## cr17395-boliviabundle ## Source details **Canonical URL:** [cr17395-boliviabundle](https://www.imf.org/-/media/files/publications/cr/2017/cr17395-boliviabundle.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17395-boliviabundle.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17395-boliviabundle.pdf.json) --- ### Social and human development indicators - Gini index (2015): 45.8 - Life expectancy at birth (years, 2015): 69 - Adult literacy rate (percent, 2015): 92.5 - Mortality rate, under-5 (per thousand, 2016): 36.9 - Gross enrollment ratio, primary, both sexes (2015): 97.1 ### Macroeconomic baseline projections (selected) - Real GDP (annual percent changes): 2014: 5.5; 2015: 4.9; 2016: 4.3; 2017: 4.0; 2018: 3.9; 2019: 3.8 - Real GDP excluding hydrocarbons (annual percent changes): 2014: 5.4; 2015: 5.4; 2016: 5.0; 2017: 5.3; 2018: 4.6; 2019: 3.9 - Nominal GDP (annual percent changes): 2014: 7.6; 2015: 0.0; 2016: 2.4; 2017: 8.7; 2018: 8.4; 2019: 7.8 - CPI inflation (period average): 2014: 5.8; 2015: 4.1; 2016: 3.6; 2017: 3.1; 2018: 4.5; 2019: 4.5 ### Investment, savings, and external sector (selected) - Total investment (percent of GDP): 2014: 21.0; 2015: 20.3; 2016: 20.8; 2017: 20.3; 2018: 19.7; 2019: 19.0 - Public sector (percent of GDP): 2014: 12.4; 2015: 13.5; 2016: 13.0; 2017: 12.4; 2018: 12.0; 2019: 11.5 - Gross national savings (percent of GDP): 2014: 20.8; 2015: 14.2; 2016: 15.1; 2017: 14.4; 2018: 13.7; 2019: 13.4 - Current account (percent of GDP): 2014: 1.7; 2015: -5.7; 2016: -5.7; 2017: -5.8; 2018: -5.9; 2019: -5.5 - Exports of goods and services (percent of GDP): 2014: 42.1; 2015: 29.8; 2016: 24.1; 2017: 23.3; 2018: 22.7; 2019: 22.3 - Natural gas (percent of GDP): 2014: 18.1; 2015: 11.3; 2016: 6.0; 2017: 6.2; 2018: 5.6; 2019: 5.1 - Imports of goods and services (percent of GDP): 2014: 38.9; 2015: 35.6; 2016: 31.5; 2017: 29.4; 2018: 28.8; 2019: 28.3 - Financial account (percent of GDP): 2014: 2.3; 2015: -8.6; 2016: -6.9; 2017: -5.8; 2018: -5.9; 2019: -5.5 - Terms of trade index (percent change): 2014: 2.1; 2015: -23.1; 2016: -15.4; 2017: 6.9; 2018: -0.5; 2019: -2.8 ### Public finances and public debt (combined public sector) - Revenues and grants (percent of GDP): 2014: 39.9; 2015: 37.7; 2016: 33.2; 2017: 31.6; 2018: 31.6; 2019: 31.8 - Hydrocarbon related revenue (percent of GDP): 2014: 12.7; 2015: 9.1; 2016: 5.5; 2017: 5.0; 2018: 5.1; 2019: 5.0 - Expenditure (percent of GDP): 2014: 43.3; 2015: 44.6; 2016: 39.8; 2017: 39.0; 2018: 38.3; 2019: 37.8 - Current (percent of GDP): 2014: 28.2; 2015: 29.1; 2016: 25.0; 2017: 25.3; 2018: 25.2; 2019: 25.2 - Capital 2/ (percent of GDP): 2014: 15.0; 2015: 15.5; 2016: 14.8; 2017: 13.7; 2018: 13.1; 2019: 12.6 - Net lending/borrowing (overall balance) (percent of GDP): 2014: -3.4; 2015: -6.9; 2016: -6.6; 2017: -7.3; 2018: -6.7; 2019: -6.0 - Non-hydrocarbon balance (percent of GDP): 2014: -13.2; 2015: -14.0; 2016: -10.6; 2017: -10.6; 2018: -10.8; 2019: -10.1 - Total gross NFPS debt 3/ (percent of GDP): 2014: 37.0; 2015: 40.6; 2016: 46.2; 2017: 49.8; 2018: 51.6; 2019: 52.8 ### Reserves, money, and credit - Net Central Bank foreign reserves (in millions of U.S. dollars): 2014: 15,123; 2015: 13,056; 2016: 10,081; 2017: 9,875; 2018: 8,780; 2019: 7,518 - Net Central Bank foreign reserves (in months of imports of goods and services): 2014: 14.1; 2015: 13.2; 2016: 11.3; 2017: 10.9; 2018: 9.1; 2019: 7.4 - Credit to the private sector (annual percent changes): 2014: 15.0; 2015: 17.6; 2016: 14.8; 2017: 12.2; 2018: 11.2; 2019: 10.6 - Credit to the private sector (percent of GDP): 2014: 43.7; 2015: 51.4; 2016: 57.6; 2017: 59.5; 2018: 61.0; 2019: 62.6 - Broad money (annual percent changes): 2014: 15.6; 2015: 16.2; 2016: 2.6; 2017: 7.1; 2018: 8.7; 2019: 8.3 - Broad money (percent of GDP): 2014: 70.3; 2015: 81.7; 2016: 81.8; 2017: 80.6; 2018: 80.8; 2019: 81.2 ### Exchange rates and nominal GDP - Nominal GDP (in billions of U.S. dollars): 2014: 33.2; 2015: 33.2; 2016: 34.1; 2017: 37.0; 2018: 40.1; 2019: 43.3 - Bolivianos/U.S. dollar (end-of-period): 2015: 6.9; 2016: 6.9; 2017: 6.9 - REER, period average (percent change): 2014: 7.9; 2015: 0.1; 2016: 1.4 ### Recent macroeconomic developments and risks - Growth performance: - Real GDP growth averaged 5.1 percent during 2006–14; output expanded by 4.3 percent in 2016 and slowed to 3.6 percent in the first half of 2017. - Fiscal developments: - Overall fiscal deficit: 2015: -6.9 percent of GDP; 2016: -6.6 percent of GDP; projected 2017: -7.3 percent of GDP. - Gross (net) public debt rose to about 47 (29) percent of GDP in September 2017 from about 35 (15) percent of GDP in 2014. - Central Bank (BCB) financing to SOEs rose to about 13 percent of GDP in September 2017. - External developments: - Current account deficit: 2016: -5.7 percent of GDP; 2014: 1.7 percent of GDP. - Gross international reserves fell from US$15,123 million in 2014 to US$10,081 million in 2016 and US$9.93 billion at end-October 2017. - Financial sector: - Banking system overall capital adequacy ratio: 12.2 percent (all banks above regulatory minimum of 10 percent). - Reported non-performing loans (NPLs): end-2016: 1.5 percent; September 2017: 2.0 percent. - Banks’ return on equity around 13 percent, but profitability declining. ### Outlook summary and scenario sensitivities - Growth outlook: - Growth projected at 4 percent in 2017 and expected to converge to potential of 3.7 percent in the medium term as natural gas production moderates. - Risk factors: - Downside risks include persistent fiscal and external deficits, declining policy buffers, rising fiscal risks, and sensitivity to hydrocarbon activities and prices. - Absence of new gas discoveries could pose additional challenges. - Forecast gaps: - Fund growth forecasts from 2006‒15 under-predicted annual real GDP growth compared to actual outcomes, on average by 0.5 percentage point. ### Policy recommendations (staff) - Macroeconomic policy stance: - Gradually tighten monetary and fiscal policies to anchor macro stability. - Reduce the non-hydrocarbon primary balance by streamlining capital spending, lowering the wage bill-to-GDP ratio, and reinforcing the financial health of public enterprises. - Fiscal framework and public finances: - Strengthen the fiscal policy framework and maintain policy buffers. - Improve fiscal sustainability by limiting build-up in macro vulnerabilities tied to PDES investment plan. - Subsidies and social spending: - Remove fuel subsidies and improve the effectiveness of social spending. - Structural reforms: - Implement key structural reforms in labor and product markets. - Improve incentives for hydrocarbon and mining exploration. - Financial sector and inclusion: - Ensure monetary policy supports stability and sustainability. - Address credit and liquidity measures (e.g., adjustments to reserve requirements) while monitoring financial stability risks. ### Baseline medium-term outlook — key projections and implications - Annual GDP growth is forecast to stabilize at 3.7 percent over the medium term, below the 5.0–5.8 percent laid out in the PDES. - Staff estimates suggest potential growth moderates over time with the end of the commodity boom. - Fiscal and external current account deficits are expected to persist over the medium term under the assumed policy stance, leading to: - a gradual increase in public debt, - a decline in government deposits, - foreign reserves declining steadily under a continued stabilized exchange rate. - Reserves projected to fall below the Fund’s reserve adequacy metric by 2019 and to about 8 percent of GDP (3 months of imports) by 2022. - Staff’s baseline represents their best estimate of likely policy stance over the medium term given current information. ### Risks to the baseline outlook - Downside risks to growth include: - more rapid depletion of gas reserves or failure to discover new fields; - lower-than forecast gas and minerals prices or reduced external demand from Brazil and Argentina; - larger-than-expected tightening in global financial conditions and/or worsening in competitiveness related to the stabilized exchange rate; - credit growth volatility linked to lending quotas, interest rate caps, increased taxation of the sector, and liquidity issues; - political tensions related to the 2019 elections. - Upside risks include: - greater discoveries and exploitation of new gas reserves; - higher-than-expected hydrocarbon prices; - more rapid success bringing downstream hydrocarbon industrialization and electricity generation projects onstream; - commercial viability of lithium battery production. ### Four-pillar policy approach (staff) - Gradually tighten monetary and fiscal policy: expenditure restraint within a credible medium-term fiscal framework combined with slower credit growth. - Improve focus of social spending: make fiscal policy less regressive and enhance effectiveness of social spending. - Concentrate on key structural reforms, including wage policies: address impediments in product markets, infrastructure gaps, and business environment weaknesses. - Contain financial sector risks: reconsider elements of the Financial Services Law (FSL) and strengthen supervisory and regulatory framework. ### Fiscal framework and public finances — key figures and scenarios - Public sector deposits: 18 percent of GDP (September 2017). - Primary deficit that would stabilize debt: about 2 percent of GDP versus current primary deficit of 6.3 percent of GDP. - Gas and minerals: over 70 percent of exports and about 20 percent of fiscal revenues. - Exports concentration: 45 percent of total exports concentrated on Brazil and Argentina. - Baseline projects reduction in public investment from about 15 percent of GDP in 2016 to 11 percent in 2022. - Nonhydrocarbon primary deficit forecast: decline from 9.6 percent of GDP to 5.3 percent of GDP by 2022 (about 0.7 percent annually on average). - Public debt-to-GDP projected: rise from 46 percent in 2016 to about 54 percent by 2022. - Illustrative PDES scenario: if public investment remained around 15–20 percent of GDP, overall fiscal deficit would widen to about 15 percent of GDP over the medium term and public debt would rise to about 90 percent of GDP in 2022. - Staff “active” scenario: target reduction in the non-hydrocarbon deficit by about 1.2 percent per year; net debt would remain under 42 percent of GDP in 2022. ### Fiscal adjustment priorities and measures - Spending-side measures: - Streamline public investment and strengthen its management; capital spending rose on average by about 20 percent annually. - Redirect resources toward priority areas like health and electricity provision. - Gradually reduce public sector wage bill: wage bill rose by over 2 percentage points since 2012; restraint could yield savings of up to 2 percentage points of GDP. - Reallocate universal subsidies to directed social programs: energy subsidies about 2 percent of GDP before tax, or almost 5 percent of GDP after tax; around 63 percent of benefits accrue to the non-poor (World Bank). - Revenue measures: - Introduce a progressive personal income tax (PIT) or reform existing VAT complementary system; a full-fledged PIT could raise additional revenue of around 1.0 percent of GDP. - Institutional strengthening: - Implement a full-fledged medium-term fiscal framework (MTFF) with a multi-year budget covering all public-sector entities. - Present NFPS