## 1. Investment and Capital Stock ## Source details **Canonical URL:** [1. Investment and Capital Stock](https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019151.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2019/wpiea2019151.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2019/wpiea2019151.pdf.json) --- ### Background - Bolivia is a resource-rich country where extractive industries play a pivotal role: the natural gas and minerals sectors account for over 80 percent of exports, 20 percent of fiscal revenues and 10 percent of GDP. - After large natural gas discoveries in the late 1990s, gas production increased eight-fold between 1999 and 2015; the last significant discovery was in 2004 (Incahuasi). - Proven gas reserves in Bolivia stood at 10.7 trillion cubic feet (TCF) in 2018. - Absent new discoveries, current natural gas reserves would last roughly 10 years; continuation of historical production levels without additional discoveries would lead to depletion of reserves sometime in the mid-2020s. - Public investment doubled from 7 percent of GDP to 14 percent of GDP from 2005 to 2015, expanding the public capital stock from 78.8 percent to 100.5 percent of GDP over the same period. - Since 2006, public investment grew at roughly 20 percent per year in nominal terms, reaching 14 percent of GDP in 2015. - Growth averaged 4.8 percent during 2006 to 2017. ### Recent macroeconomic and fiscal developments - Overall fiscal balance: surplus (2010–2013) → deficit of 3.4 percent of GDP in 2014 → deficit of 7.8 percent of GDP in 2017. - External current account: surplus of 1.7 percent of GDP in 2014 → deficit of 6.3 percent of GDP in 2017. - International reserves: US$10 billion (11 months of import cover) in 2017, down from US$15 billion in 2014. - Gross (net) public debt rose to about 53.5 (39.6) percent of GDP in 2018 from about 37 (12) percent of GDP in 2013. ### Public investment profile - Composition of capital spending: two-thirds on infrastructure and investment in productive sectors (hydrocarbon, energy, mining). - Bolivia’s five-year PDES (2016–2020) planned investment for 2015–2020 estimated at $48.6 billion (2.4 times 2006–14). Allocation: 56 percent to productive sectors, 23 percent to infrastructure, 21 percent to social sectors and environment/water. - Public investment averaged around 14 percent of GDP during 2015–17 versus regional comparator average of about 5 percent of GDP. - Public capital stock increased rapidly as a share of GDP, though remains low in per capita terms. ### The DIG model (Debt‑Investment‑Growth) - Model type: dynamic general equilibrium adapted to a small open economy with natural resource wealth. - Key features: - Two production sectors, two household types (intertemporal optimizing and rule-of-thumb), active government taxing/spending/investing. - Public capital is an input for the traded goods sector and is generated by a non-traded goods sector. - Government finances via taxes (income and consumption), bond issuance, and grants; disburses transfers and funds public investment and consumption. - Captures investment-growth nexus with investment inefficiencies and absorptive capacity constraints. - Calibration inputs and initial conditions derive from historical data; additional model details in Annex III. ### Public investment path scenarios (modelled) - Alternate Public Investment Paths: 1. Status quo: public investment kept at the average annual level registered between 2012 and 2017 of 14.0 percent of GDP over 2018–30. 2. Gradual consolidation: public investment gradually reduced from 14.0 percent of GDP to the peer average (9 percent of GDP) over the coming decade. 3. Sharp consolidation: public investment cut from 14.0 percent of GDP to 9 percent of GDP in two years. - The 9 percent of GDP target: peer average and supported by cross-country empirical evidence (growth/consumption maximizing levels computed at about 10 percent of GDP and 8.1–9.6 percent of GDP, respectively). ### Natural gas revenue scenarios and assumptions - Proven gas reserves: 10.7 trillion cubic feet (1P) in 2018 vs 10.45 trillion cubic feet in 2013. - Without discoveries, reserves last until sometime in the mid-2020s. - Two natural gas revenue scenarios modeled: - Baseline (conservative): gas revenue falls from 6.2 percent of GDP to 1.7 percent of GDP by 2024; a specific baseline projection notes future hydrocarbon revenue falls from 6.2 percent