## _cr05139 ## Source details **Canonical URL:** [_cr05139](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05139.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05139.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05139.pdf.json) --- ### Executive Summary — Overview and Context - Structural reforms in Bolivia during the 1980s and 1990s were among the most extensive in Latin America. - Outcome paradox: - trend growth never exceeded 4 percent; - average per capita income growth was less than 1.5 percent per annum; - income-based poverty measures were essentially unchanged. - After shocks between 1998 and 2001 (including severe external shocks and an acceleration of the coca eradication program) average per capita income growth turned negative, the fiscal situation unraveled, and debt increased sharply. - In 2003, Bolivia stood "at the brink of a major financial and political crisis." ### Growth, Poverty, and Social Indicators - Comparative growth context: - Latin America region averaged almost 4 percent growth pre-1998, then about 2 percent after 1998–1999 shocks; per capita growth turned slightly negative after the shocks. - Poverty and distributional facts: - Extreme poverty in capital cities decreased by 3 points from 1993 to 1999. - Poverty declined 6 points from 52 percent in 1993 to 50.7 percent in 1997 and 46 percent in 1999. - Since the economic slowdown started in 1999, poverty on a national basis has increased by "just under 2 percentage points." - Gini coefficient increased from 53.8 in 1990 to 61.4 percent in 2002. - Real GDP per capita remained "only just above 90 percent of its level in 1980." - PPP-adjusted per capita income grew by "only about 6 percent" over the entire period discussed. - Non-monetary improvements: - Unmet basic needs fell from 71 percent in 1992 to 59 percent in 2001. ### What Went Wrong — Key Findings - Reforms did not fundamentally alter the character of the state or sufficiently improve the business environment; constraints included governance problems, corruption, poor infrastructure, and high formal-sector operating costs. - Financial sector vulnerability drivers: - major reforms became effective only after a wave of credit expansion in the 1990s; - financial dollarization; - weakened prudential supervision and regulation due to political interference. - Hydrocarbons reform (1996) attracted investment but revenue performance lagged due to tax loopholes and poor administration. - Fiscal deterioration occurred in two steps: - first, much higher than expected pension costs; - second, a sharp increase in capital spending, wages, and pensions in 2001–2002. - Enhanced HIPC Initiative outcome: - Debt relief under enhanced HIPC "failed to put Bolivia on a sustainable lower debt path" because shortly after relief the country ran sharply higher deficits financed mainly through new non-concessional debt. ### IMF Role — Successes and Shortcomings - IMF contributions: - supported several structural reforms; - helped push growth into the 4 percent range prior to 1999; - helped prevent a financial disaster in 2003–04. - Fund shortcomings: - should have exercised closer surveillance over pension reform and governance/institutional reforms under the 1994–98 program; - should have advocated critical financial sector reforms earlier; - exhibited a tendency to accommodate authorities’ political constraints (manifest in awarding enhanced HIPC relief in 2001 despite unmet fiscal-structural and financial criteria). - Central critique: delaying enhanced HIPC completion until critical reforms were implemented might have reduced the risk of subsequent debt problems. ### Performance under IMF Arrangements (institutional timeline and outcomes) - Continuous sequence of IMF arrangements since 1986, with a brief gap June 2002–April 2003. - Focused assessment on: 1994–98 ESAF; 1998–2002 PRGF; 2003–2004 Stand-By (SBA). - 1994–98 ESAF: - Objective: second-generation reforms including pension reform, "capitalization" privatizations, decentralization, civil service and judicial reforms, financial sector reforms, sectoral/infrastructure reforms, education and health reforms. - Early slippages in 1995; waivers sought for 1995–1996 structural performance criteria. - Core reforms eventually passed (capitalization, pension reform, decentralization, financial sector); fiscal position improved in 1995–1996; inflation aligned with projections 1997–1998. - Ultimate objectives (raising growth to ~6 percent and creating fiscal space) were not achieved. - 1998–2002 PRGF: - Initial quantitative criteria met for 1998–1999; most structural benchmarks missed. - February 2000: Bolivia reached decision point under enhanced HIPC. - 2000 program renegotiated (moderate easing of deficit targets; postponement of tax reform). - 2001: SIN restructuring law passed December; tax code passed only in Senate (April 2001); financial sector law delayed. - June 2001: third annual arrangement approved with streamlined focus; Bolivia met enhanced HIPC completion point. - Late 2001–2003: fiscal slippages, missed targets, accumulation of new non-concessional debt; negotiations for a new PRGF failed amid social unrest and congressional opposition. - 2003 SBA: - Aimed to stabilize and implement critical reforms; no structural prior actions to allow rapid approval. - Most financial-sector structural criteria met (with delays); tax code approved August 2003. - Authorities avoided a financial crisis despite October 2003 unrest and presidential resignation. - Fragility remained: 2003 deficit targets exceeded by a large margin; 2004 deficit targets revised upwards by almost two percentage points of GDP relative to the medium-term framework; revenue measures replaced by a tax amnesty and a financial transactions tax. ### Financial Sector Reforms and Vulnerabilities - Timeline of key reforms: - 1987: independent superintendency of banks (SBEF) created. - 1993: new banking law with minimum provisions. - 1995: new Central Bank Law. - 1997: regulations on private pension funds, bank capital-asset ratios, securities market law. - 1999: SBEF stricter loan classification and provisioning. - December 2001: law establishing a comprehensive bank resolution framework approved. - Since 1993, Banking Law updated six times. - Reasons for persistent systemic vulnerability: - Timing: credit boom preceded major prudential reforms; confusing/conflicting laws in late 1980s/early 1990s; related lending and reliance on collateral during property bubble. - Political interference: partial deposit insurance blocked, recapitalization funds (FONDESIF, PROFOP) created, decrees in 2001–2002 undermined SBEF autonomy (partially reversed by May 2003 Presidential decree). - Financial dollarization and indirect exchange rate risk: almost two‑third of bank credit finances the non-tradable sector; Boliviano depreciated by about 30 percent against the U.S. dollar in 1999–2002, contributing to nonperforming loans rise. - Deposit and loan concentration: almost 60 percent of total deposits held in 1 percent of deposit accounts. - Outcomes: - Reforms improved institutional capacity and liquidity management; SBEF and central bank actions helped Bolivia survive four deposit runs in less than three years. - Remaining fragility: dollarization, political/social tensions, weak legal framework for corporate restructuring. ### Fiscal Deterioration, Pension Costs, and Debt Dynamics - Fiscal trajectory: - Between 1996 and 2002, combined public sector deficit (after grants) rose from just under 2 percent to almost 9 percent of GDP. - Increase in two phases: nearly 3 percent of GDP by 1998 (partly rolled back 1999–2000); over 5 percentage points between 2000 and 2002. - Pension-related deficit: - Expected initial loss of pension contributions: around 1¼ of GDP; actual increase in annual costs reached 4½ of GDP. - Contributing factors: unresolved problems of old PAYG system; retirement numbers under old system exceeded projections by 50 percent by 2001; benefits under old system increased three times; government assumed liabilities of insolvent complementary pension funds at cost of about 1½ percent of GDP annually; early retirement allowances; public wage increases to offset higher premiums. - Non-pension spending surge after 2000: - In 2001 and 2002 non-pension spending grew by over 4 percentage points of GDP (27 percent in nominal terms) vs. nominal GDP growth < 8 percent; capital spending and wages accounted for half the increase. - Spending related to enhanced HIPC accounted for < one-sixth of total non-pension spending increase. - Debt dynamics and HIPC: - Public sector nominal external debt around US$ 5 billion is higher today than prior to enhanced HIPC relief in 2001. - In NPV terms, external debt increased to $2.9 billion at end-2003, almost 55 percent above projections at the enhanced HIPC completion point. - External debt-to-export ratio: 117 percent at enhanced HIPC completion point → 176 percent at end-2003. - Including domestic debt (which almost doubled since end-2000), public debt burden climbed to 70 percent of GDP—about 14 points higher than prior to enhanced HIPC debt relief. - In NPV terms, total public debt climbed from 37 percent of GDP at enhanced HIPC completion point to 51.5 percent at end-2003. - Rapid accumulation of public debt/GDP since HIPC largely due to sharp widening of primary deficit beginning in 2001, offsetting about 20 points of GDP in debt relief received in 1999 and 2001. ### Hydrocarbons Strategy, Revenues, and Debt Sustainability Scenarios - 1996 hydrocarbons strategy: - Achieved a surge in investment of about $2.5 billion between 1997 and 2002; gas production more than doubled between 1998 and 2002. - Revenue outcome: royalties dropped sharply in 1997; other hydrocarbon taxes flat; excise taxes declined as domestic fuel prices were frozen in 2000; hydrocarbon revenues as share of GDP stayed roughly at pre-reform levels. - Causes of disappointing revenue performance: temporary fall in exports in 1997; generous definition of ‘old’ fields; large initial investments amortized; surtax design with generous deductions; declines in compliance and exploitation of loopholes. - Remedies suggested: strengthen transfer pricing and amortization regulation; improve tax agency institutional capacity. - Debt sustainability Scenarios (selected exact figures and projections): - Scenario I (Baseline): Underlying Primary Non-Hydrocarbon Balance 2004–2015: -4.4 (constant). Overall Primary Balance series: 2004:-2.7 2005:-2.1 2006:-1.9 2007:-1.4 2009:-0.5 2011:-0.2 2013:-0.2 2015:-0.2. - Scenario II (Adjustment): Underlying Primary Non-Hydrocarbon Balance series: 2004:-4.4 2005:-4.5 2006:-3.6 2007:-3.4 2009:-3.4 2011:-3.1 2013:-2.9 2015:-2.7. Overall Primary Balance series: 2004:-2.7 2005:-2.2 2006:-1.1 2007:-0.4 2009:0.5 2011:1.1 2013:1.3 2015:1.5. - Scenario III (Optimistic production): Overall Primary Balance series: 2004:-2.7 2005:-2.1 2006:-1.9 2007:-1.4 2009:-0.1 2011:1.3 2013:2.0 2015:2.0. - Policy conclusion: under all but the most optimistic hydrocarbon assumptions, substantial fiscal adjustment is needed to reverse the unsustainable public finance trend. ### Dollarization — Causes, Fund Strategy, and Policy Options - Four factors causing dollarization persistence: 1. Lack of macroeconomic credibility. 2. Exchange rate regime targeting the real exchange rate, reducing real volatility and making dollar holdings attractive. 3. Implicit guarantees (central bank, recapitalization funds, weak bankruptcy framework) lowering perceived risk of dollar borrowing. 4. Thin local-currency financial markets increasing Boliviano intermediation costs. - Fund strategy elements to reduce dollarization: - higher reserve requirements for foreign currency deposits; - a small tax on dollar transactions; - prudential regulation changes to internalize borrowers' currency-mismatch risk; - consideration of exchange rate regime changes from a rigid peg → stable boliviano → flexible regime anchored on inflation targeting. - Suggested four-pronged strategy to encourage Boliviano use: 1. Fiscal adjustment to address credibility problems. 2. Adoption of an inflation targeting regime (possibly gradually). 