accounts disaggregated including and excluding hydrocarbon-related expenditures and revenues. - Budget projections should be externally independently assessed. ### Ensuring monetary policy supports stability and sustainability - Central bank stance: - Central bank rates are estimated below levels suggested by macro conditions and the Taylor Rule. - BCB could normalize monetary conditions as inflation rises toward the authorities’ medium-term projection of 4.5 percent. - Normalization could remove the need for the regulation limiting insurance companies’ investment abroad (ceiling set at 10 percent). - Central bank exposure: - BCB’s exposure to SOEs has risen substantially; staff recommend phasing out direct central bank lending to enterprises and shifting to central government budget or the financial sector. - Need to enhance BCB capacity to forecast and manage banking system liquidity. ### Improving the social safety net and subsidy reform - Progress to date: - From 2000–2014 Bolivia lowered the poverty rate by one third to under 39 percent and reduced inequality supported by higher hydrocarbon revenues. - Targeting concerns: - Much social spending benefits the non-poor due to large fuel subsidies and unrestricted tertiary education access. - World Bank estimated over 63 percent of fuel subsidy benefits accrue to the non-poor. - IMF (2016) concluded energy subsidies are a highly ineffective way to redistribute income. - Recommendation: - Consider long-term subsidy reform models similar to Brazil and Morocco, reducing across-the-board energy subsidies while strengthening targeted social protection. ### Financial stability and inclusion — key vulnerabilities and recommendations - Effects of the Financial Services Law (FSL): - Rapid credit growth directed to specific sectors and social housing; interest rate caps and credit quotas may have hindered credit assessment. - Distortions include lending skewed away from medium and small-size borrowers. - Stress test results: - If NPL ratio doubled, about half of banks would need to raise capital to meet regulatory requirements. - Under a quadrupling in NPLs (one-in-twenty year shock), most banks would face a capital shortfall. - Aggregate losses under stress tests: 0.1 and 0.8 percent of GDP respectively. - Aggregate LCR estimated at about 89 percent versus 110 percent a year ago. - Policy recommendations: - Modify FSL provisions: remove targets on productive sector lending; phase out interest rate caps. - Consider market-oriented mechanisms to improve financial access (e.g., partial credit guarantees). - Monitor housing lending and publish a housing price index. - ASFI should accelerate risk-based supervision, enhance analytical capacity, conduct rigorous stress tests, and coordinate with APS. - Strengthen AML/CFT framework and approve and implement the AML/CFT national action plan. - Strengthen emergency liquidity policies by broadening eligible collateral with appropriate prior solvency assessment and haircuts. ### Authorities’ views (summarized) - Government emphasizes supportive macroeconomic policies, use of buffers, and a state-led development model. - Authorities disagree with staff on growth outlook and fiscal tightening; they view staff projections as pessimistic and expect returns from development plans to boost growth. - They defend BCB lending to SOEs as financing strategic investment and defend FSL credit policies as improving intermediation and inclusion. - Maintain commitment to exchange rate stability and universal subsidies while building a beneficiary database and targeting measures. ### Staff appraisal and policy priorities (synthesis) - Need to rebalance policies given low commodity price outlook despite socio-economic advances from 2004–14. - Macro and fiscal actions: - Tighten fiscal policy and reallocate social spending to anchor stability and preserve social gains. - Moderate reduction in the non-hydrocarbon deficit by about 1.2 percent of GDP per year. - Most tightening from spending side: reduce wage bill-to-GDP ratio and streamline public investment toward priority infrastructure, health and education. - Consider introducing a progressive personal income tax for high income earners and reform hydrocarbon and mineral sector taxation. - Structural fiscal reforms: - Adopt MTFF, reform fiscal federalism, strengthen SOE legal framework and include all subsidiaries in NFPS. - Monetary and financial sector: - Fortify central bank independence; withdraw monetary stimulus as inflation rises toward 4.5 percent. - Unwind BCB exposure to SOEs; modify FSL provisions; improve ASFI supervision and capacity. - Data and transparency: - Complete work to rebase GDP. - Publish macroeconomic data on a pre-announced schedule. - Compile external debt data according to BPM6 norms. ### Annex I — External Stability Assessment (highlights) - REER: INS-based REER stood 1.0 percent below year-earlier level as of July 2017 and about 6 percent below end-2016; REER remains above its November 2011 level. - Natural gas prices rose substantially in 2017; values of exports through August up 20 percent year-on-year. - Gross international reserves stabilized around US$9.93 billion (October); projected year-end $9.9 billion equals 168 percent of the ARA metric. - Natural gas production prospects uncertain; mega-camps Sábalo and San Alberto account for 40 percent of production and are declining. - Current account deficit in 2017 expected at 5.8 percent of GDP. - EBA-lite assessment results: - Current account approach: to close gap with expected deficit of 5.8 percent of GDP, a real depreciation of around 30 percent would be needed. - REER approach: indicates an overvaluation of around 26 percent. - External sustainability approach: maintaining NIIP at -7.5 percent of GDP would require a current account deficit of 0.8 percent of GDP, entailing a real depreciation of 18 percent. - EBA-lite illustrative numbers (2016/2017): - Current account norm: -0.2 percent of GDP; Current account balance (projection): -5.8 percent of GDP; Gap: -5.6 percent of GDP; REER overvaluation: 29.9 percent. - External Stability Scenario 1: REER overvaluation: 18.2 percent. - External Stability Scenario 2: REER overvaluation: 17.1 percent. ### Debt Sustainability Analysis — Baseline and stress tests (selected) - Baseline projections (2017–2022): - Real GDP growth: 4.0, 3.9, 3.8, 3.7, 3.7, 3.7 (2017–2022). - Inflation (GDP deflator): 4.7, 4.3, 3.8, 3.9, 3.7, 3.6 (2017–2022). - Effective interest rate: 2.3, 2.4, 2.7, 3.0, 3.4, 3.6 (2017–2022). - Primary balance (percent of GDP): -6.3, -5.6, -4.7, -4.0, -3.4, -2.9 (2017–2022). - Nominal gross public debt (percent of GDP): 36.6 (2015), 40.6 (2016), 46.2 (2017), 49.8 (2018), 51.6 (2019), 52.8 (2020), 53.6 (2021), 53.9 (2022). - Under baseline, gross financing needs projected at 7–9 percent of GDP in 2018–22. - Stress tests: - Primary balance shock (1.4 percent of GDP): Debt/GDP rises to 56.8 percent in 2019 and to 58.7 percent in 2022 (about 4.8 percentage points above baseline for 2022). - Growth shock (−1 percentage point during 2018–19): Debt/GDP increases to 55.1 in 2019 and 56.9 percent in 2022 (3.0 percentage points above baseline for 2022). - Interest rate shock (real rates +360 bps 2018–22): Debt/GDP rises to 57.1 percent in 2022 (3.2 percentage points above baseline). - Exchange rate shock (REER depreciates 20 percent in 2018): Debt/GDP increases to 54.8 percent in 2018 and to 57.6 percent in 2022 (3.7 percentage points above baseline). - Combined shock (simultaneous): Debt/GDP rises to 60.6 percent in 2018, 64.5 percent in 2019, and 67.7 percent in 2022 (13.8 percentage points above baseline for 2022). - Contingent liability shock (one-time non-interest expenditure = 10 percent of banking sector assets): Debt/GDP increases to 60.6 percent in 2018 and to 62.5 percent in 2022 (8.6 percentage points above baseline). ### SOEs, public investment efficiency, and fiscal risks - SOE stress scenarios (oil-price based): - Baseline cumulative financing need of Bs 46 billion in 2017–22 (about 17 percent of 2017 GDP). - Scenario I (oil prices to US$35/bbl): cumulative deficit around Bs 77 billion. - Scenario II (oil prices to US$60/bbl by 2022): overall balance turns positive after three years. - SOE historical operations (2008–2016, in millions of bolivianos): - Total Revenue (2008–2016(p.)): 34,310; 30,178; 31,760; 42,363; 51,682; 62,752; 68,309; 54,516; 41,783. - Total Expenditure (2008–2016(p.)): 30,382; 27,633; 29,309; 39,073; 51,814; 64,263; 70,285; 60,020; 50,134. - Overall Balance (2008–2016(p.)): 3,928; 2,545; 2,451; 3,290; -132; -1,511; -1,975; -5,503; -8,351. - YPFB Overall Balance (2008–2016(p.)): 4,425; 1,037; 1,208; 3,195; 2,064; -733; 628; -2,302; -3,330. - Net Financing from the Central Bank (2008–2016(p.)): -5,373; -817; -1,840; -1,438; 1,756; 2,143; 2,076; 6,523; 8,315. - Memorandum crude oil price (US$ per bbl): 100; 62; 79; 95; 94; 88; 89; 35; 143. - Public investment efficiency: - Public investment grew roughly 20 percent nominally per year, reaching 14 percent of GDP in 2015. - Average efficiency gap in Bolivia: about 41 percent (comparators: EMs 27 percent; Latin America 29 percent). - PIMA findings: strengths in budget comprehensiveness and transparency; weaknesses in project management and planning. ### Growth potential and reform simulations - Potential growth estimates: - Output gap in 2017: positive, ranging from 0.2 percent to 1 percent of potential output. - Potential growth in 2017: estimated at 4–5 percent. - Medium-term baseline: potential growth moderates to 3.5–4.0 percent, central projection 3.7 percent. - DSGE and WHDMOD simulation findings: - A 1 percent increase in government consumption: short-term growth boost, mostly temporary, with higher inflation and real appreciation. - A 25 percent decline in oil prices: reducing spending yields better fiscal and reserve outcomes and better growth perspectives than increasing expenditures. - WHDMOD: permanent fiscal consolidation of 2 percent of GDP (half public investment cuts, half transfers) lowers output short-term but boosts long-term potential and private investment, especially with lower sovereign premia and structural reforms. - Illustrative reform package: - "0.2 percentage points per year over 10 years and TFP increase by 0.2 percent each year for 10 years (starting 2 years later)." - Net impact: GDP below baseline until 2021, then rises notably above baseline with substantial output gains by 2026. ### Data, transparency, and SDDS - 2002 SDDS Assessment mission noted Bolivia close to meeting SDDS requirements (October 2014 assessment); SDDS subscription not yet achieved. - Selected dataset timing/frequency (as of November 5, 2017): Exchange Rates (Daily), International Reserve Assets (Daily), Reserve/Base Money (Sep. 2017; reported Oct. 2017), Broad Money (Aug. 2017; reported Oct. 2017), CPI (Oct. 2017; reported Nov. 2017), GDP/GNP (Q2 2017; reported Oct. 2017), etc. - Staff recommendation: complete GDP rebasing and publish macro data on a pre-announced schedule. *Source: IMF staff report — BOLIVIA, STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (November 27, 2017).