## Bolivia: IMF Staff Report Excerpts (_cr06270) ## Source details **Canonical URL:** [Bolivia: IMF Staff Report Excerpts (_cr06270)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06270.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06270.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06270.pdf.json) --- ### Executive summary — key findings - Political change: election of a government with an unprecedented popular mandate. - Macroeconomic performance (2005–2006): - satisfactory GDP growth and a strong balance of payments, led by the hydrocarbons sector; - low inflation; - smaller fiscal deficits; - historically high levels of international reserves; - banking system stability and a decline in financial dollarization. - Multilateral Debt Relief Initiative (MDRI) effect: - substantially reduced the public debt-GDP ratio; MDRI released fiscal resources equivalent to about 0.5 percent of the GDP per year over 2006-11. - MDRI reduced external public debt by about US$1.8 billion, or from about 50 percent to about 30 percent of GDP (textual summary). - 2006 combined public sector (CPS) outlook: - projected to narrow to near balance in 2006; CPS overall deficit estimated at 0.1 percent of GDP for 2006 (revised from 3.0 percent in the budget). - Major policy emphases: - strengthen domestic taxation; - scrutinize spending and rationalize intergovernmental fiscal relations; - phase out large fuel subsidies while protecting vulnerable groups; - central bank to continue cautious monetary policy and gradually increase exchange rate flexibility given high dollarization. - Principal risks: - modalities and implementation of the May 1, 2006 nationalization decree in hydrocarbons; - institutional changes from the constitutional assembly; - possible loss of trade preferences (e.g., ATPDEA). ### Recent macroeconomic performance and near-term outlook - 2005 outcomes: - GDP growth: just above 4 percent. - Fiscal deficit: narrowed to 2.3 percent of GDP. - Inflation: contained below 5 percent following early-year acceleration. - Banking indicators: deposits and credit increased; financial dollarization declined. - 2006 developments (to date) and near-term projections: - Real GDP growth expected at just above 4 percent in 2006. - Inflation continued in the low single digits (decreasing trend since Q4 2005). - CPS first-quarter 2006 overall surplus: 2.1 percent of GDP. - CPS full-year 2006 overall deficit estimate: 0.1 percent of GDP. - Public debt ratio projected to decline from 71 percent at end-2005 to 51 percent by end-2006. - Accumulation of official reserves projected to continue; central bank NIR rose by close to US$500 million during January–May 2006. ### Hydrocarbons policy and nationalization decree - May 1, 2006 decree requires negotiation over a six-month period on: - tax regime; - export pricing; - compensation for assets being nationalized. - Temporary hydrocarbon take for YPFB in 2006: 32 percent of the value of production of gas and oil in the two largest gas fields (textual description of temporary take). - Mission advice: - achieve expeditiously mutually acceptable operating arrangements with concerned energy companies to ensure development of natural gas reserves and sustained export growth. - Bilateral developments: - Agreement with Argentina: price increase from US$3.63 to US$5.00 per million BTU (effective July 15, 2006) for up to current contract volume; expected additional fiscal and export revenues in 2006 amounting, respectively, to 0.5 and 0.8 percent of GDP (textual continuity). ### Fiscal developments, subsidies, and structural fiscal measures - Fiscal execution and composition: - First three months of 2006: CPS overall surplus of 2.1 percent of GDP, largely reflecting hydrocarbons revenue and seasonally low expenditure. - Upward revision in 2006 revenue projections mainly reflects increased hydrocarbons prices and the temporary YPFB take. - Sub-national governments accumulated deposits at the central bank due to boosted shares of hydrocarbons-based revenue under the 2005 hydrocarbons law. - Petroleum pricing and subsidies: - Estimated total subsidies: about 7 percent of GDP. - Explicit subsidy: 1¼ percent of GDP (budgetary transfers to importers for diesel). - Implicit subsidy: 5¾ percent of GDP (domestic crude priced at US$27 per barrel and gas at US$0.58 per million BTU supporting low domestic fuel prices). - Mission recommendation: phase out subsidies by moving domestic petroleum product prices gradually to market-based levels and use part of fiscal savings to protect vulnerable groups. - Fiscal/sectoral gains from downstream price adjustment (footnote): benefit to budget about 1¼ percent of GDP in reduced expenditure and 4 percent of GDP in additional IDH and royalties; benefit to oil companies: revenue before profit tax would increase by about 1¾ percent of GDP. - Structural fiscal/tax measures: - Authorities’ tax reform aims to: limit tax exemptions; rationalize free trade zone legislation; shift large taxpayers in special regimes to regular regime; bring activities such as gambling into the tax net. - Financial transactions tax (FTT) reform: abolish FTT on boliviano deposits and make permanent a FTT on short-term dollar deposits above US$2,000 to retain revenue and incentivize dedollarization. - Modifications to VAT refund system under consideration to reduce fraud while ensuring timely refunds to exporters. - Mission suggested introducing a personal income tax excluding the lower 80 percent of the income distribution; authorities not considering at this stage. - Pension law changes: - Proposed reduction in replacement rates to permit retirement at ages 55 for men and 50 for women (instead of 65 for both); mission cautioned on fiscal cost and urged careful analysis. ### Monetary and exchange rate policy - Central bank stance and operations: - Cautious monetary policy; large increase in public sector deposits sterilized reserve inflows (public deposits at central bank over 4 percent of GDP). - 12-month growth of base money stood at more than 40 percent reflecting carry over from 2005. - Central bank absorbed liquidity via open market operations, mostly in boliviano denominated instruments and at lengthening maturities. - Exchange rate regime and recommendations: - Current regime: crawling peg. - Mission recommendation: move gradually toward greater exchange rate flexibility (for example, a managed float) to allow timely response to external shocks and encourage exchange rate risk management; transition should be gradual given high dollarization and vulnerability to deposit outflows. - Such change would require adjustment of monetary policy framework toward monetary or inflation targeting; staff notes inflation targeting appears more suited given Bolivia’s highly dollarized environment. - Risks and operational notes: - Rapid unwinding of public sector deposits would be difficult to contain without sharp interest rate and/or exchange rate action. - Currency indications: real effective exchange rate well below average over past 20 years despite hydrocarbons expansion and external debt reduction (textual observation). ### Financial sector stability, SINAFID, and supervisory priorities - System vulnerabilities and indicators: - System remains highly dollarized and vulnerable to large deposit outflows. - Reserve coverage of banking system deposits close to 100 percent. - Some banks have significant holdings of restructured loans and unprovisioned nonperforming loans. - Bank profitability is still low. - Micro-Finance (FFPs) (Box 3 highlights): - FFPs hold about 7 percent of financial system deposits and credit. - Between Dec 2002 and end-Mar 2006: deposits rose almost 60 percent to US$234 million; loan portfolio rose more than 50 percent to US$270 million. - FFP average lending rates: 38 percent boliviano credit; 23 percent dollar credit; banking sector average ~12 percent. - FFPs serve 58 percent of financial system borrowers in 2005; average loan size less than 10 percent of financial system average; 40 percent of FFP branches in rural areas. - Public development banking (SINAFID): - Plan to merge NAFIBO and FONDESIF and maintain ownership of Banco Union; credit to be channeled through private institutions if conditions agreed. - Mission cautions: keep development banking second-tier; avoid earmarking revenues; include quasi-fiscal costs in the budget; ensure voluntary private participation; maintain prudent supervisory regime and avoid regulatory forbearance. - Supervisory recommendations: - Strengthen supervision and institutional framework; mitigate credit risk from dollar loans to nonexporters; improve regulation of financial conglomerates and market risk; introduce partial coverage deposit insurance and eliminate central bank option to participate in bank resolution; strengthen AML legislation and ensure Financial Intelligence Unit transition to ministry of finance does not impair performance. ### Competitiveness, trade preferences, and labor costs - Competitiveness drivers to date: - Depreciated real exchange rate (real exchange rate depreciated >20 percent since late 2002 and at historical low); - Low labor costs (minimum wage US$63 per month; wages in dollar terms among lowest in region). - Risks to competitiveness: - Continued strong balance of payments from gas exports may create real appreciation pressures. - Erosion of preferential access: ATPDEA scheduled to expire end-2006; bilateral FTAs by Peru and Colombia may reduce Bolivia’s soy competitiveness. - Wage comparisons: Bolivia’s wages in manufactured goods higher than China and India. - Policy response urged: - Contain appreciation pressures through prudent fiscal and monetary policies and openness of exchange system; intensify efforts to expand access to external markets. ### Medium-term outlook (2006–11) — baseline, downside, and upside scenarios - Baseline assumptions: - Unchanged natural gas production and exports. - Annual GDP growth would stay above 3 percent; public debt ratio stable at about 50 percent of GDP during projection period. - Projected initial jump in the deficit in 2007: increase in deficit from 2006 low will be large (3 ½ percentage points of GDP); domestic component increase small (0.4 percentage points of GDP). - Assuming unchanged policy stance thereafter, fiscal deficit projected within range 3–4 percent of GDP. - NPV of Bolivia’s external debt projected to fall from 35 percent of GDP in 2006 to 24 percent of GDP by 2026 (textual summary). - Downside risks: - Substantial investment needed to sustain hydrocarbons production; a 5 percent annual decline in gas production in 2007–11 (cumulative >20 percent) would place the NPV debt-to-exports ratio on a rising path and could approach HIPC thresholds by end of projection period. - Loss of preferential market access, real appreciation, higher labor costs, and political/institutional uncertainty from constitutional assembly could worsen prospects. - Upside alternative (policy-driven) scenario: - Measures to yield sustained upside growth: - (i) negotiate hydrocarbons arrangements attracting additional investment consistent with increased production and exports; - (ii) strengthen fiscal position through bolder tax reform improving investment climate and equity; - (iii) sustain macroeconomic and structural policies to enhance private investment environment and expand external market access. ### Debt sustainability analysis (summary numeric highlights) - Selected projections and indicators (preserved exact values where shown in source tables and text): - Real GDP growth (Article IV baseline, selected): 4.1 (2006), 3.9 (2007), 3.0 (2008), 3.0 (2009), 3.0 (2010). - Public debt (in percent of GDP, Article IV baseline table series): 71 (2006), 69 (2007), 67 (2008), 66 (2009), 64 (2010). - NPV of overall public debt: stable around 42–44 percent in medium term (table sequences), with staff text noting NPV of overall public debt increasing beyond 2011 by about 7 percentage points of GDP to 51 percent by 2026. - External debt (nominal) selected: 2006: 55.3; 2007: 53.2; 2016: 30.7; 2026: 26.6 (table). - Stress test outcomes: - Historical-parameters stress test yields highest NPV debt-to-GDP in 2026: 77 percent of GDP. - Low gas production shock (5 percent annual fall in 2007–11): higher and rising NPV of external public debt; may require adjustment if revenue shortfalls are offset by additional borrowing. - One-time 50 percent increase in gas prices in 2007: improves debt sustainability and debt-service indicators. - Policy implication from DSA: - Maintaining stable public debt ratio post-MDRI requires broad-based expenditure containment and stronger domestic taxation; avoid compensating revenue shocks with debt-financed measures. ### Staff appraisal — consolidated policy recommendations - Fiscal policy: - View higher deficits of 3–4 percent of GDP after 2006 as an upper bound; aim for a deficit at or below the lower bound to preserve safety margins. - Strengthen domestic taxation; reduce exemptions and special regimes; rationalize free trade zone legislation; revise VAT refund system to reduce fraud. - Scrutinize spending decisions; strengthen expenditure management at all government levels; reassess revenue-sharing/expenditure allocation in light of subnational capacity. - Phase out large fuel subsidies gradually; use part of savings to protect vulnerable groups. - Carefully analyze fiscal costs of pension changes and public development banking operations; include quasi-fiscal costs in the budget. - Monetary and exchange rate policy: - Central bank to continue cautious stance; stand ready to step up open market operations and/or use greater exchange rate flexibility to contain inflationary pressures. - Gradual move toward greater exchange rate flexibility (managed float) recommended; transition aligned with shift to monetary or inflation targeting. - Structural and institutional reforms: - Preserve and strengthen public institutions amid proposals for greater state involvement in strategic sectors; ensure transparency, high-quality management, and international accounting/auditing standards for expanded YPFB role. - Keep development banking as second-tier; participation of private financial institutions must be voluntary; avoid regulatory forbearance. - Improve competitiveness via infrastructure, labor policies, and market access initiatives. - Hydrocarbons: - Reach mutually acceptable arrangements with private energy companies within the six-month implementation window for the nationalization decree to secure investor confidence and development of gas reserves. - Financial supervision: - Strengthen supervisory framework; mitigate dollarization risks; consider partial deposit insurance; strengthen AML/CFT framework and corporate restructuring legislation. *Source: IMF staff report excerpts and appendices from content unit _cr06270.