## BOLIVIA: STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (excerpt)

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### Major social achievements
- Extreme poverty fell from 45.3 to 11.1 percent over the last 17 years.
- Life expectancy rose from 62 to 72 years.
- Primary school completion rate increased from 84 to 99 percent.
- Additional staff appraisal figures (2000–2021):
  - Poverty rate fell from 66.4 to 36.3 percent.
  - Extreme poverty declined from 45.3 to 11.1 percent.
  - Life expectancy rose from 62 to 72 years.
  - Primary school completion rate increased from 84 to 99 percent.

### Fiscal adjustment and macro sustainability
- A meaningful fiscal adjustment is required to:
  - Restore debt sustainability.
  - Eliminate monetary financing.
  - Rebuild international reserves.
- If Bolivia retains the exchange rate peg, restoration of macro sustainability will require:
  - Reducing the primary deficit to around 1.5 percent of GDP through a credible medium-term plan.
  - Expenditure restraint including:
    - Eliminating the second supplementary year-end bonus ("doble aguinaldo").
    - Constraining growth in public sector wages.
    - Limiting growth in public investment.
    - Scaling back subsidies.
  - Broadening the tax base by:
    - Addressing informality.
    - Strengthening tax and customs administration (through IT modernization and improved governance).
    - Adjusting tax policy to increase personal income taxes on higher income households.
- Staff modeling indicates:
  - To eliminate monetary financing, prevent continued drawdown of international reserves, and put public debt on a downward path, Bolivia needs to reduce its primary deficit to 1.5 percent of GDP over the medium term.
  - Under current policies, the primary balance is expected to remain around 4.1 percent of GDP in 2025.

### Fuel subsidies, compensation, and communication
- Fuel subsidy reductions should be combined with compensation for the poorest deciles.
- Successful implementation of higher domestic fuel prices requires:
  - Recycling a portion of the budgetary savings to cash transfer programs targeted to the poorest deciles.
  - An effective communication strategy to raise awareness of the regressive nature of energy subsidies and benefits of market-based pricing combined with targeted cash transfers.

### Monetary policy, exchange rate, and central bank independence
- Bolivia would benefit from greater central bank independence and a carefully sequenced transition to a more flexible exchange rate.
- Benefits of increased exchange rate flexibility and institutional independence:
  - Preserve international reserves.
  - Reduce current exchange rate overvaluation.
  - Provide net welfare gains.
  - Increase resilience to market shocks if adopted with an inflation targeting monetary framework.
- Transition guidance:
  - Prepare and communicate carefully.
  - Coordinate with other macroeconomic policy measures.
  - Accompany by institutional independence for the central bank.
- Reserve management and CPVIS swaps:
  - More than half of the central bank’s gross international reserves are currently obtained through short-term FX swaps with commercial banks (CPVIS).
  - The BCB should reduce dependence on currency swaps as a source of reserves; if fiscal reforms are implemented, reserves can be built from external sovereign borrowing and direct purchases on the market.
  - Steadily lengthening maturity of remaining swaps would help lessen vulnerabilities.
  - Most CPVIS funds are provided on an overnight basis.

### Reserves and external position
- Bolivia’s external position is moderately weaker than implied by fundamentals and desirable policies.
- International reserves:
  - Declined from US$5.28 billion at end-2020 to US$4.3 billion at end-July 2022.
  - End-June 2022 reserves: US$4.5 billion = 3.8 months of projected 2023 imports or 55 percent of the ARA metric.
  - Staff target: rebuild reserve coverage to 60 percent of the ARA metric by end-2025.
- Much of existing reserves are short-term swap arrangements with private financial institutions, creating risk that these reserves would be unavailable under financial stress.

### Pension system interdependence and reform considerations
- Growing interdependence of the pension system and the government should be monitored.
- Pension fund asset trends:
  - Assets have increased by about US$1.5 billion per year since 2010; overall increase in the investment account of more than 300 percent since 2010.
  - Two private, defined contribution pension funds have around 50 percent of GDP in assets; an estimated 80 percent of the funds’ US$23 billion in assets are invested in low-yielding domestic deposit receipts and government debt.
  - Pension funds together are financing 30-40 percent of the fiscal deficit at long-term local currency interest rates of 4 to 5 percent.
  - Foreign assets limited to no more than 10 percent of the pension funds’ portfolio; offshore investment requires prior approval of the pension supervisor.
- Policy recommendations:
  - Diversify pension fund assets into a wider range of assets, potentially including foreign currency assets, to raise average returns and diversify exposure.
  - Condition liberalization on transition to professional and independent management of pension fund portfolios.
  - Pursue liberalization carefully to avoid exacerbating external imbalances and vulnerabilities.
- Authorities’ stance:
  - Authorities do not regard reliance on fiscal financing from private pension funds as a concern and view pension portfolios as conservative and prudential.

### Financial sector monitoring and regulatory reforms
- After substantial loan restructuring during the pandemic, banks’ loan books should be carefully monitored to detect deterioration in credit quality.
- Constraints on bank profitability should be gradually phased out:
  - Credit quotas and interest rate caps should be phased out.
- Regulator responsibilities:
  - Closely monitor banks’ capital adequacy and liquidity positions.
  - Further progress in anti-money laundering initiatives ahead of the FATF assessment expected to begin later this year.
- Banking sector indicators:
  - Private sector credit growth: 4.6 percent yoy at end-2021.
  - Average capital adequacy ratio: 12.9 percent.
  - Nonperforming loans to total gross loans (selected years): 1.9 (2019), 1.5 (2020), 1.9 (2021).
  - Regulatory capital to risk-weighted assets (selected years): 13.0 (2019), 13.1 (2020), 13.3 (2021).

### Governance, smuggling, and informality
- Programs to reduce smuggling and informality would:
  - Shift activity into the formal economy.
  - Broaden the tax base.
  - Improve the ability to track economic developments.
- Reforms to tax and customs administration can help by tracking goods and improving compliance with import procedures.
- These efforts are important to improve governance, where several priority reform areas remain.

### Supply-side reforms to raise investment and diversification
- Recommended reforms to boost investment in hydrocarbons and mining and develop new industries:
  - Reform the hydrocarbons law to incentivize new investments and scale back requirements for producers to sell below cost to the domestic market.
  - Revise mining laws to incentivize private investment in lithium and other sectors.
  - Loosen export limits and price controls.
  - Use international arbitration.
  - Develop a one-stop shop to assist foreign investors.
  - Remove credit quotas and interest rate ceilings.
- Increase efficiency of public investment (transportation and renewable energy), streamline SOE operations, and consider greater exchange rate flexibility to improve exporters’ competitiveness.

### Green transition and emissions mitigation
- Bolivia should increase the share of electricity generation from renewable energy and facilitate an increase in green investments.
- Recommended actions:
  - Build on recent NDC commitments by setting clear emissions targets.
  - Accelerate development of the nation’s lithium resources.
  - Present Bolivia as a destination for green investment.
- Carbon price modeling:
  - An increase in the carbon price to US$75/ton is estimated to reduce emissions in mtCO2e by about 25 percent in 2030, compared to a baseline without intervention.
  - Under a carbon tax scenario, renewables would rise from 40 to 50 percent of electricity generation by 2030.
  - Modeling assumes 85% of revenues go to labor tax reduction and 15% to transfers targeting the bottom 25% of the income distribution.

### Outlook, risks, and policy priorities (Executive Summary highlights)
- Recent macro developments:
  - Economic activity recovered rapidly and is near pre-COVID levels, but expected to remain below pre-COVID trend during the next five years.
  - Commodity windfall bolstered private savings, some of which financed the budget deficit.
  - Ongoing monetary financing in the context of a fixed exchange regime continues to drain international reserves.
  - Inflation has been one of the lowest in the region, partly due to price controls and increased subsidies for food and energy.
- Near-term outlook and risks:
  - Solid growth and low inflation expected in the near term.
  - Large fiscal imbalance poses substantial risk to macroeconomic stability.
  - Bolivia faces sizable and continuing fiscal financing needs amid tightening global financial conditions and falling reserve coverage.
  - Heavy reliance on monetary financing will further deplete international reserves.
- Policy recommendations:
  - Fiscal policy should concentrate on funding programs for the most vulnerable while accelerating spending and revenue measures to reduce the deficit.
  - Measures will support the exchange rate peg and help avert potential speculative attacks.
  - A carefully sequenced transition to a more flexible exchange rate could reduce vulnerabilities.
  - Pension reforms are needed to address medium-term imbalances.
  - Strengthen scrutiny of the financial system as loan forbearance is unwound, including rigorous stress tests.
  - Strengthen governance and combat corruption to incentivize private investment and improve public investment efficiency.
  - Careful withdrawal of fossil fuel subsidies to better align market incentives with decarbonization goals.

### Fiscal vulnerability and financing structure (chapter 7 highlights)
- Sovereign spread near 700 bps; credit rating well below investment grade.
- With limited scope to mobilize domestic savings beyond pension funds, government relies on the central bank for financing.
- Counterpart to monetization of the deficit has been—and is likely to continue to be—a steady decline in international reserves:
  - US$6.5 billion at end-2019
  - US$4.3 billion end-July 2022
- Capital flow measures:
  - In 2021 ceilings on foreign asset holdings were lowered:
    - Banks: from 15 to 10 percent of assets
    - Insurance companies: from 7 to 5 percent

### Reform scenario projections and contributions (selected figures)
- Reform scenario vs. Baseline (selected rows, values as in text table):
  - Real GDP (percent): Baseline 2019–2027: 2.2 -8.7 6.1 3.8 3.2 3.0 2.8 2.6 2.5; Reform Scenario 2019–2027: 2.2 -8.7 6.1 3.5 3.0 2.9 2.8 2.8 2.9
  - Nominal GDP (percent): Baseline 2019–2027: 1.5 -10.4 10.3 7.1 6.4 6.6 6.4 6.2 6.1; Reform Scenario: 1.5 -10.4 10.3 6.8 8.2 8.1 7.9 6.7 6.5
  - CPI inflation (period average, percent): Baseline 2019–2027: 1.8 0.9 0.7 3.2 3.6 3.5 3.5 3.5 3.5; Reform Scenario: 1.8 0.9 0.7 3.2 5.1 5.0 5.0 3.8 3.5
  - Primary balance (percent): Baseline 2019–2027: -5.8 -11.2 -8.0 -6.6 -5.2 -4.7 -4.1 -3.7 -3.4; Reform Scenario: -5.8 -11.2 -7.8 -5.8 -3.7 -2.7 -1.5 -1.5 -1.5
  - Total gross NFPS debt (percent): Baseline 2019–2027: 59.3 78.0 80.5 82.3 84.3 86.1 87.6 88.5 89.4; Reform Scenario: 59.3 78.0 80.5 81.5 80.3 78.6 77.6 76.6 75.8
  - Central Bank gross foreign reserves (levels, index): Baseline 2019–2027: 15.7 14.3 11.7 9.6 7.8 6.1 4.6 3.3 2.0; Reform Scenario: 15.7 14.3 11.7 10.4 10.2 10.5 11.3 11.8 12.0
- Contribution of reform scenario measures to fiscal adjustment (percent of GDP, values as presented):
  - Limiting public investment to 6 percent of GDP until 2025: -0.8 -0.6 -0.2 0.0 0.4 0.9
  - Customs and tax administration reforms: 0.0 -0.5 -1.0 -1.3 -1.3 -1.5
  - Increasing fuel prices by 2.5 percent each quarter until 2025: 0.0 -0.4 -0.8 -1.3 -1.3 -1.3
- Contingent measures (contribution to adjustment beyond reform scenario, percent of GDP):
  - Limiting public investment to 5 percent of GDP: -1.0 -1.0 -1.0 -1.0 -1.4 -1.9
  - Tax reforms (including PIT, and higher property taxes): 0.0 -1.5 -1.5 -1.5 -1.5 -1.5
  - More front-loaded phasing out of energy subsidies: -0.5 -1.0 -1.5 -1.5 -1.5 -1.5
- Combined, listed measures under the reform scenario could amount to an additional adjustment of 2.6 percentage points of GDP relative to the baseline.