* ### 10.9 Gini index (2015) 45.8 ### cr17395-boliviabundle - 10.9 Gini index (2015) 45.8 ### Social and human development indicators - Gini index (2015): 45.8 - Life expectancy at birth (years, 2015): 69 - Adult literacy rate (percent, 2015): 92.5 - Mortality rate, under-5 (per thousand, 2016): 36.9 - Gross enrollment ratio, primary, both sexes (2015): 97.1 ### Macroeconomic baseline projections (selected) - Real GDP (annual percent changes): 2014: 5.5; 2015: 4.9; 2016: 4.3; 2017: 4.0; 2018: 3.9; 2019: 3.8 - Real GDP excluding hydrocarbons (annual percent changes): 2014: 5.4; 2015: 5.4; 2016: 5.0; 2017: 5.3; 2018: 4.6; 2019: 3.9 - Nominal GDP (annual percent changes): 2014: 7.6; 2015: 0.0; 2016: 2.4; 2017: 8.7; 2018: 8.4; 2019: 7.8 - CPI inflation (period average): 2014: 5.8; 2015: 4.1; 2016: 3.6; 2017: 3.1; 2018: 4.5; 2019: 4.5 ### Investment, savings, and external sector (selected) - Total investment (percent of GDP): 2014: 21.0; 2015: 20.3; 2016: 20.8; 2017: 20.3; 2018: 19.7; 2019: 19.0 - Of which: Public sector (percent of GDP): 2014: 12.4; 2015: 13.5; 2016: 13.0; 2017: 12.4; 2018: 12.0; 2019: 11.5 - Gross national savings (percent of GDP): 2014: 20.8; 2015: 14.2; 2016: 15.1; 2017: 14.4; 2018: 13.7; 2019: 13.4 - Current account (percent of GDP): 2014: 1.7; 2015: -5.7; 2016: -5.7; 2017: -5.8; 2018: -5.9; 2019: -5.5 - Exports of goods and services (percent of GDP): 2014: 42.1; 2015: 29.8; 2016: 24.1; 2017: 23.3; 2018: 22.7; 2019: 22.3 - Of which: Natural gas (percent of GDP): 2014: 18.1; 2015: 11.3; 2016: 6.0; 2017: 6.2; 2018: 5.6; 2019: 5.1 - Imports of goods and services (percent of GDP): 2014: 38.9; 2015: 35.6; 2016: 31.5; 2017: 29.4; 2018: 28.8; 2019: 28.3 - Financial account (percent of GDP): 2014: 2.3; 2015: -8.6; 2016: -6.9; 2017: -5.8; 2018: -5.9; 2019: -5.5 - Terms of trade index (percent change): 2014: 2.1; 2015: -23.1; 2016: -15.4; 2017: 6.9; 2018: -0.5; 2019: -2.8 ### Public finances and public debt (combined public sector) - Revenues and grants (percent of GDP): 2014: 39.9; 2015: 37.7; 2016: 33.2; 2017: 31.6; 2018: 31.6; 2019: 31.8 - Of which: Hydrocarbon related revenue (percent of GDP): 2014: 12.7; 2015: 9.1; 2016: 5.5; 2017: 5.0; 2018: 5.1; 2019: 5.0 - Expenditure (percent of GDP): 2014: 43.3; 2015: 44.6; 2016: 39.8; 2017: 39.0; 2018: 38.3; 2019: 37.8 - Current (percent of GDP): 2014: 28.2; 2015: 29.1; 2016: 25.0; 2017: 25.3; 2018: 25.2; 2019: 25.2 - Capital 2/ (percent of GDP): 2014: 15.0; 2015: 15.5; 2016: 14.8; 2017: 13.7; 2018: 13.1; 2019: 12.6 - Net lending/borrowing (overall balance) (percent of GDP): 2014: -3.4; 2015: -6.9; 2016: -6.6; 2017: -7.3; 2018: -6.7; 2019: -6.0 - Of which: Non-hydrocarbon balance (percent of GDP): 2014: -13.2; 2015: -14.0; 2016: -10.6; 2017: -10.6; 2018: -10.8; 2019: -10.1 - Total gross NFPS debt 3/ (percent of GDP): 2014: 37.0; 2015: 40.6; 2016: 46.2; 2017: 49.8; 2018: 51.6; 2019: 52.8 ### Reserves, money, and credit - Net Central Bank foreign reserves (in millions of U.S. dollars): 2014: 15,123; 2015: 13,056; 2016: 10,081; 2017: 9,875; 2018: 8,780; 2019: 7,518 - Net Central Bank foreign reserves (in months of imports of goods and services): 2014: 14.1; 2015: 13.2; 2016: 11.3; 2017: 10.9; 2018: 9.1; 2019: 7.4 - Credit to the private sector (annual percent changes): 2014: 15.0; 2015: 17.6; 2016: 14.8; 2017: 12.2; 2018: 11.2; 2019: 10.6 - Credit to the private sector (percent of GDP): 2014: 43.7; 2015: 51.4; 2016: 57.6; 2017: 59.5; 2018: 61.0; 2019: 62.6 - Broad money (annual percent changes): 2014: 15.6; 2015: 16.2; 2016: 2.6; 2017: 7.1; 2018: 8.7; 2019: 8.3 - Broad money (percent of GDP): 2014: 70.3; 2015: 81.7; 2016: 81.8; 2017: 80.6; 2018: 80.8; 2019: 81.2 ### Exchange rates and nominal GDP - Nominal GDP (in billions of U.S. dollars): 2014: 33.2; 2015: 33.2; 2016: 34.1; 2017: 37.0; 2018: 40.1; 2019: 43.3 - Bolivianos/U.S. dollar (end-of-period): 2015: 6.9; 2016: 6.9; 2017: 6.9 - REER, period average (percent change): 2014: 7.9; 2015: 0.1; 2016: 1.4 ### Recent macroeconomic developments and risks - Growth performance: - Real GDP growth averaged 5.1 percent during 2006–14; output expanded by 4.3 percent in 2016 and slowed to 3.6 percent in the first half of 2017. - Fiscal developments: - Overall fiscal deficit: 2015: -6.9 percent of GDP; 2016: -6.6 percent of GDP; projected 2017: -7.3 percent of GDP. - Gross (net) public debt rose to about 47 (29) percent of GDP in September 2017 from about 35 (15) percent of GDP in 2014. - Central Bank (BCB) financing to SOEs rose to about 13 percent of GDP in September 2017. - External developments: - Current account deficit: 2016: -5.7 percent of GDP; 2014: 1.7 percent of GDP. - Gross international reserves fell from US$15,123 million in 2014 to US$10,081 million in 2016 and US$9.93 billion at end-October 2017. - Financial sector: - Banking system overall capital adequacy ratio: 12.2 percent (all banks above regulatory minimum of 10 percent). - Reported non-performing loans (NPLs): end-2016: 1.5 percent; September 2017: 2.0 percent. - Banks’ return on equity around 13 percent, but profitability declining. ### Outlook summary and scenario sensitivities - Growth outlook: - Growth projected at 4 percent in 2017 and expected to converge to potential of 3.7 percent in the medium term as natural gas production moderates. - Risk factors: - Downside risks include persistent fiscal and external deficits, declining policy buffers, rising fiscal risks, and sensitivity to hydrocarbon activities and prices. - Absence of new gas discoveries could pose additional challenges. - Forecast gaps: - Fund growth forecasts from 2006‒15 under-predicted annual real GDP growth compared to actual outcomes, on average by 0.5 percentage point. ### Policy recommendations (staff) - Macroeconomic policy stance: - Gradually tighten monetary and fiscal policies to anchor macro stability. - Reduce the non-hydrocarbon primary balance by streamlining capital spending, lowering the wage bill-to-GDP ratio, and reinforcing the financial health of public enterprises. - Fiscal framework and public finances: - Strengthen the fiscal policy framework and maintain policy buffers. - Improve fiscal sustainability by limiting build-up in macro vulnerabilities tied to PDES investment plan. - Subsidies and social spending: - Remove fuel subsidies and improve the effectiveness of social spending. - Structural reforms: - Implement key structural reforms in labor and product markets. - Improve incentives for hydrocarbon and mining exploration. - Financial sector and inclusion: - Ensure monetary policy supports stability and sustainability. - Address credit and liquidity measures (e.g., adjustments to reserve requirements) while monitoring financial stability risks. *Source: IMF staff report — BOLIVIA, STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (November 27, 2017).* ### 11. Staff’s baseline medium-term outlook assumes only modest fiscal tightening and ### 11. Staff’s baseline medium-term outlook assumes only modest fiscal tightening and ### Baseline medium-term outlook — key projections and implications - Annual GDP growth is forecast to stabilize at 3.7 percent over the medium term, below the 5.0–5.8 percent laid out in the PDES. - Staff estimates suggest potential growth moderates over time with the end of the commodity boom. - Fiscal and external current account deficits are expected to persist over the medium term under the assumed policy stance, leading to: - a gradual increase in public debt, - a decline in government deposits, - foreign reserves declining steadily under a continued stabilized exchange rate. - Reserves projected to fall below the Fund’s reserve adequacy metric by 2019 and to about 8 percent of GDP (3 months of imports) by 2022. - Staff’s baseline represents their best estimate of likely policy stance over the medium term given current information. ### Risks to the baseline outlook - Downside risks to growth include: - more rapid depletion of gas reserves or failure to discover new fields; - lower-than forecast gas and minerals prices or reduced external demand from Brazil and Argentina preventing needed scaling up of investment in the hydrocarbons sector; - larger-than-expected tightening in global financial conditions and/or worsening in competitiveness related to the stabilized exchange rate; - credit growth volatility linked to lending quotas, interest rate caps, increased taxation of the sector, and liquidity issues; - political tensions related to the 2019 elections. - Upside risks include: - greater discoveries and exploitation of new gas reserves; - higher-than-expected hydrocarbon prices; - more rapid success bringing downstream hydrocarbon industrialization and electricity generation projects onstream; - commercial viability of lithium battery production (Bolivia has some of the largest lithium deposits in the world). ### POLICY ISSUES: Adapting to low commodity prices — strategic summary - Since the 2014 terms of trade shock, authorities have drawn on buffers to smooth domestic demand and support growth; this succeeded in supporting growth but had less positive effects on other indicators. - With lower commodity prices expected to last several years, policy rebalancing is needed to: - anchor stability, - raise confidence, - build upon earlier social progress. - Structural reforms are recommended to strengthen external competitiveness and support broader, durable growth. - Recommendation to start adjustments while buffers remain relatively large. ### A. Ensuring the policy stance is consistent with the macro-framework - Staff analysis indicates the real value of the boliviano is well above levels warranted by fundamentals and desirable policies. - Outlook for gas exports is increasingly uncertain. - Staff propose a four-pillar policy approach: - Gradually tightening monetary and fiscal policy: expenditure restraint within a credible medium-term fiscal framework combined with slower credit growth to restore external balance and limit financial sector risks. - Improving the focus of social spending: make fiscal policy less regressive and enhance effectiveness of social spending. - Concentrating on key structural reforms, including wage policies: address impediments in product markets, infrastructure gaps, and business environment weaknesses; high real wage growth affects external competitiveness under a fixed exchange rate. - Working to contain financial sector risks: reconsider elements of the FSL and continue strengthening supervisory and regulatory framework for financial institutions. ### B. Maintaining buffers and strengthening the fiscal policy framework - Current fiscal buffer and debt situation: - Public sector deposits equivalent to 18 percent of GDP (September 2017). - Primary deficit that would stabilize debt estimated at about 2 percent of GDP versus current primary deficit of 6.3 percent of GDP. - Gas and minerals represent over 70 percent of Bolivia’s exports and generate about 20 percent of fiscal revenues. - 45 percent of total exports are concentrated on just Brazil and Argentina. - Baseline fiscal projections and risks: - Baseline projects reduction in public investment from about 15 percent of GDP in 2016 to 11 percent in 2022. - Nonhydrocarbon primary deficit forecast to decline from 9.6 percent of GDP to 5.3 percent of GDP by 2022 (about 0.7 percent annually on average). - Public debt-to-GDP projected to rise from 46 percent in 2016 to about 54 percent by 2022. - Illustrative PDES scenario (ceteris paribus): - If public investment remained around 15–20 percent of GDP, overall fiscal deficit would widen to about 15 percent of GDP over the medium term, foreign reserves would be quickly