* ### 1. Social and Governance Indicators ...........................................................................7 ### 1. Social and Governance Indicators ### Executive summary — key findings - Over the past year, Bolivia experienced far-reaching political changes culminating in the election of a government with an unprecedented popular mandate. - The Bolivian economy displayed positive trends in 2005 that are so far being maintained in 2006, including: - satisfactory GDP growth and a strong balance of payments, led by the hydrocarbons sector; - low inflation; - smaller fiscal deficits; - historically high levels of international reserves; - banking system stability and a decline in financial dollarization. - The Multilateral Debt Relief Initiative (MDRI) substantially reduced the public debt-GDP ratio. - The combined public sector deficit is projected to narrow to near balance in 2006, driven by a large increase in hydrocarbons-based revenue that may be partially reversed in coming years. - Policy needs emphasized: - strengthen domestic taxation; - carefully scrutinize spending and rationalize intergovernmental fiscal relations; - phase out large fuel subsidies while protecting vulnerable groups. - Monetary policy advice: - central bank should continue a cautious monetary policy stance; - greater exchange rate flexibility is recommended because the crawling peg limits agility and discourages exchange rate risk management; - transition toward greater flexibility should be gradual given high dollarization and vulnerability to deposit outflows. - Authorities’ medium-term framework calls for a greater state role in hydrocarbons and mining, and expanded support for small- and medium-scale producers; mission cautioned about potential fiscal cost and adverse effects on private investment incentives. - Major risks and uncertainties: - developments in the hydrocarbons sector, particularly modalities for implementing the May 1, 2006 nationalization decree; - potential institutional changes from the forthcoming constitutional assembly; - possible loss of trade preferences from the United States and Andean countries. *Source: IMF staff report (excerpts provided in content unit).* ### Background and recent macroeconomic performance - Long-run context: - Despite wide-ranging economic reforms since the 1980s and 1990s, Bolivia achieved only modest gains in poverty reduction and inequality remained high. - Growth deteriorated during 1999–2003; the partial recovery concentrated in the hydrocarbons-intensive region of Tarija. - Political context: - Constitution amended in June 2005 to allow early presidential and congressional elections in December 2005 and first direct elections for regional governors. - Agreement reached on calling a constitutional assembly and a referendum on regional autonomy in July 2006. - Elections produced a landslide victory for Evo Morales, the first indigenous head of state in Bolivian history. - 2005 outcomes and 2006 continuation: - In 2005, GDP growth was just above 4 percent and the fiscal deficit narrowed to 2.3 percent of GDP. - Inflation was contained below 5 percent following an early-year acceleration. - Financial sector indicators improved: deposits and credit increased; financial dollarization declined due to expectations of exchange rate appreciation and prudential/tax measures. - MDRI reduced external public debt by about US$1.8 billion, or from about 50 percent to about 30 percent of GDP. - IMF program context: - The 2003 Article IV consultation and the recently-expired Stand-By Arrangement emphasized fiscal sustainability, low inflation, reserve buildup, and strengthening the corporate and financial sectors. - Progress was made in reducing macroeconomic imbalances and financial vulnerabilities, but structural issues (including inefficient government spending) remain. ### Social and governance indicators (Box 1) — salient points - Real per capita income: - A substantial decline in real per capita income in 1999–2003 was followed by only a modest recovery; per capita income levels in 2004 were similar to those of 1992. - The 1990s gains in the highlands and lowlands were almost completely lost; recovery concentrated in Tarija. - Governance perceptions: - Indicators across six dimensions of governance (Kaufman et al., 2005) showed improvement until the late 1990s, followed by steady deterioration across all measures. - By 2004 Bolivia was below the South America average in all areas except regulatory quality; on political stability and corruption Bolivia ranked in the bottom third of the sample. - Millennium Development Goals (MDGs): - Bolivia will likely meet some MDGs (for example, universal primary education and gender equality in primary education). - Other goals—reducing child mortality, improving maternal health, combating HIV/AIDS, malaria and other diseases, increasing access to safe drinking water—appear within reach though further efforts are required. - The objectives of reducing poverty to 34 percent and halving extreme poverty by 2015 are unlikely to be met because they would require sustained annual growth rates of 5.5–6.5 percent through 2015. - Source for social indicators: Instituto Nacional de Estadisticas Bolivia. ### Report on discussions — authorities’ objectives and staff advice - Authorities’ objective: reduce poverty and inequality and improve governance while maintaining prudent macroeconomic management. - Policy orientation announced: - greater state role in hydrocarbons and mining (including revival of state company COMIBOL in mining); - targeted interventions to support small- and medium-scale producers via expanded credit access and extensive land reform (including redistribution of state land and eventual seizure/redistribution of privately-owned land judged unproductive, illegally obtained, or used for speculation). - Staff support and cautions: - Mission supported emphasis on macroeconomic stability, equity, transparency, and accountability. - Mission cautioned that a greater state role should be balanced with preservation of incentives for private investment and maintenance of strong and efficient public institutions. - Mission highlighted the need to monitor short- and medium-term fiscal costs of government interventions and noted authorities’ assurances that prior unsuccessful experiences with public enterprises and development banking would not be repeated. - The mission emphasized the importance of reaching mutually acceptable arrangements with energy companies to ensure development of natural gas reserves and sustained export growth. ### Short-term outlook (2006) — indicators and projections - Activity and external sector: - Thus far in 2006 the economy maintained positive trends observed in 2005; activity led by high export values of hydrocarbon and mining products contributed to a strong external current account surplus. - Accumulation of official reserves projected to continue, reflecting a strong external current account surplus associated with high international prices of fuels and minerals. - Inflation and fiscal: - Inflation continued in the low single digits, following a decreasing trend that started in Q4 2005. - The combined public sector (CPS) is expected to record a near balance for 2006 as temporary extra hydrocarbons revenues would not be immediately spent by YPFB. - Financial sector: - Banking system indicators broadly stable with high liquidity and capital adequacy ratios above mandatory levels. - Sub-national governments accumulated sizable deposits at the central bank, helping to sterilize the monetary impact of reserve accumulation. - Specific numeric projections and outcomes: - Real GDP growth expected at just above 4 percent in 2006. - Public debt ratio projected to decline from 71 percent at end-2005 to 51 percent by end-2006. - The implementation of the MDRI released fiscal resources equivalent to about 0.5 percent of the GDP per year over 2006-11. ### Hydrocarbons policy — nationalization decree and negotiations - The May 1, 2006 nationalization decree requires negotiation of key implementation aspects over a period of six months, including: - tax regime; - export pricing; - compensation for assets being nationalized. - High-level negotiating commissions have been appointed by Bolivia and Brazil; parallel discussions continue regarding natural gas exports to Argentina. - Authorities stated the decree is consistent with the 2004 national referendum and the 2005 hydrocarbons law and that new agreements with energy companies would be approved by Congress. - Mission underscored the importance of expeditiously achieving mutually acceptable operating arrangements with concerned energy companies to ensure development of natural gas reserves and sustained export growth. ### Fiscal developments and near-term fiscal outlook - First-quarter 2006 budget execution: - Budget execution in the first three months of 2006 showed an overall surplus of 2.1 percent of GDP for the combined public sector (CPS). - The surplus largely reflected strong hydrocarbons-based revenue associated with high oil and gas prices and seasonally low expenditure. - Sub-national governments accumulated deposits at the central bank due to boosted shares of hydrocarbons-based revenue under the 2005 hydrocarbons law. - Full-year 2006 projections and revisions: - The overall deficit of the CPS for 2006 is now estimated at only 0.1 percent of GDP, compared with 3.0 percent of GDP projected in the budget. - Upward revision in revenue projections mainly reflects increased hydrocarbons prices in international markets and a new hydrocarbon take for YPFB temporarily set by the nationalization decree at 32 percent of the value of production of gas and oil in the two largest gas fields. - This increase in hydrocarbons revenue would more than compensate for a significant overall spending increase associated mainly with: - (a) a higher wage bill following wage increases to health and education sectors; - (b) increased subsidies for diesel imports resulting from higher external prices; - (c) higher capital spending by subnational governments. - The substantial public enterprise surplus in 2006 reflects mainly that the new revenue accruing to YPFB is not likely to be translated immediately into project spending. ### Policy implications highlighted by the mission - Fiscal policy: - Strengthen domestic taxation to reduce reliance on temporary hydrocarbons windfalls. - Carefully scrutinize spending and rationalize intergovernmental fiscal relations to avoid unsustainable commitments. - Phase out large fuel subsidies while protecting vulnerable groups. - Monetary and exchange rate policy: - Continue a cautious monetary stance. - Move gradually toward greater exchange rate flexibility to permit a more agile response to external conditions and improve exchange rate risk management, managing transition cautiously given high dollarization. - Structural and governance reforms: - Preserve strong and efficient public institutions amid proposals for greater state involvement in strategic sectors. - Ensure that greater state participation does not undermine incentives for private investment or result in unsustainable fiscal burdens. *Source: IMF staff report excerpts in content unit.* ### 12. The government is planning to take a range of structural fiscal measures, ### 12. The government is planning to take a range of structural fiscal measures, ### Structural fiscal measures and tax reform - Authorities are working on a base-broadening and equity-enhancing tax reform that would include: - limiting tax exemptions; - rationalizing and revamping free trade zone legislation; - shifting large taxpayers in special regimes to the regular regime (e.g., transportation); - bringing into the tax net activities with potentially large taxpayers such as gambling. - Authorities indicated they will abolish the financial transactions tax (FTT) on boliviano deposits and make it permanent for short-term dollar deposits above US$2,000 to retain fiscal revenues while creating an incentive for dedollarization. - Modifications to the tax refund system are being considered to reduce fraud while ensuring timely refunds to exporters. - The mission suggested introducing a personal income tax that could exclude the lower 80 percent of the income distribution; authorities stated they were not considering such a tax at this stage. - On the FTT the mission reiterated past staff advice that the tax should be totally removed in the context of the forthcoming tax reform and suggested dedollarization efforts be supported by financial sector regulations. - The mission urged that increased tax take in the mining taxation regime be consistent with continued investment in the sector. ### Pension law changes and budget implications - Proposed changes to the pension law aim mainly at reducing the replacement rate required to retire under the private system to facilitate retirement at ages 55 for men and 50 for women, instead of at age 65 for both. - The mission cautioned about the fiscal cost of changes in the pension system and recommended careful analysis of fiscal costs and budget implications, particularly if changes involve bringing forward pension payments. ### Public sector salary compression - Government implemented a compression of salaries for senior officials in line with an election commitment: - The President cut his own salary by more than half, which automatically triggered a reduction in the maximum possible salary in the public sector. - Public entities (including the central bank, the superintendency of banks, and the tax administration) had to cut salary scales significantly at senior levels. - Mission concern: potential outflows of qualified high level officials from public entities. - Authorities’ view: salary cuts are manageable and to be assessed within a phased reform of the public sector’s salary structure to be implemented over the next two-three years to facilitate retention of high-quality staff. ### Petroleum pricing and subsidies - Rigidities in domestic petroleum pricing give rise to large explicit and implicit subsidies, estimated at about 7 percent of GDP. - Explicit subsidy: 1¼ percent of GDP — budgetary transfers to importers to compensate for gap between low wholesale price of diesel and import cost. - Implicit subsidy: 5¾ percent of GDP — arises from domestic price of crude oil set at US$27 per barrel and natural gas at US$0.58 per million BTU, supporting low domestic prices of gasoline and other oil derivatives. - Effects and concerns: - Subsidies are inefficient, primarily captured by higher income groups, give rise to smuggling, and discourage investment and energy conservation. - Mission recommendation: - Phase out subsidies by moving domestic petroleum product prices gradually to market-based levels. - Use part of substantial resulting fiscal savings to protect vulnerable groups. - Authorities’ position: - Plan a change in the energy matrix over the medium term expected to lead to gradual reduction in diesel subsidies and smuggling. - Mission noted change in energy matrix alone would not necessarily reduce implicit and explicit subsidies and strategy remains to be specified. - Fiscal and sectoral gains from downstream price adjustment (noted in footnote): - Benefit to budget: about 1¼ percent of GDP in reduced expenditure and 4 percent of GDP in additional IDH and royalties. - Benefit to oil companies: revenue before profit tax would increase by about 1¾ percent of GDP. ### Intergovernmental fiscal relations - Current revenue sharing/expenditure allocation system gives rise to structural imbalances between the central government and subnational governments. - Changes introduced in 2005 aggravate imbalances: - Full-year impact of the 2005 hydrocarbons law reduced central government’s share of hydrocarbons-based revenue to around 35 percent in 2006, from 55 percent. - Total tax revenue kept at the central level will be reduced by about 2 percent of GDP while spending responsibilities remain the same across government levels. - Mission recommendations: - Reassess existing revenue-sharing agreement in light of capacity to generate revenue and needs of each regional and local government. - Balance allocation of spending responsibilities across government layers. - Fund stands ready to provide technical assistance in coordination with the World Bank. - Authorities indicated these issues are to be taken up in the context of the Constitutional Assembly. ### Monetary and exchange rate policy - Central bank stance and liquidity: - Central bank pursued a cautious monetary policy, facilitated by a large increase in public sector deposits. - Sustained foreign exchange inflows boosted central bank NIR by close to US$500 million during January–May, about the same increase as in the whole of 2005. - Increase largely sterilized by accumulation of public deposits at the central bank of over 4 percent of GDP. - 12-month growth of base money stood at more than 40 percent reflecting a sizable carry over from 2005. - Central bank absorbed liquidity through open market operations, mostly in boliviano denominated instruments and at lengthening maturities. - Looking ahead: - Central bank may need to step up open market operations and/or exercise further exchange rate flexibility to forestall inflationary pressures. - Monetary policy may be called upon to contain mounting expansionary pressures once fiscal accounts shift into a deficit in the second half of the year. - Capacity of monetary and exchange rate policies to maintain low inflation will hinge on evolution of the non-hydrocarbons fiscal deficit. - Rapid unwinding of public sector deposits would be difficult to contain without resorting to sharp interest rate and/or exchange rate action. - Exchange rate flexibility: - Mission recommended moving toward increasing exchange rate flexibility. - Crawling peg has maintained competitiveness but limits agile response to external conditions and discourages exchange rate risk management. - Indications currency is currently undervalued: real effective exchange rate well below average level over past 20 years despite hydrocarbons expansion and external debt reduction. - Greater flexibility (for example, a managed float) would allow timely response to external shocks and encourage agents to internalize exchange rate risks; could reduce dollarization given current prospect of currency appreciation. - Such greater flexibility would require adjustment of the monetary policy framework (to monetary or inflation targeting). - Transition should be carefully managed as large exchange rate fluctuations could be disruptive in Bolivia’s dollarized economy. - Authorities acknowledged shortcomings of current regime and were open to gradually incorporating greater exchange rate flexibility in the anti-inflation policy menu. ### Financial sector stability and supervisory priorities - System-wide indicators and vulnerabilities: - International reserves and liquidity of financial system are at high levels; financial sector stability has improved. - Reserve coverage of banking system deposits is close to 100 percent. - Some banks have completed accounting of new loan loss provisioning requirements ahead of schedule. - Financial system remains vulnerable to large deposit outflows; systemic risks need careful monitoring. - Bank profitability is still low; banks have yet to internalize fully the risk posed by financial dollarization. - For some banks, significant holdings of restructured loans and some incidence of unprovisioned nonperforming loans remain a source of vulnerability. - Mission recommendations to strengthen supervisory and institutional framework: - Continue strengthening supervisory and institutional banking framework. - Mitigate credit risk arising from dollar loans to non exporters. - Improve regulation and supervision of financial conglomerates and market risk. - Introduce partial coverage deposit insurance and eliminate the option of the central bank to participate in bank resolution. - Strengthen legislation on money laundering and corporate restructuring. - Ensure transfer of the Financial Intelligence Unit to the ministry of finance does not affect its performance during transition and its additional responsibility (investigation of corruption by public officials) does not detract from main role. - Authorities’ view: - Confident existing losses in banks’ loan portfolios have been identified and did not see a vulnerability requiring immediate action, but attach importance to remain vigilant. ### Public development banking (SINAFID) - Authorities are designing a public development banking system (SINAFID) to subsidize credit for small-scale enterprises in selected sectors and facilitate absorption of new technology. - SINAFID would merge existing development financial entities (NAFIBO and FONDESIF) and maintain ownership of the state-owned Banco Union. - Credit would be channeled through private sector financial institutions if agreement on conditions is reached; possibility of using Banco Union not discarded. - Mission welcomed assurances that sound management of public development banks would be a priority and commitment to complement, rather than replace, private lending activities. - Mission cautions based on previous experience: - Development banking tends to be problematic, prone to generate solvency problems in involved financial institutions and create fiscal costs. - Mission advice for SINAFID design and operations: - (i) Keep development banking as a second-tier activity; - (ii) Avoid earmarking of government revenues to finance development banking and include quasi-fiscal costs in the budget; - (iii) Ensure participation of private financial institutions is strictly voluntary; - (iv) Maintain a comparable and prudent supervisory regime, avoiding regulatory forbearance. ### Competitiveness of nontraditional exports - Recent drivers of competitiveness: - Competitiveness of nontraditional exports (excluding hydrocarbon and mineral exports) has hinged on a depreciated real exchange rate, low labor costs, and preferential access to key markets. - Since late 2002, the real exchange rate has depreciated steadily by more than 20 percent and is currently at a historical low. - Wages in dollar terms have been the lowest in the region. - Market access and composition: - Bolivia has benefited from Andean free trade area and customs union, especially for soy-product exports, which represent about 10 percent of total exports. - Duty-free access to the U.S. market under ATPDEA accounts for about 7 percent of total exports (certain products including apparel and jewelry). *Source: _cr06270 - 12. The government is planning to take a range of structural fiscal measures,* ### 25. However, these key determinants of competitiveness may shift against Bolivia in ### 25. However, these key determinants of competitiveness may shift against Bolivia in ### Competitiveness risks and policy response - A continued strong balance of payments position, driven by natural gas exports, may lead to real appreciation pressures on the boliviano. - The mission underscored the need to contain these pressures through: - prudent fiscal policies; - prudent monetary policies; - continued openness of the exchange system. - Wage developments: - Minimum wage currently at US$63 per month. - Despite recent adjustments, wages are not likely to catch up with those in the region in the near term. - Bolivia’s wages in manufactured goods are higher than those of competitors outside the region, such as China and India. - Recent changes in the labor regime have raised redundancy costs, albeit modestly, with some impact on overall labor costs; authorities indicated competitiveness impact was minimal and emphasized enhanced workers’ rights. ### Box 3 — Micro-Credit Institutions (FFPs): growth, characteristics, and policy interaction - Market share and growth: - FFPs hold about 7 percent of financial system deposits and credit to the private sector. - Between December 2002 and end-March 2006: - deposits increased by almost 60 percent (to US$234 million); - loan portfolio rose by more than 50 percent (to US$270 million). - In contrast to the banking system, FFP deposits and lending maintained a growing trend despite political and economic turmoil. - Client profile and cost structure: - FFPs provide loans to small scale clients in the informal sector. - FFPs accounted for 58 percent of financial system borrowers in 2005. - Average loan size less than 10 percent of the average for the financial system. - 40 percent of FFP branches are in rural areas, compared to 20 percent for banks. - Operational and administrative costs more than double those of banks as a percent of loan portfolio. - Average FFP lending rates: - 38 percent for boliviano credit; - 23 percent for dollar credit; - compared to an average of 12 percent for banking sector credit. - Interaction with government concessional lending initiative: - Government channeled US$30 million, financed by a grant from Venezuela, to selected sectors at 4 percent interest and a 10-year maturity. - An additional grant of US$70 million is expected in 2007. - Concessional lending would continue thereafter based on other financing sources. - FFPs argued they cannot compete on these terms and fear undermining of credit culture unless selection criteria and collection efforts are similar. - Envisaged concessional lending operations may also reach borrowers not currently serviced by FFPs. - Sources: Central Bank of Bolivia, and Superintendency of Banks. ### Trade preferences and external competitiveness - Concern about erosion of preferential access once ATPDEA expires at end-2006 and as Andean countries implement bilateral FTAs with the U.S. - Bolivia has formally requested an extension of ATPDEA to the United States government, but bilateral FTAs by Peru and Colombia may reduce Bolivia’s competitiveness in the soy market. - Authorities are: - engaging with Colombian counterparts to extend the transition period for soy duty reduction to the United States; - seeking alternative markets; - noting a recent trade agreement with Venezuela and Cuba would help absorb some exports. ### Medium-term outlook (2006–11) — baseline scenario and assumptions - Baseline assumption: unchanged natural gas production and exports (Tables 7 and 8, and Figure 5). - Growth implications: - Annual GDP growth would stay above 3 percent as zero growth in the hydrocarbons sector would be partially offset by a key mining project expected to come into production next year. - Higher growth rates would require generalized increases in manufacturing, agriculture, and other sectors. - Prospects for higher growth dampened by uncertainties regarding private investment environment and potential loss of export markets. - Fiscal outlook dependent on hydrocarbons-based revenues; hinges on: - level of additional royalties; - possible new export prices of hydrocarbons; - productivity of the nationalized natural gas fields. - Baseline fiscal projections: - Projected initial jump in the deficit in 2007 in the absence of the exceptional hydrocarbons take for YPFB available in 2006 and as expenditures rise due to increased YPFB investments and payments for acquisition of shares in nationalized companies. - Increase in the deficit from the low level of 2006 will be large (3 ½ percentage points of GDP). - Increase in the domestic component of the deficit (i.e. the deficit excluding net payments to foreign hydrocarbon companies) will be small (0.4 percentage points of GDP). - Assuming broadly unchanged policy stance thereafter, fiscal deficit projected to remain within the range of 3–4 percent of GDP. - Ratio of expenditure to GDP