### Selected economic indicators (highlights from Table 1)
- Real GDP: 2.2 (2019), -8.7 (2020), 6.1 (2021), 3.8 (2022), 3.2 (2023), 3.0 (2024), 2.8 (2025), 2.6 (2026), 2.5 (2027)
- CPI inflation (period average): 1.8 (2019), 0.9 (2020), 0.7 (2021), 3.2 (2022), 3.6 (2023), 3.5 (2024), 3.5 (2025), 3.5 (2026), 3.5 (2027)
- Combined public sector revenues and grants: 28.8 (2019), 25.3 (2020), 25.1 (2021), 26.6 (2022), 27.2 (2023), 26.8 (2024), 26.7 (2025), 26.6 (2026), 26.6 (2027)
- Expenditure (combined public sector): 36.1 (2019), 38.0 (2020), 34.4 (2021), 35.0 (2022), 34.9 (2023), 34.2 (2024), 33.3 (2025), 32.7 (2026), 32.5 (2027)
- Net lending/borrowing (overall balance): -7.2 (2019), -12.7 (2020), -9.3 (2021), -8.5 (2022), -7.7 (2023), -7.3 (2024), -6.7 (2025), -6.1 (2026), -5.9 (2027)
- Total gross NFPS debt: 59.3 (2019), 78.0 (2020), 80.5 (2021), 82.3 (2022), 84.3 (2023), 86.1 (2024), 87.6 (2025), 88.5 (2026), 89.4 (2027)
- Current account: -3.3 (2019), -0.7 (2020), 2.0 (2021), -1.6 (2022), -1.7 (2023), -1.9 (2024), -2.1 (2025), -2.6 (2026), -3.6 (2027)
- Central Bank gross foreign reserves (millions of U.S. dollars): 6,468 (2019), 5,276 (2020), 4,753 (2021), 4,200 (2022), 3,621 (2023), 3,039 (2024), 2,442 (2025), 1,819 (2026), 1,164 (2027)
- Reserves in months of imports of goods and services: 9.4 (2019), 5.9 (2020), 4.1 (2021), 3.5 (2022), 2.9 (2023), 2.4 (2024), 1.8 (2025), 1.3 (2026), 1.0 (2027)
- Nominal GDP (in billions of U.S. dollars): 41.2 (2019), 36.9 (2020), 40.7 (2021), 43.6 (2022), 46.4 (2023), 49.4 (2024), 52.6 (2025), 55.9 (2026), 59.3 (2027)
- Energy-related subsidies to SOEs (percent of GDP): 1.4 (2019), 1.7 (2020), 1.3 (2021), 1.6 (2022), 1.4 (2023), 1.2 (2024), 1.1 (2025), 1.0 (2026), 0.9 (2027)

### Fiscal vulnerability, risks, and potential crisis dynamics
- Under current policies: international reserves will continue to decline, public debt will rise, and policy buffers will diminish.
- Monetary tightening in advanced economies expected to raise external financing costs and reduce availability, potentially resulting in budgetary financing shortfalls and/or faster depletion of international reserves.
- Anticipation of stresses could lead to deposit outflows or increased dollarization, applying further downward pressure on reserves and the exchange rate, potentially triggering a sudden stop in capital flows and/or a speculative attack on the exchange rate peg.
- The war in Ukraine will increase food and energy prices, which will either:
  - Be met with increased fiscal subsidies (uncertainty about financing sources and negative effects on debt dynamics), or
  - If domestic prices adjust, lead to higher inflation and possible social unrest.
- Other downside risks: resurgence of Covid and sharper-than-anticipated declines in natural gas output.
- Simulation: A sudden change in investors’ portfolio preferences could force abandonment of the peg leading to a sizable 34 percent nominal depreciation (model simulation) and a large contraction in output (outside the pandemic, the largest since the mid-1980s).

### Authorities’ stance
- Authorities recognize mounting fiscal pressures but do not believe there is a real risk of a disorderly adjustment.
- Authorities see no need to reduce fuel and food subsidies, viewing them as crucial to social equity and protection of the most vulnerable.
- Authorities expect investments in the public investment plan (PDES 2021–25) to increase competitiveness, support growth, and ultimately generate trade and fiscal surpluses to alleviate financing pressures over the medium term.
- Authorities expect the debt-to-GDP ratio to converge to an acceptable level over the medium-term, with reserves remaining above three months of imports.

### Risk Assessment Matrix (annex I highlights)
- Conjunctural shocks with likelihood:
  - Intensifying spillovers from Russia’s war on Ukraine — Likelihood: High
  - Commodity price shocks — Likelihood: High
  - Systemic social unrest — Likelihood: High
  - De-anchoring of inflation expectations and stagflation — Likelihood: Medium
  - Abrupt global slowdown or recession — Likelihood: Medium
  - Local Covid-19 outbreaks — Likelihood: Medium
- Structural risks:
  - Deepening geo-economic fragmentation and geopolitical tensions — Likelihood: High
  - Cyberthreats — Likelihood: Medium
  - Natural disasters related to climate change — Likelihood: Medium
- Domestic risks:
  - Speculative attack/sudden stop risk — Likelihood: Medium
  - Failure to discover new natural gas fields — Likelihood: Medium

### Debt Sustainability Analysis (annex II highlights)
- End-2021 NFPS debt: 80.5 percent of GDP, or 224.7 billion bolivianos (US$32.8 billion).
- End-2021 domestic debt (including BCB loans to SOEs, FNDR, FINPRO): 140.2 billion bolivianos (US$20.5 billion), or about 62.5 percent of total NFPS debt.
- Foreign-currency debt (including domestic debt issued in FX): US$12.3 billion (84.5 billion bolivianos), 37.6 percent of total NFPS debt.
- Composition of foreign debt: Multilateral creditors hold 65.8 percent; bilateral creditors hold 12.5 percent; remaining 18 percent mostly Eurobonds.
- Public debt projections:
  - 2022: projected to reach 82.3 percent of GDP.
  - 2027: projected to rise to 89. percent of GDP (as stated in annex; table elsewhere reports 89.4).
- Stress tests and risks:
  - Debt remains well above the 70 percent of GDP risk benchmark under all scenarios.
  - Real growth stress test (1 standard deviation) could raise projected debt to over 98 percent of GDP by end of projection period.
  - Gross financing needs exceeded the 15 percent of GDP benchmark in 2020 and 2021 and are projected to surpass it in the projection period under baseline and all stress tests.

### External Sector Assessment (annex III highlights)
- Overall assessment: The external position of Bolivia in 2021 was moderately weaker than the level implied by fundamentals and desirable policies.
- NIIP: Bolivia has been a net debtor since 2016Q4; NIIP weakened from US$4.5 billion (13.6 percent of GDP) in 2014 to a net deficit of US$7.5 billion (-18.5 percent of GDP) at end-2021.
- Key 2021 external indicators (percent of GDP):
  - NIIP: -18.5
  - Gross Assets: 43.4
  - Res. Assets: 11.7
  - Gross Liab.: 61.9
  - Debt Liab.: 36.0
- REER assessment:
  - CPI-based REER appreciated by 48 percent since the boliviano was pegged to the U.S. dollar in 2011 (as of end-2021).
  - REER regression indicates an overvaluation of 30.8 percent; CA gap implies an undervaluation of -10.7 percent (different methodologies).
- Policy response options:
  - Commit to fiscal reforms while protecting the most vulnerable.
  - Reinvigorate structural reforms to improve productivity and competitiveness.
  - Under a pegged regime, reduce fiscal deficit to lessen pressure on reserves.

### Data, statistics, and reporting gaps
- Priority statistical reforms urged by staff:
  - Complete rebasing of GDP and CPI indices (current base year 1990; INE updating base year to 2010 and implementing 2008 SNA).
  - Improve coverage of the nonfinancial public sector.
- Key statistical frequencies and latest observations (as of August 8, 2022):
  - Exchange Rates: Daily
  - International Reserve Assets and Reserve Liabilities: Daily
  - Reserve/Base Money: latest observation May, 2022; date received June 2022; frequency M
  - Broad Money: latest observation Feb. 2022; date received Apr. 2022; frequency M
  - Consumer Price Index: latest observation Jun. 2022; date received Jul. 2022; frequency M
  - GDP/GNP: latest observation 2020; date received Jan. 2022; frequency A

### Selected recent performance and authorities’ policy posture
- 2021 outcomes:
  - GDP growth: 6.1 percent (2021).
  - 2020 contraction: -8.7 percent (the worst contraction in 67 years).
  - Fiscal deficit: 9.3 percent of GDP in 2021 (down from 12.7 percent in 2020).
  - Exports of goods and services (percent of GDP): 28.1 (2021).
- 2022 outlook and early performance:
  - Real GDP growth projection: 3.8 percent in 2022.
  - Q1 2022 GDP growth: 4.0 percent y-o-y.
  - CPI inflation projected to rise to 4.2 percent by end-2022; accumulated rate of 1.6 percent as of August 2022.
  - International reserves noted as US$4.4 billion or 55 percent of the Fund’s reserve adequacy metric in August 2022 in staff appraisal.
- Authorities’ policy priorities:
  - Preserve exchange rate stability, maintain fuel and food subsidies to protect welfare, and prioritize public investment.
  - Reject staff recommendations to eliminate portfolio limits and preferential interest-rate schemes for targeted credit.

*Excerpted from the IMF Staff Report for the 2022 Article IV Consultation (Bolivia) — content unit 1bolea2022001.*

### 45.3 to 11.1 percent, life expectancy rose from 62 to 72 years, and the primary school

### BOLIVIA: STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (excerpt)

### Major social achievements
- Extreme poverty fell from 45.3 to 11.1 percent over the last 17 years.
- Life expectancy rose from 62 to 72 years.
- Primary school completion rate increased from 84 to 99 percent.

