Transcript of a Conference Call on BoliviaWashington, D.C.
Monday, February 10, 2014
Ana Corbacho, IMF Mission Chief, Bolivia
MS. CORBACHO: Thank you very much for accepting our invitation to participate in this conference call on Bolivia. Before taking your questions, I would like to summarize the main conclusions of our Article 4 consultation with the country. This is our annual visit during which we assess a country’s macroeconomic situation and have a dialogue with the authorities on both our short and longer-term policy recommendations.
For several years now Bolivia’s macroeconomic performance has been very good. This performance has been actively supported by social policies and has helped bring about an almost threefold increase in the average income of the population as well as improved income distribution and greater poverty reduction. What is more, all of this has taken place in a very short space of time. This very good performance continued in 2013, which was a year of very strong growth. Preliminary figures show that the Bolivian economy grew by around 6½ percent—the highest level of growth observed in the past three decades and one of the highest growth rates in the Latin America region. For 2014, that is this year, the outlook is very positive, with the economy projected to grow by 5.4 percent.
In this context of very good growth prospects, our dialogue with the authorities focused on the stance of macroeconomic policies and the structural reforms that could contribute to deepening these achievements going forward. I will first outline the main fiscal policy recommendations, then touch on monetary policy, and lastly talk about the financial system.
I will deal first of all with fiscal policy. Given the expected high growth scenario, we consider that it would be appropriate to maintain a neutral stance in 2014. This means that there should be no economic stimulus through fiscal spending. To achieve this objective, we estimate that the authorities would need to aim for a fiscal surplus in line with previous years’ results, which requires a greater fiscal effort than has been provided for in the 2014 budget. This is important because there are regional and global factors that could present downside risks for the Bolivia scenario, such as a fall in world oil and gas prices or a slowdown of trade with neighboring countries. We, therefore recommend preserving the fiscal stimulus, maintaining fiscal space, to respond to external shocks and, thus, support economic activity in case of a deterioration in the regional outlook.
This more ambitious fiscal effort is also important to support medium- and long-term sustainability. We have encouraged the authorities to move ahead with the implementation of a medium-term fiscal framework that takes account of two very important considerations. On the one hand, the immediate need to invest and support the development of the country and, on the other, the need to save a share of the wealth from gas for future generations. In that context, there is an urgent need to give priority to the exploration of new natural gas deposits with a view to offsetting the potential impact of the depletion of hydrocarbon revenues projected for 2023. The success of these efforts requires the establishment of a clear, stable legal framework and a favorable business climate that can attract higher levels of private investment and support public investment both in the hydrocarbon sector and in the rest of the economy.
I will turn now to monetary policy and inflation. As you are aware, there was a rise in the prices of some foodstuffs in August and September 2003[sic] resulting from temporary supply shocks because of bad weather conditions. The authorities responded appropriately by withdrawing liquidity from the financial system, allowing interest rates to rise gradually and moderating credit growth. We expect the results of these measures to feed through to inflation moderating to around 5.5 percent by end 2014. If inflationary pressures prove persistent, our recommendation is to continue the gradual tightening of monetary conditions.
We, therefore, shared with the authorities various measures that could be taken to improve the effectiveness of monetary policy. One such measure relates to strengthening the price stability mandate of the Central Bank of Bolivia by discontinuing direct central bank lending to public enterprises. We are of the opinion that such lending could be channeled through a sovereign fund that could be administered by the Ministry of Economy and Public Finance and created with clear investment criteria and a strong governance structure in keeping with international best practices.
Lastly, allow me to underscore that the financial sector has been a very important driver of economic growth and has significantly expanded its reach, providing services to increasing numbers of households and enterprises in Bolivia. Nevertheless we expressed our concern regarding certain risks that the new Financial Services Law could pose. While the objectives that the law seeks to achieve, such as financial inclusion and productive development, are certainly appropriate, the instruments that the authorities have chosen to achieve this, in particular interest rate controls and minimum portfolio quotas, are of concern to us. These regulations could complicate the conduct of monetary policy, contribute to the over-indebtedness of certain segments of the population, and lead to a reduction in the funds available for lending over the medium term. This would be counterproductive for financial deepening and inclusion. We recommended to the authorities that they consider alternative instruments that could be effective in achieving the objectives of the new law, which we agree are very important for pursuing the country’s economic and social development policies.
To sum up, in 2013, macroeconomic performance was really very good and we hope to see this sound performance continue in 2014. The focus of our recommendations was to address certain vulnerabilities and strengthen the policy frameworks so that they could continue to support such achievements going forward. Without further ado, I would like to thank you very much for your attention and open up the conference call to take your questions.
QUESTION: Very well, good day, thank you very much for making this call. I would like to ask, to ask you if you could be more specific regarding the comment you made on risks; you mentioned as possible risks a potential fall in world fuel prices and also a slowing of trade with our neighbors. Could you be more specific as to which neighbors you are referring to, what scenarios you have in mind, and whether you are referring to Argentina or to Venezuela. Thank you.