would gradually return to the 2006 levels by 2011, partly reflecting declining levels of public investment, pension payments, and explicit fuel subsidies as a share of GDP. - Constant hydrocarbons production, relatively stable hydrocarbon prices, and a gradual decline in grants would combine to generate a roughly commensurate fall in total revenue. - Public debt ratio would remain stable at about 50 percent of GDP during the projection period. - External sector: - High prices of minerals and hydrocarbons would support continuation of substantial, albeit declining, current account surpluses. - Increase in exports expected from a new mining project starting production in 2007. - Under the baseline, FDI inflows are modest and in the hydrocarbons sector aimed solely at supporting current capacity levels. - Strength of external sector reflected in further accumulation of international reserves over the medium term. ### Downside risks to the baseline - Substantial investment may be required to sustain hydrocarbons production at current levels. - Maintenance of a stable public debt ratio in the post-MDRI period will require broad-based expenditure containment. - Competitiveness for nontraditional exports depends on: - preferential access to the Andean Community and U.S. market; - a competitive real exchange rate; - low labor costs — all subject to reversal. - Political/institutional risks: - Forthcoming constitutional assembly and referendum on regional autonomy could complicate macroeconomic management and affect financial sector stability. - Policy mitigation: - Authorities need to keep within a prudent fiscal envelope and enhance competitiveness. - Important to improve governance and maintain a stable legal framework, including in taxation and property rights. ### Upside alternative scenario (policy actions that could lead to higher growth) - Policy measures that could yield sustained upside growth and poverty reduction: - (i) ensure negotiations in the hydrocarbons sector lead to additional investment consistent with increased production and exports; - (ii) strengthen the fiscal position through a bolder tax reform than currently contemplated that would also improve the investment climate and help promote greater equity; - (iii) sustain macroeconomic and structural policies that enhance the environment for private investment, and expand Bolivia’s access to external markets. ### Debt sustainability analysis - Recent improvements: - Bolivia’s external and public debt have declined significantly in relation to GDP in recent years due to sharp reduction in the fiscal deficit and implementation of the MDRI. - Projections: - NPV of Bolivia’s external debt projected to fall gradually from 35 percent of GDP in 2006 to 24 percent of GDP by 2026. - Public external debt service to export ratio projected to remain at comfortable, albeit increasing levels. - NPV of overall public debt shows an increasing trend beyond 2011, rising by about 7 percentage points of GDP, to 51 percent of GDP by 2026. - Increase driven by a slight increase in the fiscal deficit associated with declining hydrocarbon revenues as a share of GDP. - Sensitivity to shocks: - Decline in natural gas production and exports of 5 percent annually over the next five years (i.e., a cumulative decline of more than 20 percent) would place the NPV debt-to-exports ratio on a steadily rising path that could bring it near the HIPC threshold at the end of the projection period. - Conversely, a one-time 50 percent increase in the natural gas export prices to Brazil and Argentina relative to the baseline would bring about a declining trend in the long term path of the debt ratio. ### Staff appraisal — summary findings and policy recommendations - Political and macro context: - Bolivia experienced far-reaching political changes culminating in a government with an unprecedented popular mandate. - The new government inherited a favorable macroeconomic situation and is well positioned to implement policy initiatives conducive to higher and more equitable growth. - 2005–2006 performance: - Satisfactory GDP growth, strong balance of payments led by hydrocarbons, low inflation, smaller fiscal deficits, historically high international reserves. - Banking system remained stable; dollarization, although still exceptionally high, has declined somewhat. - Debt relief under the MDRI substantially reduced the burden of public debt. - Fiscal policy guidance: - Higher deficits in the range of 3–4 percent of GDP projected for 2007 onwards appear manageable but should be viewed as an upper bound. - Aim for a deficit close to the lower bound of this range—or below—to maintain a safety margin against shocks. - Careful scrutiny in spending decisions and strengthened expenditure management at all government levels. - Authorities’ restraint in containing wage increases is welcome; reform of public sector salary structure to retain high-quality staff is supported. - Authorities should carefully analyze fiscal costs and budget implications of planned changes to the pension law, particularly if bringing forward pension payments. - Energy pricing and subsidies: - Rigidities in domestic petroleum pricing generate large explicit and implicit subsidies that are inefficient and regressive, encourage smuggling, and discourage investment and energy conservation. - Need to move domestic petroleum product prices to international market-based levels gradually, using part of fiscal savings to protect vulnerable groups. - Taxation and revenues: - Attention to enhancing domestic taxation to entrench fiscal sustainability and improve efficiency and equity. - Current plans welcomed: reduce exemptions; rationalize free trade zones legislation; shift large taxpayers in special regimes or outside the tax system to the regular regime; modify VAT refund system to reduce fraud. - Authorities encouraged to revisit scope for introducing a tax on high personal incomes (excluding the bulk of the population). - In the mining sector, ensure increased tax take does not discourage additional private investment. - Fiscal institutions and intergovernmental relations: - Strengthen the budget process and intergovernmental fiscal relations to enhance transparency and accountability. - Review and resubmit draft budget framework law for early approval. - Reassess revenue sharing/expenditure allocation system in light of subnational revenue-generating capacity and agreed allocation of spending responsibilities. - Monetary and exchange rate policy: - Central bank has pursued a cautious monetary policy stance; should stand ready to step up open market operations and/or exercise further exchange rate flexibility as needed to maintain low inflation. - Crawling peg regime has contributed to competitiveness and manageable balance-sheet effects in a highly dollarized environment, but: - Does not allow an agile response to changes in external conditions; - Currency may be undervalued at this stage; - Discourages market participants from improving exchange rate risk management. - Staff recommends a gradual move towards greater exchange rate flexibility, achievable in the context of a managed float. - Such a move would require adjustment of the monetary policy framework to monetary or inflation targeting; inflation targeting appears more suited given Bolivia’s highly dollarized environment. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 40. While international reserves are high and the financial sector has strengthened ### _cr06270 - 40. While international reserves are high and the financial sector has strengthened ### Financial sector vulnerabilities and supervisory recommendations - Findings: - The system remains highly dollarized and vulnerable to large deposit outflows. - Bank profitability is still low. - Banks have yet to internalize in full the risk posed by financial dollarization. - Significant holdings of restructured loans and the unprovisioned portion of nonperforming loans of some banks remain a source of vulnerability. - Policy recommendations: - Continue efforts to closely monitor banks’ performance and to strengthen the supervisory and institutional banking framework. - Ensure the proposed public development banking system (SINAFID) does not introduce distortions in the banking system and that related fiscal costs are clearly included in the budget. - Keep development banking as a second-tier activity. - Make participation of private financial institutions strictly voluntary. - Apply a comparable supervisory regime free of regulatory forbearance. ### Structural policy stance: equity, transparency, and the role of the state - Findings: - Staff strongly supports the government’s emphasis on greater equity, transparency, and accountability. - The parallel emphasis on an elevated role for the state is a source of serious concern, with potential adverse impact on the environment for private investment. - Policy recommendations: - Maintain a careful balance between increasing the state’s role and preserving incentives for private investment critical to support growth and raise employment and living standards. - Pay close attention to the economic impact of government interventions, including their short- and medium-term fiscal cost. ### Hydrocarbons sector: nationalization decree and implementation risks - Findings: - Considerable uncertainty prevails regarding the modalities for implementing the recent nationalization decree. - A deterioration of the relationship between the government and private investors in hydrocarbons could produce serious collateral damage on the environment for domestic and foreign private investment and hurt medium-term growth prospects. - Policy recommendations and actions urged: - Undertake all efforts to achieve, as soon as possible within the six-month period established by the May 1 decree, mutually acceptable arrangements with the concerned oil companies on the key issues of taxation, export pricing, and payments for the assets that are being nationalized. - Ensure the expanded role newly assigned to YPFB demands high-quality management and full transparency, consistent with international accounting and auditing standards. ### Medium-term outlook, risks, and competitiveness - Short-term outlook: - Positive; the global environment for exporters of energy and minerals is expected to remain favorable. - Medium-term challenges and risks: - Concluding strategic negotiations over hydrocarbons policy in a manner conducive to full development of the sector’s potential is critical for investment and export prospects. - Avoiding a rebound in the public debt ratio in the post-MDRI period will require enhancing domestic taxation, containing expenditure, and strengthening intergovernmental fiscal relations. - Key determinants of competitiveness may shift against Bolivia: - A continued strong balance of payments position, driven by natural gas exports, could lead to appreciation pressures on the boliviano. - Recent changes in the labor regime have raised redundancy costs, albeit modestly, with some impact on overall labor costs. - Policy responses needed: - Maintain prudent fiscal and monetary policies. - Continue openness of the exchange system. - External market access risks: - ATPDEA is scheduled to expire at end-2006. - Other Andean countries are expected to implement in the near future bilateral free trade agreements with the United States. - Authorities will need to intensify efforts to expand Bolivia’s access to external markets. - Institutional risk: - The medium-term outlook hinges crucially on the maintenance of a stable legal framework, notably with regard to taxation and property rights, which is especially relevant in light of the land reform initiative and potential major institutional changes linked to the forthcoming constitutional assembly. ### Statistical adequacy - Finding: - Bolivia’s economic statistics are of adequate quality, timeliness, and coverage to allow the conduct of Fund surveillance. *Source: _cr06270 - 40. While international reserves are high and the financial sector has strengthened* ### 45. It is proposed that the next Article IV consultation with Bolivia be held on the ### _cr06270 - 45. It is proposed that the next Article IV consultation with Bolivia be held on the standard 12-month cycle. ### Proposed timing - Next Article IV consultation with Bolivia to be held on the standard 12-month cycle. ### Income and prices (selected values) - Real GDP: 2.5, 2.9, 3.9, 4.1, 4.1, 3.9, 3.1, 3.3, 3.3, 3.0 (2002–2011 sequence as shown). - GDP deflator: 2.8, 6.2, 7.4, 4.6, 5.3, 4.9, 4.3, 3.4, 3.3, 3.4. - CPI inflation (period average): 0.9, 3.3, 4.4, 5.4, 4.1, 4.0, 4.0, 4.0, 4.0, 4.0. - CPI inflation (end-of-period): 2.4, 3.9, 4.6, 4.9, 4.0, 4.0, 4.0, 4.0, 4.0, 4.0. - Nominal GDP (in millions of Bolivianos): 56,682; 61,980; 69,152; 75,285; 82,529; 90,005; 96,837; 103,509; 110,510; 117,627. ### Combined public sector — revenues, expenditure, balances (percent of GDP) - Revenues and grants: 24.5, 24.1, 27.0, 31.7, 35.9, 35.1, 33.4, 32.6, 31.9, 31.4. - Royalties on hydrocarbons: 2.3, 2.8, 3.4, 6.7, 10.1, 9.7, 8.9, 8.2, 7.6, 7.1. - Expenditure: 33.3, 32.0, 32.6, 33.9, 36.1, 38.7, 36.6, 36.1, 35.8, 35.3. - Current: 24.9, 23.9, 23.4, 23.7, 25.0, 25.4, 24.9, 24.4, 24.2, 24.1. - Capital: 8.4, 8.1, 9.2, 10.3, 11.1, 13.4, 11.8, 11.8, 11.6, 11.2. - Overall balance (percent of GDP): -8.8, -7.9, -5.6, -2.3, -0.1, -3.6, -3.3, -3.5, -3.8, -3.9. - Total public debt: 69.3, 74.0, 77.2, 70.8, 50.8, 49.8, 49.8, 49.6, 50.1, 50.8. - NPV of the public debt: 44.8, 51.5, 54.6, 53.4, 42.7, 42.2, 42.1, 42.2, 42.8, 43.5. ### Public sector operations (selected items, percent of GDP) - Revenue and grants (2002–2006): 24.5, 24.1, 27.0, 31.7, 35.9. - Current revenue: 22.2, 21.1, 24.5, 29.5, 33.1. - Tax revenue: 17.8, 17.8, 20.7, 25.7, 28.3. - Hydrocarbons: 4.6, 4.6, 5.0, 9.2, 12.5. - Total expenditure: 33.3, 32.0, 32.6, 33.9, 36.1. - Overall balance: -8.8, -7.9, -5.6, -2.3, -0.1. - Financing (2002–2006): 8.8, 7.9, 5.6, 2.3, 0.1. - External financing: 6.0, 5.3, 3.9, 2.3, 1.6. - Domestic financing: 2.8, 2.6, 1.6, 0.0, -1.4. ### Monetary survey and banking sector (selected aggregates) - Broad money (annual