reform, among other actions.

Addressing Social Needs

The government observed the social policy targets monitored under the HIPC initiative, and intends to adhere to the target established through 2000. In education, the government plans to increase the responsibility of local governments for education, and reward good teaching through a merit pay system; rehabilitate schools; and ensure an adequate supply of learning materials.

Increased spending on basic health care is included in the government’s five-year national plan. It contemplates expanded access to primary and preventive care for the poor and improved coordination in services provided across different levels of government.

The Challenge Ahead

The recent surge in investment, financed to an important extent by foreign direct investment, suggests that Bolivia’s growth prospects are already improving. Nonetheless, it will be crucial that the program achieve its goal of helping to ensure that a greater share of investment is financed by national savings to keep the external current account deficit on a sustainable path.

Bolivia joined the IMF on December 27, 1945; its quota3 is SDR 126.2 million (about US$173 million). Bolivia’s outstanding use of IMF credits totals SDR 181 (about US$248 million).


Bolivia: Selected Economic Indicators


1994

1995

1996

1997

1998


(Annual percentage change)

Income and Prices






Real GDP

4.7

4.7

4.1

4.2

4.7

Real domestic demand

0.9

4.6

4.9

7.1

6.6

CPI inflation (end-of-period)

8.5

12.6

8.0

6.7

6.5








(In percent of GDP)

Investment and savings






Total investment

14.9

15.6

16.5

18.7

18.8

Gross national savings

11.2

10.6

11.3

10.5

10.6







Combined public sector






Overall balance

-3.0

-1.8

-1.9

-3.3

-4.1

Foreign financing

3.7

3.6

2.5

2.7

2.6

Domestic financing

-0.7

-1.8

-0.6

0.5

1.5


(Annual percentage change, unless otherwise stated)

Money and credit






M3

21.6

9.5

24.9

17.1

14.5

Credit to private sector

24.0

12.6

13.6

21.1

14.3







External sector






Current account balance (US$ million)

-219

-335

-385

-647

-702

(percent of GDP)

-3.7

-5.0

-5.1

-8.1

-8.2

Of which: trade balance

-279

-301

-447

-684

-721

Capital account balance

208

257

727

750

677

Of which: Foreign direct investment

90

177

426

591

623

Overall balance

123

123

342

103

0







Gross official reserves1

5.7

5.6

7.3

7.5

6.8

Public sector external debt (US$ billion)

4.7

4.8

4.6

4.5

4.3

Debt service ratio2 3

35.3

42.2

25.6

26.1

23.0

Sources: Central Bank of Bolivia; Ministry of Finance; and IMF staff estimates.

1In months of imports.

2After HIPC assistance.

3In percent of exports of goods and non-factor services.


1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growthprospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5½-year grace period.
2 The HIPC Initiative entails coordinated action by the international financial community, including multilateral institutions, to reduce to sustainable levels the external debt burden of heavily indebted poor countries which pursue IMF- and World Bank-supported adjustment and reform programs, but for whom traditional debt relief mechanisms are insufficient.
3 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing , and its allocation of SDRs.


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