3. Development of local currency financial markets, beginning with gradual replacement of dollar-denominated government debt by medium term CPI-indexed debt. 4. Regulatory changes to encourage Boliviano use, offset implicit guarantee distortions, and overcome thin market problems. ### Political Economy, Decentralization, and Social Pressures - Decentralization unintended consequences: - Imbalance between revenue allocation and spending responsibilities created incentives for municipal debt accumulation. - 2000 PRF converted short-term municipal debt to longer-term debt but included a bail-out scheme encouraging future debt accumulation. - Enhanced HIPC transfers boosted municipal revenues (in some small municipalities revenues more than doubled from 2001 to 2002) while shifting revenue away from central government and leaving many spending responsibilities centralized. - Complex transfer systems with excessive earmarking, limited local revenue-raising ability, weak monitoring, and lack of effective sanctions reduced fiscal efficiency and transparency. - Political economy drivers of reform failure: - Patronage, clientelism, and politicized agencies distributing public jobs and rents to secure electoral support. - Rising fiscal costs (pensions), weakening activity, and social pressures shifted priorities away from broader institutional reforms toward short-term fiscal-structural fixes. ### Policy Recommendations and Priorities (selected and explicit) - Medium-term program priorities: - fundamental institutional and structural reforms to improve governance; - reduce and better manage public expenditure; - create a more equitable and efficient tax system; - improve fiscal and institutional relations between central and subnational governments; - strengthen the banking system; - begin a process of financial de-dollarization. - Pillars recommended for any future PRGF: - Systemic tax reform: - eliminate current payroll tax offset by VAT credits and replace with a personal income tax (protecting the poor); - eliminate special tax regimes facilitating evasion; - strengthen tax and customs administration. - Expenditure policy and civil service reform: - reduce current expenditures, wage bill, and pension costs; - reduce inequality between old and new pension regimes by rolling back increases under the old regime; - depoliticize and professionalize the civil service. - Transparent, incentives-friendly hydrocarbons regime; approval of a satisfactory hydrocarbons law could be a prior action. - Other growth-critical reforms: labor reform (reduce indirect labor costs) and judicial reform. - Financial sector reforms: - efficient corporate and insolvency framework; - strengthen banking capitalization; - partial deposit insurance to replace blanket guarantee; - removal of prudential forbearance as a potential prior action. - Budget and decentralization strategy: - better matching of revenue and spending responsibilities; - improve budget process starting with an organic budget law and eventual Fiscal Responsibility Act. - Sequencing and program design guidance: - Systemic tax reform should be undertaken up front. - Expenditure policy, financial de-dollarization, expenditure management, and corporate restructuring should begin immediately but will take time. - Structural conditionality should be parsimonious annually; rely on World Bank and IDB for technical implementation. - Growth projections should be conservative (assume trend growth in the 3–4 percent range during program period). - Contingency options: - If prior-action delays are technical: extend SBA briefly and include steps toward prior actions. - If authorities cannot commit to a three-year program: consider a one-year arrangement or one-year SBA extension with first-year PRGF-like conditionality. - If social consensus lacking: interruption of formal Fund support may be inevitable; an adequately designed SBA could be justified in urgent crisis-prevention circumstances. ### Selected Key Statistics and Time Series Highlights (selected exact values from tables/appendices) - Non-Financial Public Sector Debt (percent of GDP): 1996:65.7 1997:60.5 1998:60.1 1999:56.2 2000:56.5 2001:53.9 2002:62.1 2003:70.8 2004:69.3. - Change in Public Debt Ratio (percent of GDP): 1996:-6.8 1997:-5.2 1998:-0.4 1999:-4.0 2000:0.3 2001:-2.6 2002:8.2 2003:8.7 2004:-1.5. - Primary Deficit (before grants, percent of GDP): 1996:1.3 1997:2.4 1998:4.0 1999:3.3 2000:3.7 2001:6.7 2002:8.6 2003:8.2 2004:5.2. - Grants (percent of GDP): 1996:-2.2 1997:-1.4 1998:-1.4 1999:-1.8 2000:-2.2 2001:-2.5 2002:-2.3 2003:-3.0 2004:-2.6. - Real Growth Rate (percent): 1996:4.4 1997:5.0 1998:5.0 1999:0.4 2000:2.3 2001:1.5 2002:2.8 2003:2.5 2004:3.7. - Interest Expenditure (percent of GDP): 1996:2.8 1997:2.3 1998:2.1 1999:2.0 2000:2.3 2001:2.6 2002:2.6 2003:2.9 2004:3.1. - Fiscal Balance (after grants, percent of GDP): 1996:-1.9 1997:-3.3 1998:-4.7 1999:-3.5 2000:-3.7 2001:-6.9 2002:-8.9 2003:-8.1 2004:-5.7. - Hydrocarbons sector: investment surge ~ $2.5 billion between 1997 and 2002; gas production more than doubled between 1998 and 2002. - Capitalization investment targets and outcomes (US$ millions, until 2001): - Electricity: contracted 139.8; actual 160.0; percent of target 114.4. - Transport: contracted 86.6; actual 103.8; percent of target 119.9. - Hydrocarbons: contracted 835.0; actual 1,292.7; percent of target 154.8. - Telecommunications: contracted 591.8; actual 521.8; percent of target 88.2. - TOTAL: contracted 1,653.1; actual 2,078.3; percent of target 125.7. - Selected macro indicators (series excerpts): - Real GDP (annual % change): 4.1, 4.7, 4.4, 5.0, 5.0, 0.4, 2.3, 1.5, 2.8, 2.5, 3.7. - CPI inflation (end-of-period): 12.3, 12.6, 7.9, 6.7, 4.4, 3.1, 3.4, 0.9, 2.4, 3.9, 4.6. - Gross domestic investment (percent of GDP): 15.1, 15.2, 16.2, 19.6, 23.6, 18.8, 18.3, 14.2, 14.7, 11.1, 12.7. - Foreign currency deposits (percent of total deposits) series include: 71.8, 80.7, 81.2, 81.4, 78.5, 78.3, 91.6, 91.7, 91.9, 92.6, 92.1, 90.8, 91.1, 90.7, 86.5. - Non-performing loans (percent of total loans) series include: 6.2, 4.7, 4.4, 4.6, 6.6, 11.6, 16.2, 17.6, 16.7, 14.0. - Bolivianos/U.S. dollar (end-of-period exchange rate) series include: 4.1, 4.9, 5.1, 5.3, 5.6, 6.0, 6.4, 6.8, 7.5, 7.8, 8.0. *Source: _cr05139 - Executive Summary and selected chapters (IMF).* ### Executive Summary ...................................................................................................... ### _cr05139 - Executive Summary ### Overview and Context - Structural reforms in Bolivia during the 1980s and 1990s were among the most extensive in Latin America. - Outcome paradox: reforms raised growth and improved many social indicators, yet - trend growth never exceeded 4 percent; - average per capita income growth was less than 1.5 percent per annum; - income-based poverty measures were essentially unchanged. - After shocks between 1998 and 2001 (including severe external shocks and an acceleration of the coca eradication program) average per capita income growth turned negative, the fiscal situation unraveled, and debt increased sharply. - In 2003, Bolivia stood "at the brink of a major financial and political crisis." ### Growth, Poverty, and Social Indicators - Growth and investment context (comparative points from the summary): - Bolivia’s growth performance was fairly typical of Latin America: region averaged almost 4 percent growth pre-1998, then about 2 percent after 1998–1999 shocks; per capita growth turned slightly negative after the shocks. - Poverty and distributional facts: - Extreme poverty in capital cities decreased by 3 points from 1993 to 1999. - Poverty declined 6 points from 52 percent in 1993 to 50.7 percent in 1997 and 46 percent in 1999. - Since the economic slowdown started in 1999, poverty on a national basis has actually increased by "just under 2 percentage points." - Gini coefficient increased from 53.8 in 1990 to 61.4 percent in 2002. - Real GDP per capita remained "only just above 90 percent of its level in 1980." - PPP-adjusted per capita income grew by "only about 6 percent" over the entire period discussed. - Improvements on non-monetary measures: - Significant progress in living conditions, access to basic social services, and outcome indicators led to a decline in poverty as measured by "unmet basic needs" (e.g., unsatisfied basic needs fell from 71 percent in 1992 to 59 percent in 2001). ### What Went Wrong? — Key Findings - Structural reforms did not fundamentally alter the character of the state or sufficiently improve the business environment; constraints included governance problems, corruption, poor infrastructure, and high formal-sector operating costs. - Financial sector vulnerability stemmed from: - major reforms becoming effective only after a wave of credit expansion in the 1990s; - financial dollarization; - weakened prudential supervision and regulation due to political interference. - The 1996 hydrocarbons reform attracted major investment but its revenue performance lagged because of tax loopholes and poor administration. - Fiscal deterioration occurred in two steps: - first, much higher than expected pension costs; - second, a sharp increase in capital spending, wages, and pensions in 2001–2002 in response to external shocks and pressures from interest groups. - Critical fiscal structural reforms had not been approved by Congress, limiting revenue-side offset options. - Enhanced HIPC Initiative outcome: - Debt relief under enhanced HIPC "failed to put Bolivia on a sustainable lower debt path" — not because relief was too low, but because shortly after receiving debt relief the country ran sharply higher deficits financed mainly through new non-concessional debt. ### IMF Role — Successes and Shortcomings - The IMF shares credit for: - several structural reforms that were successful; - pushing growth into the 4 percent range prior to 1999; - helping to prevent a financial disaster in 2003–04. - The IMF shares responsibility for some disappointments: - Should have exercised closer surveillance over pension reform and been more aggressive in resisting policy decisions that resulted in rising pension costs. - Should have placed greater emphasis on governance and institutional reforms under the 1994–98 program that were ultimately not implemented. - Should have advocated critical financial sector reforms earlier. - A central critique: the Fund was often willing to accommodate authorities’ political constraints even when important reforms stalled. - Clear manifestation: decision to award Bolivia debt relief under the enhanced HIPC Initiative in 2001 even though important fiscal-structural and financial performance criteria under the 2000 program had not been met. - The assessment argues that delaying the enhanced HIPC completion point until these reforms were completed would have provided a stronger basis for preventing a new debt problem after the second round of debt relief. ### Performance under IMF Arrangements (institutional timeline) - Bolivia was in a continuous sequence of IMF arrangements since 1986, with a brief gap between June 2002 and April 2003. - The early arrangements (Stand-By, SAF, ESAF in the late 1980s/early 1990s) broadly met objectives though the ESAF was off track for about a year in 1993–94 due to fiscal slippages and delayed structural reforms. - The assessment focuses on the three most recent arrangements: the 1994–98 ESAF, the 1998–2002 PRGF, and the 2003–2004 Stand-By. ### Lessons and Policy Recommendations - A medium-term program to address Bolivia’s core problems (insufficient growth; fiscal and financial fragility) should focus on: - fundamental institutional and structural reforms to improve governance; - reducing and better managing public expenditure; - creating a more equitable and efficient tax system; - improving fiscal and institutional relations between central and subnational governments; - strengthening the banking system; - beginning a process of financial de-dollarization. - Political economy and sequencing: - Most reforms will not succeed without strong social and political consensus. - To test implementation capacity, identify a critical structural reform that failed previously due to political resistance and make its implementation a prior action for a new program. *Source: _cr05139 - Executive Summary (IMF).