depleted, and public debt would rise to about 90 percent of GDP in 2022. - Staff “active” scenario recommendation: - Target a reduction in the non-hydrocarbon deficit by about 1.2 percent per year. - This would bring debt down over the medium term close to current levels; net debt would remain under 42 percent of GDP in 2022. ### Fiscal adjustment priorities and measures - Emphasize spending-side measures to lower the non-hydrocarbon fiscal deficit: - Streamline public investment and strengthen its management: - Capital spending rose on average by about 20 percent annually; investment efficiency is relatively low. - Address weaknesses in central-local coordination, absence of competitive domestic infrastructure market, and project management shortcomings. - Redirect resources toward priority areas like health and electricity provision. - Gradually reduce the public sector wage bill as a percentage of GDP: - Wage bill rose by over 2 percentage points since 2012 and is above the regional average. - Restraint in wage and capital spending could yield savings of up to 2 percentage points of GDP. - Reallocate universal subsidies to directed social programs: - Energy subsidies amount to about 2 percent of GDP before tax, or almost 5 percent of GDP after tax, depending on oil prices. - Around 63 percent of the benefits from fuel subsidies accrue to the non-poor (World Bank). - Staff urge reducing across-the-board subsidies while gas prices are low and strengthening/tailoring the social safety net to offset impacts. - Consider select revenue measures: - Introduce a progressive personal income tax (PIT) or reform existing VAT complementary system, simplify tax regime for small companies, and reform hydrocarbon and mineral extraction sector taxation. - A full-fledged PIT could raise additional revenue of around 1.0 percent of GDP. - Institutional and fiscal framework strengthening: - Implement a full-fledged medium-term fiscal framework (MTFF) with a multi-year budget covering all public-sector entities. - MTFF should set a non-hydrocarbon primary balance target consistent with long-term debt sustainability and buffers for gas price volatility. - Present NFPS accounts disaggregated including and excluding hydrocarbon-related expenditures and revenues. - Budget projections should be externally independently assessed; main forecast risks identified and communicated. - Fiscal federalism and SOE oversight: - Fiscal Pact opportunity: ensure clear spending responsibilities, strengthen subnational own-source revenues (e.g., property and vehicle taxes), and base federal transfers on criteria other than hydrocarbon revenues. - Strengthen SOE monitoring and accountability: - Inputs for SOE operations should be based on market prices; phase out quasi-fiscal activities. - Include financial operations of all SOEs in NFPS fiscal accounts and subject them to public audits. - Consider reforming SOE legislative framework to clarify responsibilities, introduce corporate governance, improve budget approval/oversight, and define treatment/disclosure of quasi-fiscal activities. ### C. Ensuring monetary policy supports stability and sustainability - Central bank stance and reserves: - Central bank rates are estimated below levels suggested by macro conditions and the Taylor Rule; this may be appropriate with moderate inflation but has increased pressure on international reserves. - BCB could normalize monetary conditions as inflation rises toward the authorities’ medium-term projection of 4.5 percent. - Normalization could remove the need for the regulation limiting insurance companies’ investment abroad (ceiling set at 10 percent). - Central bank exposure and independence: - BCB’s exposure to SOEs has risen substantially and could undermine monetary policy credibility and the BCB balance sheet. - Staff maintain direct central bank lending to enterprises should be phased out and either shifted to the central government budget as transfers/net lending or undertaken by the financial sector. - Recent liquidity issues highlight need to enhance BCB capacity to forecast and manage banking system liquidity. ### D. Improving the social safety net - Progress to date: - From 2000–2014 Bolivia lowered the poverty rate by one third to under 39 percent and reduced inequality, supported by higher hydrocarbon revenues that expanded social programs (old age pension, school enrollment, maternity/infant benefits). - Targeting and regressivity concerns: - Much social spending benefits the non-poor due to large fuel subsidies and unrestricted tertiary education access and absence of direct taxes. - Gasoline prices in Bolivia are among the lowest across emerging and developing economies. - World Bank estimated over 63 percent of fuel subsidy benefits accrue to the non-poor. - IMF (2016) concluded energy subsidies are a highly ineffective way to redistribute income. - Recommendation: - Consider long-term subsidy reform models similar to Brazil and Morocco, reducing across-the-board energy subsidies while strengthening targeted social protection. *Source: cr17395-boliviabundle (IMF).* ### 26. The impact on the poor from removing energy subsidies could be enhanced by ### 26. The impact on the poor from removing energy subsidies could be enhanced by ### Improving effectiveness and targeting of social spending - Staff welcome recent reforms to the health insurance system to increase competition among providers and efforts to build an information system for all beneficiaries. - Suggested measures: - Reduce fuel subsidies, particularly for higher income earners. - Introduce progressive fees for higher-income users of some goods and services. - Continue efforts to enhance competition among providers. - Complete the work to create an information system for all beneficiaries of social programs. ### Pension system sustainability - Current system outcomes and projections: - The current defined-contribution system delivers a replacement rate of 35– 40 percent, which can be topped-up to 60–70 percent by the ‘solidarity system’. - Under current rules, the replacement rate is projected to fall to 20 percent over the very long term and the solidarity benefits to become negligible. - Reform options: - Raising the contribution rate to 17 percent and retirement age to 67 would boost replacement rates to around 50 percent. ### Broadening growth and strengthening competitiveness - Diagnosis: - Heavy reliance on the hydrocarbon sector and low private investment as a share of GDP. - Bolivia’s rank in the World Bank’s Doing Business index slipped three spots in 2018 to 152 out of 190. - Worsened position in the 2017 Global Competitiveness Report to 121 out of 138 due to weaknesses in innovation, institutions, goods and labor market inefficiencies. - Proven gas reserves have a relatively short horizon, increasing urgency to promote private investment. - Priority reforms that could deliver short-term impact: - Wage setting: - Real wages have risen substantially in recent years. - Reforms to consider: (i) establish objective criteria for wage increases (inflation and cost of living adjustments, productivity, market comparators); (ii) develop a modern Labor Code to set legal standards and remove government from private sector wage and hiring decisions. - Strengthen management of the public-sector wage bill and coordination with the budget process. - Product market reform: - Phase out controls on exports and domestic prices (including foodstuffs and fuel). - Reconsider creation of more public companies that may crowd out private business. - Offset adverse impact of higher prices on lower income groups with direct transfers and other social programs. - Hydrocarbons exploration: - Reform tax system to lower government’s take, allow expensing investments in exploration for tax purposes, introduce accelerated depreciation for development expenditure. - Removing the domestic fuel subsidy could raise incentives to investment. - Business environment: - Scope for improvement in “paying taxes,” “starting a business,” and “obtaining construction permits.” ### Ensuring financial stability and promoting financial inclusion - Effects of the Financial Services Law (FSL): - Rapid credit growth directed to specific sectors and social housing. - Interest rate caps and credit quotas may have hindered assessment of credit risk and return. - Smaller and specialized lenders reportedly experiencing difficulty, taking unfamiliar risks. - Distortions include lending skewed away from medium and small-size borrowers and driving small credits to informal lenders. - Stress test results and vulnerabilities: - Credit risk: - Staff stress tests suggest about half of banks would need to raise capital to meet regulatory requirements if the NPL ratio doubled from current low levels. - Under a more adverse scenario involving a quadrupling in NPLs (a “one-in-twenty year” shock), most banks would face a capital shortfall. - Aggregate losses would remain manageable combined, at 0.1 and 0.8 percent of GDP, respectively. - Liquidity risk: - Aggregate LCR estimated at about 89 percent versus 110 percent a year ago. - Extreme scenario (largest deposit withdrawal rates observed in recent years happening at all banks) suggests many banks would struggle to cover liquidity needs. - Policy recommendations: - Modify FSL provisions: remove targets on productive sector lending; phase out interest rate caps. - Consider market-oriented mechanisms to improve financial access (e.g., partial credit guarantees). - Monitor housing lending closely and finalize and publish a housing price index. - ASFI should accelerate making supervision more risk-based and forward-looking, enhance analytical capacity, conduct rigorous stress tests, and coordinate with APS for conglomerate supervision. - Strengthen AML/CFT framework and approve and implement the AML/CFT national action plan ahead of the 2020 GAFILAT assessment. - Strengthen emergency liquidity policies by broadening eligible collateral with appropriate prior solvency assessment and haircuts, and identify systemically important institutions for recovery and resolution planning. ### Authorities’ views (summarized) - Government sees supportive macroeconomic policies and use of financial buffers as effective in sustaining growth and preventing increases in poverty and inequality. - Authorities disagree with staff on growth outlook and fiscal tightening; they view staff projections as pessimistic and expect returns from development plans to boost growth. - They argue existing mechanisms limit persistent deficits among subnational governments and emphasize multi-year budgeting tools for local governments and SOEs. - Continue to support the economic development role of BCB and coordination with the Ministry of Finance; view BCB loans to SOEs as financing strategic investment projects. - Defend FSL credit policies as improving financial intermediation, supporting demand, and enhancing financial inclusion; note banks remain profitable with low NPLs. - Maintain commitment to exchange rate stability and to universal subsidies while building a beneficiary database and implementing measures to better target fuel subsidies (e.g., raising gas price for industrial users in 2017, higher priced fuel for luxury cars, restricting import of used cars and diesel-based engines). - Consulting with private sector on reducing impediments to investment and