### Fiscal adjustment and macro sustainability
- A meaningful fiscal adjustment is required to:
  - Restore debt sustainability.
  - Eliminate monetary financing.
  - Rebuild international reserves.
- If Bolivia retains the exchange rate peg, restoration of macro sustainability will require:
  - Reducing the primary deficit to around 1.5 percent of GDP through a credible medium-term plan.
  - Expenditure restraint including:
    - Eliminating the second supplementary year-end bonus ("doble aguinaldo").
    - Constraining growth in public sector wages.
    - Limiting growth in public investment.
    - Scaling back subsidies.
  - Broadening the tax base by:
    - Addressing informality.
    - Strengthening tax and customs administration (through IT modernization and improved governance).
    - Adjusting tax policy to increase personal income taxes on higher income households.

### Fuel subsidies, compensation, and communication
- Fuel subsidy reductions should be combined with compensation for the poorest deciles.
- Successful implementation of higher domestic fuel prices requires:
  - Recycling a portion of the budgetary savings to cash transfer programs targeted to the poorest deciles.
  - An effective communication strategy to raise awareness of the regressive nature of energy subsidies and benefits of market-based pricing combined with targeted cash transfers.

### Monetary policy, exchange rate, and central bank independence
- Bolivia would benefit from greater central bank independence and a carefully sequenced transition to a more flexible exchange rate.
- Benefits of increased exchange rate flexibility and institutional independence:
  - Preserve international reserves.
  - Reduce current exchange rate overvaluation.
  - Provide net welfare gains.
  - Increase resilience to market shocks if adopted with an inflation targeting monetary framework.
- Transition guidance:
  - Prepare and communicate carefully.
  - Coordinate with other macroeconomic policy measures.
  - Accompany by institutional independence for the central bank.
- The BCB should reduce dependence on currency swaps as a source of reserves:
  - If fiscal reforms are implemented, reserves can be built from external sovereign borrowing and direct purchases on the market to reduce reliance on swap arrangements with commercial banks.
  - Steadily lengthening maturity of remaining swaps would help lessen vulnerabilities.
  - Other mechanisms could be adopted if needed to ensure domestic liquidity remains adequate.

### Reserves and external position
- Bolivia’s external position is moderately weaker than implied by fundamentals and desirable policies.
- International reserves declined from US$5.28 billion at end-2020 to US$4.3 billion at end-July 2022.
- Much of the existing stock of reserves is made up of short-term swap arrangements with private financial institutions, creating risk that these reserves would be unavailable under financial stress.

### Pension system interdependence and reform considerations
- The growing interdependence of the pension system and the government should be monitored.
- Consider diversifying pension fund assets into a wider range of assets, potentially including foreign currency assets, to raise average returns and diversify exposure.
- Preconditions and cautions:
  - Transition to professional and independent management of pension fund portfolios is required before diversification.
  - Careful pursuit is needed so as not to exacerbate external imbalances and vulnerabilities.

### Financial sector monitoring and regulatory reforms
- After substantial loan restructuring during the pandemic, banks’ loan books should be carefully monitored to detect deterioration in credit quality.
- Constraints on bank profitability should be gradually phased out:
  - Credit quotas and interest rate caps should be phased out.
- The regulator should:
  - Closely monitor banks’ capital adequacy and liquidity positions.
  - Further progress in anti-money laundering initiatives ahead of the FATF assessment expected to begin later this year.

### Governance, smuggling, and informality
- Programs to reduce smuggling and informality would:
  - Shift activity into the formal economy.
  - Broaden the tax base.
  - Improve the ability to track economic developments.
- Reforms to tax and customs administration can help by tracking goods and improving compliance with import procedures.
- These efforts are important to improve governance, where several priority reform areas remain.

### Supply-side reforms to raise investment and diversification
- Reforms recommended to boost investment in hydrocarbons and mining and develop new industries:
  - Reform the hydrocarbons law to incentivize new investments and scale back requirements for producers to sell below cost to the domestic market.
  - Revise mining laws to incentivize private investment in lithium and other sectors.
  - Loosen export limits and price controls.
  - Use international arbitration.
  - Develop a one-stop shop to assist foreign investors.
  - Remove credit quotas and interest rate ceilings.

### Green transition and emissions mitigation
- Bolivia should increase the share of electricity generation from renewable energy and facilitate an increase in green investments.
- Recommended actions:
  - Build on recent NDC commitments by setting clear emissions targets.
  - Accelerate development of the nation’s lithium resources.
  - Present Bolivia as a destination for green investment.

### Outlook, risks, and policy priorities (Executive Summary highlights)
- Recent macro developments:
  - Economic activity recovered rapidly and is near pre-COVID levels, but expected to remain below pre-COVID trend during the next five years.
  - Commodity windfall bolstered private savings, some of which financed the budget deficit.
  - Ongoing monetary financing in the context of a fixed exchange regime continues to drain international reserves.
  - Inflation has been one of the lowest in the region, partly due to price controls and increased subsidies for food and energy.
- Near-term outlook and risks:
  - Solid growth and low inflation expected in the near term.
  - Large fiscal imbalance poses substantial risk to macroeconomic stability.
  - Bolivia faces sizable and continuing fiscal financing needs amid tightening global financial conditions and falling reserve coverage.
  - Heavy reliance on monetary financing will further deplete international reserves.
- Policy recommendations:
  - Fiscal policy should concentrate on funding programs for the most vulnerable while accelerating spending and revenue measures to reduce the deficit.
  - Measures will support the exchange rate peg and help avert potential speculative attacks.
  - A carefully sequenced transition to a more flexible exchange rate could reduce vulnerabilities.
  - Pension reforms are needed to address medium-term imbalances.
  - Strengthen scrutiny of the financial system as loan forbearance is unwound, including rigorous stress tests.
  - Strengthen governance and combat corruption to incentivize private investment and improve public investment efficiency.
  - Careful withdrawal of fossil fuel subsidies to better align market incentives with decarbonization goals.

### Selected economic indicators (highlights from Table 1)
- Real GDP: 2.2 (2019), -8.7 (2020), 6.1 (2021), 3.8 (2022), 3.2 (2023), 3.0 (2024), 2.8 (2025), 2.6 (2026), 2.5 (2027)
- CPI inflation (period average): 1.8 (2019), 0.9 (2020), 0.7 (2021), 3.2 (2022), 3.6 (2023), 3.5 (2024), 3.5 (2025), 3.5 (2026), 3.5 (2027)
- Combined public sector revenues and grants: 28.8 (2019), 25.3 (2020), 25.1 (2021), 26.6 (2022), 27.2 (2023), 26.8 (2024), 26.7 (2025), 26.6 (2026), 26.6 (2027)
- Expenditure (combined public sector): 36.1 (2019), 38.0 (2020), 34.4 (2021), 35.0 (2022), 34.9 (2023), 34.2 (2024), 33.3 (2025), 32.7 (2026), 32.5 (2027)
- Net lending/borrowing (overall balance): -7.2 (2019), -12.7 (2020), -9.3 (2021), -8.5 (2022), -7.7 (2023), -7.3 (2024), -6.7 (2025), -6.1 (2026), -5.9 (2027)
- Total gross NFPS debt: 59.3 (2019), 78.0 (2020), 80.5 (2021), 82.3 (2022), 84.3 (2023), 86.1 (2024), 87.6 (2025), 88.5 (2026), 89.4 (2027)
- Current account: -3.3 (2019), -0.7 (2020), 2.0 (2021), -1.6 (2022), -1.7 (2023), -1.9 (2024), -2.1 (2025), -2.6 (2026), -3.6 (2027)
- Central Bank gross foreign reserves (millions of U.S. dollars): 6,468 (2019), 5,276 (2020), 4,753 (2021), 4,200 (2022), 3,621 (2023), 3,039 (2024), 2,442 (2025), 1,819 (2026), 1,164 (2027)
- Reserves in months of imports of goods and services: 9.4 (2019), 5.9 (2020), 4.1 (2021), 3.5 (2022), 2.9 (2023), 2.4 (2024), 1.8 (2025), 1.3 (2026), 1.0 (2027)
- Nominal GDP (in billions of U.S. dollars): 41.2 (2019), 36.9 (2020), 40.7 (2021), 43.6 (2022), 46.4 (2023), 49.4 (2024), 52.6 (2025), 55.9 (2026), 59.3 (2027)
- Energy-related subsidies to SOEs (percent of GDP): 1.4 (2019), 1.7 (2020), 1.3 (2021), 1.6 (2022), 1.4 (2023), 1.2 (2024), 1.1 (2025), 1.0 (2026), 0.9 (2027)

*Excerpted from the IMF Staff Report for the 2022 Article IV Consultation (Bolivia).*

### 7.      Bolivia’s large gross fiscal financing needs   represent a chronic vulnerability.

### 7.      Bolivia’s large gross fiscal financing needs   represent a chronic vulnerability.

### Fiscal vulnerability and financing structure
- Bolivia’s sovereign spread is near 700 bps, and its credit rating is well below investment grade, indicating limited appetite for Bolivia’s external debt.
- With little scope to mobilize domestic savings beyond the pension funds, the government relies on the central bank for financing.
- Counterpart to ongoing monetization of the deficit has been—and is likely to continue to be—a steady decline in international reserves:
  - US$6.5 billion at end-2019
  - US$4.3 billion in end-July 2022
- Bolivia employs some capital flow measures, including limits on foreign asset holdings, and a small tax on domestic dollar deposits.
  - In 2021, ceilings on foreign asset holdings were lowered:
    - Banks: from 15 to 10 percent of assets
    - Insurance companies: from 7 to 5 percent

### Recent monetary and banking measures; banking sector conditions
- Central bank actions:
  - Cut reserve requirements
  - Swapped foreign currency for domestic currency
  - Purchased government bonds from private pension funds
- Private sector credit growth: 4.6 percent yoy at end-2021.
- Debt service deferrals during the pandemic mostly expired with little impact on the NPL ratio.
- Average capital adequacy ratio: 12.9 percent.
- Measured bank profitability has been adversely affected by interest rate caps and regulator-imposed directed lending requirements.
- Foreign currency assets and liabilities are generally matched throughout the banking system.
- Banks indicate frequent pressure to obtain desired amounts of domestic liquidity.

