## cr18379 ## Source details **Canonical URL:** [cr18379](https://www.imf.org/-/media/files/publications/cr/2018/cr18379.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18379.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18379.pdf.json) --- ### Fiscal framework and sustainability - Implement a rule-based fiscal framework anchored by a medium-term debt target. - Staff recommend adopting a public debt target of 40 percent of GDP as a medium-term anchor. - Operational target: non-hydrocarbon primary deficit of the NFPS at 4.5 percent of non-hydrocarbon GDP. - Reduce the non-hydrocarbon primary deficit by 1.4 percent of GDP annually. - Contain growth in the wage bill and public investment; consider an expenditure ceiling to limit procyclicality during booms. - Make social spending more progressive and improve targeting and effectiveness. - Key fiscal projections and indicators: - NFPS deficit: 7.8 percent of GDP in 2017; projected 7.4 and 6.3 percent of GDP in 2018 and 2019 under baseline. - Gross (net) public debt: about 51 (35) percent of GDP in 2017; projected to peak at 54.4 percent of GDP in 2022 under staff baseline. - Staff revised total public debt up by 2.3 percent of GDP to include BCB loans to other SOEs and public funds (FINPRO and FNDR). - Public investment-to-GDP ratio assumed to fall from 13.7 to 9.2 percent by 2023 in staff baseline. - Public gross nominal debt (percent of GDP): 2017 = 51.1; 2018 = 53.5; 2019 = 54.6; 2020 = 54.6; 2021 = 54.7; 2022 = 54.7; 2023 = 54.4. - NFPS deposits with BCB: about 14 percent of GDP (2017). ### Fiscal measures and SOE/federal governance - Priority: fiscal adjustment mainly from the spending side. - Streamline public investment: capital spending high at 13.6 percent of GDP (2017); scope to increase efficiency and reallocate to priorities (e.g., health). - Wage bill management: - Wage bill rose by about 4.0 percent of GDP from 2006–2015; dipped in 2016–2017; expected to rise in 2018 with return of Aguinaldo. - Recommendations: natural attrition, functional reviews, payroll audits, link pay to performance, align public employment size with public goods/service needs. - Energy subsidies and social transfers: - Total energy subsidies ‘before’ and ‘after tax’ estimated to range from 2-7 percent of GDP (IMF, 2015; WP/15/30, 2015). - Recommend phasing out energy subsidies while offsetting effects on the vulnerable with targeted safety nets. - SOEs and fiscal accounting: - Include all SOEs and subsidiaries in fiscal accounts and subject them to regular public audits. - Base energy inputs for SOE operations on market prices; phase out quasi-fiscal activities. - Reform SOE legislative framework, clarify oversight responsibilities, strengthen corporate governance, improve investment planning and project management. - Fiscal federalism: - Allow local governments to raise revenues independently (e.g., property taxes); link transfers to criteria other than hydrocarbon revenues. ### Monetary policy, central bank operations, and reserves - Re-orient monetary policy to an explicit focus on price stability and the nominal exchange rate anchor. - Strengthen central bank (BCB) independence and cease direct lending by the BCB to SOEs. - Simplify and tighten monetary policy tools as needed; normalize monetary conditions as inflation pressures return. - Recent monetary conditions and indicators: - Consumer price inflation: 1.8 percent (y/y) in August 2018. - BCB lowered reserve requirement on foreign currency deposits—from 35 (43) percent to 25 (33) percent for term deposits (demand deposits). - Lending to the “productive sectors” remained strong at 23 percent in July 2018. - Banking system capital adequacy ratio: 12.2 percent; regulatory minimum: 10 percent. - Non-performing loans (NPLs): 1.9 percent in June 2018 vs 1.7 percent a year earlier. - Restructured loans: rose from 1.2 percent at end-2014 to 2.4 percent in June 2018. - Banks’ return on equity: fell from 17 percent in 2016 to 12 percent in 2018. - International reserves and outlook: - International reserves declined to US$8.7 billion at end-September 2018 from US$10.3 billion at end-2017. - Net BCB international reserves (millions USD): 2016 = 10,081; 2017 = 10,261; 2018 = 8,774; projected 2019 = 8,339; 2020 = 7,914; 2021 = 7,138; 2022 = 6,312; 2023 = 5,689. - Reserves in months of imports: 2016 = 10.4; 2017 = 9.7; 2018 = 7.7; 2019 = 6.9; 2020 = 6.1; 2021 = 5.1; 2022 = 4.3; 2023 = 3.8. - Staff project reserves would fall below the Fund’s reserve adequacy metric by 2020 and to four months of imports by 2023. ### Financial sector policy, FSL impacts, and stability - Remove credit quotas and interest rate ceilings; amend key provisions of the Financial Services Law (FSL). - Strengthen financial sector supervision and move to more risk-based, forward-looking frameworks. - Key financial sector indicators and dynamics: - Credit growth: averaged 16.7 percent from 2014–17; loan amounts increased by about 60 percent between September 2014 and June 2018. - Small loans (< US$5,000) decreased by 10 percent from September 2014 to June 2018. - Credit to the private sector (annual percent change): 2016: 14.8; 2017: 12.8; 2018: 11.7; 2019: 10.9; 2020: 10.1; 2021: 10.1; 2022: 10.1; 2023: 9.8. - Share of restructured loans: 1.2 percent at end-2014 → 2.4 percent in June 2018. - Bank stress test highlights: - Credit risk: about one half (most) of banks would need to raise capital if NPL ratio doubled (quadrupled) from current levels; potential losses aggregate manageable at 0.1 and 0.9 percent of GDP, respectively. - Liquidity risk: system-level liquidity improved but many banks would struggle under an extreme simultaneous withdrawal scenario. - Exchange rate risk: direct risks limited given low dollarization and net foreign asset positions. - Recommended supervisory actions: - Conduct full-fledged stress tests regularly. - Monitor capital quality, scrutinize risks from rapid credit growth to housing. - Introduce capital surcharges for operational and market risks; adopt evaluation processes considering risk profiles and capital planning. - Strengthen AML/CFT framework and complete the National Strategy ahead of the 2020 GAFILAT assessment. - Staff believe an FSAP Update would be extremely useful for Bolivia. ### Structural reforms and competitiveness - Rationale: shift from public redistribution of hydrocarbon revenues to private sector-led activity to raise private investment and total factor productivity. - Near-term priorities with highest benefit-to-cost ratio: - Trade reform: lower tariffs on manufactured goods; ease restrictions on foreign ownership. - Product markets: phase out remaining controls; reduce administered prices and offset impacts with targeted transfers. - Labor markets and wage setting: - Discontinue centralized wage setting and indexing national bonuses to GDP growth. - Establish rational criteria for wage increases (inflation, productivity, market comparators). - Adopt a modern labor code to remove government from private firm wage/employment decisions. - Cancel or amend the “social companies law.” - Taxation and investment codes: simplify royalty brackets; consider progressive resource rent taxes; introduce accelerated depreciation for development expenditure; remove domestic fuel subsidy; implement best practices on mergers and transparency. - Governance and formalization: - Move households/businesses into the formal economy; Bolivia reduced informality from 65 to 46 percent between 2005–2015. - Ease online filing and payments, broaden VAT refunds, modernize business licensing and registration processes. - Strengthen SOE oversight, adopt PIMA for public investment, submit public entity financial statements to independent auditors, and conduct a new PEFA mission. ### Macroeconomic outlook, external sector, and risks - Recent growth and outlook: - Real GDP growth: 4.2 percent in 2017; forecast 4.5 and 4.2 percent in 2018 and 2019, respectively; growth averaged 4.8 percent between 2004–17. - Exports grew by 17 percent (y/y) in H1 2018. - Current account deficit: projected 4.8 and 4.6 percent of GDP in 2018 and 2019; projected to narrow slowly to 4.4 percent of GDP by 2023. - Nominal GDP (billions USD): 2016 = 34.1; 2017 = 37.9; 2018 = 41.6; 2019 = 44.8; 2020 = 48.3; 2021 = 52.1; 2022 = 56.3; 2023 = 61.0. - External sector assessment: - Overall: Bolivia’s external position in 2018 is substantially weaker than implied by fundamentals and desirable policies. - NIIP: fell from 4.7 billion (14.2 percent of GDP) in 2014 to -2.4 billion (-6.3 percent of GDP) at end-2017. - REER: CPI-based REER appreciated by 9.5 percent during 2018; regression model indicates an overvaluation of 33 percent. - Current account norm assessments: EBA-lite cyclically adjusted CA deficit of 5.1 percent of GDP vs norm of 0.5 percent of GDP; fuel-exporter regression implies need for a 26.3 percent real exchange rate adjustment. - Key macro-financial indicators (selected exact values): - Total gross NFPS debt (percent of GDP): 2016 = 46.6; 2017 = 51.1; 2018 = 53.5; 2019 = 54.6; 2020 = 54.6; 2021 = 54.7; 2022 = 54.7; 2023 = 54.4. - Current account balance (percent of GDP): 2016 = -5.7; 2017 = -5.3; 2018 = -4.8; 2019 = -4.6; 2020 = -4.5; 2021 = -4.5; 2022 = -4.6; 2023 = -4.4. - Total investment (percent of GDP): 2016 = 21.1; 2017 = 22.2; 2018 = 22.0; 2019 = 20.6; 2020 = 19.2; 2021 = 17.9; 2022 = 16.8; 2023 = 16.0. - Net lending/borrowing (overall balance, percent of GDP): 2016 = -7.3; 2017 = -7.8; 2018 = -7.4; 2019 = -6.3; 2020 = -5.7; 2021 = -5.1; 2022 = -4.3; 2023 = -3.8. - Risks to the baseline: - Downside (highest probability): political uncertainty related to the 2019 elections; failure to discover new gas and mineral fields; failure to freeze public investment as envisaged. - Other downside risks: US dollar/interest rate rise, lower commodity prices and capital inflows, spillovers from Argentina/Brazil, spillovers from Venezuela crisis. - Upside: new discoveries of gas/mining reserves; rapid hydrocarbon industrialization and lithium projects; higher hydrocarbon prices. ### Debt sustainability (Annex I — DSA) and stress tests - DSA summary: - Staff: risks to public debt are significant (2018–23). - Public debt: 51 percent of GDP in 2017; projected 54 percent of GDP in 2023 under baseline. - Gross financing needs: projected to decline to about 5.9 percent of GDP in 2023 under baseline; about 7.4 percent under the “combined shock.” - Stress test outcomes (selected exact results): - Primary balance shock (2.1 percent of GDP): Debt/GDP → 58.6 percent in 2020; 58.0 percent in 2023. - Growth shock (real growth lower by 1 percentage point in 2019–20): Debt/GDP → 56.2 percent in 2020; 55.5 percent in 2023. - Interest rate shock (real rates +300 bps during 2019–23): Debt/GDP → 55.3 percent in 2023. - Exchange rate shock (REER depreciates 20 percent in 2019): Debt/GDP → 58.4 percent in 2019; 56.7 percent in 2023. - Combined shock: Debt/GDP → 64.8 percent in 2019; 66.8 percent in 2023 (12.6 percentage points above baseline). - Contingent liability shock (one-time increase in non-interest expenditures in 2019 = 10 percent of banking sector assets + lower growth): Debt/GDP → 58.4 percent in 2019; 57.8 percent in 2023. - Policy implication: under several shocks, debt and financing needs rise materially; consolidation and a rules-based MTFF with a debt anchor are advised. ### Data, transparency, and governance recommendations - Data and statistics: - Publish macroeconomic indicators on a timelier basis using a pre-announced schedule (e.g., natural gas shipments, monthly hydrocarbon production, YPFB statistics, fiscal revenues by