of GDP in 2016 to 1.12 percent of GDP by 2025 and gradually tapers off by 2030 unless exploration bears fruit. - More favorable: gas revenue falls from 6.2 percent of GDP to 3.5 percent of GDP by 2024; revenues decline gradually over 2025–32. ### Model financing and calibration highlights - Bolivia's external debt at end-2017: 24.1 percent of GDP; domestic debt: approximately 27 percent of GDP. - Share of remittances in financial flows (2013–2018) averaged 3.7 percent of GDP. - Financing assumptions: - Domestic borrowing used to finance public investment gaps arising from falling natural gas revenue. - International reserves assumed to serve as buffers and not used to fund public investment. - Grants over 2014–17: grants-to-revenue = 0.9 percent; grants-to-GDP = 0.2 percent. - Ceiling on indirect taxes set at 14 percent of GDP for analyses exploring tax financing of fiscal gaps. - User fees on infrastructure services assumed to recover at least half of recurrent costs (set as an upper bound given data limitations). - Energy tariffs and fuel/gas prices are known to be subsidized; domestic natural gas prices kept lower than export prices. ### Simulation results — Baseline scenario (status quo investment at 14.0 percent of GDP) - Assumptions: start in 2018; public investment remains at 14.0 percent of GDP over 2019–30; government borrows domestically (including from the central bank) to finance fiscal gaps; historical borrowing patterns maintained (private banks and non-banking financial institutions, including the central bank, accounted for 67 percent of the portfolio of public domestic debt). - Key outcomes under conservative natural gas revenue trajectory: 1. Future hydrocarbon revenue example: falls from 6.2 percent of GDP in 2016 to 1.12 percent of GDP by 2025 and gradually tapers off by 2030 unless exploration yields results. 2. Maintaining elevated public investment with domestic borrowing to cover shortfalls can lead to: - Sharp declines in private investment growth. - A rapid rise in the fiscal deficit above already high rates of around 7 percent of GDP. - Sizeable accumulation of public debt to over 100 percent of GDP by 2030. 3. Under the gradual consolidation path (public investment falls to 9 percent of GDP by 2027): - Gradual decreases in private investment and consumption relative to status quo, driven largely by anticipated future taxes. - Lower fiscal deficit without significant adverse impact on medium-term growth. - Public debt levels kept near 60 percent of GDP. ### Sharp consolidation versus gradual consolidation (impacts) - Sharp consolidation (cut to 9 percent of GDP in two years): - Sharp losses in private investment and consumption growth in the medium term because public investment spending has been creating demand by generating jobs and supply chains across economic sectors. - Fiscal deficits for public investment are lower in the short-run but long-run deficits are no lower than under gradual consolidation because of the negative impact on growth. - Public debt trajectory is broadly similar under both sharp and gradual consolidation paths. - Gradual consolidation: - Stabilizes debt and keeps fiscal deficits at manageable levels while containing negative impact on medium-term growth rates. ### More favorable hydrocarbon production scenario (summary) - Hydrocarbon revenue path: projected hydrocarbon revenue falls to 3.5 percent of GDP by 2024 from 6.2 percent of GDP in 2016 and gradually declines over 2025–30. - Under maintained elevated public investment (domestic borrowing supplements fiscal shortfalls): - Private investment and consumption fall substantially in the long-run, erasing gains from higher medium-term growth. - Recent annual private consumption growth in Bolivia averaged 4.0-4.7 percent. - Under the status quo investment scenario, consumption growth in the medium-term is lower by more than 2 percentage points and eventually contracts by 2030. - Total public debt would exceed 80 percent of GDP by 2030. - Under gradual consolidation (public investment reduced steadily to 9 percent of GDP by 2027): - Reductions imply only moderate contractions in public consumption and investment growth compared to status quo. - Real private investment levels do not contract because historical real private investment growth at 9.8 percent since 2014 is higher than the decline in private investment growth under the gradual consolidation path. - Public debt