evaluating requests for greater flexibility to determine wage increases. - Remain committed to a state-led model for economic and social development and do not see sustainability risks in current policies. ### Staff appraisal and policy priorities - Need to rebalance policies given low commodity price outlook despite socio-economic advances from 2004–14. - Recommended macro and fiscal actions: - Tighten fiscal policy and reallocate social spending to anchor stability, raise confidence, and preserve social gains. - Moderate reduction in the non-hydrocarbon deficit by about 1.2 percent of GDP per year to stabilize public debt and slow reserve losses while preserving space for social development objectives. - Most fiscal tightening should come from the spending side; gradually reduce wage bill-to-GDP ratio and streamline public investment toward priority infrastructure, health and education and raise efficiency. - Consider introducing a progressive personal income tax for high income earners and reform hydrocarbon and mineral sector taxation to promote investment. - Structural fiscal reforms: - Adopt a comprehensive MTFF including a multi-year budget covering all public-sector entities, a target for the non-hydrocarbon primary balance, and independent and public assessments of risks. - Reform fiscal federalism toward predictability, clarity of responsibilities, scope for own-source revenues, and objective criteria for transfers. - Strengthen legal framework governing SOEs and include all subsidiaries in the NFPS. - Monetary and financial sector recommendations: - Fortify central bank independence; withdraw monetary stimulus as inflation rises toward the BCB’s projection of 4.5 percent. - Unwind BCB exposure to SOEs and shift direct central bank lending to the central government budget or the financial sector. - Modify FSL provisions as noted above and improve ASFI’s supervision, analytical capacity, and coordination with APS. - Approve and implement the AML/CFT national action plan. - Data and transparency: - Complete work to rebase GDP as a priority. - Publish macroeconomic data on a pre-announced schedule to improve transparency and efficiency. - Compile external debt data according to BPM6 norms following recent external sector TA. *Source: cr17395-boliviabundle - 26. The impact on the poor from removing energy subsidies could be enhanced by* ### 52. It is proposed that the next Article IV Consultation take place on the standard 12- ### It is proposed that the next Article IV Consultation take place on the standard 12-month cycle. ### Fiscal framework and public finances - Key policy recommendations and implementation status: - Improve the non-hydrocarbons balance — Partially implemented. "The non-hydrocarbons deficit was reduced in 2016, but remains at high levels." - Adopt a medium-term fiscal framework — In progress. Authorities adopted a five-year development plan, required public enterprises to prepare multi-year budgets, and created a Macro-Fiscal Unit at the Ministry of Finance. They used conservative oil price assumptions for the 2017 budget projections. - Fiscal aggregates (selected exact figures): - Combined public sector revenues: 39.9, 37.7, 33.2, 31.6, 31.6, 31.8, 31.8, 31.6, 31.4 (2014–2022, percent of GDP). - Hydrocarbon related revenue: 12.7, 9.1, 5.5, 5.0, 5.1, 5.0, 5.0, 4.9, 4.7 (2014–2022, percent of GDP). - Expenditure: 43.3, 44.6, 39.8, 39.0, 38.3, 37.8, 37.3, 36.6, 36.0 (2014–2022, percent of GDP). - Net lending/borrowing (overall balance): -3.4, -6.9, -6.6, -7.3, -6.7, -6.0, -5.5, -5.0, -4.7 (2014–2022, percent of GDP). - Non-hydrocarbon balance: -13.2, -14.0, -10.6, -10.6, -10.8, -10.1, -8.4, -7.6, -7.1 (2014–2022, percent of GDP). - Primary balance: -2.4, -5.9, -5.6, -6.3, -5.6, -4.7, -4.0, -3.4, -2.9 (2014–2022, percent of GDP). - Nonfinancial public sector gross public debt: 37.0, 40.6, 46.2, 49.8, 51.6, 52.8, 53.6, 53.9, 53.9 (2014–2022, percent of GDP). - Policy recommendations (from Risk Assessment / fiscal guidance): - Introduce fiscal adjustment (revenue and expenditure measures) if energy prices decline. - Narrow the non-hydrocarbon fiscal deficit to ensure debt sustainability and keep reserves at comfortable levels. ### Monetary and exchange rate policy - Key past recommendations and implementation status: - Discontinue central bank lending to SOEs — Not implemented. "Central bank lending to public corporations has continued." - Gradually allow greater exchange rate flexibility — Not implemented. "There has been a stable exchange rate vis-à-vis U.S. dollar since November 2011." - Monetary and financial indicators (selected exact figures): - CPI inflation (period average): 5.8, 4.1, 3.6, 3.1, 4.5, 4.5, 4.5, 4.5, 4.5 (2014–2022, percent). - Real GDP growth: 5.5, 4.9, 4.3, 4.0, 3.9, 3.8, 3.7, 3.7, 3.7 (2014–2022, percent). - Real GDP excluding hydrocarbons: 5.4, 5.4, 5.0, 5.3, 4.6, 3.9, 3.8, 4.0, 4.0 (2014–2022, percent). - Net Central Bank foreign reserves (in millions of U.S. dollars): 15,123; 13,056; 10,081; 9,875; 8,780; 7,518; 6,393; 5,151; 4,178 (2014–2022). - Net Central Bank foreign reserves (in percent of GDP): 45.5, 39.3, 29.6, 26.7, 21.9, 17.4, 13.7, 10.2, 7.6 (2014–2022, percent of GDP). - Credit to the private sector (annual growth): 15.0, 17.6, 14.8, 12.2, 11.2, 10.6, 10.1, 10.0, 9.9 (2014–2022, percent). - Broad money (annual growth): 15.6, 16.2, 2.6, 7.1, 8.7, 8.3, 8.2, 8.6, 8.6 (2014–2022, percent). - Policy recommendations: - Close financial supervision to prevent risks from building in the financial sector. - Consider wage reform that allows real wage to grow at productivity rate and gradual exchange rate flexibility to address overvaluation. ### Financial stability and supervision - Implementation of financial sector recommendations: - Continue strengthening supervision — In progress. Actions: credit registry coverage expanded; depositor protection fund created; regulatory requirements strengthened (inclusion of market risks to capital requirements; increase of primary capital requirement from 5 percent to 7 percent of risk-weighted assets and contingencies); guidance on operational and interest risks; Financial Stability Council met first in August 2015; IMF TA in 2017 on bank supervision and regulation. - Modify interest rate caps and credit quotas — Limited progress. "Financial insitutions have been given five years to comply, with intermediate annual targets... July 2015 decree watered down the meaning of productive sectors..." Small lenders face difficulties meeting targets. - Financial soundness indicators (latest available, selected): - Regulatory Capital to Risk-Weighted Assets: (cross-country chart context; Bolivia shown among comparators). - Non-performing Loans to Total Gross Loans: (chart indicates low NPLs; exact values not tabulated in source text). - Central bank credit to state-owned enterprises continues to expand (figure series shown). - Recommended responses (from Risk Assessment Matrix): - Modify key provisions of the Financial Services Law (interest rate caps, credit quotas, timelines) via decrees if material risks emerge. - Close financial supervision and monitoring. ### External sector and reserves - External performance (selected exact figures and projections): - Current account (in percent of GDP): 1.7, -5.7, -5.7, -5.8, -5.9, -5.5, -4.9, -4.6, -4.4 (2014–2022). - Exports of goods and services (percent of GDP): 42.1, 29.8, 24.1, 23.3, 22.7, 22.3, 22.5, 22.4, 22.5 (2014–2022). - Imports of goods and services (percent of GDP): 38.9, 35.6, 31.5, 29.4, 28.8, 28.3, 28.3, 28.1, 28.2 (2014–2022). - Exports (in millions of U.S. dollars): 12,810; 8,673; 7,000; 7,381; 7,757; 8,124; 8,771; 9,385; 10,231 (2014–2022). - Natural gas exports (in millions of U.S. dollars): 6,011; 3,771; 2,049; 2,312; 2,260; 2,226; 2,394; 2,403; 2,377 (2014–2022). - Net BCB international reserves (in millions of U.S. dollars): 15,123; 13,056; 10,081; 9,875; 8,780; 7,518; 6,393; 5,152; 4,178 (2014–2022). - Months of imports of goods and services: 14.1, 13.2, 11.3, 10.9, 9.1, 7.4, 5.8, 4.4, 3.2 (2014–2022). - External risk factors and recommended responses (from Risk Assessment Matrix): - Lower energy prices (↓/Low) — High impact. Recommended: introduce fiscal adjustment (revenue and expenditure measures), improve business climate to increase private sector participation in hydrocarbons, ensure stabilized exchange rate regime is supported by fiscal, monetary, wage, and structural policies. - Significant slowdown in key EMs/frontier economies including Brazil (↓/Medium) — High impact. Recommended: reduce current account deficit, contain wage increases, restrain government expenditure, promote nontraditional exports via structural reforms. - Tighter global financial conditions (↓/High) — Low to Medium impact. Recommended: wage reform, gradual exchange rate flexibility, structural reforms, and ensure policy credibility and close financial supervision. ### Growth, sectoral developments, and structural issues - Growth and inflation context: - Real GDP growth: 5.5, 4.9, 4.3, 4.0, 3.9, 3.8, 3.7, 3.7, 3.7 (2014–2022, percent). - CPI inflation (period average): 5.8, 4.1, 3.6, 3.1, 4.5, 4.5, 4.5, 4.5, 4.5 (2014–2022, percent). - Real GDP excluding hydrocarbons outpaced overall growth in several years: 5.4, 5.4, 5.0, 5.3, 4.6, 3.9, 3.8, 4.0, 4.0 (2014–2022, percent). - Structural/reform recommendations: - Resolve legal and regulatory uncertainty; ensure transparent and incentive compatible hydrocarbons and mining fiscal regimes — Some progress. A hydrocarbon incentives law approved in December 2015 provides incentives for crude oil and condensates on a dollar per barrel of production basis; likely to stimulate production from existing fields but "falls short regarding making exploration investments substantially more attractive." - Improve the environment for private sector participation in the hydrocarbons sector and advance proactively on contract negotiations with Brazil (related to an export supply contract expiring in 2019). ### Risks and recommended policy priorities (synthesis from Risk Assessment Matrix) - Major downside risks identified: - Lower energy prices, external demand slowdown (China/Brazil), tighter global financial conditions, distortions from Financial Services Law, declining natural gas production, and delay in policy adjustment. - Recommended high-priority actions: - Narrow the non-hydrocarbon fiscal deficit to support debt sustainability and reserves. - Implement fiscal adjustment if energy prices fall, including both revenue and expenditure measures. - Improve business climate and incentives for private participation in hydrocarbons and mining. - Modify problematic provisions of the Financial Services Law (interest rate caps, credit quotas, timelines) if material risks emerge. - Maintain close financial supervision to guard against liquidity and credit-quality risks. - Consider gradual exchange rate flexibility and wage reform aligned to productivity to address overvaluation and competitiveness. *Source: IMF staff report excerpts for Bolivia (content unit cr17395-boliviabundle).