### Outlook and risks (projections and key numbers)
- Real GDP growth projection: 3.8 percent in 2022.
- GDP: projected to exceed its pre-pandemic level in late 2022, but not return to pre-pandemic trend within forecast horizon.
- CPI inflation: projected to rise to 4.2 percent by end-2022.
- Impact of war in Ukraine expected to be felt mostly through improved terms-of-trade, increased commodity revenues, and higher fiscal costs for fuel and food subsidies.
- Commodity-specific data (selected entries from text table):
  - Natural Gas: Share of Exports (2019) 30.8; Price week before Invasion 4.6; June 24 price 15.9; Impact of the war (US dollars, mln) 59352.3
  - Gold: Share of Exports (2019) 19.8; Price week before Invasion 1897.20; June 24 price 1828.00; Impact of the war (US dollars, mln) -75; Impact of the war (% of GDP) -0.2
  - Zinc: Share of Exports (2019) 15.2; Price week before Invasion 3600.25; June 24 price 3485.00; Impact of the war (US dollars, mln) -51; Impact of the war (% of GDP) -0.1
  - Soy: Share of Exports (2019) 8.1; Price week before Invasion 15.68; June 24 price 17.50; Impact of the war (% of GDP) 0.2
  - Silver: Share of Exports (2019) 6.7; Price week before Invasion 23.97; June 24 price 21.16; Impact of the war (US dollars, mln) -82; Impact of the war (% of GDP) -0.2
  - Tin: Share of Exports (2019) 3.2; Price week before Invasion 19.82; June 24 price 12.15; Impact of the war (US dollars, mln) -130; Impact of the war (% of GDP) -0.3
  - Lead: Share of Exports (2019) 1.9; Price week before Invasion 143.92; June 24 price 121.50; Impact of the war (US dollars, mln) -32; Impact of the war (% of GDP) -0.1
  - Oil Imports (2021, US dollars, mln): 2250.49; Price week before Invasion 1.07; June 24 price 107.62; Impact of the war (US dollars, mln) 2409; Impact of the war (% of GDP) -1.0
  - ToT Shock: 10720.6
- Budget deficit projections and composition:
  - Budget deficit projected to narrow slightly to 8½ percent of GDP in 2022.
  - Downside risks could increase the deficit closer to 10 percent of GDP in 2022 (possible doble aguinaldo year-end wage bonus and additional fuel subsidies).
  - Financing of the deficit expected to be split broadly equally between: the central bank, domestic pension funds, and external funding sources.
  - Over the medium term, based on current policy plans, fiscal deficit expected to fall modestly to around 6 percent of GDP by 2027.
- Current account: projected to weaken to a deficit of 3½ percent of GDP over the medium term.
- External position assessed: 2021 external position moderately weaker than level implied by fundamentals and desirable policies; real exchange rate assessed to be moderately overvalued.

### Risks and potential crisis dynamics
- Under current policies: international reserves will continue to decline, public debt will rise, and policy buffers will diminish.
- Monetary tightening in advanced economies expected to raise external financing costs and reduce availability, potentially resulting in budgetary financing shortfalls and/or faster depletion of international reserves.
- Anticipation of stresses could lead to deposit outflows or increased dollarization, applying further downward pressure on reserves and the exchange rate, potentially triggering a sudden stop in capital flows and/or a speculative attack on the exchange rate peg.
- The war in Ukraine will increase food and energy prices, which will either:
  - Be met with increased fiscal subsidies (uncertainty about financing sources and negative effects on debt dynamics), or
  - If domestic prices adjust, lead to higher inflation and possible social unrest.
- Other downside risks: resurgence of Covid and sharper-than-anticipated declines in natural gas output.

### Policy issues — Reducing fiscal imbalances (diagnosis)
- Current policy mix unsustainable: sustained large fiscal deficit monetized by the central bank combined with a de facto fixed exchange rate is steadily depleting reserves.
- Public debt rose rapidly from below 60 percent of GDP prior to the pandemic to over 80 percent of GDP today.
- A sudden change in investors’ portfolio preferences could force abandonment of the peg leading to:
  - A sizable 34 percent nominal depreciation (model simulation)
  - A large contraction in output (outside the pandemic, the largest since the mid-1980s)
- A plan is needed to reduce the fiscal deficit and rebuild international reserves.

### Policy issues — Required fiscal adjustment and key measures
- Staff modeling indicates that to eliminate monetary financing, prevent continued drawdown of international reserves, and put the public debt ratio on a downward path, Bolivia will need to reduce its primary deficit to 1.5 percent of GDP over the medium term.
- Under current policies, the primary balance is expected to remain around 4.1 percent of GDP in 2025.
- Key measures identified to achieve the adjustment:
  - Phasing out energy subsidies:
    - Implement clear plan to phase out energy subsidies and gradually eliminate gap between market price and regulated price for each fuel category.
    - Allocate portion of budgetary savings to cash transfer programs to compensate poorer households.
    - Public communications campaign linking cash transfers to subsidy reform.
  - Rationalizing public investment:
    - Limit public investment to 6 percent of GDP under the reform scenario until other measures create fiscal space to restore investment to pre-pandemic levels.
    - Better prioritization of projects to increase efficiency and minimize negative growth effects.
    - A Public Investment Management Assessment scheduled in 2022 to help planning, allocation, and implementation.
  - Introducing tax revenue measures:
    - Develop a revenue mobilization strategy to broaden the tax base and strengthen tax and customs administration.
    - Modernization and digitalization of tax administration, strengthening customs, and introduction of new tax framework to formalize the gold mining sector.

### Reform scenario projections and contributions (selected figures)
- Baseline and Reform Scenario projections (selected rows, percent or levels as in text table):
  - Real GDP (percent): Baseline 2019–2027: 2.2 -8.7 6.1 3.8 3.2 3.0 2.8 2.6 2.5; Reform Scenario 2019–2027: 2.2 -8.7 6.1 3.5 3.0 2.9 2.8 2.8 2.9
  - Nominal GDP (percent): Baseline 2019–2027: 1.5 -10.4 10.3 7.1 6.4 6.6 6.4 6.2 6.1; Reform Scenario 2019–2027: 1.5 -10.4 10.3 6.8 8.2 8.1 7.9 6.7 6.5
  - CPI inflation (period average, percent): Baseline 2019–2027: 1.8 0.9 0.7 3.2 3.6 3.5 3.5 3.5 3.5; Reform Scenario 2019–2027: 1.8 0.9 0.7 3.2 5.1 5.0 5.0 3.8 3.5
  - Public investment: Baseline 2019–2027: 9.8 5.0 6.2 6.8 6.6 6.2 6.0 6.0 6.1; Reform Scenario 2019–2027: 9.8 5.0 6.2 6.0 6.0 6.0 6.0 6.4 6.9
  - Primary balance: Baseline 2019–2027: -5.8 -11.2 -8.0 -6.6 -5.2 -4.7 -4.1 -3.7 -3.4; Reform Scenario 2019–2027: -5.8 -11.2 -7.8 -5.8 -3.7 -2.7 -1.5 -1.5 -1.5
  - Total gross NFPS debt: Baseline 2019–2027: 59.3 78.0 80.5 82.3 84.3 86.1 87.6 88.5 89.4; Reform Scenario 2019–2027: 59.3 78.0 80.5 81.5 80.3 78.6 77.6 76.6 75.8
  - Current account: Baseline 2019–2027: -3.3 -0.7 2.0 -1.6 -1.7 -1.9 -2.1 -2.6 -3.6; Reform Scenario 2019–2027: -3.3 -0.7 2.0 -1.1 -1.4 -1.8 -2.1 -2.0 -2.0
  - Central Bank gross foreign reserves (levels): Baseline 2019–2027: 15.7 14.3 11.7 9.6 7.8 6.1 4.6 3.3 2.0; Reform Scenario 2019–2027: 15.7 14.3 11.7 10.4 10.2 10.5 11.3 11.8 12.0
- Contribution of reform scenario measures to fiscal adjustment (in percent of GDP):
  - Limiting public investment to 6 percent of GDP until 2025: -0.8 -0.6 -0.2 0.0 0.4 0.9 (years not explicitly labeled in table; numbers presented as in text table)
  - Customs and tax administration reforms: 0.0 -0.5 -1.0 -1.3 -1.3 -1.5
  - Increasing fuel prices by 2.5 percent each quarter until 2025: 0.0 -0.4 -0.8 -1.3 -1.3 -1.3
- Contingent measures (contribution to adjustment beyond the reform scenario, percent of GDP):
  - Limiting public investment to 5 percent of GDP: -1.0 -1.0 -1.0 -1.0 -1.4 -1.9
  - Tax reforms (including PIT, and higher property taxes): 0.0 -1.5 -1.5 -1.5 -1.5 -1.5
  - More front-loaded phasing out of energy subsidies: -0.5 -1.0 -1.5 -1.5 -1.5 -1.5
- Combined, listed measures under the reform scenario could amount to an additional adjustment of 2.6 percentage points of GDP relative to the baseline.
- Goal for reserve rebuilding: rebuild reserve coverage to 60 percent of the ARA metric by end-2025 (although still well below pre-pandemic levels).

### Authorities’ stance
- Authorities recognize mounting fiscal pressures but do not believe there is a real risk of a disorderly adjustment.
- Authorities see no need to reduce fuel and food subsidies, viewing them as crucial to social equity and protection of the most vulnerable.
- Authorities expect investments in the public investment plan (PDES 2021–25) to increase competitiveness, support growth, and ultimately generate trade and fiscal surpluses to alleviate financing pressures over the medium term.
- Authorities expect the debt-to-GDP ratio to converge to an acceptable level over the medium-term, with reserves remaining above three months of imports.

### Pension system issues and risks
- Increasing interdependence of the pension system and the fiscal authority, and low rate of return on pension assets, pose long-term macro risks.
- Bolivia’s two private, defined contribution pension funds have around 50 percent of GDP in assets.
  - An estimated 80 percent of the funds’ US$23 billion in assets are invested in low-yielding domestic deposit receipts and government debt.
- Pension funds together are financing 30-40 percent of the fiscal deficit at long-term local currency interest rates of 4 to 5 percent.
- Foreign assets limited to no more than 10 percent of the pension funds’ portfolio; offshore investment requires prior approval of the pension supervisor.
- The share of foreign currency instruments in assets under management has been declining since 2006.

*Source: IMF staff report content (chapter 7) from 1bolea2022001 - 7.      Bolivia’s large gross fiscal financing needs   represent a chronic vulnerability.*

### 20.      Pension fund assets have increased

### 20.      Pension fund assets have increased

### Pension fund asset trends and drivers
- Pension fund assets have increased by about US$1.5 billion per year since 2010, resulting in an overall increase in the investment account of more than 300 percent over this period.
- An 85 percent increase in the number of pension fund members (due to favorable demographics, increasing employment and the pension reform of 2010, which incentivized contributions) has been the principal force behind the increase in assets under management.
- Deadlines announced last year aim to facilitate the full nationalization of domestic pensions – as envisaged in a 2010 law – by the end of 2023. This will improve the flow deficit position of the general government but also add to future expenditure obligations.
- Investments must be in fixed income instruments having credit risk ratings of A- or better and there are limits on investments in foreign assets.

### Pension system performance and constraints
- The combination of a relatively low contribution rate, the lowest statutory pensionable age in the region, and declining returns on pension system assets has made the replacement rate of Bolivia’s private pension system one of the lowest in Latin America.
- For lower income households, the replacement rate is supplemented by transfers from the Solidarity Fund and Renta Dignidad (where the former is funded by pension fund contributions and the latter from taxes on hydrocarbons and dividends from state-owned enterprises).
- Raising the contribution rate is constrained by the ability of workers to move to the informal sector.

### Policy recommendations for pension funds
- Relax restrictions on investments to allow greater scope for portfolio diversification into different asset classes, including foreign currency assets, to improve pension outcomes and reduce macro risks.
- Condition any liberalization of foreign asset acquisition by the pension system on the establishment of an independent and professional process for asset allocation.
- Pursue liberalization carefully given balance of payments risks posed by existing external imbalances.