levels are kept near current levels around 50 percent of GDP. - Sharp consolidation under more favorable hydrocarbon revenues: - Has a larger negative impact on medium-term growth, extending private investment and consumption growth losses from 2021 until the end of the simulation period. - Gradual reduction in investment protects growth and prevents decline in private consumption and investment. ### Sensitivity analyses and hydrocarbon‑investment linkage - Endogenous indirect tax adjustment (conservative hydrocarbon revenue scenario): - Stabilizing debt with unchanged public investment-GDP requires indirect tax rates to rise to 20 percent (from an initial level of 13 percent in the first two years). - This adjustment would weigh on private consumption. - A gradual consolidation of investment-GDP together with a modest increase in indirect taxes has a minor impact on growth while preserving debt close to current levels. - Natural gas discoveries tied to public investment: - YPFB considers 48 percent of the territory with hydrocarbon potential yet to be explored. - The energy ministry expects about 10.8 TCF worth of natural gas will be uncovered in the Tarija state by 2022, where 16 of Bolivia's 22 hydrocarbon exploration projects were underway in 2015. - Private energy companies plan to invest US$12.1 billion over the next five years to develop Bolivia's oil and gas resources. - YPFB plans to invest US$2.2 billion over five years into exploration and hydrocarbon derivatives. - Scenario linkage: - Hydrocarbon revenues are assumed to fall sharply under a sharp reduction in investment. - Hydrocarbon revenues steadily decline under a gradual reduction of investment. - Revenues under the status quo investment path are 30 percent higher than under the scenario where investment is gradually lowered. - Simulation outcomes: - Under current investment levels and slowly falling gas revenues, public debt rises to 60 percent of GDP; likely need to increase expected future taxes, causing private consumption growth to fall below long-run historical levels. - Under gradual investment consolidation, public debt stabilizes at current levels; growth losses are relatively small and medium-term domestic borrowing remains lower because of consolidation. - Results are robust to parameter variations within reasonable ranges. ### Annex III — Model calibration (selected parameters) - Trend growth rate: 4.3 — WEO/IFS - Remittances to GDP ratio: 3.7 — WEO/IFS - Consumption tax rate (VAT): 13 — World Sales Tax Handbook - Public infrastructure investment to GDP ratio: 14 — AIV 2017 - Initial return on infrastructure: 25 — Authors’ computation - Efficiency of public infrastructure investment: 60 — Authors’ computation - Steady state efficiency of public investment: 60 — Authors’ computation - Initial public domestic debt to GDP ratio: 24.8 — AIV 2017 - Public concessional debt to GDP ratio: 17 — AIV 2017 - Public external commercial debt to GDP ratio: 8 — AIV 2017 - Grants to GDP ratio: 0.2 — AIV 2017 - Initial natural gas revenues to GDP ratio: 6.2 — Authorities data - Initial Private external debt to GDP ratio: 0.0 — AIV 2017 - Real rate on public domestic debt: 2.5 — Authors’ estimate - Real rate on public external commercial debt: 4.3 — Authors’ estimate - Initial Imports to GDP ratio: 18 — WEO/IFS - Value added in NT-sector: 49.4 — GTAP-IV - Labor ratio of Non-Savers to Savers: 2.00 — Global Findex 2018 - Learning externality in the T-sector: 0.1 — Buffie et al. (2012) - Learning externality in the NT-sector: 0.1 — Buffie et al. (2012) - The share of capital in value added in T-sector: 40 — Buffie et al. (2012) - The share of capital in value added in NT-sector: 55 — Buffie et al. (2012) ### Annex IV — Sensitivity on public investment efficiency (PIE‑X) - Baseline PIE‑X = 0.6; alternative benchmark PIE‑X = 0.73 (top LAC performer). - Findings: - Under the status quo public investment plan: - Public debt levels surge beyond 80 percent by 2030 when PIE‑X = 0.6. - The same debt ratio reaches 70 percent when PIE‑X = 0.73. - Under variable future gas revenues tied to three public investment paths: - Under the status quo, public debt edges up to 75 percent of GDP as gas revenues gradually fall and domestic debt finances the gap. - Gradual consolidation maintains public debt at more manageable levels and results in lower medium-term domestic borrowing than the status quo. - Efficiency improvements improve