* ### Annex I. External Stability Assessment ### Annex I. External Stability Assessment ### A Respite in the External Sector - The real effective exchange rate (INS-based REER) stood 1.0 percent below its year-earlier level as of July 2017 and about 6 percent below its end-2016 level. - The REER remains above its level in November 2011—the start of the stabilized arrangement. - Natural gas prices rose substantially in 2017, resulting in a 20 percent increase in the values of exports through August compared to a year ago, despite a slowdown in the volume of exports to Brazil. - International prices for metals have jumped since late last year and are expected to remain above last year’s medium-term paths; petroleum price path in the October 2017 WEO is rising but weaker than at the time of the last consultation. - Export volumes: shipments of natural gas to Brazil were weak in early 2017 and total natural gas exports are expected to be lower than a year ago; the volume of mineral exports has declined; non-traditional exports declined; agricultural products (especially soy) showed a significant decline through August partly due to export restrictions. - Gross international reserves stabilized during 2017 at around US$9.93 billion (October); the projected year-end level of $9.9 billion constitutes 168 percent of the Assessing Reserve Adequacy (ARA) metric (above the recommended 100–150 percent range). - Recent reserve stability largely reflects two events: - the issuance of an international bond for US$1 billion in March; and - a change in reserve requirements on foreign currency-denominated deposits by the central bank (BCB) in May 2017, which were held abroad. - Under the current regulation, transactions related to the changed reserve requirement will be unwound by January 2018, making the impact on international reserves unclear. ### A Complicated Outlook - Natural gas production prospects are highly uncertain despite the hydrocarbon incentive law; the decree allows costs to be recovered only when exploration is successful, shifting more uncertainty and risks to the private sector. - Domestic production factors: - Ongoing exploration activities have not yielded new discoveries. - Mega-camps Sábalo and San Alberto account for 40 percent of Bolivia’s production and have continued declining production. - Incahuasi field launched in August 2016 but planned expansion has not offset declines in existing fields. - Authorities expect production increases from new fields including Boyuy and Huacareta and have prioritized 13 projects to explore, but staff notes low probability of success and lags between discovery and production; output will likely decrease over the 2–4 year horizon. - External competition: - Bolivia is linked by pipeline to Brazil and Argentina, both developing domestic energy resources (Brazil’s pre-salt oilfields and Argentina’s Vaca Muerta shale), which could compete with Bolivian exports. - The current supply contract with Brazil is set to expire in 2019 and a successor arrangement is being negotiated. - Current account and reserves projections: - The current account deficit in 2017 is expected at 5.8 percent of GDP—slightly wider than in 2016. - Natural gas exports are forecast to decline in the medium term in percent of GDP. - Staff assume industrialized goods and non-traditional exports will increase over time; agricultural exports expected to rise with broader access to domestically produced fertilizer from the Urea plant that opened in 2017; 75 percent of Urea production is set to be exported in early 2018 (authorities negotiating terms with neighboring countries). - Imports will stabilize with completion of key public investment projects in coming years; current account deficit expected to remain within recent short-term range and improve slightly in the medium term. - Baseline projections assume another international bond placement to slow reserve loss; staff forecast reserve losses manageable for several years and reserves within adequate ranges until 2019–20, when they would fall below the ARA metric. ### Competitiveness Challenges - Export structure and performance: - Combined share of minerals and hydrocarbons rose from about 50 percent in 2003 to 72 percent in 2016; share of other nontraditional exports decreased. - Increase in Bolivia’s share of world exports largely driven by commodity price movements and rising shares of natural resource exports; in volume terms, Bolivia’s share has shown little change since 2003. - Bolivia’s export sophistication index has improved slightly over the past 12 years; performance stands out compared to regional declines in sophistication. - Competitiveness constraints: - Wages: government raised minimum wages by 14 percent per year on average between 2006 and 2016; inflation averaged 6 percent over the same period, so real minimum wages increased substantially and are now close (measured in dollars) to levels in other South American countries. - Authorities announced an increase of 10.8 percent in the minimum wage in May 2017 (Ordered in Decreto Supremo 3161 of May 1, 2017). - Wages more generally have exceeded inflation and labor productivity in recent years. - Structural bottlenecks: Bolivia’s rankings slipped in international business surveys: - WEF 2016–17 Global Competitiveness Index ranking slipped from 117th to 121st with weaknesses in innovation, institutions, and goods and labor market efficiency. - 2018 World Bank Doing Business ranking slipped three spots to 152nd out of 190 economies. - Logistics Performance Index ranking fell between 2014 and 2016. ### Real Exchange Rate Assessment - Methodology and settings: - Desirable policy settings used by staff include a cyclically adjusted fiscal balance of -2.9 percent of GDP (consistent with stabilizing debt at the projected 2017 level of 46 percent of GDP), a desired change in reserves of 0.0 percent of GDP, real interest rate at current level, and Chinn and Ito capital control index benchmark of 0.467. - Staff re-estimated EBA-lite equations for the current account and REER using a sample of WEO-identified fuel exporting countries. - Private credit used is 44.7 percent of GDP; capital controls index setting used is 0.5. - Assessment results: - Current account approach: the norm calls for the current account to be about balanced; to close the gap with the expected deficit of 5.8 percent of GDP, a real depreciation of around 30 percent would be needed. - REER approach: the REER model indicates an overvaluation of around 26 percent. - External sustainability approach: - Bolivia’s NIIP peaked at a net creditor position of around 14 percent of GDP in 2014. - With the US$1 billion sovereign bond, staff project a NIIP excluding gold equivalent to -7.5 percent of GDP in 2017. - Maintaining NIIP at -7.5 percent of GDP would require a current account deficit of 0.8 percent of GDP, entailing a real depreciation of 18 percent. - A development-oriented target of -11.3 percent of GDP (the level in 2007) would require a current account deficit of 1.0 percent of GDP, consistent with a real depreciation of 17 percent. - EBA-lite summary table (based on data for 2016 and projections for 2017; regressions use sample restricted to WEO fuel exporters): - Current account norm: -0.2 percent of GDP; Current account balance (projection): -5.8 percent of GDP; Gap: -5.6 percent of GDP; Elasticity: -0.192; REER overvaluation: 29.9 percent. - External Stability Scenario 1 (Stabilize 2017Q1 NFA level): Current account norm: -0.7 percent of GDP; Current account balance: -4.4 percent of GDP; Gap: -3.7 percent of GDP; Elasticity: -0.20; REER overvaluation: 18.2 percent. - External Stability Scenario 2 (Stabilize at 11.3% of GDP): Current account norm: -0.9 percent of GDP; Current account balance: -4.4 percent of GDP; Gap: -3.5 percent of GDP; Elasticity: -0.20; REER overvaluation: 17.1 percent. *Annex I. External Stability Assessment (cr17395-boliviabundle).* ### 3.9 percent in 2017 and 2018, respectively, and declines to 3.7 percent thereafter. Inflation is ### Bolivia Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario ### Baseline projections and macro-fiscal assumptions - Real GDP growth: 4.0, 3.9, 3.8, 3.7, 3.7, 3.7 (for 2017–2022 respectively). - Inflation (GDP deflator): 4.7, 4.3, 3.8, 3.9, 3.7, 3.6 (for 2017–2022 respectively). - GDP deflator projected to increase by 4– 5 percent during 2017–22. - Inflation is projected at about 4.5 percent in the medium term. - Effective interest rate: 2.3, 2.4, 2.7, 3.0, 3.4, 3.6 (for 2017–2022 respectively). - Primary balance (percent of GDP): -6.3, -5.6, -4.7, -4.0, -3.4, -2.9 (2017–2022). - Primary (noninterest) revenue + grants (percent of GDP, cumulative 2017–22): 36.6, 37.7, 33.2, 31.6, 31.6, 31.8, 31.8, 31.6, 31.4 (annual listed in table). - Primary (noninterest) expenditure (percent of GDP, cumulative 2017–22): 33.8, 43.6, 38.8, 38.0, 37.2, 36.5, 35.8, 35.0, 34.3 (annual listed in table). - Nominal gross public debt (percent of GDP): 36.6 (2015), 40.6 (2016), 46.2 (2017), 49.8 (2018), 51.6 (2019), 52.8 (2020), 53.6 (2021), 53.9 (2022). - Net public debt (percent of GDP): 25.4, 33.3, 39.5, 44.2, 47.1, 49.4, 50.9, 51.7, 52.1 (2015–2022 sequence in table). - Public gross financing needs: -2.8, 5.9, 8.7, 9.6, 8.8, 8.4, 8.0, 7.6, 7.4 (2015–2022 sequence in table). - Under baseline assumptions, gross financing needs of the public sector are projected at 7–9 percent of GDP in 2018–22, compared with about 9 percent of GDP in 2016. - Public debt-to-GDP ratio is projected to increase to about 54 percent in 2022. ### Stress tests and scenario outcomes - Primary balance shock: - Shock equal to 1.4 percent of GDP (50 percent of the 10-year historical standard deviation of the primary balance-to-GDP ratio). - Debt/GDP rises to 56.8 percent in 2019 and to 58.7 percent in 2022. - Impact: about 4.8 percentage points higher than baseline for 2022. - Assumption: increase in interest rates of 25bps for every 1 percent of GDP worsening in the primary balance. - Growth shock: - Real GDP growth lower by 1 percentage point during 2018–19 (100 percent of the 10-year historical standard deviation). - Debt-to-GDP increases to 55.1 in 2019 and 56.9 percent in 2022. - Impact: 3.0 percentage points higher than baseline for 2022. - Interest rate shock: - Real interest rates increase by about 360 basis points during 2018–22 (difference between the average real interest rate in 2007–16 and the highest historical real interest rate). - Debt-to-GDP gradually increases to 57.1 percent in 2022. - Impact: 3.2 percentage points higher than baseline for 2022. - Exchange rate shock: - Real effective exchange rate depreciates by 20 percent in 2018. - Debt-to-GDP increases to 54.8 percent in 2018 and to 57.6 percent in 2022. - Impact: 3.7 percentage points higher than baseline for 2022. - Combined shock: - Simultaneous combination of the previous four shocks. - Debt-to-GDP rises to 60.6 percent in 2018, 64.5 percent in 2019, and 67.7 percent in 2022. - Impact: 13.8 percentage points higher than baseline for 2022. - Contingent liability shock: - One-time increase in non-interest expenditures in 2018 equivalent to 10 percent of banking sector assets, combined with lower growth and lower inflation in 2017–18 (growth reduced by 1 standard deviation). - Debt-to-GDP increases to 60.6 percent in 2018 and to 62.5 percent in 2022. - Impact: 8.6 percentage points higher than baseline for 2022. ### Debt dynamics: contributions and flows - Change in gross public sector debt (cumulative, percent of GDP): -3.4, 3.6, 5.6, 3.6, 1.7, 1.3, 0.8, 0.3, 0.07 (annual 2015–2022 sequence). - Identified debt-creating flows (annual totals, percent of GDP): -6.7, 6.9, 5.7, 3.6, 2.8, 