* ### 8. The aim of the 1994–98 ESAF supported program was to implement an extensive set ### 8. The aim of the 1994–98 ESAF supported program was to implement an extensive set ### Program design and intended outcomes - Objective: implement an extensive set of “second generation” reforms to put Bolivia on a higher growth path, improve public services, and make fiscal adjustments so Bolivia could pay for reforms in the short and medium run (long run: assumed reforms would pay for themselves through higher growth and lower budget burdens). - Package components: - (1) pension reform: from traditional pay-as-you-go system to a fully funded system based on privately managed savings accounts; - (2) privatization program designed to draw foreign investments into 5 major state enterprises (“capitalization”); - (3) fiscal decentralization; - (4) civil service and judicial reforms; - (5) financial sector reforms, including central bank autonomy and new securities and insurance laws; - (6) sectoral and infrastructure reforms; - (7) reforms in education and health. - Emphasis: complementarity of reforms; pension reform and capitalization intended to be “closely linked,” with each “adult receiving one share of each of the six companies to be capitalized in an individualized pension account.” ### Implementation record and macro outcomes (1994–2003) - Early implementation problems: - Slippages in early 1995; corrected later in 1995. - Most structural reforms were delayed; example: capitalization of the state oil company envisaged for July 1995 was not completed until May of 1997. - Waivers were sought for all structural performance criteria under the 1995 and 1996 programs. - Achievements: - Core reforms eventually passed in capitalization, pension reform, decentralization, and financial sector reform. - Fiscal position improved beyond program targets in 1995 and 1996. - Inflation: after an initial spike, inflation came down in line with program projections in 1997 and 1998. - Shortfalls: - Progress in civil service reform, the judiciary, health and education was patchy. - The advertised linkage between capitalization and pension reform weakened: capitalization shares were used to create the “Bonosol” (a minimum pension for all retirees, including those under the old system) rather than directly funding new individual pension accounts. - Ultimate objectives—raising Bolivia’s growth rate to about 6 percent and making adequate room for fiscal costs of reforms—were not achieved. ### 1998–2002 ESAF/PRGF objectives and adjustments - Main objectives: - (1) lift Bolivia’s growth rate into the 6 percent range through governance, infrastructure, education and health improvements, and labor reform; - (2) clean up after the 1994–1998 program by mitigating fiscal consequences of decentralization and offsetting higher-than-expected cost of pension reform; - (3) strengthen the financial sector via improved bank resolution process and establishment of a bank-financed deposit insurance system. - Fiscal target related to pension costs: target improvement in the non-pension balance from about -0.8 percent of GDP in 1996–97 to surpluses after 1999. - Measures to achieve targets: improvements in tax administration backed by a new tax enforcement code, customs reform, and higher hydrocarbon revenues following completion of a pipeline to Brazil. - Later extension: comprehensive tax reform plan including introduction of a personal income tax; submission of tax code and tax reform to congress became structural performance criteria in the 2000 program. ### Performance under the 1998–2002 program and subsequent developments - Initial performance (1998–1999): - All quantitative performance criteria for 1998 and 1999 were met. - Most structural benchmarks were missed; the sole structural performance criterion for 1999 (publication of a bid for privatization of oil refineries) had to be waived. - Success: passing of a new customs law in July of 1999. - Financial supervision: SBEF issued important norms on loan classification and provisioning. - Bolivia reached decision point under the enhanced HIPC Initiative in February of 2000 and a second annual arrangement was approved. - 2000–2001 slippages and renegotiation: - First half of 2000: program slippage due to an “economic stimulus” package introduced by the Banzer administration, a freeze in fuel prices, and withdrawal of a draft tax code submitted in April for lack of congressional support. - August–September 2000: program renegotiated with moderate easing of deficit targets for 2000 and 2001 and postponement of tax reform until after the 2002 national election. - Conditionality adjustments: congressional approval of a modified tax code, a law restructuring the internal revenue service (SIN), and a financial sector law including a partial deposit insurance scheme were made prior actions for reviews. - 2001 outcomes: - Modified fiscal targets and remaining quantitative performance criteria for 2000 were met. - SIN restructuring law passed in December. - Tax code passed only in the Senate (April of 2001); financial sector law was delayed. - June of 2001: Board approved a third annual arrangement with a streamlined set of structural reforms focused on fiscal and financial sectors; passage of the draft tax code and financial sector law became performance criteria for end-September and end-October, respectively. - Other reforms (legal and judicial, health and education, labor market) were dropped from structural benchmarks. - Bolivia met completion point conditions under the enhanced HIPC Initiative. - Late 2001–2003 deterioration and switch to SBA: - End-2001: fiscal deficit and domestic financing targets were missed by wide margins; proposed tax code failed to pass after strong business opposition; financial sector law approved in weaker form in December. - Attempts to restore program failed; first review not completed. - An informally monitored financial program in late 2001 failed to contain widening fiscal imbalance and accumulation of new non-concessional debt. - Negotiations on a new PRGF in fall 2002 could not be concluded due to social unrest and congressional opposition to tax measures. - April of 2003: Stand-By Arrangement (SBA) agreed as a short-term alternative; aimed to stabilize the economy and implement critical structural reforms to return Bolivia to debt sustainability and strengthen the financial sector. SBA envisaged no structural prior actions and could be approved quickly. - SBA performance (2003–2004): - Mixed performance: most structural performance criteria related to the financial sector were met (with some delays); corporate sector restructuring lingered. - Revised tax code was finally approved by Congress in August of 2003. - Authorities avoided a financial crisis despite political unrest and presidential resignation in October of 2003. - Bank capitalization strengthened via actions on weak banks in November 2003 and intensified on-site inspections by the SBEF. - Fragility remained: original deficit targets for 2003 were exceeded by a large margin; deficit targets for 2004 needed to be revised upwards by almost two percentage points of GDP relative to the medium-term framework underlying the 2003 program. - Several important revenue measures originally envisaged under the 2003 program could not be implemented; the 2004 fiscal program was based on substitute revenue measures that cannot be sustained in the medium term (a tax amnesty, and a financial transactions tax). - Post-July 2004 referendum: uncertainty about hydrocarbons sector policy and the future of gas exports. ### External collaboration among IFIs - Over the last ten years, the Fund collaborated extensively with the World Bank and IDB on fiscal, financial, and other structural reforms. - Financial sector roles: - World Bank generally led until recently: technical assistance for a modern banking law in the early 1990s, improving banking supervision and regulations, and advising on capitalization. - Fund focused on central bank technical assistance until the late 1990s; since then, with FSAPs, increased collaboration with the World Bank on financial sector issues. - Fiscal roles: - All three IFIs active; Fund generally took the lead on tax administration and customs reform, with specific financing by World Bank and IDB. - World Bank led on pension reform and decentralization; since 1997 the Fund has offered technical assistance in some of these areas. ### What went wrong? — Constraints on trend growth - Shocks during 1999–2002: - External and domestic shocks included intensified coca eradication, curtailing of external credit lines, devaluation in Brazil, and the Argentina crisis, contributing to credit contraction, a deposit run in 2002, and political and financial near-crises of 2003. - Result: slow growth after 1999 understandable; Bolivia’s limited exposure to private capital flows and continued access to official financing partially mitigated potential worse outcomes. - Persistent low trend growth puzzle: - Reforms in mid-to-late 1980s and after 1994 did not yield expected long-term growth. - Fund’s 1998 Country Strategy Paper identified constraints: gaps in implementation of structural reforms; low public investment and inadequate provision of government services at municipal level following fiscal decentralization; poor infrastructure; low confidence related to political instability and weak rule of law discouraging private investment. - Firm-level and institutional evidence: - World Bank (2001) study of manufacturing found: - very high inventory levels; - low rates of capacity utilization; - low domestic and international trade (firms tend to operate in local markets, symptomatic of high transportation costs and unreliable supply chains); - low investment in fixed assets; - very high rate of informality: “90 percent of manufacturing establishments, accounting for 72 percent of the manufacturing labor force, are informal. That is, they operate outside the law and so are deprived of the institutional arrangements that encourage innovations, improve the efficiency of labor markets, and enable economic units to realize economies of scale.” - Causes of informality: costs of entering and remaining in the formal sector—red tape, corruption, burdensome labor regulations and tax administration—deterring small or unconnected firms. - Policy conclusion from study: private sector growth requires better transportation infrastructure, more predictable customs, lower indirect labor costs, and institutional reforms to improve government services and reduce barriers to formality, including better law enforcement and judicial reforms. - Governance, corruption, and institutional weaknesses: - Independent studies confirm negative effects of corruption, weak judiciary and law enforcement, and political instability. - Transparency International: Bolivia ranked 106 out of 133 (with 1 being the least corrupt). - World Business Environment Survey (WBES) 1999–2000: most important constraints to businesses in Bolivia were corruption, the judiciary, and poor government services; followed by poor infrastructure, political instability, burdensome tax administration and regulations, and lack of financing. - Within government services: roads, the judiciary, the police and customs rate poorly; privatized utilities fare fairly well. - Bolivia ranks far below average in 2002 on governance indicators: control of corruption, rule of law, government effectiveness, and political stability. - Political economy drivers of institutional weakness: - Kaufmann et al. survey (1250 public officials in 100 institutions) corroborates differences in quality across institutions: Central Bank, Ombudsman, National Comptroller and Constitutional Tribunal perform well; Police, Customs and other courts perform poorly. - Findings suggest “voice” (accountability to outsiders) and transparency better explain public service quality than conventional variables