tax, IGAE, public investment data). - Include activities of SOE subsidiaries in NFPS accounts and record government-issued US dollar bonds held by residents as domestic debt. - Staff encourage release of recent certificate on gas reserves and adoption of e-GDDS/SDDS. - Governance and anti-corruption: - Strengthen fiscal governance, SOE oversight, public investment management (PIMA), external auditing, TSA automation, and AML/CFT framework. - Adopt EITI standards in extractive sectors; improve transparency of license allocation and beneficial ownership. - Conduct an updated PEFA assessment and continue IMF TA on AML/CFT, treasury and cash management, and tax/customs administration. - Institutional reforms: - Use the new Central Bank law to improve monetary policy framework and central bank governance. - Shift BCB lending to SOEs onto government budget or financial sector funding and restrict systematic BCB lending to SOEs. - Address the politicization of national accounts linked to indexing the Doble Aguinaldo; staff recommend discontinuation. ### Authorities’ views (summarized) - Authorities expect continued strong growth from new hydrocarbon exploration, increased natural gas production, and ethanol production. - They view deficits as mainly due to large public investments that raise productive capacity and benefit future generations. - Government intends to keep public investment at current nominal levels; some energy subsidies have been reduced and a beneficiary database is being built. - Authorities defend the development role of the BCB and maintain that direct lending to SOEs is often guaranteed and supports investment when banks would be procyclical. - Authorities may revise but intend to maintain interest rate ceilings and quotas; they view credit growth under the FSL as improving intermediation. *Source: cr18379 - IMF staff report, October 26, 2018.* ### 1. Implement a rule-based fiscal framework anchored by a medium-term debt target; ### 1. Implement a rule-based fiscal framework anchored by a medium-term debt target ### Fiscal framework and fiscal recommendations - Implement a rule-based fiscal framework anchored by a medium-term debt target. - Reduce the non-hydrocarbon primary deficit by 1.4 percent of GDP annually to restore external balance in the short term and arrest the growth of public debt. - Contain growth in the wage bill and public investment. - Make social spending more progressive. ### Recent fiscal developments and outlook - The deficit of the non-financial public sector (NFPS) increased to 7.8 (percent of GDP) in 2017 from 7.2 in 2016. - Gross (net) public debt rose to about 51 (35) percent of GDP in 2017 from about 37 (12) percent of GDP in 2013. - Staff’s estimate of total public debt was revised up by 2.3 percent of GDP to include BCB loans to other SOEs and some public funds (FINPRO and FNDR) previously unrecorded. - NFPS deficit projected to improve slightly to 7.4 and 6.3 percent of GDP, respectively, in 2018 and 2019 under baseline assumptions. - Under medium-term assumptions (flat investment in nominal terms and wage bill growth below nominal GDP), NFPS deficit could decline to about 3.8 percent of GDP by 2023 and public debt would peak at 54.4 percent of GDP in 2022. - Public investment-to-GDP ratio assumed to fall from 13.7 to 9.2 percent by 2023 in staff baseline. ### Policy guidance for fiscal sustainability - Adopt a medium-term fiscal framework (MTFF) with clear operational rules and a debt anchor. - Prioritize measures that reduce the non-hydrocarbon primary deficit by 1.4 percent of GDP annually. - Reorient and contain public investment and the wage bill consistent with the MTFF. - Improve the progressivity and effectiveness of social spending. ### Boxed guidance and annexes (referenced) - Annex I: Public Debt Sustainability Analysis (DSA). - Annex III: A Proposed Fiscal Rule for Bolivia. --- ### Monetary policy and central bank operations - Focus the objectives of monetary policy on price stability and preserving the nominal exchange rate anchor. - Cease direct lending by the central bank to SOEs. - Strengthen the independence of the central bank. - Simplify monetary policy tools and tighten them as needed. ### Recent monetary and financial conditions - At 1.8 percent (y/y) in August 2018, consumer price inflation remains low. - The central bank (BCB) lowered the reserve requirement on foreign currency deposits—from 35 (43) percent to 25 (33) percent for term deposits (demand deposits)—stipulating that banks could use the released resources only for new lending in local currency to “productive sectors” and social housing. - Banks’ excess liquidity with the BCB has recently stabilized and average deposit and interbank rates are at or below the inflation rate. - Lending to the “productive sectors” remained strong at 23 percent in July 2018. - The overall capital adequacy ratio of the banking system stands at 12.2 percent, with all banks above the regulatory minimum of 10 percent. - Non-performing loans (NPLs) rose slightly to 1.9 percent of total loans in June 2018 from 1.7 percent a year earlier. - The share of restructured loans rose from 1.2 percent at end-2014 to 2.4 percent in June 2018. - Banks’ return on equity fell from 17 percent in 2016 to 12 percent in 2018. ### Monetary policy recommendations - Re-orient monetary policy to an explicit focus on price stability and the nominal exchange rate anchor. - End central bank direct lending to SOEs to avoid fiscalization of monetary policy. - Strengthen central bank independence to support credibility. --- ### Financial sector liberalization and supervision - Remove credit quotas and interest rate ceilings. - Bolster efforts to improve financial sector supervision. ### Financial sector issues and actions - Lending rates have remained stable, reflecting the rate ceiling and temporary effects of the change in the calculation of the BCB ‘s reference rate (Tasa de Referencia). - Narrowing interest margins have contributed to declining bank profitability. - The Financial Services Law (FSL) has driven credit targets (“productive sectors”), contributing to a narrowing “credit gap”. - Estimated credit gap analyses used a one-sided Hodrick-Prescott filter, as recommended by the BIS. ### Recommendations for financial stability - Eliminate credit allocation mechanisms and rate ceilings that distort credit markets. - Strengthen bank supervision and regulatory frameworks to address emerging vulnerabilities (restructured loans, narrowing profitability). --- ### Structural reforms to rebalance growth model - Move decisively on structural reforms to help shift Bolivia’s growth model away from the public redistribution of hydrocarbon revenues to private sector-led activity. Recommended measures include: - Lowering tariffs on manufactured goods. - Freeing up product markets. - Discontinuing centralized wage setting and indexing of bonuses to GDP growth. - Over-hauling labor market regulations. - Preparing reform of the taxation/investment codes in the extractive sectors. - Implementing key measures to improve the business climate. ### Rationale and expected impact - Structural reforms are aimed at increasing private investment, improving total factor productivity, and facilitating a transition from state-led to private sector-led growth. - Without such reforms, medium-term growth is projected to converge to potential of 3.7 percent (staff estimate) with limited impulse from macroeconomic policies and weaker private investment. --- ### Recent macroeconomic developments and baseline outlook - Real GDP growth: 4.2 percent in 2017; forecast 4.5 and 4.2 percent in 2018 and 2019, respectively. - Growth averaged 4.8 percent between 2004–17. - Exports grew by 17 percent (y/y) in the first half of 2018. - International reserves declined to US$8.7 billion at end-September 2018 from US$10.3 billion at end-2017. - Current account deficit projected at 4.8 and 4.6 percent of GDP in 2018 and 2019, respectively; projected to narrow slowly to 4.4 percent of GDP by 2023. - International reserves would decline slowly, falling below the Fund’s reserve adequacy metric by 2020 and to four months of imports by 2023. --- ### Risks to the baseline - Downside risks (highest probability): - Political uncertainty related to the 2019 elections affecting policy decisions or causing social unrest. - Failure to discover new gas and mineral fields. - Failure to freeze public investment as envisaged. - Other downside risks: - Larger-than-expected rise in the US dollar or interest rates. - Lower-than-forecast commodity prices and capital inflows. - Worse-than-expected spillovers from Argentina and Brazil. - Costs related to spillovers from the crisis in Venezuela. - Upside risks: - New discoveries of gas and mining reserves. - More rapid bringing on stream of hydrocarbon industrialization, electricity generation, and lithium projects. - Higher-than-expected hydrocarbon prices. --- ### Policy consistency, governance, and institutional recommendations - Policy consistency and sustainability should guide macroeconomic policymaking. - Improve governance and efficiency to bring activity into the formal sector and enhance the efficiency of public enterprises. - Advance reforms in tax, investment, product, and labor markets to raise competitiveness. - Strengthen data quality and transparency. *Source: cr18379 - 1. Implement a rule-based fiscal framework anchored by a medium-term debt target; (IMF staff report, October 26, 2018).* ### 13. Almost five years after the commodity price bust, a shift in the policy stance is needed ### 13. Almost five years after the commodity price bust, a shift in the policy stance is needed ### Policy shift and growth strategy - Continuing the status quo would lead the country onto a high debt, lower growth, gas-dependent path—unsustainable under the stabilized exchange rate-based macro-framework. - Immediate priority: tighten macro policies to restore internal and external balance while supporting sustainable growth. - Given high levels of public spending and low efficiency of some public investment (Country Report 17/395), adverse effects of a gradual fiscal consolidation are likely to be relatively small in the short term. - Three broad elements of a new growth strategy: - move to a more business-friendly approach to boost private sector investment, particularly in the traded sector—a key to diversification; - renew efforts to strengthen institutions and governance; - strengthen regulation and supervision to ensure financial stability in the wake of changes to the sector under the FSL (Annex V). ### B. A Roadmap for Sustainable Fiscal Policy — Risks and objectives - Drawing down buffers to support growth has raised fiscal risks and vulnerability to shocks; risk of policy slippage is higher in the absence of a medium-term framework. - Key fiscal vulnerabilities and indicators: - Gross debt is forecast to exceed 53 percent of GDP in 2018, the threshold requiring “high scrutiny” under the IMF’s Debt Sustainability Analysis (DSA) framework for emerging market economies (Annex I). - The primary deficit of 6.5 percent of GDP is well above the level estimated by staff (2.5 percent of GDP) to stabilize debt, putting the debt-to-GDP ratio on an upward trajectory. - The DSA finds that risks to debt sustainability are significant; a combination of shocks would raise gross public debt to 67 percent of GDP by 2023. - Bolivia’s heavy dependence on the commodity sector and the limited number of external markets increase vulnerability to exogenous shocks, suggesting the need for larger buffers. - The decision to contain growth in public