2.3, 1.7, 1.3, 1.0 (2015–2022 sequence). - Primary deficit contribution to debt: -2.8, 5.9, 5.6, 6.3, 5.6, 4.7, 4.0, 3.4, 2.9 (2015–2022 sequence). - Automatic debt dynamics contribution (percent of GDP): -3.5, 1.0, 0.0, -2.8, -2.7, -2.4, -2.3, -2.1, -1.9 (2015–2022 sequence). - Interest rate/growth differential (percent of GDP): -3.1, 1.0, 0.0, -2.8, -2.7, -2.4, -2.3, -2.1, -1.9 (2015–2022 sequence). - Of which: real interest rate contribution: -1.4, 2.8, 1.7, -1.1, -1.0, -0.6, -0.5, -0.2, -0.1. - Of which: real GDP growth contribution: -1.8, -1.8, -1.7, -1.7, -1.8, -1.8, -1.8, -1.8, -1.9. - Residual, including asset changes (percent of GDP): 3.3, -3.3, -0.1, 0.1, -1.1, -1.0, -1.0, -1.0, -1.0, cumulative -5.0 (annual sequence shown). ### External sector sustainability and external debt - External debt (percent of GDP): 15.4 (2012), 17.0 (2013), 25.7 (2014), 28.7 (2015), 31.5 (2016), 33.6 (2017), 35.4 (2018), 36.4 (2019), 36.4 (2020), 36.4 (2021), 35.8 (2022). - Change in external debt (percent of GDP): 0.9, 1.7, 8.7, 2.9, 2.8, 2.2, 1.8, 1.0, 0.1, -0.1, -0.5 (2012–2022 sequence). - Identified external debt-creating flows (4+8+9): -12.8, -10.9, -5.1, 3.9, 4.2, 2.2, 1.8, 0.9, 0.1, -0.4, -0.8 (2012–2022 sequence). - Current account deficit, excluding interest payments (percent of GDP): -7.5, -3.8, -2.6, 4.7, 4.6, 4.7, 4.8, 4.2, 3.5, 3.1, 3.0 (2012–2022 sequence). - Exports (percent of GDP): 44.9, 41.3, 42.1, 29.8, 24.1, 23.3, 22.7, 22.3, 22.5, 22.5, 22.9 (2012–2022). - Imports (percent of GDP): 36.4, 35.8, 38.9, 35.6, 31.5, 29.4, 28.7, 28.3, 28.3, 28.3, 28.6 (2012–2022). - Net non-debt creating capital inflows (negative, percent of GDP): -3.9, -5.7, -2.1, -1.7, -0.8, -1.0, -1.5, -2.0, -2.3, -2.5, -2.8 (2012–2022). - Net foreign direct investment, equity (percent of GDP): 3.9, 5.7, 2.1, 1.7, 0.8, 1.0, 1.5, 2.0, 2.3, 2.5, 2.8 (2012–2022). - External debt-to-exports ratio (percent): 34.2, 41.2, 61.0, 96.0, 130.4, 144.5, 155.9, 163.3, 162.3, 161.5, 156.8 (2012–2022). - Gross external financing need (in billions of US dollars): 0.3, 1.1, 2.5, 4.4, 4.6, 5.1, 5.3, 5.6, 5.8, 6.3, 6.2 (2012–2022 sequence). - Gross external financing need (percent of GDP): 1.2, 3.7, 7.5, 13.3, 13.4, 13.7, 13.2, 12.9, 12.4, 12.5, 11.4 (2012–2022 sequence). ### DSGE model analyses and policy simulation findings - DSGE model calibrated to Bolivia: a 1 percent increase in government consumption: - Boosts growth in the short term. - Effects mostly temporary. - Leads to higher inflation and a real exchange rate appreciation. - Higher interest rates (should authorities adopt inflation targeting) would offset stimulus effects. - Simulations of a 25 percent decline in oil prices: - Case 1: authorities increase expenditures to support demand. - Case 2: authorities reduce fiscal expenditures in response to the decline. - Findings: reducing spending (Case 2) would reduce the budget deficit and public debt (relative to Case 1), improve trade balance, reduce international-reserve losses, and yield better growth perspectives. - Conclusion: the country would be better off by adjusting fiscal policy (by curbing spending) to reduced commodity revenues. - WHDMOD analysis (fixed exchange rate to US dollar assumption): - Permanent fiscal consolidation of 2 percent of GDP: - Half via reduction in public investment; half via reduction in transfers to households through better targeting. - Short-term: output and consumption drop along with investment (public and private). - Long-term: private domestic demand recovers as lower corporate taxes (funded by savings from lower interest payments) stimulate private investment, raising potential output, real wages, employment, and consumption. - Absence of monetary policy easing (due to fixed exchange rate) amplifies short-term negative impact and causes a sizeable drop in inflation. - Additional layer: a gradual drop in sovereign risk premium of 50 basis points over 10 years further boosts private investment, potential output, real wages, and consumption. - Final layers: successful labor and product market reforms that raise productivity and labor supply further support long-term gains. *Source: IMF staff. As of November 16, 2017.* ### 0.2 percentage points per year over 10 years and TFP increase by 0.2 percent each year for 10 years ### cr17395-boliviabundle - 0.2 percentage points per year over 10 years and TFP increase by 0.2 percent each year for 10 years ### Illustrative scenario for fiscal consolidation and structural reforms - Reform package: "0.2 percentage points per year over 10 years and TFP increase by 0.2 percent each year for 10 years (starting 2 years later)." - Macroeconomic effects: - GDP and employment growth are boosted and private investment also increase significantly. - The net impact of all layers still results in GDP below baseline until 2021, but thereafter GDP rises notably above baseline with substantial output gains accruing by 2026. ### Financial health of State-Owned Enterprises (SOEs) - Context and drivers: - Weak hydrocarbon prices are putting pressure on the financial health of key SOEs. - Public enterprises have ramped up spending on industrialization projects and exploration activity. - YPFB accounts for most of the overall deficit in the consolidated public enterprise sector. - Almost the entire deficit of the sector has been financed by the central bank. - Stress-test scenarios and results: - Baseline: current WEO projections with global oil prices rising smoothly from current levels to US$53 per barrel by the end of 2022. - Sector’s overall deficit narrows in 2017–19 and turns into a small surplus in 2020. - Cumulative financing need of Bs 46 billion in 2017–22 (about 17 percent of 2017 GDP). - Scenario I (more severe): oil prices decline to US$35 per barrel over the next five years. - Cumulative deficit would be around Bs 77 billion. - Scenario II (benign): oil prices recover to US$60 per barrel by 2022. - The overall balance would turn positive after three years. - Additional risks and stock-flow concerns: - Deficits of SOE subsidiaries not included in NFPS accounts. - SOEs’ impending debt repayment schedule (chart shows large scheduled repayments across 2015–2025 for YPFB, COMIBOL, ENDE, and others). - Loans approved but not yet disbursed by the BCB are estimated at 11 of percent of GDP; if fully implemented, would raise repayments in the outer years, particularly by ENDE. - Historical SOE operations (selected figures, 2008–2016, in millions of bolivianos): - Total Revenue (2008–2016(p.)): 34,310; 30,178; 31,760; 42,363; 51,682; 62,752; 68,309; 54,516; 41,783. - Total Expenditure (2008–2016(p.)): 30,382; 27,633; 29,309; 39,073; 51,814; 64,263; 70,285; 60,020; 50,134. - Overall Balance (2008–2016(p.)): 3,928; 2,545; 2,451; 3,290; -132; -1,511; -1,975; -5,503; -8,351. - Of which YPFB Overall Balance (2008–2016(p.)): 4,425; 1,037; 1,208; 3,195; 2,064; -733; 628; -2,302; -3,330. - Net Financing from the Central Bank (2008–2016(p.)): -5,373; -817; -1,840; -1,438; 1,756; 2,143; 2,076; 6,523; 8,315. - Memorandum: Crude oil price (in US$ per bbl) series include: 100; 62; 79; 95; 94; 88; 89; 35; 143 (corresponding to 2008–2016 entries). - SOE subsidiaries investment (% of GDP) (2008–2016(p.)): 1.6; 3.0; 2.3; 3.1; 2.8; 2.6; 3.4; 3.7; 2.6. ### Efficiency of public investment - Trend and composition: - Since 2006, public investment has grown by roughly 20 percent in nominal terms per year, reaching 14 percent of GDP in 2015. - Investment in the ‘productive sectors’ and in infrastructure represent more than two-thirds of the total. - An additional 25 percent more investment is carried out by other majority state owned companies. - Efficiency assessment: - The average efficiency gap in Bolivia is about 41 percent. - Comparator averages: emerging markets (EMs) 27 percent; Latin America 29 percent. - Perceived infrastructure quality (WEF Global Competitiveness Index) is relatively low compared to peers. - Access and sectoral gaps: - Infrastructure access is on par with Latin American and Emerging Market averages for education and access to treated water, and much higher for roads. - Bolivia is lagging for electricity and health. - Public Investment Management Assessment (PIMA) findings: - Strengths: budget comprehensiveness; protection of investment; availability of funding; transparency of budget execution; most aspects of allocating and implementing institutions. - Weaknesses: project management and monitoring of assets; planning institutions (including competition in the infrastructure market and central-local government coordination); measures of fiscal rules and PPP frameworks (not yet relevant in Bolivia). - Policy priorities to raise returns on public investment: - Strengthen project management and evaluation. - Improve central-local coordination. - Increase private sector participation in the infrastructure market. - Enhance monitoring of the existing stock of assets. - Reprioritize resources toward electricity and health while maintaining existing infrastructure stock where appropriate. ### Potential growth estimations - Historical context: - Supported by strong commodity revenues and exports, Bolivia’s annual GDP growth rate averaged 5.1 percent during 2006–14. - Public investment grew by 6.7 percent of GDP from 2005 to 2015, and wages and salaries grew by 3.9 percentage points. - Labor force participation increased, and the unemployment rate fell. - Recent moderation: - Real GDP growth has been moderating since 2013, reflecting the negative impact of the decline in gas and metals prices, partly offset by fiscal stimulus and expansionary credit policy. - Sectoral: public administration, financial and real estate services, transport and communication, and manufacturing expanded; mining, electricity and gas were sluggish. - Methodology for estimates: - Potential growth and output gap estimated using: (1) Hodrick-Prescott (HP) filter; (2) multi-variate filter (MVF) (inflation, unemployment, commodity revenues); (3) growth accounting with Cobb-Douglas production function. - Quantitative estimates: - Output gap in 2017: positive, ranging from 0.2 percent to 1 percent of potential output (MVF on the higher end). - Potential growth in 2017: estimated at 4–5 percent, depending on assumptions. - Medium-term baseline projection: potential growth moderates to 3.5–4.0 percent, with a central projection of 3.7 percent. - Cobb-Douglas estimates reflect moderating post-boom TFP and public investment growth. - Policy interaction: - Increasing public investment in line with the PDES would further boost potential growth, but model estimations suggest the impact could be limited, and could even be negative if large levels of public expenditure lead to declining confidence in fiscal sustainability and higher interest rates. *Source: cr17395-boliviabundle - 0.2 percentage points per year over 10 years and TFP increase by 0.2 percent each year for 10 years (PDF).