Press Release: IMF Approves Third Annual PRGF Loan for Bolivia
June 8, 2001
The International Monetary Fund (IMF) today approved the third annual program for Bolivia under the Poverty Reduction and Growth Facility (PRGF)1 in an amount equivalent to SDR 56.1 million (about US$70 million) to support the government's economic program.Bolivia's three-year program, originally under ESAF, was first approved on September 18, 1998 (see Press Release 98/41), in an amount equivalent to SDR 100.96 million (about US$126 million), of which SDR 44.86 million (about US$56 million) has been disbursed. Today's decision provides Bolivia with another SDR 56.1 million to be disbursed in two drawings of SDR 19.0 million (about US$23.7 million), the first of which is available immediately, and a third drawing of SDR 18.1 million (about US$22.6 million). In a separate decision, the IMF Executive Board has agreed that Bolivia has met the conditions for reaching the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The Executive Board has also broadly endorsed Bolivia's Poverty Reduction Strategy Paper, which should provide the policy framework for future reviews under this PRGF loan (see Press Release 01/29).
In commenting on the Executive Board discussion on Bolivia, Shigemitsu Sugisaki, Deputy Managing Director, said:
"Bolivia is to be commended for its track record of sound macroeconomic policies and substantial structural reforms, which has made it possible to lower inflation, strengthen the balance of payments, and attain real GDP growth of 4 percent a year during the 1990s. However, there was a sharp economic slowdown in 1999, and poverty is still widespread. Despite a strong export performance, the economic recovery in 2000 was weaker than expected owing to sluggish domestic demand.
"The authorities are to be commended for their efforts in conducting a widely participatory process for the development of a comprehensive poverty reduction strategy, which Directors have endorsed as providing an overall context for the Fund's assistance to Bolivia. The goal of reducing the incidence of poverty and extreme poverty by one-third and one-half, respectively, by 2015 is ambitious, but achievable. In addition to stepped-up poverty-related spending, strong economic growth over the medium and long term, anchored by sound macroeconomic policies and sustained structural adjustment, will be required to meet these targets.
"The authorities' economic program for 2001 will be supported by the third annual arrangement under the current three-year PRGF commitment. The program calls for the continuation of macroeconomic policies designed to encourage a stronger economic recovery while keeping inflation under control; well-focused structural reforms, including a reform of the domestic tax "agency, a new tax procedures code, and early passage of key elements of financial sector legislation; and increased resources devoted to stepping-up the fight against poverty. Additional debt relief provided under the enhanced HIPC framework will contribute to this strengthened effort to reduce poverty.
"The authorities will need to take appropriate revenue and spending measures to close any fiscal gap that may arise from revenue shortfalls or unbudgeted expenditure, in order to meet the program's fiscal targets. At the same time, it will be important to maintain the levels of poverty-related expenditure that are needed for the successful implementation of the poverty-reduction strategy.
"The authorities also should avoid further recourse to measures in support of the banking system that increase regulatory forbearance, since such measures may postpone both the detection of bank problems and the timely corrective action needed to address them. In this regard, the proposed financial sector reforms take on added importance", Sugisaki said.
Bolivia's economic recovery in 2000 was weaker than expected, due to the sluggish economic growth of domestic demand. Real GDP grew by 2.4% despite strong export volume growth, as real domestic demand is estimated to have grown by only 1.6%. The virtual elimination of illicit coca cultivation over the last two to three years, as well as the customs reform, which reduced commercial activity based on contraband imports, may have contributed to lower the incomes in the informal sector. Despite pressure on domestic fuel prices in the first half of the year, inflation remained subdued in 2000, rising slightly to 3.4%.
Fiscal discipline was maintained, although an expected increase in tax revenues failed to materialize, reflecting the weak economy, delays in the implementation of tax and tax administration measures, and lost revenue from tax breaks. Contrary to projections, the external account deficit narrowed to 5.5% of GDP in 2000, owing to an export growth of 11%.
The program for 2001 is based on the government's Poverty Reduction Strategy Paper (PRSP), which incorporated the main conclusions of the National Dialogue on poverty reduction, held between June and August of 2000. The program is based on real GDP growth of 4%, led by a further expansion of natural gas exports and a pickup in domestic demand. The inflation target for 2001 was set at 4%.
The fiscal program for 2001 seeks to achieve a balance between the need for further fiscal consolidation over time, as expressed in the PRSP, and the objective of avoiding a fiscal tightening during the present period of weak domestic demand. The fiscal deficit is expected to remain unchanged at 3.7% of GDP. Revenue gains will result from the impact of tax administration reforms on the efficiency of domestic tax collections, increased fuel taxes and improved collections by customs. The government also intends to prepare a proposal for a comprehensive tax reform, which would be ready for consideration by the next government.
The monetary policy will be guided by the inflation objective for 2001. To address a weakening in the banking system, due to a rise in non-performing loan ratios, measures were introduced on May 2001, providing credits to encourage banks to reschedule loans and subordinated loans for recapitalization.
The external account deficit in 2001 is projected to remain stable and the authorities intend to continue with the crawling peg exchange rate policy, with the aim of maintaining internal price stability and improving external competitiveness.
The structural reforms programmed for 2001 are focused primarily on tax and customs administration, budget management, and fiscal decentralization, with the aim of enhancing transparency, improving the monitoring of expenditure, particularly for local governments, and increasing tax revenue. The authorities also plan to complete the privatization program, by offering for sale three electricity generation and distribution companies in 2001, and will seek congressional approval of new regulations to strengthen banking supervision.
The authorities will begin to implement their new poverty reduction strategy over the second half of the 2001. This comprehensive strategy, which aims to reduce the incidence of poverty and extreme poverty by one-third and one-half, respectively, by 2015, will be partly supported by assistance provided by HIPC debt relief.
Bolivia joined the IMF on December 27, 1945; its quota2 is SDR 171.5 million (about US$214 million). Bolivia's outstanding use of IMF credits totals SDR 165.1 million (about US$206 million).