### Authorities’ stance on pension fund financing and risk profile
- The authorities do not regard the reliance on fiscal financing from private pension funds as a concern and believe that the pension funds’ current portfolio has a conservative and prudential risk profile.
- They note that the decision to acquire government bonds is voluntary and that the bonds are available to all financial institutions.
- They argue that adequate levels of liquidity in the financial system indicate there is no crowding-out and judge the financial system as a whole remains solid, noting Bolivia’s low NPL rates, including on loans that were deferred during the pandemic.

### Monetary and exchange rate policy (summary linked to pension and macro context)
- Bolivia would benefit from a carefully sequenced transition to a more flexible exchange rate. Adoption of a flexible exchange rate within the context of an inflation targeting framework would substantially reduce the risk of an eventual disorderly adjustment.
- Increasing the central bank’s institutional capacity and granting institutional independence to the central bank are prerequisites for a successful transition to a more flexible exchange rate.
- Short-term claims on Bolivia’s gross international reserves have been bolstered by short-term FX swaps with commercial banks, through a facility designated CPVIS. More than half of the central bank’s gross international reserves are currently obtained through such swaps; these reserves would not normally constitute net international reserves.
- The BCB should reduce its dependence on the CPVIS swaps as a source of reserves, which will require addressing underlying external imbalances (notably through a reduction in the fiscal deficit). Once reforms are in place, the central bank could try to both reduce the reliance on, and extend the maturity of, these swap arrangements.
- The authorities believe exchange rate stability has served Bolivia well and should be maintained; they note benefits of low inflation, a low rate of dollarization in the formal economy, and strong demand for local currency.

### Raising growth — constraints and reforms
- Growth has been driven almost entirely by increases in public investment (which averaged over 10 percent of GDP from 2010-19). Private investment has been weak (less than 11 percent of GDP in 2021) and net foreign direct investment has fallen close to zero.
- Bolivia’s average incremental capital-output ratio is 5.7, indicating relatively inefficient utilization of new capital; total factor productivity growth has been negative for more than a decade.
- Recommended supply-side and sector-specific reforms:
  - Redesign the hydrocarbons law to provide greater incentives for new exploration, reduce cost of compliance with labor and other restrictions while maintaining safeguards, minimize regulatory uncertainty, and eliminate requirements for producers to sell below cost to the domestic market.
  - Amend the mining law to permit a greater role for foreign capital and know-how, particularly in the development of Bolivia’s lithium resources.
  - Phase out export ceilings and price controls to incentivize new investment and efficiency improvements in agriculture.
  - Eliminate credit quotas and interest rate caps for banks that lead to misallocation of credit and reduced bank capital levels.
- Increase efficiency of public investment (transportation and renewable energy), streamline SOE operations, and consider greater exchange rate flexibility to improve exporters’ competitiveness.
- Strengthen governance and combat corruption: address customs enforcement, protection of natural resources, bribery, potential money laundering, criminal justice, the rule of law, and administration of public enterprises. The planned PIMA assessment should detail reforms for public enterprises.

### Emissions mitigation and the green transition
- Bolivia lost more tropical forest in 2021 than all but two other countries, largely due to severe forest fires; climate change is likely to accelerate loss of forests and glaciers.
- Bolivia’s Nationally Determined Contributions submitted in April 2022 include goals such as reaching 100 percent access to electricity and clean drinking water and achieving an 80 percent reduction of deforestation (compared to the average of 2016-2020).
- Gradual introduction of a carbon price combined with targeted cash transfers is recommended to reduce greenhouse gas emissions while protecting the poorest households.
  - An increase in the carbon price to US$75/ton is estimated to reduce emissions in mtCO2e by about 25 percent in 2030, compared to a baseline scenario without intervention.
  - Under a carbon tax scenario, renewables would rise from 40 to 50 percent of electricity generation by 2030.
  - Fiscal revenues from a carbon tax could fund health, education, and social transfers (or labor tax reductions) for low-income groups; modeling assumes 85% of revenues go to labor tax reduction and 15% to transfers targeting the bottom 25% of the income distribution.
- Bolivia could access new financing sources for green investments, including marketing itself to attract ESG capital and considering the sale of green bonds linked to specific policy goals.

### Staff appraisal — key macroeconomic outcomes and required adjustments
- Major social and development gains (2000–2021):
  - Poverty rate fell from 66.4 to 36.3 percent.
  - Extreme poverty declined from 45.3 to 11.1 percent.
  - Life expectancy rose from 62 to 72 years.
  - Primary school completion rate increased from 84 to 99 percent.
- Pandemic and recent macro performance:
  - Pandemic-induced contraction of 8.7 percent in 2020.
  - Growth of 6.1 percent in 2021.
  - The economy is expected to grow by 3.8 percent in 2022.
  - Inflation is projected to rise from 1.4 percent to 4.2 percent by the end of 2022.
  - The current account moved to a surplus of 2 percent of GDP in 2021 and is projected to shift to a small deficit in 2022.
  - The fiscal deficit is projected to remain high, at 8.5 percent of GDP in 2022.
  - International reserves stand at US$4.4 billion, or 55 percent of the Fund’s reserve adequacy metric in August 2022.
- Risks and recommended fiscal consolidation:
  - Recurrent large fiscal deficits and sustained monetary financing have been sterilized through a steady drawdown of international reserves, increasing vulnerability to a speculative attack on the currency.
  - Heavy reliance on callable overnight currency swaps now make up more than two-thirds of gross reserves, and the real exchange rate is assessed as overvalued.
  - Public debt is assessed to be sustainable, but with high risk; Bolivia’s external position is moderately weaker than implied by fundamentals and desirable policies.
  - If Bolivia retains its exchange rate peg, restoration of macro sustainability will require reducing the primary deficit to around 1.5 percent of GDP through a credible medium-term plan.
  - Adjustment options include: eliminating the doble aguinaldo year-end wage bonus, constraining growth in public sector wages, limiting growth in public investment, scaling back subsidies, broadening the tax base by addressing informality, strengthening tax and customs administration (IT modernization and improved governance), and adjusting tax policy to increase personal income taxes on higher income households.

*Source: IMF staff report excerpt (chapter/section titled "20.      Pension fund assets have increased").*

### 40.      Fuel subsidy reductions will need to be combined with compensation for the poorest

### 1bolea2022001 - 40.      Fuel subsidy reductions will need to be combined with compensation for the poorest

### Energy pricing and social protection
- Fuel subsidy reductions should be combined with compensation targeted to the poorest deciles of the population (paragraph 40).
- Recycling a portion of the budgetary savings to cash transfer programs targeted to the poorest deciles is required for successful implementation of higher domestic fuel prices (paragraph 40).
- An effective communication strategy is critical to raise awareness of:
  - the regressive nature of energy subsidies, and
  - the benefits of shifting to market-based pricing of energy combined with targeted cash transfers (paragraph 40).

### Monetary and exchange-rate policy
- Bolivia would benefit from greater central bank independence and a carefully sequenced transition to a more flexible exchange rate (paragraph 41).
- Greater central bank independence and institutional capacity would:
  - support macro and financial stability, and
  - facilitate exchange rate adjustments when needed (paragraph 41).
- Increased exchange rate flexibility would:
  - help preserve international reserves,
  - reduce the current exchange rate overvaluation, and
  - provide net welfare gains (paragraph 41).
- Adoption of a flexible exchange rate alongside an inflation targeting monetary framework would substantially reduce the risk of a speculative attack and a disorderly adjustment (paragraph 41).
- The transition should be prepared and communicated carefully, coordinated with other macroeconomic policy measures, and accompanied by institutional independence for the central bank (paragraph 41).

### Reserve management and currency swap dependence
- The BCB should reduce its dependence on currency swaps as a source of reserves (paragraph 42).
- If fiscal reforms can be put in place, balance of payments pressures should subside and reserves can be built from:
  - external sovereign borrowing, and
  - direct purchases on the market,
  so as to reduce the reliance on swap arrangements with commercial banks (paragraph 42).
- Steadily lengthening the maturity of remaining swaps would help lessen vulnerabilities (paragraph 42).
- If needed, other mechanisms could be adopted to ensure that domestic liquidity remains adequate (paragraph 42).

### Pension system exposure and management
- The growing interdependence of the pension system and the government should be monitored (paragraph 43).
- Consideration should be given to diversifying pension fund assets into a wider range of assets – potentially including foreign currency assets – to raise average returns and diversify exposure (paragraph 43).
- Such diversification would need to be preceded by a transition to professional and independent management of pension fund portfolios and, even then, must be pursued carefully so as not to exacerbate external imbalances and vulnerabilities (paragraph 43).

### Banking sector monitoring and financial-sector reforms
- In the wake of substantial loan restructuring during the pandemic, banks’ loan books should be carefully monitored to quickly identify signs of deterioration in credit quality (paragraph 44).
- A range of credit quotas and interest rate caps that constrain bank profitability and distort resource allocation should be gradually phased out (paragraph 44).
- The regulator should closely monitor banks’ capital adequacy and liquidity positions (paragraph 44).
- Further progress in identified AML/CFT shortcomings should be pursued ahead of the FATF assessment that is expected to begin later this year (paragraph 44).

### Governance: smuggling, informality, and tax/customs reform
- Programs to reduce smuggling and informality would help improve governance where progress has lagged (paragraph 45).
- The aim is to shift activity into the formal economy, broaden the tax base, and improve the ability to track economic developments (paragraph 45).
- Reforms to tax and customs administration can help by tracking goods and improving compliance with import procedures (paragraph 45).
- These efforts will play an important role in reducing corruption and improving governance, where several priority reform areas still need to be addressed (paragraph 45).

### Supply-side reforms to boost investment and diversification
- Supply side reforms are needed to boost investment in hydrocarbons and mining and encourage the development of new industries (paragraph 46).
- Specific recommendations include:
  - Reforming the hydrocarbons law to incentivize new investments and to scale back existing requirements for producers to sell below cost to the domestic market (paragraph 46).
  - Revising mining laws to incentivize private investment in lithium and other sectors (paragraph 46).
  - Loosening export limits and price controls (paragraph 46).
  - Using international arbitration (paragraph 46).
  - Developing a one-stop shop to assist foreign investors (paragraph 46).
  - Removing credit quotas and interest rate ceilings (paragraph 46).

### Green transition and renewable energy
- Bolivia should increase the share of electricity generation from renewable energy and facilitate an increase in green investments (paragraph 47).
- Bolivia can expand on its recent NDC commitments by:
  - setting clear emissions targets,
  - accelerating the development of the nation’s lithium resources, and
  - presenting itself as a destination for green investment (paragraph 47).