such as wages. - Political clientelism: coalition-building across parties involves bargaining over public jobs, producing politicized agencies that distribute public jobs and rents to secure electoral support—undermining broader accountability. - Institutions succeed only when they can extricate themselves from the patronage system and become accountable to society more broadly. - Synthesis: - Root causes of low trend growth: poor infrastructure, poor institutions and government services, and fear of instability. - Recent studies highlight deeper political and social roots: industry-level manifestation is a dichotomy between a formal sector benefiting powerful or well-connected firms and a vast informal sector; at the state level, politicized agencies provide services and rents to clients at society’s expense. *Source: _cr05139 - 8. The aim of the 1994–98 ESAF supported program was to implement an extensive set* ### 24. Bolivia undertook important financial sector reforms since the late 1980s. In 1987, an ### _cr05139 - 24. Bolivia undertook important financial sector reforms since the late 1980s. In 1987, an ### Financial sector reforms since the late 1980s - 1987: an independent superintendency of banks (SBEF) was created. - 1993: a new banking law establishing minimum provisions for a modern banking system was implemented. - 1995: a new Central Bank Law was adopted. - 1997: new regulations on private pension funds and bank capital-asset ratios as well as a securities market law were passed. - 1999: the SBEF introduced stricter loan classification and provisioning policies. - December 2001: a law establishing a comprehensive bank resolution framework was approved. - Note: Since 1993, the Banking Law has been updated six times. ### Why Bolivia still faced systemic financial vulnerability (findings) - Four main reasons for continued financial sector vulnerability: - The timing of financial sector reforms: - The credit boom of the 1990s preceded the most important reforms. - In the late 1980s and early 1990s the banking system operated under confusing and conflicting laws and regulations. - Coordination between the Banking Superintendency (SBEF) and the Central Bank (BCB) was less than satisfactory. - Lending practices were distorted by strong links between the banking and corporate sector, resulting in a high degree of related lending. - Lack of proper governance, management, and control systems led to excessive reliance on collateral rather than capacity to repay during a property-price bubble. - These practices began to change in the late 1990s as a result of regulatory changes in 1997 and 1999, and the entry of foreign banks (Morales, 2004). - Political interference which prevented or undercut critical reforms: - Adoption of a partial deposit insurance scheme faced strong political opposition in Parliament, leaving the burden of an implicit full deposit guarantee to the central bank and hampering the bank resolution framework. - In 1995 and 2001, special funds (FONDESIF and PROFOP) were created to recapitalize weak local banks and help restructure loans, feeding expectations of corporate bail-outs and discouraging corporate restructuring. - In 2001–2002, government measures undermined the autonomy of the SBEF through decrees introducing forbearance in loan classification and provision, and the establishment of new regulatory and “coordinating” bodies dominated by government representatives. - In the context of 2003 SBA, this was in part taken back by a May 2003 Presidential decree which reaffirmed the regulatory autonomy of the SBEF. - Financial dollarization and indirect exchange rate risk: - Banks do not suffer a currency mismatch because deposits and loans are dollarized, but private sector borrowers do. - Almost two-third of bank credit is estimated to finance the non-tradable sector (i.e., borrowers with no regular source of income in foreign currency). - This contributed to a sharp rise in nonperforming loans in the 1999–2002 period, when the Boliviano depreciated by about 30 percent against the U.S. dollar. - Deposit and loan concentration: - Almost 60 percent of total deposits are held in one percent of the total number of deposit accounts, making the system vulnerable to withdrawals by a few large depositors. ### Outcomes of reforms and remaining fragility - Reforms significantly improved the institutional setting and the capacity of financial authorities to handle crisis situations, and improved banks’ liquidity management. - Efforts by the SBEF and the central bank to strengthen capitalization and liquidity were the main reason Bolivia survived four deposit runs in less than three years. - Remaining sources of fragility: - Financial dollarization problem. - Continuing political and social tensions, which impede further structural reforms and can be potential triggers of deposit runs. - A weak legal framework for corporate restructuring remains a key impediment to reducing the vulnerability of creditor banks. ### Fiscal situation unraveling: trajectory and decomposition (findings) - Between 1996 and 2002, the deficit of the combined public sector (after grants) rose from just under 2 percent to almost 9 percent of GDP. - The increase happened in two phases: - An increase by almost 3 percent of GDP by 1998 (partly rolled back in 1999 and 2000). - An increase of over 5 percentage points between 2000 and 2002. - Table 2 (Decomposition of Changes in the Fiscal Deficit, 1996–2004) highlights: - The initial deterioration after 1995 was mostly due to a surge in the pension-related deficit by 4 percentage points between 1995 and 2000. - Excluding pension contributions, tax revenues grew only marginally after 1996—not enough to compensate for the loss of pension-related revenues. - By 1999, temporary revenue sources (including privatization receipts) began to dry up, leaving Bolivia’s fiscal position vulnerable to negative shocks. ### Pension-related deficit: causes and magnitude - The surge in the pension-related deficit reflected far higher than expected costs associated with the 1997 pension reform and its subsequent implementation. - While initially expected to reflect the loss of pension contributions to the budget, around 1¼ of GDP, the actual increase in annual costs reached 4½ of GDP. - Three contributing factors: - Problems of the old pay-as-you-go system (unsustainably high benefits, low retirement age, poor administration) were not addressed before adopting the new system, creating strong incentives for early retirement and fraud. - By 2001, the number of retirees under the old system exceeded initial (1997) projections by 50 percent. - Government decisions during the shutdown of the old system increased pension costs: - Benefits under the old system were increased three times: at reform time and twice in 2001. - The government took over liabilities of mostly insolvent “complementary pension funds” at a cost of about 1½ percent of GDP on an annual basis. - Certain groups were allowed to benefit from early retirement under the old system (not envisaged in the original law). - Wages of public employees were raised to compensate for higher premiums under the new system. - Certain macroeconomic and demographic assumptions proved too optimistic. ### Fiscal deterioration after 2000: drivers - The steep deterioration after 2000 reflected mainly a surge in non-pension spending: - In 2001 and 2002, non-pension spending grew by over 4 percentage points of GDP, or 27 percent in nominal terms—against nominal GDP growth of less than 8 percent—with capital spending and wages accounting for half of the increase. - Spending related to the enhanced HIPC Initiative accounted for less than one-sixth of the total non-pension spending increase. - The rise in interest payments, starting in 2000, occurred despite HIPC debt relief as a result of accelerating domestic debt accumulation. - Decentralization contributed to fiscal tensions: accumulation of municipal debt led to a partial bail out by the central government and a debt restructuring recognizing arrears to the private sector. - Policy measures affecting revenues: - Domestic fuel prices were frozen in 2000, leading to a gradual decline in excise taxes. - Revenue collection by customs fell due to reduced tariffs, new tax exemptions, and inability to contain smuggling and tax evasion, reflecting undermining of the customs reform initiated in 1999. - Tax revenues from higher gas and oil exports partially compensated losses in non-hydrocarbon tax revenues, but not for the decline in nontax revenues, particularly as privatization ended. - Postponement of tax reforms further undermined efforts to tighten the non-pension fiscal position. - Political economy drivers: - The 2001–2002 increases in expenditures and the fuel price freeze reflected a decision to run a “countercyclical fiscal policy” through employment programs and high capital spending, and pressures by interest groups including business groups, banks, and public sector workers. - Business groups opposed the introduction of a tax code that would have ended withholding of tax payments while disputes were adjudicated. ### HIPC Initiative and public debt dynamics (findings) - Public sector nominal external debt at around US$ 5 billion in Bolivia is higher today than prior to enhanced HIPC debt relief in 2001. - In NPV terms, external debt increased to $2.9 billion at end-2003, almost 55 percent above projections at the enhanced HIPC completion point. - The external debt-to-export ratio increased from 117 percent at enhanced HIPC completion point to 176 percent at end-2003. - Taking into account domestic debt (which almost doubled since end-2000), the public debt burden climbed to 70 percent of GDP—about 14 points higher than prior to enhanced HIPC debt relief. - In NPV terms, total public debt climbed from 37 percent of GDP at enhanced HIPC completion point to 51.5 percent at end-2003. - Debt dynamics decomposition: - The rapid accumulation of total public debt to GDP since the HIPC Initiative is largely due to the sharp widening of the primary deficit that began in 2001, which more than offset about 20 points of GDP in debt relief received in 1999 and 2001. - Interest costs have not been the primary factor driving debt accumulation to date, though they have been rising because of the increasing share of domestic debt. - The effect of large primary deficits eclipsed the effect from real depreciations during 2001–02. ### Decentralization: unintended fiscal consequences (findings) - Decentralization (popular participation and decentralization laws, momentum 1994–97) aimed to improve democratic processes and local public services with a pro-poor focus. - Unintended consequences: - Imbalance between revenue allocation and spending responsibilities and absence of effective control/monitoring of local spending created incentives for municipal debt accumulation. - 2000 PRF (financial restructuring plan) converted short-term municipal debt (mainly arrears to private sector) to longer-term debt and imposed greater monitoring and spending control for participating local governments—but the PRF incorporated a bail-out scheme that generated incentives for future debt accumulation. - Enhanced HIPC transfers boosted municipal revenues (in some small municipalities revenues more than doubled from 2001 to 2002) but also shifted revenue away from the central government while many spending responsibilities remained centralized, creating pressures on the central government. - Accumulation of deposits by local governments gave the central government more room for borrowing from the Central Bank; a fall in these deposits could lead to monetary expansion or a credit crunch for the central government. - Decentralization contributed to lower efficiency and transparency in fiscal policy due to complex transfer systems with excessive earmarking, limited local revenue-raising ability, lack of accountability, weak monitoring of budget execution, and lack of effective sanctions for untimely reporting. ### Policy implications and remaining reform priorities (as identified in the text) - Reaffirm and protect the regulatory autonomy of the SBEF to prevent political interference; steps in May 2003 partially restored this autonomy. - Strengthen legal and institutional frameworks to reduce financial dollarization vulnerabilities and indirect exchange-rate risks for borrowers. - Improve the legal framework for corporate restructuring to reduce creditor-bank vulnerability. - Address concentration risks in deposits and lending, and strengthen governance, management, and control systems in banks to move away from excessive reliance on collateral. - Undertake tax reforms and customs enforcement to shore up non-pension revenue sources and limit erosion of the fiscal position. - Reassess decentralization design to align revenue allocation with spending responsibilities, strengthen monitoring and accountability, and remove incentives for municipal debt accumulation. *Source: IMF staff report content from _cr05139 (excerpt provided).