the public capital stock per dollar spent and raise output, but do not by themselves produce substantial public debt reduction under the status quo investment plan. ### Policy implications and recommendations - Continued ambitious public investment amid declining hydrocarbon revenues risks pushing public debt to unsustainable levels (over 100 percent of GDP by 2030 under status quo and conservative gas scenario). - A gradual reduction of public investment toward the peer average (9 percent of GDP) can contain fiscal deficits and public debt while mitigating adverse growth impacts from reduced investment. - Domestic borrowing to finance investment gaps is the modeled financing response given constraints on using reserves and limited external financing/grants. - Investment efficiency and absorptive capacity constraints are critical in assessing the returns to continued high public investment. - Gradual fiscal consolidation is the preferred strategy: - It prevents sharp contractions in private consumption and investment growth. - It keeps medium-term domestic borrowing lower than under the status quo. - Public investment efficiency improvements are necessary but not sufficient: - Efficiency gains raise output by improving public capital per dollar spent, but must be accompanied by sustainable investment plans to materially reduce public debt trajectories. - Avoid sharp short-term investment cuts: - While effective at stabilizing debt ratios, sharp consolidation causes larger growth and private-sector absorption costs. - Risks point to the need for a prudent and restrained public investment plan that ensures fiscal sustainability and durable growth: uncertainty in hydrocarbon exploration, current fiscal deficits, hydrocarbon-related revenue risks, uncertain prospects for new discoveries and reserves, risks related to global oil/gas prices, and the risk of weaker demand from Brazil and/or Argentina. *Source: IMF staff analysis from "1. Investment and Capital Stock", "3. The “sharp consolidation” scenario has a larger negative impact on medium-term growth", and Annex III/IV (wpiea2019151).* ### 1. Investment and Capital Stock ........................................................................................ ### 1. Investment and Capital Stock ### Background - Bolivia is a resource-rich country where extractive industries play a pivotal role: the natural gas and minerals sectors account for over 80 percent of exports, 20 percent of fiscal revenues and 10 percent of GDP. - After large natural gas discoveries in the late 1990s, gas production increased eight-fold between 1999 and 2015; the last significant discovery was in 2004 (Incahuasi). - Absent new discoveries, current natural gas reserves would last roughly 10 years. Proven gas reserves in Bolivia stood at 10.7 trillion cubic feet (TCF) in 2018. - Continuation of historical production levels without additional discoveries would lead to depletion of reserves sometime in the mid-2020s. - Public investment doubled from 7 percent of GDP to 14 percent of GDP from 2005 to 2015, expanding the public capital stock from 78.8 percent to 100.5 percent of GDP over the same period. - Since 2006, public investment grew at roughly 20 percent per year in nominal terms, reaching 14 percent of GDP in 2015. - Growth averaged 4.8 percent during 2006 to 2017. ### Recent Macroeconomic and Fiscal Developments - Overall fiscal balance: surplus (2010–2013) → deficit of 3.4 percent of GDP in 2014 → deficit of 7.8 percent of GDP in 2017. - External current account: surplus of 1.7 percent of GDP in 2014 → deficit of 6.3 percent of GDP in 2017. - International reserves amounted to US$10 billion (11 months of import cover) in 2017, down from US$15 billion in 2014. - Gross (net) public debt rose to about 53.5 (39.6) percent of GDP in 2018 from about 37 (12) percent of GDP in 2013. ### Public Investment in Bolivia - Composition of capital spending: two-thirds on infrastructure and investment in productive sectors (hydrocarbon, energy, mining). - Bolivia’s five-year PDES (2016–2020) planned investment for 2015–2020 estimated at $48.6 billion (2.4 times 2006–14). Allocation: 56 percent to productive sectors, 23 percent to infrastructure, 21 percent to social sectors and environment/water. - Public investment averaged around 14 percent of GDP during 2015–17 versus regional comparator average of about 5 percent of GDP. - Public capital stock increased