investment is welcome but absence of clear short- and medium-term fiscal targets raises uncertainty and slippage risks. - A Medium-term Fiscal Framework (MTFF) with a fiscal rule: - Staff welcome progress in preparing medium-term fiscal projections and encourage follow-through on recent IMF Technical Assistance by designing an MTFF with a timetable, approval process, and clearly defined responsibilities. - Staff recommend adopting a public debt target of 40 percent of GDP as a medium-term anchor to reduce debt-distress risks to low levels. - Operational target proposed: the non-hydrocarbon primary deficit of the NFPS at 4.5 percent of non-hydrocarbon GDP (an effective indicator to help absorb gas price volatility). - Authorities should consider introducing an expenditure ceiling to limit procyclicality during large resource booms. - Rationale for near-term consolidation and an “active” policy scenario: - Imbalances have persisted, buffers have been falling, and risks to the outlook have worsened; consolidation case is more compelling than in 2016–2017. - In the rules-based MTFF, staff present an alternative “active” policy scenario that: - reduces the non-hydrocarbon primary deficit by 1.4 percent of GDP per year (0.5 percent of GDP more than in the baseline); - brings down the NFPS deficit to 2.3 percent of GDP; - puts the debt-to-GDP ratio on a downward trajectory. - Expected impact: slightly lower GDP growth short term vs baseline but higher growth in outer years, partly via confidence effects from improved fiscal and macro sustainability. - Mitigating factors that reduce near-term adjustment costs: - public sector deposits with the BCB are still high, at 14 percent of GDP; - financing needs remain moderate at under 10 percent of GDP owing to the government’s success at extending the debt stock maturity (to 20 years); - a large share of foreign financing is secured from multilateral and bilateral lenders largely on concessional terms. - Given the challenging global outlook, even the active scenario could be insufficient and stronger adjustment may be needed. - Fiscal governance improvements recommended: - Subject fiscal projections to independent assessment and identify main sources of risks to forecasts for public communication. - Base budget and debt projections on conservative growth assumptions. - Save higher-than-planned revenue collection instead of spending it (as happened in 2017). - Update the 2009 PEFA assessment to identify progress and reinforce reform areas. ### Key Fiscal Measures — Spending and revenue adjustments - Overall guidance: fiscal adjustment should come more from the spending side. - Streamline public investment: - Growth in capital spending has decelerated but is still among the highest in the world at 13.6 percent of GDP. - Efficiency of public investment found relatively low (Country Report 17/395) due to weaknesses in central-local coordination, lack of a competitive domestic infrastructure market, and project management shortcomings. - Scope exists to streamline capital spending and increase efficiency without adverse long-term growth effects; direct resources to priority areas (e.g., health outcomes). - Wage bill reforms: - The wage bill of the NFPS increased by about 4.0 percent of GDP from 2006–2015; it dipped in 2016–2017 because of non-payment of Doble Aguinaldo but remains higher than the regional average and is expected to rise in 2018 with return of Aguinaldo (see ¶32). - Recommendations: - Use natural attrition to reduce headcount, combined with active resource reallocation and training. - Consider comprehensive public-sector wage bill reform in the medium term: functional review, payroll audit, link pay to performance and objective criteria, and align size of public employment with desired public goods and services (in context of broader labor market reform). - IMF stands ready to provide technical assistance on wage bill management. - Energy subsidies and social transfers: - Reconsider spending on universal subsidies: depending on oil prices, total energy subsidies ‘before’ and ‘after tax’ were estimated to range from 2-7 percent of GDP (IMF, 2015; WP/15/30, 2015). - Staff welcome recent energy price increases and recommend phasing out energy subsidies while offsetting adverse effects on the vulnerable with well-targeted social safety measures. - Revenue measures to explore: - Introduce a progressive personal income tax (PIT) to replace the existing VAT complementary system. - Reform tax system for hydrocarbon and mineral extraction sectors to incentivize exploration activities. - Strengthen “own-revenues” of local governments. - A full-fledged PIT could raise additional revenues of around 1.0 percent of GDP and improve equity and efficiency; incentive-compatible extractive-sector taxation may reduce short-term revenues but motivate discovery of more gas reserves and generate longer-term revenue gains. ### SOEs, fiscal accounting, and fiscal federalism - Financial health and oversight of SOEs: - Investment by SOEs has risen rapidly under the PDES; about half is carried out by subsidiaries and not included in NFPS accounts. - All SOEs and subsidiaries should be included in fiscal accounts and subject to regular public audits; ongoing GFSM 2014 compilation work is an opportunity to address this. - Recommend: base energy inputs for SOE operations on market prices; phase out quasi-fiscal activities of SOEs. - Consider reforms to: legislative framework governing SOEs; clarify responsibilities for regulatory and fiscal oversight; strengthen corporate governance; improve budget approval and oversight; strengthen investment planning and project management of SOEs (see ¶36, Annex IV). - Fiscal federalism: - Local governments’ ability to raise revenues independently is constrained; some rely heavily on hydrocarbon revenues, exposing them to gas revenue volatility. - Staff recommend: improve coordination at project evaluation/adoption stage with clear spending responsibilities; allow local governments to raise revenues independently (e.g., property taxes); link federal transfers to criteria other than hydrocarbon revenues (e.g., population size, infrastructure needs, human development indicators). ### C. Social Policies—An Updated Strategy - Progress and limits: - Between 2006–17, social spending (in nominal terms) increased by about 10 percent annually, with transfers benefiting more than half the population; access to potable water, electricity, education, and health services greatly increased. - Patriotic Agenda includes many SDG elements. - Poverty ratio declined from 61 percent in 2005 to 36 percent in 2017. - Extreme poverty declined from 38 percent to 17 percent over the same period, although improvements stalled after 2014. - Most pre-2014 poverty and inequality reduction attributed to a declining skills premium (IMF 2014). - Sustainability considerations and inefficiencies: - Past model relied on natural resource windfall revenues and economy-wide wage growth above productivity—both not sustainable. - A large share of total social spending (3.7 percent of GDP) accrues to the non-poor even under fiscal constraints. - Gasoline prices are among the lowest in the world and over 60 percent of fuel subsidies accrue to the non-poor (World Bank 2015). - Fund analysis (Country Report 16/387, Box 3) found inefficiencies in social spending due to capacity-based financing, weak coordination among government levels, and failure to target benefits. - Recommended social policy reforms: - Implement gradual reforms while strengthening social safety nets given high poverty rates and a sizeable informal economy. - Proposals: - introduce progressive fees for higher-income users of some goods and services; - enhance targeted assistance to the most vulnerable groups; - phase out energy subsidies; - enhance competition among providers of social services; - launch an information system for beneficiaries of social programs. ### D. Monetary Policy: Simplify and Tighten as Needed - Central bank focus and stance: - The BCB should focus objectives on price stability and preserving the nominal exchange rate anchor. - Current BCB policy anchors inflation on quantitative targets, mainly growth rate of central bank net domestic credit, set in a monetary program alongside overall fiscal balance target and net credit to the public sector. - The BCB has supported growth by promoting strong credit growth and lending directly to SOEs; this accommodative stance has contributed to pressure on international reserves. - Policy recommendations: - Administered prices should be reformed to reflect market forces and the BCB should normalize monetary conditions as inflation pressures return. - Normalization could obviate the need for regulation limiting the amount of investment abroad by insurance companies—a capital flow management measure under the Fund’s Institutional View. - Total investments of the insurance sector represent only 1.8 percent of GDP (2017) and the ceiling is not binding as assets abroad are well below the ceiling of 10 percent of resources for investment. - With Fund TA focusing on early warning indicators in the insurance sector expected soon, staff believe the measure could be maintained for now and reassessed as supervision capacity strengthens. *Source: cr18379 - 13. Almost five years after the commodity price bust, a shift in the policy stance is needed* ### 27. Stronger central bank independence would be good for Bolivia. Continued lending to ### 27. Stronger central bank independence would be good for Bolivia. Continued lending to ### Central bank independence and SOE lending - Continued lending to SOEs exposes the BCB to significant credit risks. - At negative real interest rates, this creates ‘soft’ budget constraints which fuel domestic demand (Kornai, 1992) and create fiscal risks to the state. - Continued lending undermines the credibility of monetary policy and poses conflicts of interest in the regular conduct of monetary policy (for example, the central bank may not take a needed policy decision if it could negatively affect loan quality of a particular SOE). - Recommendation: Public investment by SOEs should be funded by the financial sector or directly from the government’s budget. - Opportunity: The new Central Bank law presents an opportunity to improve the legislative framework for monetary policy and central bank governance. ### Reforms needed to raise competitiveness - Recent pressures: - High real wage increases under the stabilized exchange rate and a sizeable appreciation in the real exchange rate from 2011–16. - Large depreciations in regional currencies compounded pressures in 2018. - Controls on domestic prices, trade barriers, and a high tax burden on companies in the extractive sectors have hindered private investment, productivity growth, and export diversification. - Exchange rate and external assessment: - The real effective exchange rate appreciated by 9.5 percent during 2018. - Fund staff estimates suggest a substantial overvaluation of the exchange rate relative to its long run equilibrium level. - Minerals and hydrocarbons exports rose from about 50 percent of total exports in 2003 to 78 percent in 2017. - Business climate: - National and foreign private investment has been low. - Investors cite impediments including market restrictions, burdensome and uneven regulatory framework, and concerns arising from the vaguely-worded law on “social companies.” - Policy stance on exchange rate: - Continued commitment to the stabilized exchange rate makes structural reforms more critical. - Introducing greater exchange rate flexibility could facilitate