* ### 35. How was Bolivia able to obtain the extensive additional financing that was required ### _cr05139 - 35. How was Bolivia able to obtain the extensive additional financing that was required ### Sources of additional financing (2001–2003) - Almost 40 percent in the increase in the face value of total public debt between 2001 and 2003 came from domestic sources. - Of the remaining 60 percent, about half came from non-concessional lending by the Andean Development Corporation. - Bolivia continued to receive concessional financing from the IDB and the World Bank, aided by “comfort letters” from the IMF based on its informally monitored program with Bolivia. ### Impact of enhanced HIPC Initiative and subsequent debt dynamics - Debt relief under the enhanced HIPC Initiative failed to put Bolivia on a sustainable lower debt path because shortly after receiving debt relief the country ran sharply higher deficits, financed mainly through new non-concessional debt, which more than offset the debt relief granted. - Key table excerpts (Non-Financial Public Sector Debt and related indicators, 1996–2004; values shown as year:value): - Non-Financial Public Sector Debt: 1996:65.7 1997:60.5 1998:60.1 1999:56.2 2000:56.5 2001:53.9 2002:62.1 2003:70.8 2004:69.3 - Change in Public Debt Ratio: 1996:-6.8 1997:-5.2 1998:-0.4 1999:-4.0 2000:0.3 2001:-2.6 2002:8.2 2003:8.7 2004:-1.5 - Primary Deficit (before grants): 1996:1.3 1997:2.4 1998:4.0 1999:3.3 2000:3.7 2001:6.7 2002:8.6 2003:8.2 2004:5.2 - Grants: 1996:-2.2 1997:-1.4 1998:-1.4 1999:-1.8 2000:-2.2 2001:-2.5 2002:-2.3 2003:-3.0 2004:-2.6 - Real Growth Rate (in percent): 1996:4.4 1997:5.0 1998:5.0 1999:0.4 2000:2.3 2001:1.5 2002:2.8 2003:2.5 2004:3.7 - Interest Expenditure: 1996:2.8 1997:2.3 1998:2.1 1999:2.0 2000:2.3 2001:2.6 2002:2.6 2003:2.9 2004:3.1 - Fiscal Balance (after grants): 1996:-1.9 1997:-3.3 1998:-4.7 1999:-3.5 2000:-3.7 2001:-6.9 2002:-8.9 2003:-8.1 2004:-5.7 - Conclusion in text: under all but the most optimistic assumptions about hydrocarbon revenues, Bolivia will need substantial fiscal adjustment to reverse the unsustainable trend in its public finances. ### Political economy, expectations, and social spending - The HIPC Initiative and PRSP process may have raised spending expectations to unrealistic levels: - A 2000 survey of 400 persons in La Paz and El Alto suggested a large majority viewed the “national dialogue” as “just a political maneuver” to bring in a billion dollars of debt relief. - Municipal demands for funds in 2000 were on average more than twice as high as in 1997. - HIPC contributed to increased social spending: - Contribution of debt relief to social spending rose from 0.1 percent of GDP in 2001 to 0.8 percent in 2003. - Over 70 percent of “pro-poor” spending is in health and education and is largely allocated to wages, crowding out priority nonwage goods (e.g., textbooks). - A large share of the education budget is directed to universities, which mostly benefit high-income households; secondary education is underfunded. ### Hydrocarbon revenues and debt sustainability (Box 3) - Hydrocarbon sector generates almost one third of Bolivian exports. - Baseline assumptions and outcomes: - If the non-hydrocarbon primary fiscal deficit is unchanged at its current level of 4.4 percent of GDP and medium term GDP growth is 4 percent, the NPV debt to GDP ratio would continue to rise in the short term and eventually stabilize at about 60 percent of GDP (Scenario I). - To reduce the NPV debt to GDP ratio to around 45 percent by 2015 (Scenario II), the non-hydrocarbons primary fiscal deficit would need to be adjusted by about 1.7 percentage points over 10 years, while directing all extra hydrocarbon revenues to debt reduction. - An optimistic production scenario (Scenario III) that raises gas production to around 50 percent above the baseline by 2015 still sees debt continue to rise and remain at very high levels until about 2010; thus fiscal adjustment appears necessary even under optimistic hydrocarbon projections. - Table 1 (selected values, in percent of GDP): - Scenario I (Baseline) Underlying Primary Non-Hydrocarbon Balance: 2004–2015: -4.4 (constant) - Scenario I Overall Primary Balance: 2004:-2.7 2005:-2.1 2006:-1.9 2007:-1.4 2009:-0.5 2011:-0.2 2013:-0.2 2015:-0.2 - Scenario II Underlying Primary Non-Hydrocarbon Balance: 2004:-4.4 2005:-4.5 2006:-3.6 2007:-3.4 2009:-3.4 2011:-3.1 2013:-2.9 2015:-2.7 - Scenario II Overall Primary Balance: 2004:-2.7 2005:-2.2 2006:-1.1 2007:-0.4 2009:0.5 2011:1.1 2013:1.3 2015:1.5 - Scenario III (Optimistic) Overall Primary Balance: 2004:-2.7 2005:-2.1 2006:-1.9 2007:-1.4 2009:-0.1 2011:1.3 2013:2.0 2015:2.0 ### Evaluation of the 1996 Hydrocarbons Strategy - Objectives and outcomes: - Objective: attract private investment, be revenue neutral short run, eventually increase revenues. - Investment outcome: surge in investment of about $2.5 billion dollars between 1997 and 2002; discovery of large gas reserves; gas production more than doubled between 1998 and 2002. - Revenue outcome: royalties dropped sharply in 1997; other hydrocarbon taxes flat; excise taxes declined as domestic fuel prices were frozen in 2000; hydrocarbon revenues as a share of GDP stayed roughly at pre-reform levels. - Causes of disappointing revenue performance (identified in text): - Temporary fall in exports in 1997. - Generous (narrow) definition of ‘old’ fields relative to ‘new’ fields reduced overall government take. - Large initial investments amortized, temporarily reducing profits and tax receipts. - Surtax design allowed relatively generous admissible deductions. - Declined compliance and loophole exploitation as authorities adjusted slowly to new tax system. - Policy remedies suggested: - Strengthen regulations on transfer pricing and amortization. - Improve institutional capacity of the tax agency. ### Role of the IMF: reforms and oversight - Pension reform and decentralization: - The pension reform and decentralization were highly “owned” by the authorities; the Fund was not the main source of technical assistance for implementation. - The Fund agreed that pension reform was necessary and made elements part of structural benchmarks under the 1994–98 ESAF program. - The Fund should have been more vigilant in recognizing the fiscal risks of the pension reform early and pushing for remedial action; the first full discussion of potential costs occurred in the 1997 Article IV Consultations, by which time critical aspects were a fait accompli. - For decentralization, the Fund did not advocate quick implementation nor set structural benchmarks initially, but starting in 1997 provided extensive technical assistance to improve revenue sharing and control of spending and debt levels. - Financial sector supervision and reforms: - The Fund recognized financial system weaknesses early (1987 report) and both the 1994–98 and 1998–2001 programs contained extensive financial sector conditionality. - Emphasis prior to 1997 was on reform of the central bank and resolution of problem banks; prudential and regulatory reforms became IMF TA focus only in mid 1996 and conditionality in September 1997. - Key reforms were delayed: Basel-consistent regulations were issued in August 1997 and came into effect in 1998–99. - After 1997 the Fund became more involved but may not have been forceful enough on deposit insurance adequacy, consolidated supervision of financial conglomerates, moral hazard in recapitalization programs, and reversing regulatory forbearance. - From 2000, staff concerns about fragility may have led to compromises on financial sector reforms; more recently (post-2002–03) staff has taken a firmer stance supported by a Financial Sector Stability Assessment. - Bolivia received extensive recent technical assistance in banking system liquidity management, regulation and supervision of bank credit risks, early warning systems, and increased use of domestic currency in the financial system. *Source: _cr05139 - 35. How was Bolivia able to obtain the extensive additional financing that was required* ### 49. Concerning dollarization, the Fund’s strategy hinged primarily upon the ### Concerning dollarization, the Fund’s strategy hinged primarily upon the ### Dollarization: Fund strategy and policy evolution - The Fund’s strategy hinged primarily upon the implementation of consistent macroeconomic policies and envisaged an array of “structural measures” including: - higher reserve requirements for foreign currency deposits, - a small tax on dollar transactions, - changes in prudential regulations to internalize the credit risk embedded in the currency mismatch of borrowers’ balance sheet. - Changes in the exchange rate regime were considered; Fund advice evolved from: - advocating a rigid peg, - to enhancing the credibility of a stable boliviano, - to a more flexible exchange rate regime anchored on inflation targeting. - The Fund never insisted on regime change, accepting authorities’ view that the prevailing system (an informal crawl designed to keep inflation low while maintaining a competitive real exchange rate) had “served Bolivia well.” - Dollarization persisted for multiple reasons including the exchange rate regime, monetary and institutional credibility, and implicit guarantees in the financial system. ### Box 4 — Causes of dollarization persistence (four factors) - Historical background: - Dollarization dates to the abandonment of gold convertibility in the early 1930s. - Four contributing factors identified: 1. Lack of macroeconomic credibility: - Despite currency stability since the late 1980s, depositors and firms may still fear high inflation and/or sharp devaluation in the future. - This encourages contracts and deposits denominated in dollars and dollar borrowing by firms. 2. The exchange rate regime: - By targeting the real exchange rate, policy may have contributed to persistence of deposit dollarization because low real exchange rate volatility makes dollar holdings attractive. 3. Implicit guarantees in the corporate and financial sectors: - Implicit guarantees shouldered by the central bank, creation of special funds to recapitalize weak banks, and absence of an effective bankruptcy framework contribute to perceptions of bailouts, lowering the perceived risk of dollar borrowing. 