*International Monetary Fund — Bolivia chapter excerpts (paragraphs 40–47).*

### 48.      It is proposed that the next Article IV consultation with Bolivia be held on the standard

### It is proposed that the next Article IV consultation with Bolivia be held on the standard 12-month cycle.

### Real sector developments
- Inflation has remained at low levels despite the rise in international commodity prices.
- Real GDP growth and composition:
  - Real GDP y/y: 2.2 (2019), -8.7 (2020), 6.1 (2021), 3.8 (2022), 3.2 (2023), 3.0 (2024), 2.8 (2025), 2.6 (2026), 2.5 (2027).
  - Nominal GDP: 1.5 (2019), -10.4 (2020), 10.3 (2021), 7.1 (2022), 6.4 (2023), 6.6 (2024), 6.4 (2025), 6.2 (2026), 6.1 (2027).
- Sector drivers in 2021:
  - Recovery driven by mining, construction, and transportation sectors.
  - Private consumption remains the main driver of demand-side growth.
  - Gradual recovery of public investment.
  - Subsidies and price controls on key energy and food items that constitute a large component of the CPI basket.

### Price developments
- CPI inflation (period average): 1.8 (2019), 0.9 (2020), 0.7 (2021), 3.2 (2022), 3.6 (2023), 3.5 (2024), 3.5 (2025), 3.5 (2026), 3.5 (2027).
- CPI inflation (end of period): 1.5 (2019), 0.7 (2020), 0.9 (2021), 4.2 (2022), 3.6 (2023), 3.5 (2024), 3.5 (2025), 3.5 (2026), 3.5 (2027).

### Fiscal sector developments and public finances
- Fiscal stance:
  - The policy stance remains expansionary until 2021.
  - Output Gap and Fiscal Impulse chart shows expansionary stance through 2021.
- Combined public sector fiscal aggregates (percent of GDP, Table 1 / Table 3):
  - Total revenues: 28.8 (2019), 25.3 (2020), 25.1 (2021), 26.6 (2022), 27.2 (2023), 26.8 (2024), 26.7 (2025), 26.6 (2026), 26.6 (2027).
  - Expenditure: 36.1 (2019), 38.0 (2020), 34.4 (2021), 35.0 (2022), 34.9 (2023), 34.2 (2024), 33.3 (2025), 32.7 (2026), 32.5 (2027).
  - Net lending/borrowing (overall balance): -7.2 (2019), -12.7 (2020), -9.3 (2021), -8.5 (2022), -7.7 (2023), -7.3 (2024), -6.7 (2025), -6.1 (2026), -5.9 (2027).
  - Non-hydrocarbon balance: -10.1 (2019), -15.2 (2020), -10.9 (2021), -10.1 (2022–2024), -9.4 (2024), -8.5 (2025), -8.7 (2026), -8.4 (2027).
- Debt dynamics:
  - Total gross NFPS debt (percent of GDP): 59.3 (2019), 78.0 (2020), 80.5 (2021), 82.3 (2022), 84.3 (2023), 86.1 (2024), 87.6 (2025), 88.5 (2026), 89.4 (2027).
  - Table 2 (Bs million) memorandum: Nonfinancial public sector gross public debt: 167,453 (2019), 197,355 (2020), 224,705 (2021), projected 246,013 (2022), 268,131 (2023), 291,932 (2024), 315,993 (2025), 339,270 (2026), 363,330 (2027).
- Revenue composition highlights (Table 2):
  - Hydrocarbon related revenue (Bs million memorandum): 13,701 (2019), 11,887 (2020), 9,969 (2021), 10,608 (2022), 13,497 (2023).
  - Tax revenues (Bs million): 63,629 (2019), 49,692 (2020), 56,672 (2021), 68,609 (2022), 72,472 (2023).
- Expenditure composition highlights (Table 2):
  - Energy-related subsidies to SOEs (Bs million): 4,072 (2019), 4,195 (2020), 3,729 (2021), 4,795 (2022), 4,338 (2023).
  - Social benefits (Bs million): 17,150 (2019), 26,391 (2020), 17,799 (2021), 19,553 (2022), 20,666 (2023).
  - Net acquisition of nonfinancial assets (Bs million): 27,728 (2019), 12,593 (2020), 17,352 (2021), 20,249 (2022), 20,959 (2023).

### Monetary sector developments
- Interest rates and liquidity:
  - Rates on Central Bank paper remained low; interbank rates dropped significantly in the past year.
  - Banks' excess reserves markedly increased in the past year while BCB open market operations have been limited in recent years.
  - Deposit and lending rates have been stable in the last year.
- Central bank and credit:
  - Central Bank lending to the public sector expanded sharply in 2021 (Central government and SOEs lines in thousands/millions).
  - Base money (Bs million): 75,166 (2019), 93,669 (2020), 102,086 (2021), 109,346 (2022), 116,860 (2023), 124,576 (2024), 132,544 (2025), 140,749 (2026), 149,318 (2027).
  - Base money (percentage change): 3.5 (2019), 24.6 (2020), 9.0 (2021), 7.1 (2022), 6.9 (2023), 6.6 (2024), 6.4 (2025), 6.2 (2026), 6.1 (2027).
- Money and credit:
  - Credit to the private sector (percent change): 6.7 (2019), 9.1 (2020), 4.6 (2021), 7.1 (2022), 6.4 (2023), 6.6 (2024), 6.4 (2025), 6.2 (2026), 6.1 (2027).
  - Credit to the private sector (percent of GDP): 65.8 (2019), 80.2 (2020), 76.0 (2021–2027 series repeating 76.0 … 76.0).
  - Broad money (percent of GDP): 79.1 (2019), 97.6 (2020), 94.3 (2021), 96.6 (2022), 98.6 (2023), 100.4 (2024), 101.7 (2025), 103.6 (2026), 106.2 (2027).
- FX and reserves:
  - Central Bank gross foreign reserves (US$ million): 6,468 (2019), 5,276 (2020), 4,753 (2021), 4,200 (2022), 3,621 (2023), 3,039 (2024), 2,442 (2025), 1,819 (2026), 1,164 (2027).
  - Reserves in months of imports: 9.4 (2019), 5.9 (2020), 4.1 (2021), 3.5 (2022), 2.9 (2023), 2.4 (2024), 1.8 (2025), 1.3 (2026), 1.0 (2027).
  - NEER/REER: REER period average (percent change): 4.6 (2019), 5.2 (2020), -4.2 (2021) (authorities' methodology differs from IMF).

### Financial sector developments
- Capital and asset quality:
  - Capital adequacy ratios are above the regulatory minimum; nonperforming loans (NPLs) remain low.
  - Capital Adequacy Ratio and NPL (In percent): (chart period) Capital adequacy ratios above regulatory minimum; NPL low.
- Profitability and credit:
  - Bank profitability has been declining (ROA and ROE trends shown).
  - Deposits and credit growth: credit growth remains at relatively low levels despite reserve requirement reductions.
  - Microcredit lending rate is the most affected by the Financial Services law.
- Liquidity measures and dollarization:
  - Authorities reduced reserve requirements on FX deposits three times to support liquidity and lending.
  - Dollarization ratios continue to be stable at low levels; central bank foreign exchange interventions remain low.
- Financial stability indicators (Table 7):
  - Regulatory capital to risk-weighted assets: 13.2 (2015), 13.1 (2016), 12.8 (2017), 12.8 (2018), 13.0 (2019), 13.1 (2020), 13.3 (2021).
  - Nonperforming loans to total gross loans: 1.5 (2015), 1.6 (2016), 1.7 (2017), 1.7 (2018), 1.9 (2019), 1.5 (2020), 1.9 (2021).

### External sector developments
- Trade and exports:
  - Exports of goods and services (percent of GDP): 24.9 (2019), 20.0 (2020), 28.1 (2021), 30.7 (2022), 28.9 (2023), 27.6 (2024), 26.4 (2025), 25.2 (2026), 24.1 (2027).
  - Natural gas export share (percent of GDP): 6.6 (2019), 5.4 (2020), 5.5 (2021), 6.0 (2022), 5.9 (2023), 5.6 (2024), 5.2 (2025), 4.6 (2026), 4.0 (2027).
  - In 2021, exports of minerals and agricultural products increased significantly; natural gas exports were little changed.
- Current account and financial flows (Table 5):
  - Current account (US$ million): -1,366 (2019), -269 (2020), 802 (2021), -705 (2022), -799 (2023), -946 (2024), -1,079 (2025), -1,479 (2026), -2,123 (2027).
  - Current account (percent of GDP): -3.3 (2019), -0.7 (2020), 2.0 (2021), -1.6 (2022), -1.7 (2023), -1.9 (2024), -2.1 (2025), -2.6 (2026), -3.6 (2027).
  - Financial account (percent of GDP): 0.2 (2019), 2.1 (2020), -0.4 (2021), -0.3 (2022), -0.5 (2023), -0.7 (2024), -0.9 (2025), -1.5 (2026), -2.5 (2027).
- Reserves and import coverage:
  - Gross BCB international reserves (US$ million): 6,468 (2019), 5,276 (2020), 4,753 (2021), 4,200 (2022), 3,621 (2023), 3,039 (2024), 2,442 (2025), 1,819 (2026), 1,164 (2027).
  - Months of next year's imports: 9.4 (2019), 5.9 (2020), 4.1 (2021), 3.5 (2022), 2.9 (2023), 2.4 (2024), 1.8 (2025), 1.3 (2026), 1.0 (2027).
- Imports:
  - Imports of goods and services (percent of GDP): 29.0 (2019), 22.4 (2020), 26.5 (2021), 32.2 (2022), 30.8 (2023), 30.1 (2024), 29.3 (2025), 28.6 (2026), 28.3 (2027).

### Key projections and memorandum items (selected)
- Nominal GDP (in billions of U.S. dollars): 41.2 (2019), 36.9 (2020), 40.7 (2021), 43.6 (2022), 46.4 (2023), 49.4 (2024), 52.6 (2025), 55.9 (2026), 59.3 (2027).
- Oil prices (U.S. dollars per barrel, memorandum): 61.44 (2019), 41.36 (2020), 69.11 (2021), 103.99 (2022), 91.18 (2023), 72.37 (2024), 67.37 (2025), 62.36 (2026), 69.90 (2027).
- Energy-related subsidies to SOEs (percent of GDP): 1.4 (2019), 1.7 (2020), 1.3 (2021), 1.6 (2022), 1.4 (2023), 1.2 (2024), 1.1 (2025), 1.0 (2026), 0.9 (2027).