restoring competitiveness and diversification, ease fiscal adjustment, and reduce negative impact of external shocks. - Relying on internal devaluation would require lowering or containing wages and compressing demand. - Early reform priorities to unleash private investment (expected highest benefit-to-cost ratio): i. Trade reform and market entry: - Phase out remaining controls and consider alternative methods to ensure sufficient domestic supply. - Tariffs on manufactured goods in Bolivia are much higher than in countries across the region; staff recommended lowering trade barriers and easing restrictions on foreign ownership. ii. Product markets: - Reduce controls on domestic prices and offset adverse impacts on the most vulnerable with direct transfers and social benefits. iii. Labor markets and wage setting: - The annual wage increase is negotiated every year in private between the government and the main labor union and applied economy-wide; the payment this year of the second Aguinaldo will contribute to nominal wage growth of 13 percent—a real wage increase of about 10 percent—which is not consistent with a stabilized exchange rate nor with efforts to promote competitiveness or diversification. - Staff recommendations: a. discontinuing the practice of centralized wage setting and indexing national bonuses to the “GDP growth” rate; b. establishing rational criteria for determining wage increases such as inflation or cost of living adjustments, productivity, and market comparators; c. adopting a modern labor code that guarantees strong workers’ rights and benefits but removes the government from the wage and employment decisions of private firms; d. canceling or amending the “social companies law” and associated regulations to address private sector concerns over security of assets or property. iv. Taxation and investment codes: - Bolivia’s attractiveness as an investment location for mining was assessed to be very weak. - Consider simplifying royalty rate bracket structure; replacing current surtaxes with simpler progressive resource rent taxes; adding an accelerated depreciation scheme for development expenditure; removing the domestic fuel subsidy; and implementing best international practices on mergers and acquisitions and overall transparency. ### Governance and formalization of activity - Moving households and businesses into the formal economy would support sustained growth and social progress. - Bolivia experienced a reduction in informality from 65 to 46 percent between 2005–2015 (IMF 2018). - Two broad themes to focus on: creating a more business-friendly environment and strengthening institutions and governance. - Priority business-climate reforms (easier to implement): - Enable filing of taxes and all payments online and possibly reduce the frequency of tax payments (VAT, social security contributions, the transaction tax) in some instances. - Allow broader VAT refunds. - Modernize technology and processes to obtain a business license, get a company deed, and register employees with the national health insurance/pension system. - Subsequent reforms could include implementing regulations to enhance investor protections, withdrawing the recent Law of Creation of Social Enterprises, and revising building laws to match international standards. - Governance weaknesses and anti-corruption efforts: - Inefficient and cumbersome regulations can “constrain firms’ operations as they present opportunities for soliciting bribes.” - Interactions with public bodies such as the tax authority, customs, or the judiciary are often associated with facilitation payments to accelerate procedures. - Government actions in the past decade include: anti-corruption law (2010), witness protection law (2013), merging the Transparency Ministry with Justice, decentralizing by installing an anticorruption unit in each public-sector entity, and plans to transfer the Real Estate Office to the Ministry of Justice to create a national registry. - Staff-identified governance priorities (in line with the Framework for Enhanced Fund Engagement on governance): - Move toward digital methods for tax and business-related procedures. - Improve legislative framework governing SOEs and SOE oversight. - Strengthen planning and implementation of public investment, including with a full PIMA assessment. - Submit financial statements of public entities to independent auditors. - Eliminate manual procedures on the Treasury Single Account. - Conduct a new PEFA mission for the central government (follow-up to 2009 report). - Strengthen the AML/CFT framework ahead of the 2020 GAFILAT assessment. - Adopt standards under the Extractive Industries Transparency Initiative (EITI) in the extractive sectors. ### Financial stability and financial inclusion - Effects of the FSL: - The FSL has induced rapid credit growth and may be adversely affecting financial inclusion. - Imposition of credit quotas and interest rate ceilings may have hindered assessment of credit risks. - The share of restructured loans rose from 1.2 percent in 2014 to 2.4 percent in June 2018. - Bank profitability is declining. - Data suggest the number of small loans decreased by 10 percent between September 2014 and June 2018 while loan amounts increased. - International experience: lending caps tend to reduce financial intermediation, lead to less transparency, and raise risks to financial stability, including by hurting viability of small and medium-sized banks. - Bank stress test summary (updated results confirm 2017 trends): a. Credit risk: about one half (most) of banks would need to raise capital to meet regulatory requirements in the event the NPL ratio doubled (quadrupled) from current levels. Potential losses would be large for some banks but in aggregate would remain manageable (at 0.1 and 0.9 percent of GDP, respectively). b. Liquidity risk: system-level liquidity has improved from a year ago, but under an extreme scenario (largest deposit withdrawal rates observed in recent years happen at all banks simultaneously) many banks would struggle to cover liquidity needs. c. Exchange rate risk: direct exchange rate risks are limited, reflecting low dollarization ratios and net foreign asset positions of banks. - Policy recommendations for the FSL and supervision: - Amend key provisions of the FSL: relax credit quotas and remove interest caps to limit poor-quality credit growth and allow lending decisions to reflect intrinsic risks. - ASFI should monitor capital quality closely and scrutinize risks from rapid credit growth to housing. - Assist authorities to prepare a real estate price index and urge rapid progress. - Continue making supervisory and regulatory framework more risk-based and forward-looking, including: (i) implementing full-fledged stress tests; (ii) introducing capital surcharges for operational and market risks; (iii) adopting a review and evaluation process considering institutions’ risk profiles, mitigating techniques, and capital planning. - Keep strengthening AML/CFT framework, including adopting the National Strategy on AML/CFT and relevant laws and regulations ahead of the 2020 GAFILAT assessment. - Staff believe an FSAP Update would be extremely useful for Bolivia. ### Data issues - Data availability and timeliness: - While macroeconomic data quality and quantity are generally sound, data should be published on a timelier basis according to a pre-announced schedule. - Staff encourage resuming regular and timely publication of indicators previously released monthly or quarterly, including shipments of natural gas, monthly hydrocarbon production, YPFB statistics, fiscal revenues by tax, the monthly production index (IGAE), public investment data, and more timely fiscal data dissemination. - Activities of subsidiaries of SOEs should be included in the accounts of the NFPS. - Government-issued US dollar bonds held by residents should be recorded as domestic debt. - Staff encourage the government to release the recent certificate on gas reserves to the public. - Staff welcome the government’s plan to adopt one of the Fund’s Data Dissemination Standards and encourage commitment as soon as possible. ### Authorities’ views - The authorities expect strong growth to continue, driven by new hydrocarbon exploration, a projected increase in natural gas production, and production and substitution of ethanol for imported fuel (which has increased sugar cultivation). - They view fiscal and external current account deficits as mainly caused by large public investments that will raise productive capacity and benefit future generations. - The government intends to hold public investment at current levels in nominal terms, noting that large investments had greatly improved economic and social indicators and there was no need for large increases in the medium term. - As mega projects unwind, new capital spending would focus on urban development, infrastructure, and youth programs, expected to help lower imports given the high import content of mega capital projects. *IMF staff summary from Country Report content provided.* ### 44. They expect the current account balance to improve in the near term and the fiscal ### They expect the current account balance to improve in the near term and the fiscal ### Authorities’ macroeconomic outlook and assumptions - Expect the current account balance to improve in the near term and the fiscal deficit to decline gradually. - Project moderation in public investment and an associated slowdown in imports to coincide with a steady rise in mineral and natural gas exports. - Use a different methodology than Fund staff to calculate the real effective exchange rate and estimate exchange rate misalignment at much lower levels than Fund staff. - Expect significant new revenues from the execution of projects in the PDES, obviating the need for near-term fiscal and external adjustment beyond that already envisaged. - Use a conservative oil price assumption of $45 per barrel in 2018 for annual budget preparations. ### Central bank role, lending, and credit policies - Authorities continue to believe in the development role of the BCB. - Argue that return on BCB loans to SOEs is higher than those from alternative financial assets and that financial institutions in Bolivia tend to lend in a procyclical manner. - Indicate banks would not likely fund investment projects when commodity prices are low. - Emphasize that most BCB loans were guaranteed by the central government and that direct lending to public corporations will remain an important financing source for public investment. - Government believes credit growth under the FSL has improved financial intermediation: banks remain profitable, NPLs are still the lowest in the region, credit is flowing to productive sectors, and credit quotas have helped diversify the economy and deepen finance. - Credit growth has been moderating and would not be excessive in the future since banks are set to meet the targets this year. - Interest rate ceiling and quotas may be revised given market developments, but they would be maintained. ### Social policy stance and targeting - Authorities emphasize achievements at reducing poverty and inequality and argue against fundamental change. - Note that past social policies achieved considerable success in reducing inequality and improving social indicators. - Argue that phasing out universal subsidies totally might lead to exclusion of some groups. - Have moved to reduce some energy subsidies and are building a database on all beneficiaries to better target future programs. - Recommend progressive fees for high-income earners on some universal benefits