4. Thin local-currency financial markets: - Thin Boliviano markets increase intermediation costs in Bolivianos and encourage dollar intermediation, reinforcing weakness of Boliviano markets. - Footnote detail: - Currently, time deposits in Bolivianos are exempted from reserve requirements and credit/debit operations on savings accounts denominated in Bolivianos are free from the recently introduced Financial Transaction Tax. ### Institutional reform: design, implementation, and Fund role - Institutional reform featured prominently in Fund-supported programs, especially 1994–2000, with goals including: - reform of the judiciary, civil service, and central bank, - widening political participation and redistributing resources to the disenfranchised, - major reforms in basic education and health services, - customs reform, tax administration reform, and civil service reforms. - Outcomes by area: - Political participation and decentralization: mixed — higher local spending and improved social indicators, but strained municipal capacity and municipal debt problems; limited success in opening political decision-making to the disenfranchised. - Education reform: increased number of schools and coverage; serious quality problems remain. - Central bank reform: a success. - Civil service reform: a failure, with virtually no progress. - Judiciary reform: created institutions (Magistracy Council, Constitutional Tribunal, Ombudsman’s Office) but judicial power remains subject to political pressure. - Customs reform: initial success in 1999–2000, later efforts to re-politicize the agency reversed many gains. - Fund’s engagement and limitations: - The Fund’s enthusiasm and attention varied across reforms; political participation and decentralization initially received limited staff interest. - Judicial and civil service areas lacked structural performance criteria or structural benchmarks and received scant attention until the 1998–2001 program. - The 1998–2001 program gave more prominence to education reforms, made customs reform a priority, and included structural benchmarks for judicial reforms. - The Fund was reasonably successful in privatization, central bank reform, tax administration reforms and initially in customs reform. - The report argues that more emphasis by the Fund on civil service and judiciary reform in 1994–99 would have been desirable. ### Political economy constraints on reform implementation - Two factors that reduced the Fund’s ability to push broad institutional reform over time: - Rising fiscal costs (pensions), weakening economic activity, and increased social pressures shifted priority to specific fiscal-structural reforms over broader institutional reforms. - Growing resistance from traditional elites and interest groups as reforms with redistributive implications reached the agenda; the government became politically weaker and unable to implement even critical reforms (e.g., systemic tax reform and the tax code) beginning in 2000. - Since 2001, Fund conditionality concentrated on critical fiscal-structural and financial sector reforms, reflecting a shift from growth to fiscal sustainability and crisis prevention. ### Fiscal adjustment: assessment of program design and outcomes - Three periods considered separately: 1998–2000; the 2001 PRGF third annual arrangement; the current Stand-By Arrangement (SBA) at the time. - 1998–99: - Pension costs under the old regime were higher than expected. - Programs included measures to gradually contain the overall deficit (e.g., large increase in excise taxes, partly implemented) but did not directly reduce the pension deficit or resist benefit increases. - The primary deficit (before grants) grew to 4 percent of GDP in 1998, a deterioration of about 1½ percentage points in one year. - An unexpected drop in economic growth in 1999 further undermined sustainable measures to offset the pension deficit. - 2001 fiscal program: - Envisaged large spending increases based on optimistic nominal GDP growth projection: “4 percent real growth plus 4.3 percent for the GDP deflator.” - By program approval there were signs the projected growth was too high, including a public pronouncement by the central bank president, but the program was not revised to avoid undermining the PRSP process and the enhanced HIPC Initiative. - Nominal growth outturn for the year was “1.5 percent in real terms and 0.7 percent for the deflator.” - Given the outturn, programmed spending increases would have made meeting the deficit target very difficult; authorities exceeded programmed spending increases by a significant margin. - 2003 SBA and 2004 program: - 2003 SBA contained revenue assumptions that turned out too optimistic but was initially compensated by spending cuts; after the October political and social crisis the fiscal position deteriorated and the deficit target was breached by a large margin. - The 2004 program’s programmed adjustment was less the issue than how it was achieved: stronger measures (fuel price increases and a wealth tax) could not be implemented and were substituted with lower-quality measures (a tax amnesty and a financial transactions tax) providing at best temporary effects. ### Lessons and overall assessment - Over the last ten years covered: - Bolivia achieved reform successes, stabilization, and some growth; average per capita income grew slightly, and social indicators significantly improved. - Measured against expectations, the overall outcome was disappointing. - Four main causes of disappointing performance: 1. Structural reforms did not fundamentally change governance; patronage and clientelism persist; business environment unfavorable for those without political connections; corruption is widespread; government services generally poor. 2. A string of major adverse shocks (1999 Brazil devaluation, stepped-up coca eradication, Argentina crisis of 2001/2002) harmed Bolivia directly and generated social pressures that increased government spending and worsened medium-term fiscal problems. 3. Critical financial and fiscal structural reforms were never implemented or were delayed, amplifying the shocks’ effects. 4. Financial dollarization (economy-wide currency mismatch) was not reduced and remains a constant source of financial vulnerability. - Political resistance: - Resistance to “neoliberal” reforms among the underprivileged majority led to populist measures (e.g., Bonosol, pension increases) that diffused resistance but created fiscal/quasi-fiscal burdens. - Resistance from interest groups (traditional elites and middle class) impeded reforms like specific financial sector changes, adoption of a new tax code, systemic tax reform, civil service reform, and certain education reforms. - Fund’s role: - The Fund contributed to reforms, stabilization, and prevention of a financial meltdown in 2003. - The Fund also shares responsibility for disappointments: - Could have done better on some surveillance and program design issues. - Exhibited a bias toward accommodating political constraints, which contributed to loss of reform momentum and failure to adopt critical structural reforms. *Source: _cr05139 - 49. Concerning dollarization, the Fund’s strategy hinged primarily upon the* ### 65. The Fund’s specific successes include (1) helping to push privatization, which had the ### _cr05139 - 65. The Fund’s specific successes include (1) helping to push privatization, which had the ### Assessment of the Fund’s performance in Bolivia - Specific successes: - Helping to push privatization, which had desired effects on investment and improved the quality of utilities. - Insisting on central bank reform. - Helping contain the adverse fiscal consequences of decentralization. - Advocating financial sector reforms which contributed to the sector’s resilience during 2002–2004, notwithstanding the fragility caused by dollarization. - Areas where the Fund could have done better: - Exercising firmer surveillance over the pension reform and more aggressively resisting policy decisions taken after the reform which resulted in rising pension costs. - Placing more emphasis on governance and institutional reforms plans that were part of the 1994–98 program. - Lowering the spending targets under the 2001 program as it became clear that growth would be much lower than originally expected. - Pushing critical financial sector reforms at an earlier stage. - Fundamental critique: - The Fund’s willingness to accommodate the authorities’ political constraints even when important reforms were delayed or had stalled completely. - Awarding Bolivia debt relief under the enhanced HIPC Initiative in 2001 even though critical structural performance criteria under the 2000 program had not been met. - Use of “comfort letters” based on an informally monitored 2002 program that was weak and quickly went off track. - By continuing to support Bolivia despite limited reform progress, the Fund became a source of moral hazard; a tougher stance would have increased chances of reform implementation over the medium run. - Underlying causes of an accommodative bias: - “Samaritan’s Dilemma”: difficulty denying support when the alternative might be a crisis, interruption of reforms, or social tensions. - Gatekeeper role with respect to aid flows—pressure from donors and other IFIs. ### Strategy for future Fund engagement (overview) - Two central questions any new PRGF-supported arrangement must address: - Given that the main constraints to growth and poverty reduction in Bolivia are related to poor governance, corruption, and political and social instability, what contribution can the Fund make? - How would a program overcome the political resistance that derailed the last PRGF and undermined negotiations for a new PRGF in 2002? - The Fund’s potential contribution: - Address Bolivia’s continuous state of near-crisis and vulnerability to shocks (financial and fiscal causes) within the Fund’s core expertise. - Fiscal-structural and financial sector reforms can reduce rent seeking, improve accountability, and eliminate special treatment of privileged groups—factors central to Bolivia’s growth problem. - The Fund should take non-core reforms seriously and use conditionality while coordinating with other institutions for technical specifics. - Preconditions for going forward: - A PRGF-supported program should not proceed unless there is social consensus in favor of a critical mass of structural reforms. - Define a critical set of reforms and identify a key reform to be a prior action to test implementation capacity (examples: introduction of a personal income tax, critical expenditure measures, or financial sector reforms). ### Pillars recommended for any future PRGF (explicit list) - Systemic tax reform: - Elimination of the current payroll tax against which VAT receipts can be credited and its replacement with a personal income tax, taking care that this does not increase the tax burden on the poor. - Elimination of special tax regimes that result in unequal treatment of taxpayers with the same contributive capacity and facilitate tax evasion. - Strengthening of tax and customs administration to combat widespread corruption and tax evasion. - Expenditure policy and civil service reform: - Reduce current expenditures (noting they are high relative to neighbors and other HIPC countries). - Reduce the wage bill and pension costs to allow for higher priority nonwage spending (for example, in the education sector). - Reduce inequality between the old and new pension regimes by rolling back increases in benefits under the old regime. - Review the size and composition of the civil service; depoliticize and professionalize the civil service. - A transparent and incentives-friendly hydrocarbons regime: - Attract investment, generate a rising revenue stream from current levels, and be transparent in revenue generation and use. - Some degree of earmarking may be acceptable if principles are met. - If the present reform does not meet these principles, approval of a satisfactory hydrocarbons law should be a prior action under a PRGF-supported program. - Other growth-critical institutional reforms: - Labor reform to address indirect labor costs, which are very high in Bolivia. - Judicial reform to address corruption, shorten court proceedings, and improve contract enforcement. - Strategy to encourage greater use of Bolivianos (four-pronged): - (1) Fiscal adjustment to address the credibility problem. - (2) Adoption of an inflation targeting regime (possibly in gradual steps) to strengthen monetary credibility and move away from real exchange rate targeting. - (3) Development of local currency financial markets, beginning with the gradual replacement of dollar denominated government debt by medium term CPI-indexed debt. - (4) Regulatory changes to encourage greater Boliviano use, offset implicit guarantee distortions, and overcome the thin market problem (Ize and Powell, 2004). - Timing and sequencing: “one go” approach (clean break, strong upfront measures, greater risks) versus gradualist approach. - Key financial sector reforms: - Efficient corporate and insolvency framework