change, percent): -10.7, -1.2, -1.7, 17.2, 12.9, 10.5, 8.4, 7.3, 7.2, 6.7 (where series provided). - Credit to the private sector (in percent of GDP): 41.5, 38.9, 33.7, 32.2, 32.6. - Net foreign assets (in millions of U.S. dollars): 1,085; 1,266; 1,474; 2,019; 2,564; 2,657; 2,815; 2,901; 2,959; 3,020 (selected sequence shown). - GIR (in millions of U.S. dollars): 1,085; 1,266; 1,474; 2,019; 2,564. - Banking system: share of U.S. dollar and dollar-indexed deposits (percent of total deposits): 91.4, 90.5, 86.5, 81.7, 75.6. - U.S. dollar and dollar indexed credit (percent of total credit): 95.3, 97.0, 95.3, 91.8, 87.7. ### Central Bank of Bolivia (selected flows and stocks) - Net international reserves (flow, millions of U.S. dollars): -1,936; 718; 1,112; 4,105; 3,523 (2002–2006 flow sequence). - Net international reserves (stock, millions of U.S. dollars): 5,428; 6,866; 8,640; 12,785; 17,543 (2002–2006). - Currency issue (average stock in percent of GDP): 4.1, 4.4, 4.7, 5.7, 6.5. - NIR coverage of broad money (percent): 24.6, 29.1, 36.1, 45.2, 55.6. ### Commercial bank performance and vulnerability indicators - Operating income (ratios to total average assets): 4.1, 4.4, 5.3, 5.6, 5.5, 5.7, 6.1, 6.5 (selected points). - Profits before taxes (ratios to average equity): 3.5, 5.1, 1.4, 2.3, 3.4, 7.0, 9.1, 12.8. - Nonperforming loans (percent of total loans): 17.6, 16.7, 14.0, 15.5, 13.7, 13.7, 11.3, 12.2. - Provisions (as percentage of NPL): 63.7, 74.0, 84.3, 73.6, 78.1, 74.7, 81.1, 76.9. - Capital adequacy (qualified capital over risk-adjusted assets): 16.1, 12.9, 14.9, 14.9, 14.9, 14.6, 14.7, 14.5. ### External sector and balance of payments (selected figures) - Current account (percent of GDP): -4.1, 1.0, 3.9, 5.0, 5.0, 4.8, 3.5, 2.0, 1.3, 0.8. - Merchandise exports (percent of GDP): 16.4, 19.7, 24.5, 28.5, 32.7, 31.0, 29.0, 27.4, 26.1, 25.3. - Natural gas exports (percent of GDP): 3.4, 4.7, 7.1, 10.5, 14.0, 13.4, 12.2, 11.3, 10.4, 9.7. - Merchandise imports (percent of GDP): -22.4, -19.9, -21.1, -25.0, -29.0, -26.8, -25.7, -25.7, -25.3, -24.9. - Trade balance and components (millions of U.S. dollars, selected): Exports f.o.b.: 1,299; 1,598; 2,146; 2,671; 3,390; 3,500; 3,524; 3,557; 3,630; 3,736. - Natural gas (millions of U.S. dollars): 266; 381; 620; 984; 1,445; 1,516; 1,488; 1,467; 1,450; 1,434. - Natural gas to Brazil (millions of U.S. dollars): 206; 360; 542; 794; 1,155; 1,212; 1,190; 1,173; 1,160; 1,147. - Volume (millions of cubic meters p/day) for gas to Brazil (selected): 10.3; 13.8; 19.5; 22.4; 24.0; 24.0; 24.0; 24.0; 24.0; 24.0. - Price (US$ per thousand cubic feet) for gas to Brazil: 1.5; 2.0; 2.2; 2.8; 3.7; 3.9; 3.8; 3.8; 3.7; 3.7. - Gross international reserves (end-of-period, millions of U.S. dollars): 854; 1,057; 1,212; 1,674; 2,212; 2,281; 2,422; 2,493; 2,537; 2,584. - Net international reserves (in millions of U.S. dollars): 772; 888; 1,076; 1,568; 2,197. ### Medium-term scenarios and staff projections (Article IV baseline vs Sixth Review baseline, selected) - Real GDP growth (Article IV baseline): 4.1 (2006), 3.9 (2007), 3.0 (2008), 3.0 (2009), 3.0 (2010). - CPI inflation (period average, Article IV baseline): 3.4 (2006), 3.1 (2007), 3.0 (2008), 3.0 (2009), 3.0 (2010). - Public sector overall balance (in percent of GDP, Article IV baseline): -3.0 (2006), -2.6 (2007), -2.3 (2008), -2.2 (2009), -1.9 (2010). - Hydrocarbons based revenue (in percent of GDP, Article IV baseline): 6.7 (2006), 6.3 (2007), 5.9 (2008), 5.5 (2009), 5.2 (2010). - Overall balance before hydrocarbons based revenue (in percent of GDP): -9.7 (2006), -8.9 (2007), -8.2 (2008), -7.7 (2009), -7.0 (2010). - Public debt (in percent of GDP, Article IV baseline): 71 (2006), 69 (2007), 67 (2008), 66 (2009), 64 (2010). - Exports, f.o.b. (in millions of U.S. dollars, Article IV baseline): 2,721 (2006), 2,702 (2007), 2,748 (2008), 2,770 (2009), 2,819 (2010). - Natural gas (millions of U.S. dollars, Article IV baseline): 1,002 (2006), 1,033 (2007), 1,037 (2008), 1,023 (2009), 1,018 (2010). - Gas to Brazil (millions of U.S. dollars): 747 (2006), 768 (2007), 771 (2008), 760 (2009), 756 (2010). - Volume (millions of cubic meters p/day) for gas to Brazil: 22.5 (2006–2010 baseline series). - Price (US$ per thousand cubic feet) for gas to Brazil: 2.6 (2006–2010 baseline series). - Current account balance (in percent of GDP, Article IV baseline): 1.5 (2006), 1.1 (2007), 1.0 (2008), 0.1 (2009), -0.4 (2010). - Net international reserves (in millions of U.S. dollars, Article IV baseline): 1,628 (2006), 1,716 (2007), 1,799 (2008), 1,892 (2009), 1,996 (2010). - Broad money (annual percentage change, Article IV baseline): 8.7 (2006), 7.1 (2007), 6.0 (2008), 6.1 (2009), 6.0 (2010). - Credit to the private sector (in percent of GDP, Article IV baseline): 28.9 (2006), 28.0 (2007), 27.4 (2008), 26.6 (2009), 25.8 (2010). ### Millennium Development Goals (selected indicators and targets) - Population below US$1 a day (percent): 41.2 (1990), 45.0, 39.0, 41.3, 24 (target 2015). - Prevalence of child malnutrition (percent of children under 3): 38.3 (1990), 25.6, 24.2, 19 (target 2015). - Net primary enrollment ratio (percent): 96.4, 97.0, 97.7, 97.1, 100 (target). - Infant mortality rate (per 1,000 live births): 89 (1990), 67, 54, 30 (target 2015). - Maternal mortality ratio (per 100,000 live births): 416 (1990), 235, 229, 104 (target 2015). - Access to potable water (percent of population): 57.5 (1992), 72.0, 72.0, 78.5 (target progression). - HIV prevalence, total (percent ages 15-24): 1.8 (1990), 5.2, 5.0, 9.4, 6.5, 11.5, 13.4, 13 (series as shown). *Source: Bolivian authorities; and Fund staff estimates and projections, as presented in the IMF staff report tables and figures.* ### APPENDIX I. BOLIVIA—FUND RELATIONS ### APPENDIX I. BOLIVIA—FUND RELATIONS (As of May 31, 2006) ### Membership and Accounts - Membership Status: Joined December 27, 1945; Article VIII - General Resources Account (SDR Million / Percent of Quota) - Quota: 171.50 100.0 - Fund holdings of currency: 172.30 100.47 - Reserve position in Fund: 8.87 5.17 - SDR Department (SDR Million / Percent of Allocation) - Net cumulative allocation: 26.70 100.00 - Holdings: 25.80 96.63 ### Outstanding Purchases, Loans, and Financial Arrangements - Outstanding Purchases and Loans (SDR Million / Percent of Quota) - Stand-By Arrangements: 9.66 5.63 - Financial Arrangements - Stand-By: Approval date 4/02/03; Expiration date 3/31/06; Amount approved (SDR million) 145.78; Amount drawn (SDR million) 111.50 - PRGF: Approval date 9/18/98; Expiration date 6/07/02; Amount approved (SDR million) 100.96; Amount drawn (SDR million) 63.86 - PRGF: Approval date 12/19/94; Expiration date 9/09/98; Amount approved (SDR million) 100.96; Amount drawn (SDR million) 100.96 ### Projected Obligations to the Fund (SDR million; based on existing use of resources and present holdings of SDRs) - Expectations Basis - 2006: Charges/Interest 0.26; Total 0.26 - 2007: Principal 2.42; Charges/Interest 0.26; Total 2.90 - 2008: Principal 4.83; Charges/Interest 0.49; Total 5.12 - 2009: Principal 2.42; Charges/Interest 0.29; Total 2.49 - 2010: Charges/Interest 0.03; Total 0.03 - Obligations Basis - 2006: Charges/Interest 0.26; Total 0.26 - 2007: Charges/Interest 0.51; Total 0.51 - 2008: Principal 2.90; Charges/Interest 0.49; Total 2.90 - 2009: Principal 5.12; Charges/Interest 0.29; Total 5.12 - 2010: Principal 2.49; Charges/Interest 0.07; Total 2.49 ### Implementation of HIPC Initiative - Original / Enhanced framework summary - I. Commitment of HIPC assistance Framework - Decision point date: Sep 1997 / Feb 2000 - Assistance committed by all creditors (US$ Million): 448.00 / 854.00 - Of which: IMF assistance (US$ million): 29.00 / 55.32 - (SDR equivalent in millions): 21.25 / 41.14 - Completion point date: Sep 1998 / Jun 2001 - II. Disbursement of IMF assistance (SDR Million) - Assistance disbursed to the member: 21.25 / 41.14 / 62.39 - Interim assistance: -- / -- / -- - Completion point balance: 21.25 / 41.14 / 62.39 - Additional disbursement of interest income: -- / 3.09 / 3.09 - Total disbursements: 21.25 / 44.23 / 65.48 - Notes - Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts can not be added. - Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period. ### Implementation of MDRI Assistance - I. Total Debt Relief (SDR Million): 160.93 - Of Which: MDRI 154.82; HIPC 6.11 - II. Debt Relief by Facility (SDR Million) - Eligible Debt Delivery Date GRP RG F Total - January 2006: 6.70 71.15 77.85 - January 2006: 83.08 N/A 83.08 - Note: The Multilateral Debt Relief Initiative (MDRI) provides 100 percent debt relief to eligible member countries that are qualified for the assistance. The debt relief covers the full stock of debt owed to the Fund as of end-2004 which remains outstanding at the time the member qualifies for such debt relief. The MDRI is financed by bilateral contributions and the Fund's own resources, as well as the resources already disbursed to the member under the HIPC Initiative. ### Safeguards Assessment - A safeguards assessment of the Central Bank of Bolivia (CBB) was completed June 27, 2003 with respect to the April 2, 2003 Stand-By Arrangement (SBA). - Outcome: No systemic risks with the CBB’s safeguards were identified, but uncertainties were expressed about the de facto lack of operational independence and program monetary data. - An update assessment was completed September 27, 2004 in conjunction with an augmentation of the SBA. - Outcome: Measures had been implemented to address all previously identified vulnerabilities, except for those requiring a change in the central bank law. ### Exchange Arrangement - Currency: boliviano - Exchange rate regime: crawling peg - Central bank operations: daily foreign exchange auction accepting all bids at or above the central bank’s minimum price; if acceptable bids exceed amount offered, lowest acceptable bids are prorated to exhaust amount offered; minimum price adjusted periodically based on evaluation of Bolivia’s real exchange rate vis-à-vis key trading partners. - Official selling rate on May 31, 2006: US$8.06 per U.S. dollar ### Article IV Consultation - Last Article IV consultation and request for the first review under the Stand-By Arrangement completed by the Executive Board on July 7, 2003 (Country Report No. 03/257). - Consultation cycle: 12-month ### Technical Assistance (Department / Purpose / Date) - FAD: Modernization of customs administration and follow-up missions — June 1999, May 2001, Dec. 2001 - FAD: Tax administration — June 1999, Feb. 2000, June 2001 - FAD: Fiscal decentralization — December 2000 - MAE: Central bank operations and domestic capital markets — June 1999 - MAE: Vulnerability of the banking system — Oct. 1999, April 2000, Dec. 2000 - STA: Money and banking statistics — Jan 1999, Sept. 2001 - STA: Balance of payments statistics — August 1999 - MAE: Monetary operations, monetary, and exchange rate policy — May 2002 - STA: National accounts statistics — August 2002 - MAE: FSAP — Nov. 2002, Jan. 2003 - FAD: Customs reform — December 2002 - FAD: Tax Administration — May 2003 - MFD: Training of bank supervisors on AML/CFT — July 2003 - FAD: Pension reform — April 2004 - LEG: Review of draft AML law (desk review) — July 2004 - MFD: Banking sector — July 2004; August 2004 - FAD: Tax policy — August 2004 - FAD: Tax administration — August 2004 - MFD/LEG: Financial Intelligence Unit and AML/CFT legislative advice — September 2004 - FAD: PSIA — October 2004 - FAD: Decentralization and public expenditure management — October 2004 - MFD: Promote use of domestic currency — October 2004 - FAD: Public expenditure management: the budget process — April 2005 - STA: Monetary statistics — March 2006 ### Resident Representative - Mr. Esteban Vesperoni took over the post of IMF resident representative in February 2006. *Source: APPENDIX I. BOLIVIA—FUND RELATIONS (As of May 31, 2006).* ### APPENDIX II. BOLIVIA: EXTERNAL AND PUBLIC DEBT SUSTAINABILITY ANALYSIS (DSA) ### Summary of findings - Recent developments - Bolivia’s external and public debt have declined significantly in relation to GDP in recent years as a result of the sharp reduction in the fiscal deficit and implementation of the MDRI. - Medium- and long-term outlook - External debt (public and private) is projected to fall further in the medium term to about 36 percent of GDP in 2011 and stabilize in both nominal and NPV terms in the longer term (2016–26). - Public external debt service to export ratio is projected to remain at comfortable, albeit increasing, levels. - NPV of total public debt (external and domestic) remains stable in the period 2006–11 at about 43 percent, then shows an increasing trend in 2012–26 reaching about 50 percent in 2026. - Gradual deterioration of the deficit is driven by broadly stable hydrocarbon prices and production which imply declining hydrocarbon revenues as a share of GDP. - Sensitivities and risks - Outcome is sensitive to standard stress tests, particularly continuation of past historical trends, permanently lower real GDP growth, and devaluation. - Solvency would be particularly compromised under adverse shocks: a decline in natural gas production and exports of 5 percent annually over the next five years (i.e., a cumulative decline of more than 20 percent) would place the debt ratio to GDP on a rising path. - Conversely, a one-time 50 percent increase in natural gas export prices relative to the baseline scenario would substantially improve debt sustainability. - These results underscore the need to reach mutually acceptable agreements with the private sector in the hydrocarbons sector to promote continued private investment and growth. ### Main assumptions (baseline 2006–26) - Average annual real GDP growth: 3.5 percent - Inflation: 4 percent - Export growth: 5 percent - Gas prices: stable with a price to Brazil of 3.7 U.S. dollars per thousand cubic feet in longer term - Gas volumes: stable at 2006 levels - The average concessionality of the public sector borrowing is expected to decrease gradually and effective interest rate somewhat increase. - The real effective exchange rate will remain constant. - The evolution of domestic public debt is consistent with the path for the