and phasing out broad-based fuel price subsidies (staff view). ### Efforts to enhance private sector contribution and administrative reforms - Setting up a website portal to provide easier access to information on tax incentives in the mining and manufacturing sectors. - Launched a national plan to reduce bureaucracy and lower corruption, taken steps to digitalize business processes, and made progress to modernize systems for importing and exporting. - Working to encourage public-private partnership (PPP) to implement infrastructure projects and intend to begin work on a new labor Code. ### Staff appraisal — vulnerabilities and risks - After years of strong GDP growth since the commodity price drop in 2014, trade-offs include large twin deficits, foreign reserve losses, and a sharp increase in public debt. - Staff assess the external position is weaker than implied by fundamentals and desirable policy settings. - Vulnerabilities are aggravated by worsening external and domestic risks. - Current commodity price outlook considered a permanent shock warranting policy rebalancing. - Staff welcome authorities’ plan to restrain public investment but call for a more definitive short-term policy correction to stem reserve decline and erosion of fiscal buffers. - Overall recommendation: tighten the macro policy stance, reallocate social spending, and pursue select structural reforms to shift toward broader, more diversified growth. ### Staff recommendations — fiscal framework and consolidation - Implement a full-fledged MTFF elaborated with a fiscal rule. - Under a rules-based MTFF, staff propose reducing the non-hydrocarbon primary deficit by about 1.4 percent of GDP per year so as to arrest the growth in debt-to-GDP by 2023. - Most fiscal tightening should come from spending: contain growth in the wage bill and public investment. - Ensure social spending is directed at those most in need, including by introducing progressive fees for high-income earners on some universal benefits and phasing out broad-based fuel price subsidies (well planned and communicated, with alternatives for the most vulnerable). ### Staff recommendations — monetary policy and central bank independence - Strengthen the independence of the central bank and streamline policy objectives. - Monetary policy should focus on price stability and preservation of the nominal exchange rate anchor. - Reform remaining administered prices to reflect market forces and normalize monetary conditions when inflation pressures resume. - The BCB’s exposure to SOEs exposes it to important credit risks and could undermine monetary policy. - Public investment should be undertaken by the central government or funded by the financial sector. ### Staff recommendations — financial sector and supervision - Modify some provisions of the FSL and continue efforts to improve financial sector supervision. - Early signs of credit quality deterioration: NPLs and the share of restructured loans are increasing. - Staff recommend removing credit quotas and interest rate caps to better reflect risks and returns and limit systemic risk build-up. - Encourage implementing full-fledged bank stress tests, introducing capital surcharges for operational and market risks, and strengthening the AML/CFT framework ahead of the 2020 assessment by GAFILAT. ### Staff recommendations — structural reforms to boost private sector-led growth - Lower tariffs on manufacturing goods and free up remaining product markets. - Discontinue indexing national wage bonuses to the GDP growth rate and align wage growth with cost of living adjustments and productivity. - Consider reducing the government’s take in hydrocarbon and mineral sectors in a transparent manner that avoids discretionary tax incentives. - Cancel the Social Companies Law and implement measures to improve the business climate and reduce vulnerabilities to corruption. - Implement digital processes for filing taxes and payments online (VAT, social security contributions, transaction tax) and move toward digital methods for business-related procedures. ### Data provision and transparency - Data provision is broadly adequate for surveillance, but recent weaknesses need addressing. - Policy of indexing the national wage bonus (Aguinaldo) to the rate of GDP growth risks politicizing national accounts and could affect confidence in official statistics; staff urge discontinuation. - Urge resumption of regular and timely publication of data on shipments of natural gas, monthly hydrocarbon production, YPFB statistics, the monthly production index (IGAE), tax revenues, public investment data, and monetary data on Other Financial Corporations. - Encourage Bolivia to subscribe to the e-GDDS or the SDDS to enhance data transparency. *Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18379.pdf* ### 56. It is proposed that the next Article IV consultation with Bolivia be held on the standard ### cr18379 - 56. It is proposed that the next Article IV consultation with Bolivia be held on the standard ### Consultation timing - It is proposed that the next Article IV consultation with Bolivia be held on the standard 12-month cycle. ### Past Fund policy recommendations (summary of Table 1) - Enhancing the Fiscal policy framework - Improve the non-hydrocarbons balance — Partially implemented. "The non-hydrocarbons deficit was reduced in 2016, but increased thereafter, and remains at high levels." - Adopt a medium-term fiscal framework — In progress. "The authorities plan to create a Macro-Fiscal Unit at the Ministry of Finance to produce fiscal projections, and local governments and public enterprises prepare multi-year budgets." Authorities used conservative oil price assumptions and "did not save higher revenues in 2017 when actual prices exceeded the price assumed in the budget law." - Improving Monetary and Exchange Rate Policies - Discontinue central bank lending to SOEs — Not implemented. "Central bank lending to public corporations has continued." - Safeguarding Financial Stability - Continue strengthening supervision — In progress. "Credit registry coverage was expanded and the depositor protection fund was created." Regulatory tightening included increasing the primary capital requirement "from 5 percent to 7 percent of risk-weighted assets and contingencies," guidance on operational and interest risks, and the Financial Stability Council met for the first time in August 2015. IMF TA received in 2017-18 on bank supervision, macro-prudential supervision, and bank stress testing. AML/CFT national strategy prepared but stalled in parliament. - Modify interest rate caps and credit quotas — Limited progress. "Financial institutions have been given five years to comply, with intermediate annual targets." July 2015 decree broadened "productive" sector definitions; small lenders face difficulties meeting targets. - Increasing Potential Growth - Implement key structural reforms in labor and product markets, and improve incentives for hydrocarbon and mining exploration — Some progress. "Authorities increased gas prices for industrial users, increased electricity prices depending on the amount used, and abolished some key restrictions on exports in 2017-18." Hydrocarbon incentives law (December 2015) provides incentives for crude oil and condensates production but "falls short regarding making exploration investments substantially more attractive." August 2017 "ultra efficient" exploration plan introduced. ### Selected economic and financial indicators (highlights from Table 2) - Real GDP (annual percentage changes): 2016: 4.3, 2017: 4.2, 2018: 4.5, 2019: 4.2, 2020: 3.9, 2021: 3.8, 2022: 3.7, 2023: 3.7 - Nominal GDP (percent of GDP figures by year listed in table): 2016: 3.6, 2017: 11.1, 2018: 9.8, 2019: 7.8, 2020: 7.8, 2021: 7.8, 2022: 8.1, 2023: 8.3 - CPI inflation (period average): 2016: 3.6, 2017: 2.8, 2018: 2.8, 2019: 4.0, 2020: 4.0, 2021: 4.0, 2022: 4.3, 2023: 4.5 - Total investment (percent of GDP): 2016: 21.1, 2017: 22.2, 2018: 22.0, 2019: 20.6, 2020: 19.2, 2021: 17.9, 2022: 16.8, 2023: 16.0 - Gross national savings (percent of GDP): 2016: 15.1, 2017: 16.0, 2018: 16.3, 2019: 15.0, 2020: 13.8, 2021: 12.5, 2022: 11.3, 2023: 10.7 - Combined public sector revenues and grants (percent of GDP): 2016: 32.8, 2017: 30.7, 2018: 31.3, 2019: 31.9, 2020: 31.6, 2021: 31.2, 2022: 30.8, 2023: 30.3 - Hydrocarbon related revenue (percent of GDP): 2016: 5.1, 2017: 4.8, 2018: 5.7, 2019: 6.3, 2020: 5.9, 2021: 5.5, 2022: 5.2, 2023: 4.8 - Expenditure (percent of GDP): 2016: 40.0, 2017: 38.5, 2018: 38.8, 2019: 38.2, 2020: 37.2, 2021: 36.3, 2022: 35.2, 2023: 34.1 - Capital expenditure (percent of GDP): 2016: 14.7, 2017: 13.6, 2018: 13.0, 2019: 12.2, 2020: 11.4, 2021: 10.6, 2022: 9.9, 2023: 9.2 - Net lending/borrowing (overall balance, percent of GDP): 2016: -7.3, 2017: -7.8, 2018: -7.4, 2019: -6.3, 2020: -5.7, 2021: -5.1, 2022: -4.3, 2023: -3.8 - Non-hydrocarbon balance (percent of GDP): 2016: -10.9, 2017: -11.7, 2018: -12.6, 2019: -11.7, 2020: -10.5, 2021: -9.6, 2022: -8.5, 2023: -7.6 - Total gross NFPS debt (percent of GDP): 2016: 46.6, 2017: 51.1, 2018: 53.5, 2019: 54.6, 2020: 54.6, 2021: 54.7, 2022: 54.7, 2023: 54.4 - Net Central Bank foreign reserves (in millions of U.S. dollars): 2016: 10,081; 2017: 10,261; 2018: 8,774; 2019: 8,339; 2020: 7,914; 2021: 7,138; 2022: 6,312; 2023: 5,689 - In months of imports of goods and services: 2016: 10.4, 2017: 9.7, 2018: 7.7, 2019: 6.9, 2020: 6.1, 2021: 5.1, 2022: 4.3, 2023: 3.8 - In percent of GDP: 2016: 29.6, 2017: 27.1, 2018: 21.1, 2019: 18.6, 2020: 16.4, 2021: 13.7, 2022: 11.2, 2023: 9.3 - Credit to the private sector (annual percent change): 2016: 14.8, 2017: 12.8, 2018: 11.7, 2019: 10.9, 2020: 10.1, 2021: 10.1, 2022: 10.1, 2023: 9.8 - Nominal GDP (in billions of U.S. dollars, memorandum): 2016: 34.1, 2017: 37.9, 2018: 41.6, 2019: 44.8, 2020: 48.3, 2021: 52.1, 2022: 56.3, 2023: 61.0 - Oil prices (U.S. dollars per barrel, memorandum): 2016: 42.8, 2017: 52.8, 2018: 69.4, 2019: 68.8, 2020: 65.7, 2021: 63.1, 2022: 61.3, 2023: 60.3 ### Combined public sector operations (highlights from Table 3) - Revenue (percent of GDP): 2016: 32.8, 2017: 30.7, 2018: 31.3, 2019: 31.9, 2020: 31.6, 2021: 31.2, 2022: 30.8, 2023: 30.3 - Taxes (percent of GDP): 2016: 26.2, 2017: 23.9, 2018: 24.1, 2019: 24.4, 2020: 24.4, 2021: 24.0, 2022: 23.8, 2023: 23.4 - IDH and royalties (percent of GDP): 2016: 4.1, 2017: 3.7, 2018: 4.2, 2019: 4.5, 2020: 4.3, 2021: 3.9, 2022: 3.7, 2023: 3.5 - Expenditure (percent of GDP): 2016: 40.0, 2017: 38.5, 2018: 38.8, 2019: 38.2, 2020: 37.2, 2021: 36.3, 2022: 35.2, 2023: 34.1 - Compensation of employees (percent of GDP): 2016: 11.2, 2017: 11.7, 2018: 12.0, 2019: 11.9, 2020: 11.8, 2021: 11.6, 2022: 11.5, 2023: 11.3 - Energy-related subsidies to SOEs (percent of GDP): 2016: 0.5, 2017: 0.8, 2018: 1.7, 2019: 1.8, 2020: 1.6, 2021: 1.5, 2022: 1.4, 2023: 1.3 - Net acquisition of nonfinancial assets (percent of GDP): 2016: 14.7, 2017: 13.6, 2018: 13.0, 2019: 12.2, 2020: 11.4, 2021: 10.6, 2022: 9.9, 2023: 9.2 - Primary balance (percent of GDP): 2016: -6.3, 2017: -6.7, 2018: -6.4, 2019: -4.9, 2020: -4.1, 2021: -3.4, 2022: -2.7, 2023: -2.2 - Net incurrence of liabilities (percent of GDP): 2016: 7.3, 2017: 7.8, 2018: 7.4, 2019: 6.3, 2020: 5.7, 2021: 5.1, 2022: 4.3, 2023: 3.8 - External net incurrence of liabilities (percent of GDP): 2016: 2.0, 2017: 5.6, 2018: 2.1, 2019: 2.1, 2020: 1.9, 2021: 1.5, 2022: 1.2, 2023: 1.0 - Domestic net incurrence of liabilities (percent of GDP): 2016: 5.3, 2017: 2.2, 2018: 5.3, 2019: 4.2, 2020: 3.7, 2021: 3.6, 2022: 3.1, 2023: 2.8 ### Non-Financial Public Sector debt (Table 4) - Total NFPS