to strengthen bank soundness. - Measures to strengthen banking system capitalization. - Partial deposit insurance scheme to replace the existing blanket guarantee on deposits. - Potential prior action: removal of the current prudential forbearance. - Strategy for budget and decentralization (given Constituent Assembly and regional autonomy pressures): - Better matching of revenue and spending responsibilities at various levels of government. - Significant improvement in the budget process, starting with introduction of an organic budget law and eventually enacting a Fiscal Responsibility Act. ### Implementation, sequencing, and program design guidance - The Fund must monitor and apply conditionality even in reforms outside its core expertise, relying on World Bank and IDB for specifics per the Conditionality Guidelines (IMF, 2002). - Sequencing and priorities: - Systemic tax reform needs to be undertaken up front because it is critical for fiscal stability, equity, efficiency, and serves as a signal. - Expenditure policy and civil service reform, financial de-dollarization, expenditure management, and corporate restructuring should be initiated immediately but will take time to complete. - Other reforms may wait until the second or third year of the program due to limited capacity and the need to keep structural conditionality parsimonious annually. - Growth projection conservatism: - New PRGF should be conservative in growth projections: assume trend growth will remain in the 3–4 percent range in the program period, though actual programmed growth could be higher depending on gas export projects, terms of trade, and other cyclical developments. - Contingency options if authorities cannot meet the high bar quickly: - If delays are technical (time required for prior actions): extend the current Stand-By Arrangement briefly; include steps toward prior actions as conditionality of the extension. - If authorities cannot commit to a three year program because of political and constitutional uncertainty: consider a new one-year arrangement—or a one-year extension under the current Stand-By—with conditionality similar to the first year of a PRGF except for three-year horizon reforms. - If the requisite social consensus is lacking (e.g., a critical prior action blocked in congress): interruption of formal Fund support until consensus emerges may be inevitable. However, if urgent support is needed to prevent imminent financial collapse and to provide a framework for donor support, a Stand-By that meets adequate standards (along the lines of the 2003 Arrangement) could be justified. ### Historical economic developments and key indicators (selected highlights from Appendix I) - Historical stabilization and reform: - On August 29, 1985, the “New Economic Policy” was introduced; central administration’s cash deficit cut from over 20 percent to around 6.5 percent; hyperinflation disappeared; by Spring 1986 inflation stabilized at low levels. - Debt restructuring and relief: - Debt restructuring reduced the face value of $650 million commercial bank debt by $473 million, including buying back $253 million at 11 cents on the dollar using donated funds. - From 1986 to 1995, total (face value) debt forgiveness or reduction amounted to $1.74 billion—about 38 percent of its 1986 debt stock. - External debt-to-GDP fell from 115 percent to 70 percent by 1995. - Fiscal and macro performance indicators (selected exact figures and ranges as reported): - Trend growth expectations for program period: 3–4 percent. - Fiscal deficit (after grants) evolution: from 7 percent in the late 1980s to about 5 percent in the early 1990s and finally 2 percent in 1995. - Inflation: around 10 percent in the early 1990s and about 5 percent in 1997. - Investment recovered to around 15 percent of GDP. - Table 5 excerpts (1986–2004 data series summarized in the text and table): - Real GDP: values reported across years in Table 5 (see source for full series). - CPI inflation (end-of-period): series include 26.2, 15.4, 10.5, 9.3, 8.5, 12.6, 7.9, 6.7, 4.4, 3.1, 3.4, 0.9, 2.4, 3.9, 3.5 (series by year in Table 5). - Gross domestic investment (percent of GDP): series include 13.4, 15.6, 16.7, 16.6, 14.4, 15.2, 16.2, 19.6, 23.6, 18.8, 18.3, 14.2, 14.7, 11.1, 13.4 (series by year in Table 5). - Nonfinancial public sector debt (percent of GDP and composition): series and breakdowns provided in Table 5 (example totals and external/domestic splits). - Dollarization: foreign currency deposits (in percent of total deposits) reported as 71.8, 80.7, 81.2, 81.4, 78.5, 78.3, 91.6, 91.7, 91.9, 92.6, 92.1, 90.8, 91.1, 90.7, 86.5 (yearly series). - Banking indicators and financial sector metrics presented in Table 5 (see table for full series). - Note: Appendix I contains a detailed Table 5 with annual series for 1986–2004 on income, prices, investment, savings, fiscal balances, external sector, reserves, public sector external debt, financial sector, and exchange rates. *Source: _cr05139.* ### 4. The reform process received new impetus after the election of Gonzalo Sánchez de ### _cr05139 - 4. The reform process received new impetus after the election of Gonzalo Sánchez de ### Reform program and implementation outcomes - Second-generation reform program (post-1993) focused on: privatization, pension reform, fiscal decentralization, education reform, and improvements in governance and accountability. - Implementation judged a success; 1997 ESAF review described Bolivia’s record of structural reforms as among the best of all ESAF countries. - Early 1998: Bolivia received debt relief under the HIPC Initiative of $448 million in NPV terms; Japan granted additional debt relief of $371 million in NPV terms in October, reducing the debt-to-GDP ratio to about 55 percent. - Bolivia received a second round of debt relief under the enhanced HIPC initiative (June 2001, $854 million in NPV terms), reducing external debt from 53 percent to about 41 percent of GDP. ### Capitalization (Box 5): design, effects, and investment outcomes - Design: - Privatization scheme to secure a minimum level of foreign investment rather than maximize privatization revenues. - Private investors acquired a 50 percent stake and management control of public enterprises in return for a commitment to undertake capital expenditure at least equivalent to the enterprise’s original net worth. - Remaining 50 percent of shares distributed equally to all Bolivian citizens above the age of 18 in 1997; managed by a fund using dividends to partly finance an annual payment (the “Bonosol”) to all Bolivian retirees. - This approach implied lower fiscal revenues from privatization than the norm. - Outcomes: - Despite perceptions of mishandling, capitalization largely met investment objectives; employment losses estimated at less than five thousand. - Services improved: access to electricity increased by nearly 20 percentage points from 1994–97; telephone connections increased significantly. - Only telecommunications marginally failed to reach its investment target. - Table 1: Investment in Capitalized Industries until 2001 (millions of US$) - Electricity — Investment contracted: 139.8; Actual Investment: 160.0; Percent of Target: 114.4 - Transport — Investment contracted: 86.6; Actual Investment: 103.8; Percent of Target: 119.9 - Hydrocarbons — Investment contracted: 835.0; Actual Investment: 1,292.7; Percent of Target: 154.8 - Telecommunications — Investment contracted: 591.8; Actual Investment: 521.8; Percent of Target: 88.2 - TOTAL — Investment contracted: 1,653.1; Actual Investment: 2,078.3; Percent of Target: 125.7 - Source: Ministerio de Comercio Exterior e Inversión ### Macroeconomic consequences of reforms (1994–1998) - Foreign direct investment increased tenfold from $90 million in 1994 to about $900 million in 1997 as a result of the capitalization program. - Private investment as a share of GDP jumped from around 5 percent to 12 percent in 1997 and over 16 percent in 1998. - GDP growth rose to 5 percent per annum in 1997 and 1998. - Pension reform (switch from pay-as-you-go to a fully funded system) created fiscal costs estimated at: - 2.5 percent of GDP in 1997 - about 4 percent in 1998 ### External and domestic shocks beginning 1998 and financial sector impact - Four shocks beginning in 1998: - Spillovers from the 1998 Russian crisis to Latin America; Brazil devalued in February 1999. - Acceleration of coca eradication by the Banzer government. - Changes in regulations and take-over of the country’s largest bank by a Spanish bank, leading to a reduction in credit. - Argentine crisis of late 2001, which strained competitiveness and lowered the dollar value of remittances. - Additional factor: some large investment projects ended (notably construction of a natural gas pipeline to Brazil). - Impacts: - GDP growth fell to 0.4 percent in 1999. - FDI flows declined by about 30 percent after peaking at about $1 billion; non-FDI private capital flows turned negative. - Non-performing loans rose from about 5 percent of total loans in 1998 to 18 percent in 2003. - Credit to the private sector contracted sharply due to early repayment of costly foreign credit lines by banks, increased risk perception, and stricter loan policies. - Central bank faced trade-off between faster devaluation (competitiveness) and risk of exacerbating currency mismatches in corporate balance sheets. ### Fiscal deterioration, debt, and financing (2001–2003) - Fiscal deficits widened: - 7 percent in 2001 - 9 percent in 2002 - 8 percent in 2003 - Financing: partly by rapidly growing domestic debt and partly by new multilateral lending. - End-2003 debt ratios: - External debt to GDP ratio: over 50 percent - Total public debt to GDP ratio: 73 percent ### Social unrest, political crisis, and deposit runs (2000–2004) - Social unrest in April and September 2000 weakened the structural reform program. - Election-related uncertainty led to a run on deposits in mid 2002; deposits recovered after Sánchez de Lozada was elected President. - Violent unrest in February and October 2003 led to severe runs on deposits; October protests resulted in 70 deaths and the President’s resignation. - Vice-president Carlos Mesa assumed the presidency (until 2007) on a platform of social dialogue, a referendum on hydrocarbon policies and gas exports, and a call for a constitutional assembly in 2005. - July 18, 2004 gas referendum results: - Large support for revision of the 1996 hydrocarbon law toward a stronger state role. - Support for export of natural gas, but by a much slimmer margin. ### Coca eradication (Box 6): cultivation, eradication, and economic effects - Historical and economic context: - Coca cultivation expanded from the mid-1970s due to the global cocaine trade; recessions and public enterprise reforms of the 1980s led many former public sector workers to become coca growers. - Coca trade boosted dollarization and encouraged corruption, crowded out traditional crops, and raised labor costs elsewhere. - Eradication timeline and quantities: - Net cultivation of coca crops fell by two thirds between 1997 and 2000 (U.S. State Department data). - During 2001–2003, replanting exceeded destruction; net cultivation recovered to about 60 percent of its peak in the mid-1990s. - Economic impact: - Coca trade as a percentage of GDP fell from a peak of 5.6 percent in 1988 to about 0.7 in 2003, producing a large negative income shock, particularly in the informal sector. - Notes on reported conversion ratios: - Reported leaf-to-HCl conversion ratio estimated at 370 kilograms of leaf to one kilograms of cocaine HCl in the Chapare. - In the Yungas, the reported ratio is 315:1. ### IMF arrangements and program performance (summary indicators) - HIPC and PRGF engagements noted earlier; IMF arrangements history and performance criteria show multiple arrangements (SBA, PRGF, ESAF, SAF) over 1986–2004 with varying degrees of compliance. - Examples from Table 7 and Table 8: - SBA Apr 02, 2003–Mar 31, 2005: Amount Agreed 129; Amount Drawn 102; Percent Drawn 79. - PRGF Sep 18, 1998–Jun 07, 2002: Amount Agreed 101; Amount Drawn 64; Percent Drawn 63. - ESAF Dec 19, 1994–Sep 09, 1998: Amount Agreed 101; Amount Drawn 101; Percent Drawn 100. - Total (1986–2004) Amount Agreed 559; Amount Drawn 443; Percent Drawn 79. - Performance criteria over 1994–2004 show mixed compliance: several targets “Met”, “Not met”, or “Waived” across indicators such as combined deficit of the public sector, net domestic financing, net domestic assets of the central bank, net international reserves, public and publicly guaranteed external debt with 1–10 years maturity, and various structural benchmarks. *Source: _cr05139 - 4. The reform process received new impetus after the election of Gonzalo Sánchez de (IMF PDF content).