rapidly as a share of GDP, though remains low in per capita terms. ### The DIG Model (Debt-Investment-Growth) - Model type: dynamic general equilibrium adapted to a small open economy with natural resource wealth. - Key model features: - Two production sectors, two household types (intertemporal optimizing and rule-of-thumb), active government taxing/spending/investing. - Public capital is an input for the traded goods sector and is generated by a non-traded goods sector. - Government finances via taxes (income and consumption), bond issuance, and grants; disburses transfers and funds public investment and consumption. - Captures investment-growth nexus with investment inefficiencies and absorptive capacity constraints. - Calibration inputs and initial conditions derive from historical data; additional model details in Annex III. ### Public Investment Path Scenarios (modelled paths) - Alternate Public Investment Paths: 1. Status quo: public investment kept at the average annual level registered between 2012 and 2017 of 14.0 percent of GDP over 2018–30. 2. Gradual consolidation: public investment gradually reduced from 14.0 percent of GDP to the peer average (9 percent of GDP) over the coming decade. 3. Sharp consolidation: public investment cut from 14.0 percent of GDP to 9 percent of GDP in two years. - The 9 percent of GDP target: peer average and supported by cross-country empirical evidence (growth/consumption maximizing levels computed at about 10 percent of GDP and 8.1–9.6 percent of GDP, respectively). - Natural gas reserve assumptions: - Proven gas reserves: 10.7 trillion cubic feet (1P) in 2018 vs 10.45 trillion cubic feet in 2013. - Without discoveries, reserves last until sometime in the mid-2020s. - Two natural gas revenue scenarios modeled: - Baseline (conservative): hypothetical depletion—production and associated revenues decline; natural gas output would decelerate and cease by 2025 under the conservative description. - More favorable: more gradual decline where some discoveries occur but not enough to replenish current reserves for the long term; output falls more gradually. ### Natural Gas Revenue Assumptions (two scenarios) - Baseline scenario: - Gas revenue falls from 6.2 percent of GDP to 1.7 percent of GDP by 2024; gas revenues continue to decline over 2025–32. - A specific baseline projection noted later: future hydrocarbon revenue falls from 6.2 percent of GDP in 2016 to 1.12 percent of GDP by 2025 and gradually tapers off by 2030 unless exploration bears fruit. - More favorable scenario: - Gas revenue falls from 6.2 percent of GDP to 3.5 percent of GDP by 2024; revenues decline gradually over 2025–32. ### Model Assumptions and Calibration Highlights - Bolivia's external debt at end-2017: 24.1 percent of GDP; domestic debt: approximately 27 percent of GDP. - Share of remittances in financial flows (2013–2018) averaged 3.7 percent of GDP. - Financing assumptions: - Domestic borrowing used to finance public investment gaps arising from falling natural gas revenue. - International reserves assumed to serve as buffers and not used to fund public investment. - Grants over 2014–17: grants-to-revenue = 0.9 percent; grants-to-GDP = 0.2 percent. - Ceiling on indirect taxes set at 14 percent of GDP for analyses exploring tax financing of fiscal gaps. - User fees on infrastructure services assumed to recover at least half of recurrent costs (set as an upper bound given data limitations). - Energy tariffs and fuel/gas prices are known to be subsidized; domestic natural gas prices kept lower than export prices. ### Simulation Results — Baseline Scenario (status quo investment at 14 percent of GDP) - Assumptions: start in 2018; public investment remains at 14 percent of GDP over 2019–30; government borrows domestically (including from the central bank) to finance fiscal gaps; historical borrowing patterns maintained (private banks and non-banking financial institutions, including the central bank, accounted for 67 percent of the portfolio of public domestic debt). - Key modeled outcomes under conservative natural gas revenue trajectory: 1. Future hydrocarbon revenue trajectory example: falls from 6.2 percent of GDP in 2016 to 1.12 percent of GDP by 2025 and gradually tapers off by 2030 unless exploration yields results. 