debt (percent of GDP): 2010: 39.6, 2011: 37.5, 2012: 36.2, 2013: 37.1, 2014: 38.0, 2015: 41.3, 2016: 46.6, 2017: 51.1 - Foreign debt (in millions of U.S. dollars): 2010: 15.4, 2011: 15.3, 2012: 15.7, 2013: 17.5, 2014: 17.5, 2015: 18.4, 2016: 20.5, 2017: 24.1 - BCB loans to SOEs (percent of GDP): 2010: 0.0, 2011: 2.1, 2012: 4.4, 2013: 6.1, 2014: 7.3, 2015: 9.3, 2016: 11.8, 2017: 12.7 - Memorandum: NFPS deposits with BCB: 2010: 21.0, 2011: 21.5, 2012: 23.7, 2013: 25.0, 2014: 22.2, 2015: 18.3, 2016: 16.1, 2017: 14.0 ### Financial system indicators (Table 5 key figures) - Central Bank net international reserves (stocks in millions of U.S. dollars): 2016: 10,081; 2017: 10,261; 2018: 8,774; 2019: 8,339; 2020: 7,914; 2021: 7,138; 2022: 6,312; 2023: 5,689 - Base money (thousands of Bolivianos): 2016: 63,139; 2017: 69,565; 2018: 75,772; 2019: 82,489; 2020: 88,899; 2021: 95,910; 2022: 103,066; 2023: 110,282 - Financial system broad money (stocks in millions of Bolivianos): 2016: 191,109; 2017: 210,220; 2018: 232,039; 2019: 253,650; 2020: 275,831; 2021: 300,155; 2022: 326,365; 2023: 354,295 - Credit to the private sector (stocks in millions of Bolivianos): 2016: 134,637; 2017: 151,923; 2018: 169,704; 2019: 188,206; 2020: 207,262; 2021: 228,136; 2022: 251,067; 2023: 275,689 - Annual percentage changes (selected): Broad money growth: 2016: 2.6, 2017: 10.0, 2018: 10.4, 2019: 9.3, 2020: 8.7, 2021: 8.8, 2022: 8.7, 2023: 8.6; Credit to the private sector growth: 2016: 9.3, 2017: 9.0, 2018: 8.5, 2019: 8.0, 2020: 7.5, 2021: 7.6, 2022: 7.6, 2023: 7.5 ### Balance of payments (Table 6 highlights) - Current account balance (in millions of U.S. dollars): 2016: -1,944; 2017: -2,013; 2018: -1,977; 2019: -2,082; 2020: -2,190; 2021: -2,369; 2022: -2,615; 2023: -2,688 - Current account balance (percent of GDP): 2016: -5.7, 2017: -5.3, 2018: -4.8, 2019: -4.6, 2020: -4.5, 2021: -4.5, 2022: -4.6, 2023: -4.4 - Exports (c.i.f., in millions of U.S. dollars): 2016: 7,000; 2017: 7,752; 2018: 9,041; 2019: 9,521; 2020: 10,141; 2021: 10,761; 2022: 11,373; 2023: 12,063 - Natural gas exports (millions of U.S. dollars): 2016: 2,049; 2017: 2,581; 2018: 2,903; 2019: 3,079; 2020: 3,066; 2021: 3,013; 2022: 2,999; 2023: 2,980 - Imports (c.i.f., in millions of U.S. dollars): 2016: 8,515; 2017: 9,308; 2018: 9,974; 2019: 10,614; 2020: 11,241; 2021: 11,889; 2022: 12,626; 2023: 13,367 - Net BCB international reserves (in billions of U.S. dollars): 2016: 10.1, 2017: 10.3, 2018: 8.8, 2019: 8.3, 2020: 7.9, 2021: 7.1, 2022: 6.3, 2023: 5.7 ### External vulnerability indicators (Table 7) - Public sector debt (percent of GDP): 2016: 46.6, 2017: 51.1, 2018: 53.5, 2019: 54.6, 2020: 54.6, 2021: 54.7, 2022: 54.7, 2023: 54.4 - Credit to the private sector (percent of GDP): 2016: 57.6, 2017: 58.5, 2018: 59.5, 2019: 61.2, 2020: 62.5, 2021: 63.8, 2022: 65.0, 2023: 65.9 - Total external debt (percent of GDP): 2016: 30.6, 2017: 32.8, 2018: 32.5, 2019: 32.8, 2020: 32.9, 2021: 32.7, 2022: 32.3, 2023: 31.3 - Gross official reserves (in months of next year's imports): 2016: 10.4, 2017: 9.7, 2018: 7.7, 2019: 6.9, 2020: 6.1, 2021: 5.1, 2022: 4.3, 2023: 3.8 - Total external debt (percent of exports of goods and services): 2016: 126.1, 2017: 130.5, 2018: 129.1, 2019: 132.7, 2020: 133.7, 2021: 134.3, 2022: 134.3, 2023: 132.4 - Total external debt service (percent of exports of goods and services): 2016: 20.9, 2017: 24.9, 2018: 18.3, 2019: 18.4, 2020: 18.4, 2021: 17.0, 2022: 16.7, 2023: 16.6 ### Risk Assessment Matrix (Table 8) — key risks and recommended responses - External risks - Unsustainable macroeconomic policies (Likelihood: Medium) — Expected impact: High. Recommended response: "Fiscal, credit, wage, and structural policies should be consistent with/supportive of the stabilized exchange rate regime. Implement gradual fiscal consolidation and develop a medium-term fiscal framework... Public investment should be prioritized and the efficiency improved, and wage increases contained in line with productivity." - Sizeable deviations from baseline commodity prices (Likelihood: Medium) — Expected impact: Medium. Recommended response: "Bolivia’s economy is sensitive to commodity prices. Gas and minerals account for 82 percent of total exports, and hydrocarbons alone account for more than 15 percent of government revenues. Without fiscal correction, lower energy prices will put further pressures on reserves. Bolivia would need a strong macro policy response..." - Tighter global financial conditions and US dollar appreciation (Likelihood: High) — Expected impact: High. Recommended response: "Fiscal and credit policies should be tightened... Introducing greater exchange rate flexibility could help the economy absorb external shocks..." - Slowdown in growth and higher risks in neighboring countries (Likelihood: High) — Expected impact: Medium. Recommended response: "Pursue macro and structural reforms... consider introducing exchange rate flexibility." - Domestic risks - Declining natural gas production and failure to discover new fields (Likelihood: Medium to High) — Expected impact: Medium to High. Recommended response: "Improve the business environment for private sector participation in the hydrocarbons sector. Move forward proactively on the Brazilian contract negotiations." - Distortions in the financial system (Likelihood: Medium) — Expected impact: Medium to High. Recommended response: "Modify key provisions of the law (interest rate caps, credit quotas) via decrees or amendments as needed." - Political uncertainty related to the 2019 election (Likelihood: Medium to High) — Expected impact: Low to Medium. Recommended response: "Proceed with corrective policy measures, including restraining fiscal spending." ### Sustainable Development Goals (Table 9) - Summary statuses and trends (selected): - No poverty — Status: Significant challenges remain; Trend: on track to achieve goal by 2030 - Zero hunger — Status: Major challenges remain; Trend: score moderately increasing, insufficient to attain goal - Good health and well-being — Status: Major challenges remain; Trend: score stagnating or increasing at less than 50% of required rate - Quality education — Status: Significant challenges remain; Trend: score moderately increasing, insufficient to attain goal - Gender equality — Status: Challenges remain; Trend: score stagnating or increasing at less than 50% of required rate - Decent work and economic growth — Status: Significant challenges remain; Trend: on track to achieve goal by 2030 - Climate action — Status: Challenges remain; Trend: maintaining SDG achievement - Partnership for the goals — Status: Challenges remain ### Key policy recommendations (synthesized from tables and narrative) - Implement gradual fiscal consolidation and develop a medium-term fiscal framework (create Macro-Fiscal Unit; prioritize and improve efficiency of public investment). - Restrain fiscal spending to reduce the overall and non-hydrocarbon deficits (target reductions from -7.4 percent to lower deficits in projection years). - Reform monetary/exchange rate policy stance to allow greater flexibility to absorb external shocks, while tightening fiscal and credit policies consistent with a nominal exchange rate anchor. - Address central bank lending to SOEs — discontinue or restrict to reduce fiscal and contingent liabilities. - Strengthen financial regulation and supervision further (complete AML/CFT strategy in parliament; modify interest rate caps and credit quotas to avoid financial distortions). - Improve incentives and business environment to attract private participation in hydrocarbon exploration and mining; act proactively on contract negotiations (notably with Brazil). - Pursue structural reforms in labor and product markets to enhance competitiveness and diversify exports. *Source: Fund staff.* ### Annex I. Public Debt Sustainability Analysis (DSA) ### Annex I. Public Debt Sustainability Analysis (DSA) ### Summary findings - Staff’s analysis applying the Public DSA framework for Market-Access Countries suggests that risks to Bolivia’s public debt are significant (2018–23). - Public debt was 51 percent of GDP in 2017 and is projected to reach 54 percent of GDP in 2023 under the baseline (which assumes that public investments in nominal terms will be kept at the current levels, reducing the public investment-to-GDP ratio by 3.8 percentage points of GDP in 2019–23). - Gross financing needs are projected to gradually decline to about 5.9 percent of GDP in 2023 under the baseline and to about 7.4 percent of GDP under the “combined shock.” - The long maturity of most loans (20 years and more) and relatively low interest rates reduce financing needs; financing needs would remain below the respective benchmark under most standard macroeconomic shocks through 2023, except in 2019–20 when they would exceed 10 percent under the “primary balance” and “combined” shocks. - Rapid growth in foreign financing in recent years poses risks; staff’s historical projections have been slightly pessimistic, and medium-term projections remain conservative given prevailing risks. ### Definition and debt profile - Public sector debt in this DSA includes all financial obligations of the central government and subnational governments and central bank (BCB) loans to non-financial SOEs and two public funds—Fondo Nacional de Desarrollo Regional (FNDR) and Fondo para la Revolución Industrial Productiva—FINPRO. - Public sector debt path: - Declined to 37.5 percent of GDP in 2011, increased to 51.1 percent of GDP by 2017. - BCB’s lending to SOEs, FNDR, and FINPRO increased from 2.1 percent of GDP in 2011 to 15 percent of GDP in 2017. - There was a 4.5 percentage point of GDP increase in gross public debt during 2017, due mainly to external borrowing and BCB lending to SOEs. - External debt accounted for about 47 percent of total debt at end-2017. - Net public debt (gross debt excluding deposits of the general government and SOEs at the BCB) stood at 35.3 percent of GDP in 2017, with public-sector deposits at the BCB at about 14 percent of GDP. ### Staff macroeconomic and fiscal assumptions (baseline) - Real GDP growth: about 4.5 percent in 2018 and 4.2 percent in 2019; converging to potential of 3.7 percent thereafter. - Inflation (GDP deflator): projected at about 4.5 percent in the medium term; GDP deflator projected to increase by 4.6 percent in 2018 and 4-5 percent during 2019–23. - Budget balance / primary deficit: primary deficit declining to 2.2 percent of GDP by 2023 from 6.7 percent of GDP in 2017 based on the authorities’ plan to contain capital spending. - Effective interest rate: impact of rising US rates would be gradual and limited given debt maturity structure. - Gross financing needs (baseline): projected to fall to about 6- 7 percent of GDP in 2021–23 from about 9 percent of GDP in 2018. - Public debt-to-GDP ratio (baseline): projected to reach 54 percent in 2023. ### Stress tests and scenario outcomes - a. Primary balance shock - Shock: primary balance hit by 2.1 percent of GDP (50 percent of the 10-year historical standard deviation of the primary balance-to-GDP ratio). - Debt/GDP ratio: increases to 58.6 percent in 2020 and then gradually decreases to 58.0 percent in 2023 (about 3.6 percentage points higher than the baseline for 2023). - Assumption: increase in interest rates of 25 bps for every 1 percent of GDP worsening in the primary balance. - b. Growth shock - Shock: real GDP growth rates lower by 1 percentage point during 2019–20 (100 percent of the 10-year historical standard deviation). - Debt/GDP ratio: increases to 56.2 percent in 2020 and then decreases to 55.5 percent in 2023 (1.1 