* ### Annex VII. Growth Forecast Errors ### Annex VII. Growth Forecast Errors ### Key findings on forecast performance (2007–2016) - Annual Fund growth forecasts for Bolivia under-predicted actual real GDP growth on average by 0.5 percentage points. - The forecast errors (defined as actual growth ex post minus the October WEO projection for that year) were consistently one of the smallest of Fund forecasts for South American countries. - Bolivia experienced sustained high annual growth rates of 5 percent on average during 2007-2016, which partly explains the Fund’s under-prediction. ### Cross-country relationship between growth and forecast errors - A regression of real GDP growth against forecast error across 194 countries over 10 years shows that, on average, a GDP growth rate one percentage point higher is associated with a 0.16 percentage point increase in the forecast error. ### Comparison with Consensus Forecasts (Carriere-Swallow and Faruqee, IMF, 2016) - (i) The bias of WEO forecasts for Bolivian growth went from mildly optimistic in 1995-2004 to mildly pessimistic in 2005-2015, but statistically these were largely indistinguishable from zero. - (ii) The WEO forecasts have been slightly less accurate than those of Consensus Economics, but the difference is very small (and statistically not different from zero). - (iii) WEO forecast accuracy for Bolivia has improved substantially over the period, and over 2005-15 they were amongst the most accurate of those in the Western Hemisphere Department (WHD). ### Figure summary (Forecast Gap for South American Countries: 2007-2016) - The report includes a country-level depiction of forecast gaps (percentage points) for Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, and Uruguay for the years 2008–2016, showing Bolivia among the countries with the smallest forecast gaps. *Source: Annex VII. Growth Forecast Errors, cr17395-boliviabundle.* ### 2002. A Special Data Dissemination Standard (SDDS) Assessment mission, conducted by STA in ### Bolivia: A Special Data Dissemination Standard (SDDS) Assessment mission; Authorities’ Statement on the Bolivia Staff Report for the 2017 Article IV Consultation ### SDDS, Data ROSC, and Indicators Required for Surveillance - 2002: A Special Data Dissemination Standard (SDDS) Assessment mission, conducted by STA in October 2014, found that Bolivia was close to meeting the SDDS requirements, but SDDS subscription has not yet been achieved. - A data Report on the Observance of Standards and Codes (ROSC) was published on August 13, 2007. - Bolivia: Indicators Required for Surveillance (As of November 5, 2017) — selected dataset timing, frequency, and data quality assessments (as reported): - Exchange Rates: Date of Latest Observation: Daily; Date Received: Daily; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Daily; Daily; D; D; D. - Reserve/Base Money: Date of Latest Observation: Sep. 2017; Date Received: Oct. 2017; Frequency: M; Reporting: M; Publication: M; Data Quality–Methodological Soundness: O, LO, LO, O; Data Quality–Accuracy and Reliability: O, O, O, O, O. - Broad Money: Date of Latest Observation: Aug. 2017; Date Received: Oct. 2017; Frequency: M; Reporting: M; Publication: M. - Central Bank Balance Sheet: Sep. 2017; Oct. 2017; M; M; M. - Consolidated Balance Sheet of the Banking System: Sep. 2017; Oct. 2017; M; M; M. - Interest Rates: Aug. 2017; Oct. 2017; W; W; W. - Consumer Price Index: Oct. 2017; Nov. 2017; M; M; M; Data Quality–Methodological Soundness: LO, O, LO, O; Data Quality–Accuracy and Reliability: O, LO, LNO, O, LO. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Jun. 2017; Oct. 2017; M; M; M; Data Quality–Methodological Soundness: LO, LO, LNO, LO; Data Quality–Accuracy and Reliability: LO, O, O, O, LO. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Jun. 2017; Oct. 2017; M; M; M. - Stock of Central Government and Central Government-Guaranteed Debt: Sep. 2017; Oct. 2017; M; M; M. - External Current Account Balance: Q2 2017; Oct. 2017; Q; Q; Q; Data Quality–Methodological Soundness: O, LO, LO, LO; Data Quality–Accuracy and Reliability: LO, O, LO, O, LO. - Exports and Imports of Goods and Services: Q2 2017; Oct. 2017; Q; Q; Q. - GDP/GNP: Q2 2017; Oct. 2017; Q; Q; Q; Data Quality–Methodological Soundness: LO, LO, LO, O; Data Quality–Accuracy and Reliability: LNO, LO, LNO, O, LO. - Gross External Debt: Sep. 2017; Oct. 2017; Q; Q; Q. - International Investment Position: Q1 2017; Jun. 2017; Q; Q; Q. ### Authorities’ Statement — Recent Economic Developments and Outlook - Overall assessment: - Since 2006 Bolivia accumulated financial buffers intended to preserve macroeconomic stability; these buffers have been reduced financing high levels of investment, but authorities assert Bolivia still has fiscal and monetary space to continue countercyclical policies. - Bolivia emphasizes economic sovereignty and does not intend to follow IMF policy "recipes," citing experiences between 1986 and 2005. - Growth performance: - GDP growth: first half of 2017 growth rate was 3.58 percent. - Domestic demand growth: 7.2 percent in Q2 compared with 4.8 percent in the same quarter in 2016. - Contribution to growth: sustained mainly by public investment and household consumption; non-extractive sectors (agriculture, financial establishments, transport, public administration services, food industry) performed strongly. - External-demand-related sectors: brief contractions due to lower external demand for natural gas and temporary delays in mining production. - Outlook and policy priorities: - Government priorities: use and generation of surpluses, income redistribution, reduction of poverty and inequality, creation of opportunities, strengthening the productive sector, major private participation, and consolidating industrialization. - Investment projects planned in the Economic and Social Development Plan (PDES 2016-2020) and the 2025 Patriotic Agenda underpin outlook. - Authorities expect the Bolivian economic outlook to be positive and stable. ### Fiscal Sector - Countercyclical policy rationale: - Fiscal and external imbalances in recent years reflect countercyclical policies; fiscal deficit should be analyzed considering its composition and focus on capital expenditure. - Public investment projects (including investments in State-Owned Enterprises and highways) were main components of public expenditure. - Central Administration registered a surplus in the first half of the year; expectation that the fiscal result will end with a small deficit this year. - Future fiscal stance: - Near-term fiscal deficits are expected to maintain the expansion of the output base, increase productivity, and close infrastructure and industrialization gaps; these temporal deficits were predicted in the PDES. - Public debt is characterized as sustainable; the economy has "comfortable fiscal space" to contract debt and can access international financing from bilateral and multilateral organizations and international markets. ### External Sector - Current account and imports: - Current-account deficits in 2017 are driven by capital and imported intermediate goods required for industrialization (they account for 80 percent of imports). - Current deficit should be viewed in the context of PDES 2016-2020 and the 2025 Patriotic Agenda which prioritize imported capital goods. - Reserves and buffers: - Loss of Net International Reserves and lower domestic buffers during the last three years are consistent with increased capital goods imports and a decrease in commodity prices. - Authorities expect an increase in the Reserves this year compared to last year’s level. - Projections have transitorily diminished, but new export flows from strategic projects (Ammonia and Urea, Lithium Carbonate, Liquefied Natural Gas (LNG), potassium salts, steel, propylene and polypropylene, textile manufacture, and other products through National Companies) are expected to increase income and generate a favorable change in the terms exchange. - Exchange rate policy: - Exchange rate stability is credited with shielding the domestic economy from inflationary pressures and aiding the de-dollarization process. - Authorities contend more exchange rate flexibility is not necessary for higher economic diversification and would have limited impact on external imbalances. ### Monetary and Financial Sector - Monetary policy stance: - Monetary policy in the first part of the year was countercyclical to ensure adequate liquidity and support credit growth to the private sector, especially productive and housing segments, consistent with the Financial Services Law. - Inflation: - Base inflation projection was revised downward from 5.0 percent to 4.3 percent. - Financial intermediation and credit: - Increased family incomes and expansionary stance led to increased public deposits, higher liquidity, and significant increase in the credit portfolio to support private investment. - Credit increases concentrated in production and housing sectors; credit risk shown by stress tests is not considered a high vulnerability for the financial system. - High provident funds required by regulation and permanent monitoring by the financial stability council (CEF) are cited as guarantees of stability and efficiency. - De-dollarization: - Credit in domestic currency: 97.2 percent as of June 2017. - Deposits in domestic currency: 85.2 percent as of June 2017. - Authorities view these indicators as evidence of the soundness of the financial system and the success of de-dollarization. ### Social Sector and Poverty Outcomes - Social policy: - Continued state-led model redistributing income through conditional and non-conditional cash transfers and other measures to support the most vulnerable. - Poverty reduction (2005 to 2015): - Moderate poverty: reduced from 60.6 percent in 2005 to 38.6 percent in 2015. - Extreme poverty: reduced from 38.2 percent in 2005 to 16.8 percent in 2015. - Progress largely impacted rural areas. ### Structural and Investment Initiatives - Reforms to boost private participation and efficiency: - Implemented reforms include the "Investment Promotion Law", "Financial Services Law", "Law of Conciliation and Arbitration", and "Law of Promotion for the investment in Exploration and Exploitation". - These measures are reported to have boosted private investment and sustained private-sector growth. - Hydrocarbons investment and production potential: - Law of Promotion for Investment in Exploration and Exploitation targets increasing reserves and production over a potential of 17 TCF. - Outcomes reported: eight signed contracts in oil services (Charagua, Aguaragüe, Abapó, San Telmo Norte, Astiller, Iñiguazú and Yuchán), three addendums (Amboró Espejos, Caipipendi and Huacareta) and three cessions (Colpa, Caranda and Tatarenda). - Expected result: increase gas supply for exports and support hydrocarbon and mining sectors. ### Conclusion and Policy Orientation - Authorities’ evaluation: - Countercyclical policies and financial cushions have maintained growth despite negative external shocks (falling international prices, global cycle effects); these policies justify recent fiscal and external imbalances. - Complementary public-sector reforms aim to increase revenue and improve public-expenditure efficiency (law of the National Planning System, reforms in efficiency collections, etc.). - Continued reforms aim to increase private-sector participation and sustain private investment. - Budget and planning: - The General Budget of the State 2018 prioritizes execution of public policies aligned with the National Plan of Development 2016-2020 to strengthen sustainable and inclusive growth. *Source: Bolivia — Authorities’ Statement on Bolivia Staff Report for the 2017 Article IV Consultation (as reflected in the provided content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17395-boliviabundle.pdf_