2. Maintaining elevated public investment with domestic borrowing to cover shortfalls can lead to: - Sharp declines in private investment growth. - A rapid rise in the fiscal deficit above already high rates of around 7 percent of GDP. - Sizeable accumulation of public debt to over 100 percent of GDP by 2030. 3. Under the gradual consolidation path (public investment falls to 9 percent of GDP by 2027): - Gradual decreases in private investment and consumption relative to status quo, driven largely by anticipated future taxes. - Lower fiscal deficit without significant adverse impact on medium-term growth. - Public debt levels kept near 60 percent of GDP. ### Key Policy Implications and Findings - Continued ambitious public investment amid declining hydrocarbon revenues risks pushing public debt to unsustainable levels (over 100 percent of GDP by 2030 under status quo and conservative gas scenario). - A gradual reduction of public investment toward the peer average (9 percent of GDP) can contain fiscal deficits and public debt while mitigating adverse growth impacts from reduced investment. - Domestic borrowing to finance investment gaps is the modeled financing response given constraints on using reserves and limited external financing/grants. - Investment efficiency and absorptive capacity constraints are critical in assessing the returns to continued high public investment. *Source: IMF staff analysis from "1. Investment and Capital Stock" (wpiea2019151).* ### 3. The “sharp consolidation” scenario has a larger negative impact on medium-term growth ### 3. The “sharp consolidation” scenario has a larger negative impact on medium-term growth ### Sharp consolidation versus gradual consolidation - Sharp consolidation: public investment is cut to 9 percent of GDP in two years. - Impacts of sharp consolidation: - Sharp losses in private investment and consumption growth in the medium term because public investment spending has been creating demand by generating jobs and supply chains across economic sectors. - Fiscal deficits for public investment are lower in the short-run but long-run deficits are no lower than under the gradual consolidation path because of the negative impact on growth. - Public debt trajectory is broadly similar under both the sharp and gradual investment consolidation paths. - Gradual consolidation: - Able to stabilize debt and keep fiscal deficits at manageable levels while containing negative impact on medium-term growth rates. ### More favorable hydrocarbon production scenario - Hydrocarbon revenue path: - Projected hydrocarbon revenue falls to 3.5 percent of GDP by 2024 from 6.2 percent of GDP in 2016 and gradually declines over the remainder of the simulation period (2025–30). - Under maintained elevated public investment (domestic borrowing supplements fiscal shortfalls): - Private investment and consumption fall substantially in the long-run, erasing gains from higher medium-term growth. - For context, recent rates of annual private consumption growth in Bolivia averaged 4.0-4.7 percent. - Under the status quo investment scenario, consumption growth in the medium-term is lower by more than 2 percentage points and eventually contracts by 2030. - Total public debt would exceed 80 percent of GDP by 2030. - Under gradual consolidation path (public investment reduced steadily to 9 percent of GDP by 2027): - Reductions imply only moderate contractions in public consumption and investment growth compared to status quo. - Real private investment levels do not contract because historical real private investment growth at 9.8 percent since 2014 is higher than the decline in private investment growth under the gradual consolidation path. - Public debt levels are kept near current levels around 50 percent of GDP. - Sharp investment consolidation under more favorable hydrocarbon revenues: - Has a larger negative impact on medium-term growth, extending private investment and consumption growth losses from 2021 until the end of the simulation period. - Even with more favorable hydrocarbon revenues, gradual reduction in investment protects growth and prevents decline in private consumption and investment. ### Sensitivity analyses - Endogenously adjusting indirect taxes (conservative hydrocarbon revenue scenario): - Stabilizing debt with unchanged public investment-GDP requires indirect tax rates to rise to 20 percent (from an initial level of 13 percent in the first two years). - This adjustment would weigh on private consumption. - A gradual consolidation of investment-GDP together with a modest increase in