percentage points higher than the baseline). - c. Interest rate shock - Shock: real interest rates increase by about 300 basis points during 2019–23 (difference between average real interest rate in 2007–17 and the highest historical real interest rate). - Debt/GDP ratio: gradually increases to 55.3 percent in 2023 (1.2 percentage points higher than the baseline). - d. Exchange rate shock - Shock: real effective exchange rate depreciates by 20 percent in 2019. - Debt/GDP ratio: increases to 58.4 percent in 2019 and falls to 56.7 percent in 2023 (2.3 percentage points higher than the baseline). - e. Combined shock - Shock: simultaneous combination of the previous four shocks. - Debt/GDP ratio: rises to 64.8 percent in 2019 and further to 66.8 percent by 2023 (12.6 percentage points higher than the baseline). - f. Contingent liability shock - Shock: one-time increase in non-interest expenditures in 2019 equivalent to 10 percent of banking sector assets, combined with lower growth and lower inflation in 2018–19 (growth reduced by 1 standard deviation). - Debt/GDP ratio: increases to 58.4 percent in 2019 and moderates to 57.8 percent in 2023 (3.5 percentage points higher than the baseline). ### Projections and key statistics (selected exact values) - Public gross nominal debt (percent of GDP): 2017 = 51.1; 2018 = 53.5; 2019 = 54.6; 2020 = 54.6; 2021 = 54.7; 2022 = 54.7; 2023 = 54.4. - Net public debt (percent of GDP): 2017 = 35.7; 2018 = 49.7; 2019 = 45.7; 2020 = 49.0; 2021 = 51.1; 2022 = 51.8; 2023 = 52.6; 2023 reported later = 52.9 (table entries). - Public gross financing needs (percent of GDP): 2017 = 8.4; 2018 = 9.1; 2019 = 8.2; 2020 = 7.6; 2021 = 7.1; 2022 = 6.4; 2023 = 5.9. - Real GDP growth (percent): 2018 = 4.5; 2019 = 4.2; 2020 = 3.9; 2021 = 3.8; 2022 = 3.7; 2023 = 3.7. - Inflation (GDP deflator, percent): 2018 = 4.6; 2019 = 4.2; 2020–2023 = 4.5. - Effective interest rate (percent): 2018 = 2.2; 2019 = 2.9; 2020 = 3.2; 2021–2023 = 3.3. - Change in gross public sector debt (cumulative): 2018 = 2.3; 2019 = 1.1; 2020 = 0.0; 2021 = 0.1; 2022 = 0.0; 2023 = -0.3; cumulative = 3.3. - Identified debt-creating flows (cumulative): primary deficit contributions sum to 23.6 (over projection horizon in table). - Public sector deposits at BCB: about 14 percent of GDP (2017). ### Debt dynamics, vulnerabilities and market indicators - Debt composition and maturity: most loans have long maturities (20 years and more); medium- and long-term debt dominate the maturity profile. - Currency composition: significant share of debt is foreign-currency denominated (external debt ≈ 47 percent of total debt at end-2017). - Market indicators (as reported): - EMBIG (bp) = 263 (long-term bond spread over U.S. bonds; 3/263 shown in table). - CDS = N/A in table. - Risk assessment: DSA heat-map indicates significant risks given debt profile vulnerabilities, gross financing needs, and external financing requirements. ### External debt sustainability (selected exact values) - External debt (percent of GDP): Baseline path shows external debt around 20.2 in 2013, rising to 32.8 by 2019 and remaining near 32.3–32.7 through 2023 in the table’s projections. - External debt dynamics (selected flows): - Change in external debt (various years): 2013 = 1.5; 2014 = 5.8; 2015 = 2.1; 2016 = 2.5; 2017 = 2.2; 2018 = -0.2; 2019 onward small changes. - Current account deficit, excluding interest payments (percent of GDP): 2013 = -3.9; 2014 = -3.0; 2015 = -4.7; 2016 = -4.4; 2017 = -3.9; projected 2018–23 around -3.3 to -3.1. - Gross external financing need (in billions of US dollars): 2013 = 0.4; 2014 = 1.4; 2015 = 5.7; 2016 = 4.7; 2017 = 5.5; 2018 = 5.1; 2019 = 4.6; 2020 = 4.8; 2021 = 5.0; 2022 = 5.4; 2023 = 6.8. - External debt-to-exports ratio (percent): 2013 = 47.7; 2014 = 61.0; 2015 = 93.1; 2016 = 126.1; 2017 = 130.5; projected 2018–23 remain elevated (e.g., 2018 = 129.1; 2023 = 132.4). ### Realism of baseline and forecast track record - Forecast track record (2009–2017): Bolivia’s median forecast errors show: - Real GDP growth forecast error = 0.65 (Bolivia has a percentile rank of 91%). - Primary balance forecast error = 0.21 (percent of GDP) (percentile rank 78%). - Inflation (deflator) forecast error = -0.97 (percentile rank 25%). - Assessments include boom-bust analysis and measures of cyclically-adjusted primary balance (CAPB) adjustment; Bolivia’s 3-year average CAPB level has a percentile rank of 91% in the distribution shown. ### Policy implications and considerations (as reported in text) - Maintaining public investments in nominal terms (authorities’ plan) reduces the public investment-to-GDP ratio by 3.8 percentage points during 2019–23 and is central to the baseline projection of a declining primary deficit to 2.2 percent of GDP by 2023. - Given the rapid growth in foreign financing and the significant share of external debt, risks from exchange rate and external financing shocks warrant monitoring. - The long maturity and relatively low interest rates on existing loans provide resilience, but combined shocks (growth, interest, exchange rate, primary balance) can materially raise debt ratios (example: combined shock → debt-to-GDP 66.8 percent by 2023). *Source: IMF staff (Annex I. Public Debt Sustainability Analysis (DSA), Bolivia).* ### Annex II. External Sector Assessment ### Annex II. External Sector Assessment ### Overall assessment and policy implications - Overall Assessment: The external position of Bolivia in 2018 is substantially weaker than implied by fundamentals and desirable policy settings. - Potential policy responses: - Fiscal consolidation supported with structural reforms are needed to improve Bolivia’s competitiveness and potential growth. - To preserve the stabilized exchange rate, Bolivia will need to rely on internal adjustment: - Wage should grow in line with the productivity. - Government should employ structural reforms that improve the business environment by lowering tariff barriers and strengthening governance. - Wage containment and fiscal consolidation supported by structural reforms to raise productivity. ### Foreign asset and liability position and trajectory - Background: - Bolivia has been a net debtor since 2016Q4. - NIIP fell from 4.7 billion (14.2 percent of GDP) in 2014 to -2.4 billion (-6.3 percent of GDP) at end-2017. - Decline in net foreign assets driven largely by widening current account deficit during the commodity boom cycle. - Foreign liabilities increased by 5.7 percent of GDP, which included an external sovereign bond issuance of US$1 billion in 2017. - Assessment: - The negative NIIP is expected to deteriorate reflecting persistent current account deficits through 2023. - NFA model: maintaining the NIIP at the 2017 level of -6.3 percent of GDP would require a current account deficit of 0.8 percent of GDP, implying a real depreciation of 18.5 percent. - Bolivia does not have large short-term gross financing needs as much of external debt is long-term, though external debt-to-GDP has risen rapidly, raising external vulnerability. ### Current account - Background: - Current account closely follows commodity price swings. - With collapse in commodity prices in 2014, current account reverted to deficit after 10 years of continuous surplus. - Over the last three years, the current account deficit has averaged 5.6 percent of GDP, with exports declining by 17.6 percent of GDP. - Terms-of-trade are projected to recover in 2018, helping to narrow the current account deficit. - Medium-term baseline: slowing in exports as hydrocarbon production from existing fields declines and imports moderate with lower public investment; current account deficit expected to moderate slightly. - Assessment: - EBA-lite model-based estimates: cyclically adjusted current account deficit of 5.1 percent of GDP, compared to a norm of 0.5 percent of GDP; implies an imbalance of 5.6 percent of GDP. - Regression-based model (fuel exporters only): a real exchange rate adjustment of 26.3 percent is needed to close the current account gap. ### Real exchange rate (REER) - Background: - CPI-based REER appreciating trend since end-2017. - As of September 2018, the REER had appreciated by 9.5 percent since end-2017. - Appreciation reflects depreciation of Bolivia’s major trading partners against the U.S. dollar since the Argentina Crisis, coupled with an appreciating U.S. dollar (Boliviano pegged to U.S. dollar). - Assessment: - REER regression model for 2018 indicates an overvaluation of 33 percent compared to the level implied by fundamentals and desirable policies. - Regression modified to include only fuel exporters; results sensitive to fiscal and financial policies. - Model assumes an appropriate cyclically adjusted fiscal deficit of 4.3 percent of GDP, which would put the debt-to-GDP ratio back to its 2016 level. - To realign the exchange rate with fundamentals: focus on fiscal consolidation and improving productivity and competitiveness, including lower wage growth. ### Capital and financial accounts: flows and policy measures - Background: - Bolivia issued sovereign bonds of US$1 billion (2.6 percent of GDP) in 2017, maturity 10 years, interest rate 4.5 percent. - FDI inflows expected to be about 1.0 percent of GDP in 2018 compared to a three-year average of 1.5 percent of GDP. - According to the Chinn-Ito index, Bolivia’s capital account is less open than the LAC average. - Assessment: - Current account deficit has been financed mainly by drawing down international reserves. - Normalization in U.S. monetary policy expected to raise cost of external funding. - Authorities need policies that attract larger FDI inflows, preferably non-debt creating, to revitalize the non-hydrocarbon sector. ### FX intervention and reserves level - Background: - Bolivia has a stabilized exchange rate regime pegged to U.S. dollar. - Through auctions and direct sales, the central bank sold about 2.5 billion of reserves in 2017. - Recent data for 2018 suggests a slowing in FX sales. - Assessment: - Reserves remain adequate (at 8 months of imports) according to standard Fund Assessing Reserve Adequacy (ARA) metrics. - Reserves loss accelerated in 2018 and are forecast to fall below adequate levels based on the ARA by end-2020. - To preserve the stabilized exchange rate, correcting external imbalances will have to rely more on internal adjustment, including fiscal consolidation and wage containment, supported by structural reforms to raise productivity. ### Technical background notes and modules - Regression estimation: - Regression coefficients are estimated using fuel exporting countries as defined by WEO. - External assessment for 2018 is based on baseline projections presented in Table 1-6. - While the size of overvaluation varies slightly depending on year used, the overall assessment of a moderate weak external sector assessment remains unchanged. - Commodity module: - Consumption-based allocation model suggests a current account norm at above 1.0 percent of GDP for Bolivia measured at constant real per capita annuity. - EBA-lite CA methodology suggests -0.5 percent of GDP. - Higher CA norm in consumption allocation model reflects volatility of revenue flows motivating precautionary savings to smooth consumption. - Focus should be on the medium term to filter cyclical components. - Investment income module: - Investment-needs model suggests a CA norm lower than consumption-allocation model; for Bolivia the medium-term CA norm from the investment model is close to 0 percent. - Bolivia’s CA norm is sensitive to public and private investment efficiency, illustrating that external misalignment depends on investment efficiency