overall fiscal deficit percent and available domestic financing. ### External debt sustainability - Projections and composition - Stock of total public and private external debt-to-GDP ratio expected to fall to about 36 percent by 2011 and stabilize at the range of 26–28 percent by 2026. - Composition of public external debt expected to shift to less concessional sources; speed of reduction of public external debt NPV to GDP ratio will be lower than that of nominal debt. - NPV external public debt to GDP ratio projected to be close to 20 percent of GDP by the end of the period. - Risk assessment - Bolivia’s risk of debt distress is low given its debt levels and the overall rating of its macroeconomic policies. - According to the World Bank’s IDA Resource Allocation Index (IRAI) Bolivia is classified as a medium performer with respect to quality of policies and the related thresholds on NPV of debt-to-GDP and debt-to-exports ratios (40 and 150 percent, respectively) are met with ample margins under the baseline projections and even under stress scenarios. - Stress test outcomes - Standardized stress tests show external debt would remain sustainable under several shocks. - Bolivia’s NPV to GDP ratio experiences highest increase under the 30 percent devaluation shock in 2007, but nevertheless stabilizes at around 30 percent of GDP. - Stress test assuming borrowing on less favorable terms leads to higher, but stabilizing, ratios. - Adverse scenario with fall in gas production (5 percent fall each year in 2007–11) and compensating additional external borrowing puts the NPV of external public debt on a higher and rising path and may require adjustment measures. - Positive shock of a one-time 50 percent increase in gas prices in 2007 improves external solvency with further improvement in NPV of debt-to-exports ratio and debt service indicators. ### Public debt sustainability - Short- and medium-term outlook - Public debt sustainability is expected to be maintained in the short to medium term (2006–11). - NPV of debt is broadly constant until 2011 and the NPV of external debt is flat given constant expected external financing as a share of GDP. - Long-term vulnerabilities - After 2011 the overall deficit increases slowly, implying additional domestic financing will be needed as declining pension and investment spending is not enough to compensate for the increasing interest bill and the reduction of hydrocarbon revenues as a share of GDP. - The standardized stress tests show public debt sustainability is sensitive to several shocks. - Bolivia’s NPV to GDP ratio experiences highest increase under a historical pattern, a permanent reduction in growth, and a 30 percent devaluation shock. *Source: APPENDIX II. BOLIVIA: EXTERNAL AND PUBLIC DEBT SUSTAINABILITY ANALYSIS (excerpts).* ### 2007. The stress test assuming historical parameters is the one that shows the higher NPV of ### _cr06270 - 2007. The stress test assuming historical parameters is the one that shows the higher NPV of ### Summary findings - The stress test assuming historical parameters shows the higher NPV of debt as a share of GDP in 2026 at a level of 77 percent of GDP. - Under an adverse scenario that assumes fall in gas production (5 percent fall each year in 2007–11), prospects for public debt sustainability would be seriously compromised if related shortfalls in fiscal revenues are compensated by additional external borrowing; this scenario puts the NPV of external public debt on a higher and rising path and may require adjustment measures to return to a stable debt ratio. - A positive shock assuming one time 50 percent increase in gas prices in 2007 raises the prospects for public debt sustainability with further improvement in the level of NPV of debt-to-revenue ratio and debt service indicators. ### Stress test scenarios and outcomes - Low gas production scenario: - Assumption: 5 percent fall each year in 2007–11. - Result: Higher and rising NPV of external public debt; may require adjustment measures to return to a stable debt ratio. - High gas price scenario: - Assumption: one time 50 percent increase in gas prices in 2007. - Result: Improves public debt sustainability; better NPV of debt-to-revenue ratio and debt service indicators. - Historical-parameters stress test: - Yields the highest NPV of debt-to-GDP ratio in 2026: 77 percent of GDP. ### Key projections and indicators (selected values from staff simulations) - External debt (nominal), selected years and items: - External debt (nominal) 2006: 55.3 - External debt (nominal) 2007: 53.2 - External debt (nominal) 2016: 30.7 - External debt (nominal) 2026: 26.6 - Of which: public and publicly guaranteed (PPG), selected years: - 2006: 55.3 - 2007: 53.2 - 2016: 25.2 - 2026: 24.0 - Change in external debt (selected): - 2006: 0.4 - 2007: -2.1 - 2016: -0.9 - 2026: -0.2 - Identified net debt-creating flows, selected: - 2006: -4.9 - 2007: -3.7 - 2016: -2.6 - 2026: 0.0 - Non-interest current account deficit, selected: - 2006: 4.3 - 2007: 3.7 - 2016: -3.2 - 2026: -2.7 - Net FDI (negative = inflow), selected: - 1999: -12.3 - 2006: -6.1 - 2016: -0.6 - 2026: -0.4 - Endogenous debt dynamics, selected: - 1999: 3.1 - 2006: -0.3 - 2016: 0.6 - Contribution from nominal interest rate (selected): 1.6 (1999), 2.2 (2006), 1.4 (2026) - Contribution from real GDP growth (selected): -0.2 (1999), -2.4 (2006), -0.9 (2026) - Residual (including exceptional financing), selected: - 1999: 5.3 - 2006: -13.1 - 2016: 1.7 - 2026: -0.2 - NPV of external debt (selected projection values): - 2016: 23.9 - 2026: (table indicates) 46.7 in an earlier column, and other year series include 35.1, 33.4, 32.3, 31.2, 30.4, 29.9, 26.3, 23.9 - NPV of PPG external debt (selected projection values): - 2016: 21.3 - In percent of exports (selected): 95.5; 95.9; 97.9; 99.7; 101.2; 102.7; 101.9; 119.8 - Debt service-to-exports ratio (in percent), selected: - 1999: 25.5 - 2006: 13.0 - 2016: 12.2 - 2026: 16.4 - Total gross financing need (billions of U.S. dollars), selected: - 1999: -0.3 - 2006: -0.4 - 2016: 0.1 - 2026: 1.4 - Non-interest current account deficit that stabilizes debt ratio (selected values shown in table): 3.9; 5.8; -0.1; 1.8; -21.3; 1.0; -4.1; 14.6; -4.3; -4.0; -2.7; -2.1; -1.9; -1.7; -0.2 ### Public sector debt (selected public-sector indicators) - Public sector debt (selected projected values): - 2016: 55.3 - 2026: 50.6 - NPV of public sector debt (selected): 54.9 (2016), 51.3 (2026) - Of which: foreign-currency denominated (selected): - 2016: 46.9 - 2026: 31.9 - Change in public sector debt (selected): - 2006–11 average: 9.4 (est.) - 2016: 0.3 - 2026: 0.4 - Identified debt-creating flows (public sector), selected: - 2006–11 average: 8.1 - 2016: 0.0 - 2026: 0.4 - Primary deficit (public sector, percent of GDP), selected: - 1999: 1.5 - 2006: -0.8 - 2016: 1.1 - 2026: 1.2 - Revenue and grants (percent of GDP), selected: - 1999: 25.9 - 2006: 36.1 - 2016: 31.4 - 2026: 25.3 - Gross financing need (public sector, percent of GDP), selected: - 2006: 5.5 - 2016: 8.4 - 2026: 10.3 - NPV of public sector debt-to-revenue ratio (in percent), selected: - 2016: 161.1 - 2026: 202.8 - Debt service-to-revenue ratio (in percent), selected: - 2016: 26.3 - 2026: 34.8 - Primary deficit that stabilizes the debt-to-GDP ratio, selected: - 2016: 1.0 - 2026: 0.7 ### Key macroeconomic assumptions (selected exact values from tables) - Real GDP growth (in percent), selected: - 1999: 0.4 - 2006-11 (average): 2.6 - 2016: 3.5 - 2026: 3.5 - GDP deflator in US dollar terms (change in percent), selected: - 1999: -3.0 - 2006-11 (some years): -1.1; 3.5; 6.3; 5.1; 4.3; 3.4; 3.3 - 2016: 4.3 - 2026: 4.0 - Effective interest rate (percent) 6/, selected: - 1999: 2.8 - 2006: 0.3 - 2009–11: 3.7; 5.1; 5.1 - 2016: 4.8 - 2026: 5.4 - Growth of exports of G&S (US dollar terms, in percent), selected: - 1999: -3.3 - 2005: 13.3 - 2007: 13.0 - 2016: 5.7 - 2026: 5.0 - Growth of imports of G&S (US dollar terms, in percent), selected: - 1999: -9.6 - 2006: 4.4 - 2008: 11.1 - 2016: 7.7 - 2026: 5.5 - Grant element of new public sector borrowing (in percent), selected: - 2016: 15.4 - 2026: 12.9 - Memorandum: Nominal GDP (billions of US dollars), selected: - 1999: 8.3 - 2006: 10.4 - 2016: 21.4 - 2026: 44.6 ### Policy implications and recommended considerations - Adverse supply shocks to gas production (5 percent fall each year in 2007–11) that are offset with additional external borrowing can materially worsen debt dynamics and may necessitate fiscal adjustment measures to restore debt sustainability. - A favorable one-time commodity price shock (one time 50 percent increase in gas prices in 2007) materially improves debt and debt-service indicators, suggesting the importance of using windfall revenue for debt reduction or precautionary saving. - Stress-test results highlight the sensitivity of external and public debt NPV ratios and debt-service ratios to shocks in exports, gas production, and terms of new borrowing; policy should emphasize building buffers and limiting reliance on debt-financed compensating measures in face of commodity volatility. *Source: Staff simulations and projections as presented in the provided IMF staff document.* ### APPENDIX IV. BOLIVIA: RELATIONS WITH THE INTER-AMERICAN DEVELOPMENT BANK ### APPENDIX IV. BOLIVIA: RELATIONS WITH THE INTER-AMERICAN DEVELOPMENT BANK ### IDB portfolio, financing, and strategic priorities - As of December 31, 2005, the Inter-American Development Bank (IDB) had approved loans to Bolivia amounting to US$3.77 billion, with disbursements totaling US$3.14 billion. - Bolivia’s outstanding debt to the IDB was US$1.77 billion. - The IDB portfolio in Bolivia also includes: - active nonreimbursable technical cooperation projects amounting to US$23 million (US$15.6 million undisbursed); - US$8.3 million in credits for small and micro projects. - Sustainable poverty reduction is the overarching objective of the Bank’s country strategy with Bolivia, with main support areas: - (a) improving the managerial capacity and transparency of the State; - (b) supporting competitiveness and sustainable development of the private sector; - (c) enhancing efficiency and equity in basic services delivery. - The IDB is updating its country strategy to reflect priorities of the new government inaugurated in January 2006 and the National Development Program expected to be announced next April. - Strategic and operational context: - The implementation backdrop is characterized by a widespread reorientation of the reform process, need for continued fiscal consolidation, weak policy implementation and institutional capacity, and an over-arching political agenda dominated by the constituent assembly and the referendum for regional autonomy. - The country strategy update is conceived as a process in which the Bank, together with the Government and development partners, will: - (i) remain engaged in high-priority areas to attenuate economic risks and preserve social gains of the last decade (pension and tax administration, microfinance); - (ii) continue cooperating to improve planning, budgeting and the ongoing fiscal decentralization process; - (iii) sharpen focus on local/rural development and provision of productive infrastructure. - Operational capacity and near-term program: - As of March 15, 2006, undisbursed balances amounted to US$409 million. - The proposed IDB lending program for Bolivia for FY2006 consists of three loans amounting to approximately US$100 million (in support of basic infrastructure, institutional reforms in the public sector and competitiveness). - Debt relief discussions: - Discussions among Bank shareholders regarding the possibility of Bank participation and the potential scope for MDRI type debt relief are ongoing. - If approved, additional debt relief beyond HIPC Initiative support could become effective in 2007. ### Key implications for fiscal sustainability and Millennium Development Goals - The IDB’s concessional resources in 2006 are intended to support fiscal sustainability while protecting investments critical for achieving the Millennium Development Goals. - The Bank’s active portfolio and undisbursed resources form a resource base to implement the updated strategy in priority areas. *Source: APPENDIX IV. BOLIVIA: RELATIONS WITH THE INTER-AMERICAN DEVELOPMENT BANK (content as provided).