indirect taxes has a minor impact on growth while preserving debt close to current levels. - Natural gas discoveries tied to public investment: - YPFB considers 48 percent of the territory with hydrocarbon potential yet to be explored. - The energy ministry expects about 10.8 TCF worth of natural gas will be uncovered in the Tarija state by 2022, where 16 of Bolivia's 22 hydrocarbon exploration projects were underway in 2015. - Private energy companies plan to invest US$12.1 billion over the next five years to develop Bolivia's oil and gas resources. - YPFB plans to invest US$2.2 billion over five years into exploration and hydrocarbon derivatives. - Scenario linkage: - Hydrocarbon revenues are assumed to fall sharply under a sharp reduction in investment. - Hydrocarbon revenues steadily decline under a gradual reduction of investment. - Revenues under the status quo investment path are 30 percent higher than under the scenario where investment is gradually lowered. - Simulation outcomes: - Under current investment levels and slowly falling gas revenues, public debt rises to 60 percent of GDP; likely need to increase expected future taxes, causing private consumption growth to fall below long-run historical levels. - Under gradual investment consolidation, public debt stabilizes at current levels; growth losses are relatively small and medium-term domestic borrowing remains lower because of consolidation. - Results are robust to parameter variations within reasonable ranges. ### Conclusion and policy implications - The model shows macroeconomic impacts of sustained high public investment amid hydrocarbon reserve depletion and declining projected hydrocarbon revenues. - Under a conservative scenario with no new natural gas discoveries: - Keeping public investment-GDP at current levels could push public debt levels to over 100 percent of GDP by 2030. - Main policy-relevant conclusions: - A gradual fiscal consolidation through lower public investment-GDP levels would contain increases in public debt and result in relatively small output losses. - Any remaining fiscal gap financed with domestic debt does not require sharp future tax increases. - Over the medium term, private consumption and investment growth—which are estimated to have accounted for 60 percent of the growth performance or nearly 3 percentage points of the average 4.7 percent real GDP growth rate since 2014—are likely to continue to drive growth. - Gradual fiscal consolidation would support private consumption and investment growth and avert the possibility of boom-bust cycles, particularly if financing availability becomes constrained. - Risks and recommended stance: - Uncertainty and risks related to hydrocarbons exploration, current fiscal deficits, hydrocarbon-related revenue risks, uncertain prospects for new discoveries and reserves, risks related to global oil/gas prices, and the risk of weaker demand from Brazil and/or Argentina point to the need for a prudent and restrained public investment plan that ensures fiscal sustainability and durable growth. ### Annex highlights (efficiency of public investment and model features) - Public investment efficiency in Bolivia: - Based on a hybrid indicator, the average efficiency gap in Bolivia is about 41 percent, above the average gap of 27 percent for EMEs and 29 percent for LAC countries. - Physical and survey-based indicator gaps are about 31 percent and 45 percent, respectively. - Closing the public investment efficiency gap could yield a large economic dividend. - A PIMA desk review (2014 data) assigns Bolivia an overall score of 5 on public investment management, close to the average of EMEs; planning stage is weakest, allocation and implementation stronger. - DIG model key features: - Two-sector economy (traded and non-traded goods) with Cobb-Douglas technologies and productivity-enhancing public capital. - Firms and households optimize with market clearing conditions; public budget constraint allows financing via domestic borrowing, external concessional borrowing, external commercial borrowing, tax adjustments, or transfer reallocations. - Public investment may be inefficient: not every dollar invested generates productive capital (s, s̅ ∈ [0,1]). - Model incorporates endogenous indirect tax adjustment, natural resource revenues, private and public capital accumulation, and various adjustment costs. *Source: IMF staff estimates and analysis from the chapter titled "3. The “sharp consolidation” scenario has a larger negative impact on medium-term growth" (wpiea2019151).