and motivates specific policies around it. - Focus should be on the medium term to filter cyclical components. *Source: cr18379 - Annex II. External Sector Assessment* ### Annex IV. Governance Issues and Options ### Annex IV. Governance Issues and Options ### Overview - Governance weaknesses can have adverse effects on economic growth and equity (IMF 2018a). - Corruption has been linked to lower long-term growth (Ugur 2014), lower tax collection (IMF 2007), and inequality (Gupta, Davoodi and Alonso-Terme 1998). - Staff identified macro-critical governance weaknesses warranting analysis and follow up this year: (i) fiscal governance, in particular public financial management (PFM); (ii) transparency of government operations in the natural resource sector; (iii) certain aspects of the regulatory environment for the private sector and asset/investor protection; and (iv) follow up on progress to strengthen AML-CFT. ### The Government’s Efforts to Improve Governance - Major initiatives promoted by the authorities over the last decade: - Creation in 2009 of the Ministerio de Transparencia Institucional y Lucha Contra la Corrupción with an explicit mandate and investigative powers. - Merger in 2018 of this Ministry with the Ministry of Justice to create the Ministerio de Justicia y Transparencia Institucional. - Decentralization of corruption investigation to “transparency units” within each body of the public administration; Vice-ministry coordinates units and takes over investigations if they involve sums over US$1 million or involve the head of an entity of the public administration. - Enactment of the “Marcelo Quiroga Santa Cruz” anti-corruption law in 2010 and the Witness Protection Law in 2013. - Development of the Sistema Integrado de Información Anticorrupción y de Recuperación de Bienes del Estado. - Joint program with the UNODC under the UN Convention against Corruption to promote transparency practices in municipalities. - The authorities received IMF TA on AML/CFT, treasury and cash management, and tax and customs administration. - The government requested TA in 2017 to strengthen the overall framework to prevent corruption (not specific on areas of need). ### Staff Assessment — Public Financial Management (PFM) - Historical assessments: - PEFA Review in 2009 and IMF Fiscal Transparency Assessment in 2014. - PEFA awarded solid ratings of A or B to 40 percent of performance indicators. - 2014 IMF Fiscal Transparency Report classified 60 percent of Bolivia’s fiscal transparency practices as “Advanced” or “Good”. - IMF TA priorities and staff recommendations: - Governance and oversight of SOEs: - Identified weaknesses in the present law: (i) complicated governance structure dilutes responsibilities; (ii) blurred line between ownership and supervisory functions of the state; (iii) Act does not insulate corporate governance fully from political interference; (iv) effectiveness of monitoring and oversight of SOE budgets is unclear. - Recommendation: consider reform of legislation governing SOEs to increase accountability and transparency, clarify responsibilities of key decision-making bodies and agencies for regulatory and fiscal oversight functions, strengthen corporate governance regulations, and improve the budget approval process and budget oversight — consistent with the 2009 PEFA report. - Public investment: - Given government and SOE share of investment, staff recommend an in-depth Public Investment Management Assessment (PIMA) with FAD assistance. - Partial analysis during 2017 Article IV identified priorities: improving “project management and evaluation, central-local coordination, private sector participation in the infrastructure market, and monitoring of the existing stock of assets” (Country Report No. 17/395, Annex V). - Improved project planning, management and evaluation might have helped prevent the 2015 Fondo Indigena scandal involving “ghost” projects. - External auditing: - The financial statements of the Central Government are currently not audited by an independent external auditing institution. - An independent financial audit would boost reliability of financial and budgetary information; this weakness was identified in 2009 PEFA and 2014 Fiscal Transparency Assessment. - Operational risks involving the Treasury Single Account (TSA): - TSA adheres to best practices in most areas (extensive coverage of central government entities and SOEs; automatic revenue collection processes), but recent TA identified operational problems and manual processes affecting financial information accuracy and timeliness. - Staff urge adoption of TA recommendations to: (i) develop technological solutions to eliminate manual procedures, and (ii) automate revenue streams, revenue accounting classifications, and the integration of all cash forecasts (inflows, outflows and financing). - Medium-term fiscal framework: - A Medium Term Fiscal Framework would help address governance risks associated with excess spending above budget targets and mid-term supplementary budgets by making the process more transparent and predictable. ### The Extractive Sectors - Mining and hydrocarbon-related revenues contributed 30 percent on average of annual total fiscal revenues over 2009–17. - State involvement is extensive; management at Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) changed seven times in ten years; one executive arrested and indicted on corruption charges; other employees including technicians also arrested. - Staff recommendations: - Adopt international standards under the Extractive Industries Transparency Initiative (EITI) to promote disclosure: publish procedures for license allocation, a register of licenses and contracts, discussion of beneficial ownership and the role of the state. - Joining EITI would speed disclosure of revenue collection from every activity in the sector, including direct budget allocations and by SOEs and their subsidiaries. - Authorities were receptive and indicated follow up through the Ministry of Foreign Affairs. - EITI adoption should complement, not substitute, SOE oversight reforms. ### Business Regulation - Identified problems: - Inefficient and cumbersome regulations constrain firms and present corruption opportunities; interactions with public bodies are often associated with higher incidence of “facilitation payments”. - Private investment has been weak and declining as a share of total investment. - Staff proposals to strengthen governance and reduce corruption risks: - Move to full online filing and tax payments (including for VAT, social security contributions, the transaction tax) and possibly reduce the frequency of payments in some instances. - Improve IT (automation, web based, digital applications) to reduce interactions needed to obtain a business license from the municipality, get a company deed, obtain construction permits, and other administrative services. - Work on regulations to enhance investor protections and corporate governance regulations. - Recognize that reform of the judiciary system is essential but likely long-term. ### AML/CFT - Authorities have been strengthening AML/CFT supervision in the financial sector and are in the process of approving and implementing a National AML/CFT Strategy. - IMF provided TA between 2012-2017 on risk-based supervision and developing a National Strategy and Action Plan. - Strategy first proposed in 2016 but stalled in the Plurinational Legislative Assembly. - Staff encourage the government to move forward discussions with stakeholders to implement the National Strategy and continue strengthening AML/CFT framework, particularly ahead of the 2020 assessment by GAFILAT. ### Other Areas for Consideration - Independence of institutions: - Central bank lending to SOEs poses potential conflict of interest in monetary policy; legislation governing credit to SOEs and transparency of these operations are described in the Resoluciones de Directorio, but consultation processes and investment criteria are not well understood. - Staff maintain that direct lending by the BCB to SOEs be shifted onto the government budget or undertaken by the financial sector, and that legislation be amended to restrict systematic BCB lending to SOEs and government. - Official statistics: - Macroeconomic data are generally sound and technical capacities at INE are strong. - The policy of indexing the Doble Aguinaldo national wage bonus to real GDP growth has politicized the release of national accounts statistics and may have reduced dissemination of some data. - Staff recommend discontinuing the practice of indexing the economy-wide wage increase to real GDP growth as soon as possible. - Staff encourage authorities to subscribe to the e-GDDS and upgrade shortly thereafter to the SDDS to enhance data transparency in Bolivia. *Source: Annex IV. Governance Issues and Options, cr18379* ### 16.7 percent on average from 2014–17. Loan ### 16.7 percent on average from 2014–17. Loan ### Credit expansion and loan portfolio dynamics - Credit growth averaged 16.7 percent on average from 2014–17. - Loan amounts increased by about 60 percent between September 2014 and June 2018. - Larger loans were extended to fewer borrowers, raising idiosyncratic shock risks. - Loan concentration increased, with a large share of the aggregate loan portfolio at fixed interest rates. - Banks’ liabilities also have long maturities and fixed interest rates, partially offsetting interest rate risk from the loan side. - Pressures on banks to reach loan quotas have favored major borrowers in the productive sector, including some SOE subsidiaries, who benefited from low interest rates and long-term maturities and may have become over-indebted. ### Impact of lending caps and financial inclusion - Lending caps appear to have taken a toll on small borrowers. - Borrowers of less than US$5,000 dollars decreased by 10 percent from September 2014 to June 2018. - Average loan amounts increased, suggesting small borrowers may have been excluded from the formal financial system. - International experience on interest rate caps points to negative effects: withdrawal of financial services from the poor (Kenya); an increase in informal (unregulated) lending; an increase in the costs of borrowing caused by additional fees and commissions (Armenia, Nicaragua, South Africa); and a decrease in product diversity (Maimbo and Collegos, 2014). ### Risks to financial stability - Major borrowers’ low-rate, long-maturity financing may encourage over-indebtedness and lead to adverse implications for NPLs in the future. - Loan concentration and the large share of fixed-rate loans could pose interest rate risks under plausible shocks. - A recent change in the calculation of the BCB‘s reference rate (Tasa de Referencia), to which most floating rate loans are linked, implies lower profits for banks temporarily since yields on floating-rate loans have decreased while banks’ borrowing costs have been rising. ### Policy recommendations and supervisory actions - Promote further competition in the financial system to better attain financial inclusion objectives. - Eliminate interest rate caps to avoid the negative effects observed internationally (see examples above). - It is strongly recommended that ASFI conduct full-fledged stress tests on a regular basis to anticipate potential deterioration in the financial health of the system in the context of the strong credit dynamic that has evolved since the FSL was enforced. *Source: Authorities' data and Fund staff calculations; excerpts from the IMF staff report informational annex.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18379.pdf_