* ### REFERENCES ### REFERENCES ### Bibliographic sources - Andersen, L.E. and O. Nina, 2001, “The HIPC Initiative in Bolivia,” Canadian Journal of Development Studies, Vol. 22, No. 2, pp. 343–73. - Birdsall, N. and A. de la Torre, 2001, Washington Contentious. Eocnomic Policies for Social Equity in Latin America (Washington, DC: Carnegie Endowment for International Peace). - Boughton, J., 2001, Silent Revolution: the International Monetary Fund, 1979–1989 (Washington:. International Monetary Fund). - Brooks, R. and others, 1998, “External Debt Histories of Ten Low-Income Developing Countries: Lessons from Their Experience”, IMF Working Paper WP/98/7. - Burnside, C, M. Eichenbaum and S. Rebelo, 2001, “Prospective Deficits and the Asian Currency Crisis, Journal of Political Economy, 109 (6), pp. 1155–1197. - Cohen, Daniel, and Richard Portes, 2004, “Towards a Lender of First Resort,” CEPR Disussion Paper 4615 (London: Centre for Economic Policy Research). - Comisión de Revisión del Gasto Público, 2004, “Informe de la Comisión de Revisión del Gasto Público”, La Paz, September. - Cueva S. and E. Revilla, 2003, “The Growing Fiscal Costs of the Pension Reform,” in International Monetary Fund: Bolivia. Selected Economic Issues, August (Washington, DC: International Monetary Fund). - Daseking C. and R. Powell, 1999, “From Toronto terms to the HIPC Initiative: a Brief History of Debt Relief for Low Income Countries,” IMF Working Paper WP/99/142. - De Mesa, J., T. Gisbert, and C. Mesa, 2003, Historia de Bolivia, Fifth Edition (La Paz: Editorial Gisbert). - Inter-American Development Bank., 2004, Country Program Evaluation: Bolivia 1990–2002. - International Monetary Fund,1995, Private Market Financing for Developing Countries (Washington, DC: International Monetary Fund). - International Monetary Fund, 1998, “Bolivia: Country Strategy Paper” (unpublished paper, Washington, DC: International Monetary Fund). - International Monetary Fund, 2000a, “The Logic of Debt Relief for the Poorest Countries.” Available via the internet: http://www.imf.org/external/np/exr/ib/2000/092300.htm#III. - International Monetary Fund, 2000b, “Key Features of IMF Poverty Reduction and Growth Facility (PRGF) Supported Programs,” Prepared by the Policy Development and Review Departments. Available via internet: http://www.imf.org/external/np/prgf/2000/eng/key.htm - International Monetary Fund, 2002, “Conditionality Guidelines,” Prepared by the Legal and Policy Development and Review Departments. Available via the internet: http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.pdf - International Monetary Fund and International Development Association, 2004, “Debt Sustainability in Low-Income Countries: Further Considerations on an Operational Framework and Policy Implications.” Available via the internet: http://www.imf.org/external/np/pdr/sustain/2004/091004.pdf - Ize, A. and E. Levy Yeyati, 2003, “Financial Dollarization,” Journal of International Economics, 59, pp. 323–347. - Ize and A. Powell, 2004, “Prudential Responses to De Facto Dollarization,” IMF Working Paper WP/04/66. - Jeanne, O., 2003, “Why do Emerging Economies Borrow in Foreign Currency?” IMF Working Paper WP/03/177. - Kaufmann D., Mastruzzi M. and D. Zavaleta, 2003, “Sustained Macroeconomic Reforms, Tepid Growth: A Governance Puzzle in Bolivia?” in, In Search of Prosperity: Analytic Narratives on Economic Growth, ed. D. Rodrik (Princeton: Princeton University Press). - Lora, E., 2001, “ Structural Reforms in Latin America: What has been reformed and how to measure it,” Inter-American Development Bank Working Paper No. 348. - Morales, J.A., 2003, “Dollarization of Assets and Liabilities: Problem or Solution? The Case of Bolivia” paper presented at the conference “La via hacia la posperidad regional y global: Retos y oportunidades” organized by the IMF and the World bank at Dubai (UAE), September 20–22. - Morales, 2004, “De la restricción creditia a la intermediación financiera efectiva: comentario,” revised version of a paper presented at the seminar “Politicas Economicas y Sectoriales para Reanudar el Crecimiento en Bolivia”, organized by Coporación Andina de Fomento, La Paz, February 5. - Morales, and J. Sachs, 1989, “Bolivia’s Economic Crisis” in Jeffrey D. Sachs (ed.) Developing Country Debt and Economic Performance, Vol.. 2, University of Chicago Press, Chicago, pp. 157–268. - Rajan, R.G., 2004, “Dollar Shortages and Crises” (unpublished draft, Washington, DC: International Monetary Fund). - World Bank,1998, Bolivia: Country Assistance Strategy (Washington, DC: The World Bank). - World Bank, 2000, Bolivia: from Patronage to a Professional State (Washington, DC: The World Bank). - World Bank, 2001, Bolivia: Microeconomic Constraints and Opportunities for Higher Growth. (Washington, DC: The World Bank). - World Bank, 2004, Bolivia: Country Assistance Strategy (Washington, DC: The World Bank). - World Bank, and Inter-American Development Bank, 2004, Bolivia: Public Expenditure Management for Fiscal Sustainability and Equitable and Efficient Public Services (Washington, DC: The World Bank). ### IMF Public Information Notice (PIN No. 05/53) — Executive Board review (April 8, 2005) - Event: Executive Board of the International Monetary Fund reviewed Bolivia’s experience with IMF-supported programs since 1994 based on an Ex Post Assessment of Longer Term Program Engagement. - Purpose of Ex Post Assessments: Prepared for countries with a longer-term history of Fund-supported programs to evaluate the success of past programs and draw implications for possible future IMF involvement. - Background findings: - Structural reforms in Bolivia during the 1980s and 1990s were among the most extensive in Latin America; economic growth increased, and social indicators improved significantly, but trend growth did not improve as much as expected and poverty remains very high. - Between 1998 and 2002 the economy was hit by a series of shocks: average per capita income growth turned negative, the fiscal situation unraveled, and debt increased sharply; 2002–2003 saw several episodes of financial instability. - Growth recovered in 2004, in part driven by favorable terms of trade, but the economic and financial situation remained fragile. - Conclusions of the Ex Post Assessment — four main reasons Bolivia “did not do better”: 1. Governance problems and inadequate government services, contributing to a poor business environment and inhibiting growth. 2. Adverse shocks of 1998-2002, which harmed Bolivia directly and generated social pressures that made reforms more difficult and led to persistent increases in government spending. 3. Incomplete or delayed implementation of critical financial and fiscal-structural reforms. 4. Continuing financial dollarization, which remains a source of financial vulnerability. - Policy implications and Executive Board view: - Significant progress requires a social consensus for reforms and institutional changes over the medium-term. - Fundamental institutional and structural reforms are needed to address insufficient growth and fiscal and financial vulnerabilities, including: - Improving governance. - Reducing and better managing public expenditure. - Creating a more equitable and efficient tax system. - Strengthening the banking system. - Beginning a process of financial de-dollarization. - Directors considered that extension of the Stand-By Arrangement would be helpful as a bridge toward a possible PRGF arrangement while the authorities build sufficient social consensus over medium-term policies. ### Bolivia: Selected Economic and Financial Indicators, 1995–2004 (selected series and values as presented) - Real GDP (Annual percentage change): 4.1, 4.7, 4.4, 5.0, 5.0, 0.4, 2.3, 1.5, 2.8, 2.5, 3.7 - Real domestic demand (Annual percentage change): 5.0, 0.1, 8.9, 9.2, 4.0, -2.0, 1.2, -2.5, 1.6, -1.3, 2.6 - CPI inflation (end-of-period): 12.3, 12.6, 7.9, 6.7, 4.4, 3.1, 3.4, 0.9, 2.4, 3.9, 4.6 - Gross domestic investment (percent of GDP): 15.1, 15.2, 16.2, 19.6, 23.6, 18.8, 18.3, 14.2, 14.7, 11.1, 12.7 - Public (percent of GDP): 9.5, 8.2, 8.2, 7.2, 7.0, 5.0, 5.2, 5.8, 5.4, 4.7, 5.3 - Private, including stockbuilding (percent of GDP): 5.7, 7.0, 8.1, 12.4, 16.6, 13.8, 13.1, 8.5, 9.4, 6.4, 7.4 - Gross national savings (percent of GDP): 9.7, 10.2, 11.7, 12.6, 15.8, 12.9, 13.0, 10.8, 10.6, 11.7, 15.7 - Overall balance (Combined public sector, percent of GDP): -4.4, -1.8, -1.9, -3.3, -4.7, -3.5, -3.7, -6.9, -8.9, -8.1, -5.7 - External financing (percent of GDP): 3.7, 3.6, 2.5, 2.7, 2.7, 1.9, 2.0, 3.1, 6.1, 5.4, 4.2 - Domestic financing (percent of GDP): 0.7, -1.8, -0.6, 0.5, 1.9, 1.6, 1.8, 3.9, 2.8, 2.7, 1.5 - Nonpension balance (percent of GDP): ... , -1.2, -0.7, -0.8, -0.7, 0.6, 0.7, -2.1, -3.9, -3.2, -0.9 - Pension-related balance (percent of GDP): ... , -0.6, -1.2, -2.5, -4.0, -4.1, -4.5, -4.8, -5.0, -4.9, -4.8 - Nonfinancial public sector debt (percent of GDP): ... , 72.5, 65.7, 60.5, 60.1, 59.7, 58.8, 53.7, 61.6, 73.8, 74.6 - External (incl. IMF) (percent of GDP): ... , 57.4, 50.6, 45.9, 45.3, 49.7, 47.3, 36.1, 42.4, 51.3, 52.6 - Domestic (percent of GDP): ... , 15.1, 15.0, 14.7, 14.9, 10.0, 11.5, 17.6, 19.3, 22.5, 22.0 - Current account (US$ million, percent of GDP): -5.5, -5.0, -4.5, -7.0, -7.9, -5.9, -5.3, -3.4, -4.2, 0.6, 3.0 - Official grants and loans to the public sector (US$ million, percent of GDP): ... , 9.0, 8.5, 7.0, 6.1, 5.6, 5.7, 6.9, 9.7, 13.0, 9.2 - Direct Investment (percent of GDP): ... , 2.6, 5.8, 11.1, 11.2, 12.3, 8.4, 8.3, 8.7, 2.5, 1.3 - Merchandise export volume, percent change: 10.3, 10.8, 3.1, 2.0, 4.7, -1.2, 13.2, 6.0, 7.9, 8.5, 16.2 - Merchandise import volume, percent change: 6.0, -0.3, 29.3, 25.0, 14.5, -10.6, 3.0, -5.4, 3.3, -10.1, 11.5 - Terms of trade, percent change (deterioration -): -6.5, -9.1, 5.2, 4.8, -3.4, -2.7, 3.5, -1.4, 0.5, 6.1, 12.3 - Gross international reserves (Months of imports of goods and services): 4.5, 4.4, 5.9, 7.6, 7.2, 8.7, 8.7, 8.0, 6.5, 8.6, 6.7 - (In percent of broad money): ... , 24.4, 32.8, 39.8, 31.3, 40.2, 39.7, 39.2, 31.2, 41.3, 47.2 - M3 growth (at current exchange rates, annual percentage change): 39.8, 9.5, 25.0, 17.3, 13.7, 4.2, 3.4, 3.4, -3.0, 2.5, 0.5 - M3 growth (in U.S. dollars at current exchange rates): ... , 4.1, 19.0, 13.6, 7.8, -1.8, -3.3, -5.1, -11.7, -2.0, -2.2 - Credit to private sector (at current exchange rates, annual percentage change): 39.6, 12.6, 13.6, 19.2, 23.8, 4.1, -2.6, -8.0, -1.0, -0.5, -4.2 - Credit to private sector (in U.S dollars at current exchange rates, annual percentage change): 17.4, -2.0, -9.0, -14.3, -9.4, -4.8, -6.8 - Yield on T-bills in Bolivianos (end-of-period, percent): 27.9, 26.6, 16.5, 11.2, 12.2, 13.6, 14.7, 12.9, 17.2, 10.9, 10.6 - Yield on T-bills in U.S. dollars (end-of-period, percent): 10.1, 14.8, 7.6, 8.2, 8.6, 8.9, 9.1, 5.6, 4.9, 6.2, 4.3 - Banking system deposits (annual percentage change): ... , 15.3, 28.7, 17.7, 13.7, 4.3, 4.2, 3.0, -4.3, 0.3, -2.7 - Foreign currency deposits (percent of total deposits): 80.7, 80.4, 92.1, 91.9, 92.2, 92.9, 92.6, 92.2, 91.9, 90.6, 86.5 - Non-performing loans (percent of total loans): ... , 6.2, 4.7, 4.4, 4.6, 6.6, 11.6, 16.2, 17.6, 16.7, 14.0 - Bolivianos/U.S. dollar (end-of-period exchange rate): 4.1, 4.9, 5.1, 5.3, 5.6, 6.0, 6.4, 6.8, 7.5, 7.8, 8.0 - REER (percentage change during year): -5.0, 4.2, 1.1, 4.7, -1.3, 2.2, -1.6, -3.2, 4.4, -8.5, -5.2 *Sources: Central Bank of Bolivia; Ministry of Finance; and Fund staff estimates.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05139.pdf_