MS. CORBACHO: Thank you very much for your question. What we see as the main risks facing Bolivia are related to what is happening in the world oil and gas market, in particular, with oil and gas prices, and Bolivia is also exposed, in respect of its natural gas exports, to developments that may occur, as you yourself mentioned, in Argentina and in Brazil, which are Bolivia’s main trading partners. What we emphasized in our assessment is that, despite this exposure to external risks, and of course all economies face risks, Bolivia is in a very strong position to deal with external shocks. This is because it has a very comfortable international reserves position of almost 50 percent of output. Another important factor to take into account is that Bolivia’s commercial gas transactions with its regional neighbors are based on long-term contracts based on prices that are updated with something of a time lag in relation to international commodity price movements, which has the advantage, when shocks do occur, of delaying the pass through to the Bolivian economy. However, let me repeat that although we recognize that there is some exposure to regional and global risks, our assessment is that the Bolivian economy is in a very strong and comfortable position to respond to external shocks that may occur.
QUESTION: I would like to ask a question about the Central Bank, particularly the loans to public sector companies. What I am especially keen on, what I am wondering about is the Central Bank law, are you talking about rewriting of the constitution and how that may compromise the Central Bank independence. I wonder if you could elaborate on that, on what the IMF view is with regard to the Central Bank independence in Bolivia.
MS. CORBACHO: The connection was not great so let me rephrase your question to make sure I understood it correctly. You are asking about the Central Bank lending to public corporations?
QUESTION: Yes, specifically I am wondering about Central Bank independence especially under the threat that I mentioned, basically that the new constitution will undermine the central bank’s independence by changing the central Bank law, if I understand correctly.
MS. CORBACHO: So the new constitution provides for a dual mandate for the Central Bank. One key core mandate is price stability, which is, in a way, in line with the mandates of most central banks around the world, but it also has another mandate to contribute to economic and social development. Based on the second dual mandate is that the authorities interpret that the Central Bank of Bolivia is allowed then to provide financing, direct financing to public corporations for specific strategic investments that are considered very important for development. With respect to the Central Bank law, the Central Bank law that is currently in application precedes the Constitution, and we do not know whether there will be changes to that specific law. One thing that we have mentioned, that we have discussed with the authorities, is that we believe the supremacy of the Central Bank law needs to continue to apply in particular also with the changes that are now being foreseen after the new financial services law.
QUESTION: I also wanted to ask about the IMF’s feel of this new financial services law. I guess I just wanted to know is the idea of usury caps or caps on lending rates, it is something that the IMF is just against across the board in many countries, are these set particularly low and I just, obviously I cover the UN, and I have heard Evo Morales, you know, really denounce the IMF, so maybe this is kind of a naïve question but I am wondering how do you see the, how do you contrast the public statements of the country with this type of a review and what does it mean that these reviews are permitted, and what is the purpose of the reviews?
MS. CORBACHO: Just to clarify, did you mean the review of the Article 4?
QUESTION: Yes, I did. I, actually, last time it was pretty recent that President Morales was here, he told a number of kind of anecdotes about what he learned of the IMF’s role in the country when he came to the presidency, and it seems, it seem wildly inconsistent with this type… I mean would you say that your discussions with the officials were as smooth as in other countries and what do you make of the public statements, really kind of denounce the IMF as imperialistic, etc.?
MS. CORBACHO: So let me start with your first question that was related to the financial services law and the caps on the lending rate. Our concern there is that there is going to be a very large part of the credit portfolio that would fall under these regulated rates. There will also be a floor on the deposit rate that will apply to all financial institutions that we do not know the level yet and then there will be caps on the lending rates that the banks can use to big sectors of the credit portfolio, such as housing and productive development.
We are concerned that then these regulated rates are going to compress interest margins and the profitability of financial institutions and eventually they could lead to financial problems and financial instability of certain institutions, especially under bad economic conditions or if the economic cycle is not as good as it has been right now. The authorities did not agree with the risks that we had highlighted, they have stressed that all the regulations will be set to make sure that the financial stability is not compromised. So we do agree, they do agree with us in the sense that it is fundamental to preserve the financial stability of the system. In their view, financial inclusion in Bolivia has not advanced at a sufficiently rapid pace and hence they have opted to pursue or to implement these instruments that in their view would help them achieve their goals faster than with alternative instruments.
With respect to the context of our dialogue with the authorities, the review of the Article 4 is an annual visit that we do in all member countries of the IMF that receive the visit. The discussions with the authorities are very open, are very frank, you can see in our report that we have reported on areas where we do not have an agreement on the assessment of the macroeconomic situation, but the dialogue is very open, very fluid, is frequent and from that perspective we consider it very successful.
IMF: If there are no more questions we can go ahead and finish the call… Just a reminder that the report and the conference all are embargoed until 11 am Eastern Time.