*Source: 1bolea2022001 - 48. (IMF staff calculations and Bolivian authorities data).*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Conjunctural shocks and scenarios
- Intensifying spillovers from Russia’s war on Ukraine: Further sanctions and uncertainties exacerbate trade and financial disruptions and commodity price volatility, with Europe, LICs, and commodity-importing EMs among the worst hit. As a net commodity exporter, Bolivia has a dampened exposure to this risk.
  - Likelihood: High
- Commodity price shocks: Continuing supply disruptions (e.g., due to conflicts and export restrictions) and negative demand shocks cause recurrent commodity price volatility and social and economic instability.
  - Likelihood: High
- Systemic social unrest: Rising inflation, declining incomes, and worsening inequality amplify social unrest and political instability, causing capital outflows from EMDEs, slowing economic growth, and giving rise to economically damaging populist policies (e.g., preserving fossil fuel subsidies).
  - Likelihood: High
- De-anchoring of inflation expectations and stagflation: Supply shocks to food and energy prices sharply increase headline inflation and pass through to core inflation, de-anchoring inflation expectations and triggering a wage-price spiral in tight labor markets. Central banks tighten monetary policy more than envisaged leading to weaker global demand, currency depreciations in EMDEs, and sovereign defaults. Together, this could lead to the onset of stagflation.
  - Likelihood: Medium
- Abrupt global slowdown or recession: Global and idiosyncratic risk factors combine to cause a synchronized sharp growth slowdown, with outright recessions in some countries, spillovers through trade and financial channels, and downward pressures on some commodity prices, which would magnify Bolivia’s external imbalances.
  - Likelihood: Medium
- Local Covid-19 outbreaks: Outbreaks in slow-to-vaccinate countries, such as Bolivia, or emergence of more contagious vaccine-resistant variants force new lockdowns or inhibit commerce, resulting in extended supply chain disruptions, slower growth, capital outflows, and debt distress in some EMDEs.
  - Likelihood: Medium

### Structural risks
- Deepening geo-economic fragmentation and geopolitical tensions: Broadening of conflicts and reduced international cooperation accelerate deglobalization, resulting in a reconfiguration of trade, supply disruptions, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial system, and lower potential growth.
  - Likelihood: High
- Cyberthreats: Cyberattacks on critical physical or digital infrastructure (including digital currency platforms) trigger financial instability and disrupt economic activities.
  - Likelihood: Medium
- Natural disasters related to climate change: More frequent natural disasters deal severe damage to infrastructure (especially in smaller vulnerable economies) and amplify supply chain disruptions and inflationary pressures, causing water and food shortages and reducing medium-term growth.
  - Likelihood: Medium

### Domestic risks
- Speculative attack/sudden stop risk: The confluence of inadequate reserves, a fixed exchange rate, and a recurring fiscal deficit raises the risk that a drop in money demand could lead to reserve depletion and a disorderly adjustment.
  - Likelihood: Medium
- Failure to discover new natural gas fields: Production from the existing fields is declining and the success of ongoing exploration activities is uncertain.
  - Likelihood: Medium

*The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. The conjunctural shocks and scenarios highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon.*

---

### Annex II. Debt Sustainability Analysis

### A. Definitions and recent evolution of public debt stock
- Fiscal perimeter: Non-financial public sector (NFPS) fiscal perimeter includes lending by the BCB to state owned enterprises (SOEs), to the National Fund for Regional Development (FNDR), to the Fund for the Productive Industrial Revolution (FINPRO) added to the central government debt published by the BCB.
- End-2021 NFPS debt: 80.5 percent of GDP, or 224.7 billion bolivianos (US$32.8 billion).
- End-2021 domestic debt (including BCB loans to SOEs, FNDR, FINPRO): 140.2 billion bolivianos (US$20.5 billion), or about 62.5 percent of total NFPS debt.
- Foreign-currency debt (including domestic debt issued in FX): US$12.3 billion (84.5 billion bolivianos), 37.6 percent of total NFPS debt.
- Composition of foreign debt: Multilateral creditors hold 65.8 percent; bilateral creditors hold 12.5 percent; the remaining 18 percent consists mostly of Eurobonds.
- Change since end-2019: NFPS debt ratio increased by 20 percentage points from 59.4 percent. Domestic debt rose from 31.9 to 50.2 percent of GDP; foreign debt rose from 27.4 to 30.3 percent of GDP.

### B. Economic assumptions
- Growth and inflation:
  - 2022 GDP growth projected: 3.8 percent.
  - 2022 average inflation projected: 3.2 percent.
  - Medium term: growth expected to stabilize at the potential rate of 2.5 percent while average inflation is expected to return to its long-run average.
- Primary balance:
  - 2022 primary balance projected: -5.6 percent of GDP.
  - Primary deficit assumed to gradually tighten to 3.1 percent by 2027.
  - Fiscal multiplier used: 1 (FAD methodology staff guidance).
- Debt management strategy:
  - Assumes limited access to external capital markets with tighter financing conditions and heavier reliance on the BCB and domestic pension funds for domestic financing and multilateral and bilateral creditors for external financing.

### C. Public debt projections
- Public debt projections:
  - 2022: projected to reach 82.3 percent of GDP.
  - 2027: projected to rise to 89. percent of GDP.
  - Debt projected to continue increasing without stabilizing in the projection period despite a moderately favorable interest rate growth differential.
- Local currency debt:
  - Projected increase by 9.1 percent of GDP to 59.3 percent of GDP by end of the projection period, mainly driven by BCB and AFP lending to the public sector.
  - Implicit interest rate on domestic debt projected to increase from 1.4 percent in 2021 to an average of 2.4 percent in the projection period.
- Foreign currency debt:
  - Projected to remain stable at around 30 percent of GDP in the projection period.
  - Includes a Eurobond issuance of US$850 million placed in February 2022 at a rate of 7.5 percent, 2.5 percent wider than the average of previous issues.
  - Implicit interest rate on external debt assumed to increase from 2.6 percent in 2021 to an average of 4.2 percent in the projection period.
  - External funding largely multilateral, keeping interest burdens on external debt relatively low.

### D. Stress tests and risks to the projections
- Overall assessment: Elevated risks associated with the debt burden persist; debt levels and gross financing needs exceed risk assessment benchmarks under stress test and baseline scenarios.
- Key stress-test outcomes and risks:
  - Debt remains well above the 70 percent of GDP risk benchmark under all scenarios.
  - Real growth stress test impact: 1 standard deviation equivalent to 4.5 percent of GDP in 2023 and 2024, raising projected debt to over 98 percent of GDP by end of the projection period.
  - Gross financing needs exceeded the 15 percent of GDP benchmark in 2020 and 2021 and are projected to surpass it in the projection period under the baseline and all stress test scenarios. Gross financing needs are expected to moderate starting in 2022 in the baseline but peak in the medium term (2023-2025) under all stress tests.
  - Debt risks from departure from the exchange rate peg assessed as moderate: a departure would lead to devaluation and increase the local currency value of public external debt; sovereign’s ability to repay is primarily determined by international reserves. Under a disorderly adjustment (seen as a moderate risk over the short term) during which the central bank attempts to defend the peg, reserves would be expected to decline, weakening capacity to repay.
  - Debt profile vulnerabilities are low: limited share of short-term debt (less than 2 percent of GDP by end of projection period) helps contain gross financing needs; maturity structure poses only moderate risks following the February 2022 refinancing operation.
- Market perception:
  - EMBIG spread has surpassed the upper early warning threshold of 600 basis points, although its 3-months average is at 538 bps.
  - External debt held by non-residents and the share of FX debt remain lower than respective high risk assessment benchmarks.
  - Share of external debt expected to decrease over time as financing tilts to domestic sources with tightening external financing conditions.

---

### Annex III. External Sector Assessment

### Overall assessment and reserves
- Overall assessment: The external position of Bolivia in 2021 was moderately weaker than the level implied by fundamentals and desirable policies.
- Key reasons:
  - Persistent decline of Bolivia’s international reserves in the context of a de facto fixed exchange rate regime and shortfall in adequacy of reserves.
  - Persistent current account deficits, diminishing international reserves, and substantial real exchange rate appreciation since 2015 matched a deteriorating fiscal position.
- Reserves level:
  - At end-June 2022, reserves stand at US$4.5 billion, which is 3.8 months of projected 2023 imports, or 55 percent of the Fund’s 2021 reserve adequacy metric.

### Potential policy responses
- Commit to implementing fiscal reforms while protecting the most vulnerable.
- Reinvigorate structural reforms to improve productivity and competitiveness.
- Under a pegged exchange rate regime, internal adjustments to public and private demand—most notably through a reduction in the fiscal deficit—to reduce pressures on international reserves.

### Foreign assets and liabilities: position and trajectory
- Net international position (NIIP):
  - Bolivia has been a net debtor since 2016Q4.
  - NIIP weakened from a net surplus of US$4.5 billion (13.6 percent of GDP) in 2014 to a net deficit of US$7.5 billion (-18.5 percent of GDP) at end-2021.
- Composition:
  - Over half of foreign liabilities are loans and debt instruments; the remaining share is equity, primarily direct investment.
- Assessment:
  - NIIP expected to continue deteriorating by 1 to 2 percent of GDP per year due to sustained current account deficits.
  - To maintain NIIP at the 2021 level of -18.5 percent of GDP would require a current account balance of about -1.3 percent of GDP over the coming years.
  - Short-term gross external financing needs are limited as much external debt is long-term with relatively favorable financing terms.

### Current account
- Background:
  - Current account follows commodity price swings and related fiscal policy.
  - Commodity price collapse in 2015 and fiscal expansion led to a sharp swing into deficit after a 10-year period of recurring surpluses; commodity boom eased external imbalances in 2021.
  - Net errors and omissions likely representing unreported imports and capital outflows accounted for 3.3 percent of GDP.
- Assessment:
  - Cyclically adjusted CA balance: 1.6 percent of GDP in 2021.
  - EBA-lite CA regression norm: –0.4 percent of GDP, implying a CA gap of 2 percent of GDP.
  - Considering inadequate reserves, appreciated REER, and loss of market share in non-energy exports, external position assessed as moderately weaker than fundamentals and desired policies.

### Real exchange rate (REER)
- Background:
  - CPI-based REER has been appreciating since end-2017.
  - As of end-2021, REER has appreciated by 48 percent since the boliviano was pegged to the U.S. dollar in 2011.
- Assessment:
  - CA gap implies a REER undervaluation of -10.7 percent (applying an estimated elasticity of 0.19).
  - REER regression model indicates an overvaluation of 30.8 percent.
  - REER regression judged more accurate; to realign exchange rate with fundamentals, policies should focus on fiscal consolidation, improving productivity and competitiveness.

### Capital and financial accounts: flows and policy measures
- February 2022 refinancing operation:
  - Extended maturity of most of Bolivia’s US$1 billion in sovereign debt maturing in 2022 and 2023 but provided little additional net financing to cover the 2022 fiscal deficit.
- Net FDI inflow:
  - Projected at –   0.8 percent of GDP compared to a three-year average of 0.6 percent of GDP net inflow prior to the pandemic.
- Capital account openness:
  - According to the Chinn-Ito index using 2019 data, Bolivia’s capital account is less open than the LAC average.
- External funding in 2021:
  - World Bank, IDB and CAF provided net new external funding totaling $841.3 million in 2021.
- Assessment:
  - Current account deficit has been mainly financed by running down international reserves.
  - Declining reserves, continued fiscal and current account deficits, and tightening global financial conditions expected to raise cost of external funding, limiting prospects for further external sovereign bond issuance.
  - Authorities need policies that attract larger FDI inflows to support sustainable and durable growth.