* ### Annex III. Model Calibration ### Annex III. Model Calibration ### Calibration of Key Parameters - Trend growth rate: 4.3 — WEO/IFS - Remittances to GDP ratio: 3.7 — WEO/IFS - Consumption tax rate (VAT): 13 — World Sales Tax Handbook - Public infrastructure investment to GDP ratio: 14 — AIV 2017 - Initial return on infrastructure: 25 — Authors’ computation - Efficiency of public infrastructure investment: 60 — Authors’ computation - Steady state efficiency of public investment: 60 — Authors’ computation - Initial public domestic debt to GDP ratio: 24.8 — AIV 2017 - Public concessional debt to GDP ratio: 17 — AIV 2017 - Public external commercial debt to GDP ratio: 8 — AIV 2017 - Grants to GDP ratio: 0.2 — AIV 2017 - Initial natural gas revenues to GDP ratio: 6.2 — Authorities data - Initial Private external debt to GDP ratio: 0.0 — AIV 2017 - Real rate on public domestic debt: 2.5 — Authors’ estimate - Real rate on public external commercial debt: 4.3 — Authors’ estimate - Initial Imports to GDP ratio: 18 — WEO/IFS - Value added in NT-sector: 49.4 — GTAP-IV - Labor ratio of Non-Savers to Savers: 2.00 — Global Findex 2018 - Learning externality in the T-sector: 0.1 — Buffie et al. (2012) - Learning externality in the NT-sector: 0.1 — Buffie et al. (2012) - The share of capital in value added in T-sector: 40 — Buffie et al. (2012) - The share of capital in value added in NT-sector: 55 — Buffie et al. (2012) ### Notes on Table - Parameter labels and sources are reported exactly as calibrated in the model table. ### Additional Sensitivity Analyses (Annex IV): Public Investment Efficiency - Objective of sensitivity checks: - (1) Show how much gains accrue to efficiency improvements when facing revenue shocks. - (2) Show how much macroeconomic outcomes are sensitive to the efficiency parameter. - Alternative efficiency benchmark: - PIE-X set to 0.73 (top LAC performer — Cerra, et al. 2016 estimate for Chile). - Baseline efficiency elsewhere in the analysis: PIE-X = 0.6. ### Key Findings from Sensitivity Exercises - Results with PIE-X = 0.73 largely mimic those with PIE-X = 0.6 but with improved outcomes: - Under the status quo public investment plan: - Public debt levels surge beyond 80 percent by 2030 when PIE-X = 0.6. - The same debt ratio reaches 70 percent when PIE-X = 0.73. - Under variable future gas revenues tied to three public investment paths: - Under the status quo, public debt edges up to 75 percent of GDP as gas revenues gradually fall and domestic debt finances the gap. - Gradual consolidation maintains public debt at more manageable levels and results in lower medium-term domestic borrowing than the status quo. - Macroeconomic trade-offs: - Sharp investment consolidation helps maintain debt ratios at current levels but imposes larger negative effects on medium-term growth, private investment, and consumption growth. - Gradual investment consolidation achieves manageable fiscal deficits and public debt levels with a lower negative impact on domestic absorption. - Efficiency improvements (higher PIE-X) improve the public capital stock per dollar spent and ultimately lead to higher output, but by themselves do not produce substantial public debt reduction under the status quo investment plan. - The steady decline in gas revenues and the gradual increase in domestic debt increase expected future taxes, which contributes to a gradual fall in private consumption growth below the long-run average under the status quo. ### Policy Implications and Recommendations - Gradual investment consolidation is the preferred strategy: - It prevents sharp contractions in private consumption and investment growth. - It keeps medium-term domestic borrowing lower than under the status quo. - Public investment efficiency improvements are necessary but not sufficient: - Efficiency gains raise output by improving public capital per dollar spent, but must be accompanied by sustainable investment plans to materially reduce public debt trajectories. - Avoid sharp short-term investment cuts: - While effective at stabilizing debt ratios, sharp consolidation causes larger growth and private-sector absorption costs. *Source: Annex III. Model Calibration and Annex IV. Additional Sensitivity Analyses (excerpt).* --- _Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019151.pdf_