### Key 2021 external sector indicators (in percent of GDP)
- NIIP: -18.5
- Gross Assets: 43.4
- Res. Assets: 11.7
- Gross Liab.: 61.9
- Debt Liab.: 36.0

*Content based on the Annex I–III material provided in the source document.*

### 2022.  Bolivian commercial banks have swapped over US$3 billion to the BCB over the past two years under

### 1bolea2022001 - 2022.  Bolivian commercial banks have swapped over US$3 billion to the BCB over the past two years under

### Background
- Bolivian commercial banks have swapped over US$3 billion to the BCB over the past two years under a program known as CPVIS.
- These swaps constitute more than half of the BCB’s US$4.5 billion in gross international reserves.
- Most of these funds are provided on an overnight basis, implying that they may not be available to the BCB in the event of a crisis.

### Assessment
- Reserves are not adequate according to standard Fund metrics.
- They currently stand at

### Key statistics
- US$3 billion — amount swapped by Bolivian commercial banks to the BCB over the past two years under CPVIS.
- US$4.5 billion — BCB’s gross international reserves; swaps constitute more than half of this amount.
- Overnight maturity — most CPVIS funds are provided on an overnight basis.

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1bolea2022001.pdf*

### 3.8 months of projected 2023   imports or 55 percent of the ARA metric. Reserves have diminished from

### 1bolea2022001 - 3.8 months of projected 2023   imports or 55 percent of the ARA metric. Reserves have diminished from

### Reserves, exchange rate, and external buffers
- Reserves: "3.8 months of projected 2023 imports or 55 percent of the ARA metric."
- Historical reserve change: "Reserves have diminished from over 50 percent of GDP to about 12 percent of GDP in the last decade, and are projected to continue falling."
- Policy implication: "To preserve the stabilized exchange rate, there is a need to correct internal imbalances including through fiscal consolidation and supply side reforms."
- Exchange arrangement:
  - De jure regime: "crawling peg to the U.S. dollar."
  - Sliding rate: "set to zero in 2011" and "the boliviano has stabilized against the U.S. dollar since November 2011."
  - De facto classification: "retroactively reclassified to a ‘stabilized arrangement’ from a crawling peg, effective November 2, 2011."
- Chinn-Ito index (KAOPEN): "an index measuring a country's degree of capital account openness based on restrictions on cross-border financial transactions quantified in IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER)."

### Data, statistics, and reporting gaps
- Data adequacy: "Data provision is broadly adequate for surveillance, but staff urge the authorities to move forward on key improvements."
- Priority reforms:
  - "(i) completing the rebasing of the GDP and CPI indices; and (ii) improving the coverage of the nonfinancial public sector."
- National accounts: current base year "1990" is outdated; INE started updating base year to "2010" and to implement the "2008 SNA."
- Labor market: "quarterly employment survey was discontinued in 2010" — absence of quarterly unemployment/employment/wages; yearly wages still compiled.
- Prices statistics: CPI based on "2015/16 household budget survey"; "CPI (2016=100) basket comprises 397 items"; geographic coverage "nine capital cities and three conurbations"; INE disseminates a "PPI (2016=100)."
- Government finance statistics: Annual consolidated central government data "do not cover all operations of state-owned enterprises, their subsidiaries, decentralized agencies, and operations channeled through special funds."
- Monetary and Financial Statistics (MFS): recommendations to exclude long term deposits from broad money and extend coverage of Other Financial Corporations to include "FONDESIF and leasing companies."
- ESS/BPM6: BCB began publishing balance of payments and IIP according to "BPM6" in November 2016; concern that "government-issued external bonds held by residents are now being recorded as external debt, which is not consistent with the BPM6."
- e-GDDS participation since "November 2000"; last metadata updates "2005" and "2014"; "Bolivia has yet to establish a National Summary Data Page."

### Key statistical and data-frequency table highlights (as of August 8, 2022)
- Exchange Rates: frequency "Daily"
- International Reserve Assets and Reserve Liabilities: frequency "Daily"
- Reserve/Base Money: latest observation "May, 2022"; date received "June 2022"; frequency "M"
- Broad Money: latest observation "Feb. 2022"; date received "April 2022"; frequency "M"
- Central Bank Balance Sheet: latest observation "May, 2022"; date received "June 2022"; frequency "M"
- Consolidated Balance Sheet of the Banking System: latest observation "Feb. 2022"; date received "April 2022"; frequency "M"
- Consumer Price Index: latest observation "Jun. 2022"; date received "Jul. 2022"; frequency "M"
- GDP/GNP: latest observation "2020"; date received "Jan. 2022"; frequency "A"
- External Current Account Balance: latest observation "Q1 2022"; date received "Jun. 2022"; frequency "Q"
- International Investment Position: latest observation "Q1 2022"; date received "Jun. 2022"; frequency "Q"

### Recent economic performance and indicators
- 2021 GDP growth: "6.1 percent"
- 2020 contraction: "the worst contraction in 67 years" (contextual)
- 2022 outlook and early performance:
  - Q1 2022 GDP growth: "4.0 percent y- o-y"
  - Inflation: "an accumulated rate of 1.6 percent as of August 2022"
  - Agricultural production growth: "5.3 percent y-o- y in the first quarter of the year"
- COVID-19 mortality: "mortality rate in the fifth wave... reached 0.1 percent, well below the 6.2 percent recorded during the first wave."
- 2021 fiscal outcome: fiscal deficit "9.3 percent of GDP" (down from "12.7 percent of GDP in 2020")
- 2022 fiscal projection: "a fiscal deficit of around 8.5 percent of GDP is expected for this year."

### Fiscal policy stance and authorities’ priorities
- Government stance: prioritize promoting economic recovery and protecting population welfare; disagreement with staff on "abrupt fiscal adjustment" and particular instruments.
- Policy measures maintained:
  - Fuel and food subsidies retained to "preserve price stability and contain possible impacts on the population’s welfare."
  - Public investment prioritized; authorities reject limiting public investment as a fiscal consolidation measure.
  - Rejection of eliminating the "segundo aguinaldo" (supplementary end-year bonus) citing legal framework and redistribution policy.
- Financing and debt:
  - Authorities view "Public debt is at sustainable levels, as also stated in the staff’s debt sustainability analysis."
  - Ongoing access to multilateral financing and potential sovereign financing if external conditions become favorable.
- Medium-term revenue expectations tied to large public investment projects: "Mutun iron plant, lithium industrialization, zinc refining plants," and import substitution projects such as "biodiesel plant" and SIBOLIVIA.

### Monetary and financial sector assessment and policies
- Financial system indicators described as robust: "adequate liquidity, capitalization above the required levels, low rate of non-performing loans (NPLs), and significant growth in deposits and loans."
- 2021 banking sector flows: "deposits grew by 6 percent and loans by 4 percent."
- NPLs: "less than 2 percent."
- Loan composition: solid growth in productive loans and microcredits; growth in Social Interest Housing (VIS) credits; portfolio limits and preferential interest rates used to promote productive credit and VIS.
- Authorities’ rejection of staff recommendation: do not agree "to eliminate the portfolio limit and preferential interest rates scheme."
- Loan rescheduling/refinancing measures: provided support to debtors after credit deferral period; ASFI closely monitors sector performance.
- Pension fund financing:
  - Historical concentration in government bonds: "In 2006, 75 percent of the pension fund investment portfolio was concentrated in government bonds;"
  - April 2022: these "represented 23 percent of the total."
  - "Currently, more than 50 percent of the investments of these funds corresponds to financial system fixed term deposits (DPF)."
- Policy coordination: BCB and Ministry "annually sign a Fiscal Financial Program"; authorities emphasize coordination and the BCB's role in promoting macroeconomic targets and recovery.

### External sector developments (selected)
- 2021 external outcomes: "For the first time in seven years, the current account recorded a surplus, driven by the positive outcome in the trade balance."
- Exports: "reaching the highest level since 2014 and a growth rate close to 60 percent compared to" (text ends here in source).

*Source: BOLIVIA STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION*

### 2020. Within it, the sales of the manufacturing industry achieved historical levels. Moreover,

### 1bolea2022001 - 2020. Within it, the sales of the manufacturing industry achieved historical levels. Moreover,

### External sector performance and international reserves
- Manufacturing sales "achieved historical levels."
- Imports grew by 35 percent, driven by purchases of capital goods, raw materials, and inputs, which represented 78 percent of total imports and help strengthen Bolivia’s productive capacity.
- In 2021 the country stopped recording twin deficits.
- Exports and imports remain dynamic in 2022, and a trade surplus is still recorded, which will contribute to the result of the current account.
- International reserves stabilized in 2021:
  - Their level showed a decrease compared to the previous year, but the reduction was notably lower than that experienced in 2020, when the economy had lost around US$ 1,500 million.
  - In the first half of this year, international reserves remained at adequate levels according to reference parameters, managing to cover five months of imports.

### Exchange rate policy and government position
- Staff recommended a transition to a flexible exchange rate regime.
- The Bolivian authorities' assessment:
  - The stability of the exchange rate in Bolivia has played a fundamental role in generating economic certainty, containing imported inflation pressures, and in the de-dollarization process.
  - This orientation has promoted a scenario of stability despite the external turbulences of the last decade.
  - Reviewing the same document to which staff refers, a potential exchange rate flexibilization would not generate significant gains for the country with respect to the current exchange rate scheme.
  - Therefore, the Bolivian government does not consider this transition as appropriate and does not expect to modify the exchange rate position.

### Social policy and social outcomes
- Improving living standards, especially for the most vulnerable, is a main objective of the Bolivian economic model; income redistribution policy plus higher economic dynamism drove advances in social indicators.
- Poverty and inequality trends:
  - Moderate poverty decreased from 60.6 percent in 2005 to 36.3 percent in 2021.
  - Extreme poverty decreased from 38.2 percent in 2005 to 11.1 percent in 2021.
  - Inequality (Gini Index) fell from 0.60 in 2005 to 0.42 in 2021.
  - Income gap between highest and lowest deciles reduced from 128 times to 20 times.
- Other social outcomes:
  - Access to basic services was expanded.
  - After setbacks in 2020, in 2021 the country returned to a downward path of poverty and inequality and to gradual restoration of living conditions.
  - Unemployment fell from close to 12 percent in mid-2020 to 4.6 percent in July 2022.
- Policy posture in 2022:
  - The government continues applying policies to preserve price stability and protect the population’s welfare in the face of strong external inflationary pressures.

### Conclusion and short- to medium-term outlook
- Given high external uncertainty and risks, the national government is making efforts to support economic recovery and Bolivian households, especially the most vulnerable.
- 2022 projections:
  - Economy growth expected by around 5 percent.
  - Inflation rate expected of 3.3 percent in 2022.
- Medium-term drivers:
  - Growth will be driven by major public investment projects, some underway and others to be implemented soon, within the framework of the National Development Plan, 2021-2025.
  - Import substitution strategy and the strengthening of the productive sector are expected to play a fundamental role.

*Source: 1bolea2022001 - 2020. Within it, the sales of the manufacturing industry achieved historical levels. Moreover,*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1bolea2022001.pdf_