* ### APPENDIX V. BOLIVIA: STATISTICAL ISSUES ### General assessment and metadata frameworks - Timeliness and coverage of economic statistics in Bolivia are generally adequate for monitoring, with significant advances in recent years but further improvements needed. - Many national agencies, including the National Institute of Statistics (INE), post statistical information on the Internet. - Bolivia has participated in the GDDS since November 2000 and plans to subscribe to the SDDS in FY07 are in the advance stages. ### I. Real sector - National accounts: - The INE plans to initiate in 2006 a thorough revision of the national accounts statistics, including a revision of the base year; expected completion over the next 3 years. - A 2002 STA mission found that improvements were hampered by an inadequate statistical law and insufficient resources to undertake censuses and surveys. - Labor market: - Quality of household and employment surveys deteriorated in recent years due mainly to financial constraints. - The Survey of Improvement in Living Conditions (MECOVI), which replaced earlier household surveys, was last conducted in November 2002. - Important surveys discontinued: annual manufacturing survey (in 2001) and the employment survey (in 2003), resulting in lack of quarterly information on employment and wages. - Plans to reestablish these surveys are underway. - Prices: - Consumer price index (CPI) covering the four largest cities has a base year of 1991; CPI was revised on the basis of a household budget survey conducted over a 12-month period beginning June 2, 2003. - Industrial producer price indices and external trade unit values are compiled by INE but need revision regarding coverage, product breakdown, and base year (1990=100). ### II. Fiscal sector - The Ministry of Finance (MoF) provides timely monthly information on revenue, current and investment spending, and financing for the consolidated general government (central government and decentralized entities), public enterprises and the central bank, with appropriate disaggregation. - The MoF provides annual data to STA for publication in Government Finance Statistics Yearbook; these data do not cover all operations of decentralized agencies and operations channeled through special funds. - Ongoing implementation of a comprehensive financial management system, with funding from the IDB, will help ensure proper monitoring of public sector financial operations including local debt and social spending. ### III. External sector - The Central Bank of Bolivia (BCB) provides balance of payments and international investment position statistics to STA for publication in the Balance of Payments Statistics Yearbook and the International Financial Statistics (IFS). - Classification of accounts is broadly in accordance with the fifth edition of the Balance of Payments Manual. - Quarterly balance of payments data are available before the end of the year, but submitted to STA only once a year. - The BCB provides monthly trade data to the Fund, but import data are only available with a lag. - Fund staff, upon request, has access to more detailed and timely balance of payments and debt data. - Authorities are working on a database on gross flows of short and medium-term private debt. - Concern exists about private capital flow quality as the foreign direct investment survey was discontinued in the third quarter of 2004. ### IV. Monetary sector - Monetary data are provided on balance sheets of the central bank, commercial banks, nonbank financial institutions, and two state-owned second-tier banks: Nacional Financiera Boliviana (NAFIBO), and Fondo de Desarrollo del Sistema Financiero (FONDESIF). - Monetary survey data are available with a short lag; commercial bank data (collected by the Superintendency of Banks) become available with a lag of six to eight weeks. - Coverage of banks in the monetary survey is comprehensive. - An STA mission in April 2006 found the central bank implemented most recommendations of the 2001 STA advisory mission; monetary statistics are now broadly in line with the Monetary and Financial Statistics Manual. - Remaining weaknesses identified in data provided by deposit institutions could be improved with implementation of new standardized report forms. *Source: APPENDIX V. BOLIVIA: STATISTICAL ISSUES (content as provided).* ### Indicators Required for Surveillance (As of June 9, 2006) — availability and reporting frequency - Exchange Rates: Date of latest observation May 2006; Date received Jun. 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities2: Date of latest observation Jun. 2006; Date received Jun. 2006; Frequency of Data D; Frequency of Reporting D; Frequency of publication M. - Reserve/Base Money: Date of latest observation Apr. 2006; Date received Apr. 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Broad Money: Date of latest observation Apr. 2006; Date received Apr. 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Central Bank Balance Sheet: Date of latest observation Apr. 2006; Date received Apr. 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Consolidated Balance Sheet of the Banking System: Date of latest observation Mar. 2006; Date received Mar. 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Interest Rates3: Date of latest observation May 2006; Date received May 2006; Frequency of Data W; Frequency of Reporting W; Frequency of publication M. - Consumer Price Index: Date of latest observation May 2006; Date received Jun. 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Revenue, Expenditure, Balance and Composition of Financing4 – General Government5: Date of latest observation Mar. 2006; Date received May 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Revenue, Expenditure, Balance and Composition of Financing4 – Central Government: Date of latest observation Dec. 2005; Date received May 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Stocks of Non Financial Public Sector-Guaranteed Debt6: Date of latest observation Dec. 2005; Date received Mar. 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - External Current Account Balance: Date of latest observation Mar. 2006; Date received Jun. 2006; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - Exports and Imports of Goods and Services7: Date of latest observation Mar. 2006; Date received May 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - GDP/GNP: Date of latest observation Mar. 2006; Date received Apr. 2006; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - Gross External Debt: Date of latest observation May 2006; Date received Jun. 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. Notes included in table: - 1 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA). - 2 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - 3 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. - 4 Foreign, domestic bank, and domestic nonbank financing. - 5 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - 6 Including currency and maturity composition. - 7 Monthly frequency for goods only. *Source: Indicators table and notes as provided.* ### Statement by the IMF Staff Representative (July 17, 2006) — new information and implications ### 1. Elections for the constitutional assembly and regional autonomy referendums - Election results (July 2): - Movimiento al Socialismo (MAS) obtained 51 percent of the vote and will be represented by 137 of the 255 delegates to the constitutional assembly. - A two-thirds majority is required to approve constitutional reforms, so consensus with other political groups will be needed. - Regional referendums: four of the nine departments favored autonomy. - The constitutional assembly, beginning deliberations on August 6, will define modalities of greater autonomy and is expected to consider a wide range of institutional changes, including the economic role of the state, land tenure, and property rights. ### 2. National Development Plan (NDP) — objectives, policy approach, macro framework, and sectoral policies - Key objectives (period 2006-11): - Target average real GDP growth of 6.3 percent; - Target a 9 percentage point reduction in poverty (to 50 percent); - Target a sharp decline in the unemployment rate, to 4 percent. - Policy approach: - Advocates a greater state role in the economy and support for small- and medium-scale producers, including through development banking. - Government would recover control of all enterprises privatized in the mid-1990s (except the former national airline); nationalization process for hydrocarbons described in the Staff Report would eventually be extended to telecommunications, electricity, and water sectors (no related legislation yet in place). - Independent regulatory agencies would be abolished, except for the superintendency of banks. - New FDI framework to introduce new requirements regarding financial information, technology transfer, minimum employment creation, and use of local inputs and services. - Macroeconomic framework (comparison: Staff Baseline vs National Development Plan — selected figures preserved verbatim): - Income and prices (percent growth) - Real GDP (Staff Baseline 2006–2011): 4.1 3.9 3.1 3.3 3.3 3.0 - Real GDP (NDP 2006–2011): 4.1 5.3 6.4 6.9 7.5 7.6 - Of which: Hydrocarbons (Staff Baseline 2006–2011): 9.1 0.0 0.0 0.0 0.0 0.0 - Of which: Hydrocarbons (NDP 2006–2011): 9.1 19.4 14.8 14.6 14.7 7.2 - Construction (Staff Baseline 2006–2011): 16.8 10.0 0.0 6.0 6.0 6.0 - Construction (NDP 2006–2011): 16.8 36.1 21.5 2.5 13.8 24.7 - CPI inflation (period average) (Staff Baseline 2006–2011): 4.1 4.0 4.0 4.0 4.0 4.0 - CPI inflation (NDP 2006–2011): 4.0 3.0 3.0 3.0 3.0 3.0 - Combined public sector (percent of GDP) - Revenue (Staff Baseline 2006–2011): 35.9 35.1 33.4 32.6 31.9 31.4 - Revenue (NDP 2006–2011): 34.2 38.2 38.6 39.9 39.8 39.3 - Of which: Hydrocarbons (Staff Baseline 2006–2011): 12.5 11.9 11.0 10.3 9.6 9.0 - Of which: Hydrocarbons (NDP 2006–2011): 11.2 13.8 14.5 15.4 15.6 15.3 - Expenditure (Staff Baseline 2006–2011): 36.1 38.7 36.6 36.1 35.8 35.3 - Expenditure (NDP 2006–2011): 37.6 41.9 42.1 42.7 42.2 41.4 - Of which: Capital expenditure (Staff Baseline 2006–2011): 11.1 13.4 11.8 11.8 11.6 11.2 - Of which: Capital expenditure (NDP 2006–2011): 11.3 14.1 14.4 15.4 15.4 15.2 - Overall balance (Staff Baseline 2006–2011): -0.1 -3.6 -3.3 -3.5 -3.8 -3.9 - Overall balance (NDP 2006–2011): -3.4 -3.7 -3.5 -2.8 -2.4 -2.1 - External sector (US$ billion) - Exports, f.o.b. (Staff Baseline 2006–2011): 3.39 3.50 3.52 3.56 3.63 3.74 - Exports, f.o.b. (NDP 2006–2011): 3.22 3.74 4.36 5.08 5.74 6.36 - Imports, c.i.f. (Staff Baseline 2006–2011): -3.00 -3.03 -3.13 -3.34 -3.51 -3.68 - Imports, c.i.f. (NDP 2006–2011): -2.93 -3.60 -4.20 -5.03 -6.10 -6.88 - Current account balance (percent of GDP) (Staff Baseline 2006–2011): 5.0 4.8 3.5 2.0 1.3 0.8 - Current account balance (NDP 2006–2011): 4.5 3.1 2.4 2.2 -0.9 -1.5 - Foreign direct investment (net) (Staff Baseline 2006–2011): 0.13 -0.20 -0.16 0.09 0.09 0.10 - Foreign direct investment (net) (NDP 2006–2011): 0.08 0.42 0.72 0.64 1.01 1.28 - Macroeconomic interpretation: - NDP’s higher growth relative to staff baseline is driven by strong hydrocarbons-sector growth (vs unchanged production in staff baseline), larger public investment and FDI, and an assumption of much higher hydrocarbons-based revenues. - Under NDP assumptions, fiscal deficit would trend downwards beyond 2008. - External current account would be somewhat weaker under NDP than staff scenario due to stronger import growth. - NDP expresses firm commitment to macroeconomic stability, low projected inflation, and continued openness in the exchange system under an unchanged exchange rate regime. - A special fund would be created to absorb extraordinary hydrocarbons revenues. - Sectoral policies in NDP: - Envisages employment programs, increases in public investment, and improvements in public services. - Detailed sectoral policies specified for education; health and sanitation; justice and security; culture and technology; social safety net and community development. - Industrial policies outlined for hydrocarbons, mining, manufacturing, telecommunications, power, transport, agriculture, housing, and tourism. - Land reform expected to expand access to land by small-scale farmers. - Trade policy would support export promotion and selective import restrictions to promote domestic industries. ### 3. Natural gas exports to Argentina — agreement, negotiations, and economic impact - Price agreement: - Governments of Bolivia and Argentina reached understandings on an increase in the price of natural gas, from US$3.63 to US$5.00 per million British Thermal Units (BTU) — with effect from July 15, 2006, and up to an export volume of up to 7.7 million cubic meters per day (currently, Argentina imports 5.5 million cubic meters per day). - Bilateral negotiations: - Governments will designate representatives to negotiate, by December 31, 2006, a 20-year agreement whereby the export price would be updated annually (with effect from January 1), according to a formula to be specified. - Volume could increase to up to 27 million cubic meters per day by 2026. - Understandings envisage joint investments to support higher export volumes and production in Bolivia of natural gas derivatives and gas-based electricity. - Economic impact: - In 2006, the higher natural gas price to Argentina is expected to yield additional fiscal and export revenues amounting, respectively, to 0.5 and *Source: Statement by the IMF Staff Representative, July 17, 2006 (content as provided).* ### 0.8 percent of GDP. Over the medium term, the revenue impact will hinge on the ### _cr06270 - 0.8 percent of GDP. Over the medium term, the revenue impact will hinge on the ### Background and recent political developments - Despite wide-ranging economic reforms over the past two decades, and macroeconomic stability plus a major expansion of the hydrocarbons sector, Bolivia has achieved only modest gains in poverty reduction and inequality has remained high. - Political changes over the past year included a June 2005 constitutional amendment allowing early presidential and congressional elections in December 2005, direct elections for regional governors, and agreement to call a constitutional assembly and a referendum on regional autonomy in July 2006. - The December 2005 elections produced a major renewal of Congress and a landslide victory for Evo Morales, the first indigenous head of state in Bolivian history. - The Constitutional Assembly was to be installed on August 6 with the objective of elaborating a new constitution in the coming twelve months. - The government announced a land reform targeting redistribution of land that is unproductive or was obtained illegally. ### Macroeconomic performance and outlook (2005–2006) - 2005 performance: - GDP growth was just above 4 percent. - Fiscal deficit narrowed to 2.3 percent of GDP. - Inflation contained below 5 percent after early-year acceleration. - Financial sector stability improved with deposits and credit increasing. - Official foreign exchange reserves rose to historic highs. - Financial dollarization declined. - Multilateral Debt Relief Initiative (MDRI) resulted in a substantial reduction of the public debt burden. - 2006 developments to date: - Economic activity led by high export values of hydrocarbon and mining products, contributing to a strong external current account surplus. - Inflation continued in the low single digits. - Overall fiscal position in surplus; sub-national governments accumulating sizable deposits at the central bank. - Banking system indicators broadly stable with high liquidity and capital adequacy ratios above mandatory levels. - Outlook for remainder of 2006: - Real GDP growth is expected at just above 4 percent. - Inflation expected in the low single digits. - Combined public sector expected to record a near balance for the year as a whole because temporary extra revenues from the new hydrocarbons policy framework would not be translated immediately into investment spending by Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). - Ratio of public debt to GDP projected to decline from 71 percent at end-2005 to 51 percent by end-2006 (reflecting MDRI debt relief). - Accumulation of official reserves projected to continue due to a strong external current account surplus associated with high international prices of fuels and minerals. ### Hydrocarbons sector and agreements - Government reached a new agreement with Argentina to increase the price and volume of natural gas exports: - Price increase from US$3.63 to US$5 per million British thermal units (BTU) for the current contract of 7.5 million cubic meters per day. - New price in effect from July 15 to December 2006. - Technical commission from both countries to study a formula to establish the price of natural gas for 2007 onwards. - Agreement includes the sale of an additional 20 million cubic meters per day in the next 20 years once a new pipeline to Argentina has been built. - Negotiation with Brazil on the new price is underway. - Government conducting audits in involved projects to establish whether companies fulfilled investment commitments to evaluate the value of nationalized assets and determine possible new participations in new contracts. ### Executive Board assessment — main findings - Directors noted strong performance in 2005 and so far in 2006, reflecting satisfactory GDP growth, a strong balance of payments, low inflation, improved fiscal position, and historically high levels of international reserves. - Banking system remained stable and dollarization declined somewhat despite political uncertainty. - MDRI substantially reduced the burden of public debt. - Short-term prospects favorable but medium-term challenges remain; Directors encouraged the government to use its mandate to cement macroeconomic gains, enhance the business climate, and promote higher, diversified, and more equitable growth. - Directors welcomed authorities’ emphasis on safeguarding macroeconomic stability and strengthening governance. ### Policy recommendations and cautions from Directors - Fiscal policy and public expenditure management: - Stress on fiscal prudence and strengthened public expenditure management to ensure fiscal sustainability. - Combined public sector projected close to balance in 2006; deficit could re-emerge in 2007 absent another exceptional hydrocarbon revenue yield and with higher YPFB investments and payments for acquisition of shares in nationalized companies. - Encourage strengthening expenditure management at all levels of government. - Welcome containment of wage increases to manageable levels; note potential issue of salary compression at higher levels conflicting with need to upgrade public entity management. - Resources from MDRI should be spent effectively. - Fiscal transparency and intergovernmental relations: - Enhance fiscal transparency and accountability at all levels; strengthen the budget process and intergovernmental fiscal relations. - Resubmit to Congress the draft budget framework law. - Reassess revenue sharing and expenditure allocation system in light of subnational capacity to generate revenue; align with agreed allocation of spending responsibilities. - Petroleum pricing and subsidies: - Concern about rigidities in domestic petroleum pricing creating large explicit and implicit subsidies. - Move domestic petroleum product prices to international market-based levels, potentially gradually, using part of fiscal savings to protect vulnerable groups. - Reflect these subsidies explicitly and transparently in the budget. - Taxation and revenue mobilization: - Enhance domestic taxation: reduce exemptions and special regimes, rationalize free trade zones legislation, modify VAT refund system to reduce fraud. - Revisit scope for introducing a tax on high personal incomes (excluding bulk of population). - In mining, ensure revenue measures do not discourage additional private investment. - Monetary and exchange rate policy: - Commend central bank’s cautious monetary policy stance. - Many Directors recommended considering a gradual, well-sequenced move towards greater exchange rate flexibility, possibly via a managed float, with adaptation of monetary policy framework to monetary or inflation targeting. - Several Directors judged inflation targeting premature given challenges of a still dollarized economy; others preferred improving the operation of current exchange rate regime instead of moving to a managed float. - Financial sector and public banking: - Caution that proposed public development banking system should not introduce distortions in the banking system; any fiscal costs must be clearly included in the budget. - Role of the state and private investment climate: - Welcome emphasis on greater equity, transparency, and accountability but caution that an elevated role for the state may risk the environment for private investment. - Maintain a careful balance between government interventions and preserving incentives for private investment, which remain critical to support growth and raise employment and living standards. - Hydrocarbons nationalization process: - Considerable uncertainty regarding modalities for implementing the nationalization decree; authorities urged to achieve mutually acceptable arrangements with concerned oil companies. - Expanded role for YPFB will require high-quality management and full transparency, consistent with international accounting and auditing standards. - External competitiveness and legal framework: - Bolivia may face a more competitive external environment for nontraditional exports, including potential erosion of preferential access to important markets; authorities should intensify efforts to expand access to external markets. - Medium-term outlook hinges crucially on maintaining a stable legal framework, notably property rights, which gains relevance given the land reform initiative and potential major institutional changes from the constitutional assembly. ### Selected economic indicators (extract) - Real GDP (annual percentage changes): 2001 1.7; 2002 2.5; 2003 2.9; 2004 3.9; 2005 4.1; 2006 (Proj.) 4.1 - GDP deflator: 2001 1.7; 2002 2.8; 2003 6.2; 2004 7.4; 2005 4.6; 2006 (Proj.) 5.3 - CPI inflation (period average): 2001 1.6; 2002 0.9; 2003 3.3; 2004 4.4; 2005 5.4; 2006 (Proj.) 4.1 - CPI inflation (end-of-period): 2001 .; 2002 0.9; 2003 2.4; 2004 3.9; 2005 4.6; 2006 (Proj.) 4.0 - Combined public sector revenues and grants (percent of GDP): 2001 25.1; 2002 24.5; 2003 24.1; 2004 27.0; 2005 31.7; 2006 (Proj.) 35.9 - Of which: Royalties on hydrocarbons (percent of GDP): 2001 2.6; 2002 2.3; 2003 2.8; 2004 3.4; 2005 6.7; 2006 (Proj.) 10.1 - Combined public sector expenditure (percent of GDP): 2001 32.0; 2002 33.3; 2003 32.0; 2004 32.6; 2005 33.9; 2006 (Proj.) 36.1 - Overall balance (percent of GDP): 2001 -6.8; 2002 -8.8; 2003 -7.9; 2004 -5.6; 2005 -2.3; 2006 (Proj.) -0.1 - Total public debt (percent of GDP): 2001 60.0; 2002 69.3; 2003 74.0; 2004 77.2; 2005 70.8; 2006 (Proj.) 50.8 - Current account (percent of GDP): 2001 -3.4; 2002 -4.1; 2003 1.0; 2004 3.9; 2005 5.0; 2006 (Proj.) 5.0 - Merchandise exports (percent of GDP): 2001 15.8; 2002 16.4; 2003 19.7; 2004 24.5; 2005 28.5; 2006 (Proj.) 32.7 - Of which: Natural gas (percent of GDP): 2001 2.9; 2002 3.4; 2003 4.7; 2004 7.1; 2005 10.5; 2006 (Proj.) 14.0 - Merchandise imports (percent of GDP): 2001 20.9; 2002 22.4; 2003 19.9; 2004 21.1; 2005 25.0; 2006 (Proj.) 29.0 - Gross international reserves (in millions of U.S. dollars): 2001 1,375; 2002 1,085; 2003 1,266; 2004 1,474; 2005 2,019; 2006 (Proj.) 2,564 - Gross international reserves (in percent of broad money): 2001 39.1; 2002 36.7; 2003 42.0; 2004 49.6; 2005 57.2; 2006 (Proj.) 64.7 - Changes in percent of broad money at the beginning of the period: - NFA of the banking system: 2001 11.8; 2002 -11.4; 2003 3.5; 2004 3.8; 2005 25.2; 2006 ... - NDA of the banking system: 2001 -9.3; 2002 0.8; 2003 -4.7; 2004 -5.5; 2005 -8.0; 2006 ... - Credit to the private sector (in percent of GDP): 2001 38.9; 2002 33.7; 2003 32.2; 2004 ... - Broad money: 2001 2.6; 2002 -10.7; 2003 -1.2; 2004 -1.7; 2005 17.2; 2006 ... - Yield on treasury bills in local currency (percent, end-of-period): 2001 12.9; 2002 17.2; 2003 10.9; 2004 10.6; 2005 7.9; 2006 ... - Yield on treasury bills in U.S. dollars (percent, end-of-period): 2001 5.6; 2002 4.9; 2003 6.2; 2004 4.3; 2005 7.4; 2006 ... *IMF Executive Board Concludes 2006 Article IV Consultation with Bolivia; Public Information Notice (PIN) No. 06/77; July 19, 2006.* ### 5. The authorities highlight the need to attain greater equity, transparency, and ### _cr06270 - 5. The authorities highlight the need to attain greater equity, transparency, and ### Authorities' objectives and policy stance - Aim to attain greater equity, transparency, and accountability underpinned by cautious macroeconomic policies. - Assign a greater state role in mining and hydrocarbons activities; receipts from these sectors will be used to improve education, health, and infrastructure to reduce poverty and inequality and enhance competitiveness. - Public investment in other economic sectors will be complementary to private investment to support growth and job creation. - Government supports growth of small and medium companies by facilitating credit access; these sectors are labor intensive and their expansion would help reduce high unemployment, noted as the major cause of the rise in poverty. - YPFB: Yacimientos Petrolíferos Fiscales Bolivianos. ### Fiscal Policy - Budget execution showed an overall surplus of 3.9 percent of GDP in the first five months of 2006, reflecting prudent management, strong hydrocarbons revenues associated to higher oil and gas prices, and low seasonal expenditures. - A fiscal surplus of 1.4 percent of GDP remains even if receipts from the new hydrocarbon law and the nationalization decree are not taken into account. - Higher natural gas price to Argentina would generate additional fiscal receipts of 0.5 percent of GDP. - Public finance would show an overall fiscal surplus in 2006; this exceptional outcome is not expected to repeat next year because the state oil company, YPFB, and sub-national governments will begin to execute their investment prospects. - Authorities envisage higher deficits of approximately 3 percent of GDP in the National Development Plan for the period 2007–2011; staff evaluates these as manageable. - Concern that current revenue sharing and expenditure allocation system creates structural imbalances between central government and sub-national governments and undermines fiscal management. - Intend to reduce earmarking; part of receipts from the difference between the new and current prices of natural gas exports to Argentina and Brazil will be deposited in a fund of stabilization and development to partially address the imbalance and prevent future exogenous shocks. - Working on a tax reform to broaden the tax base, improve equity, and increase revenues. - Plan to eliminate the financial transactions tax (ITF) on boliviano deposits and make it permanent for short-term dollar deposits above US$2000. - Authorities consider that the FTT and exchange rate appreciation have created incentives for dedollarization and prefer maintaining this tax as described; note that the FTT has existed in some neighboring countries for many years and there is no clear and empirical evidence on its negative effects on the financial sector. - Main spending problem identified as high fuel subsidies, which have been increasing; staff stresses the need to phase them out. - Authorities plan to change the energy matrix over the medium term to increase natural gas consumption and gradually reduce fuel subsidies and smuggling, while recognizing political difficulties in the near term. ### Monetary, Exchange Rate, and Financial Policies - International reserves continued growing strongly during the first half of the year and were sterilized by an accumulation of public deposits at the central bank. - Base money expansion remains high but has been partially matched by an increase in real demand for bolivianos; the central bank has absorbed liquidity mostly in instruments denominated in domestic currency and with longer maturities. - Authorities are aware that an abrupt change in public finance from surplus to deficit could jeopardize the central bank’s ability to contain inflationary pressures; the central bank has shown capacity and flexibility to adjust the interest rate despite prior instability. - The crawling peg regime has contributed to maintaining competitiveness; minor devaluations were prudent and necessary to preserve the health of a highly dollarized financial system. - High cost of transport and deficient basic infrastructure are undermining competitiveness of nontraditional exports, which will be more affected by erosion of preferential access to U.S. and Andean countries’ markets. - A mission led by the Vice-President, Garcia-Linera, will be in Washington, D.C. to try to extend the Andean Trade Promotion and Drug Eradication Act (ATPDEA), which ends in December 2006. - Given problems and uncertainty weakening competitiveness, authorities consider it prudent to maintain the managed float regime and exercise more exchange rate flexibility as needed to prevent inflationary pressures. - Possible appreciation pressures on the exchange rate arising from high hydrocarbons revenues will be contained through cautious fiscal and monetary policies. - Financial sector stability has improved: - Nonperforming loans, as a percentage of total loans, reduced from 18 percent in 2002 to 11 percent in 2005. - Provisions, as a percentage of nonperforming loans, increased from 64 percent to 81 percent during the same period. - Profitability in the financial sector remains low and financial dollarization remains high, though dollarization fell between 2003 and 2005 due to the introduction of ITF and exchange rate appreciation. - Authorities consider that land reform will not be a source of vulnerability for the banking system since most loans are collateralized with urban real estate rather than rural land. ### Medium-Term Outlook - Medium-term economic outlook remains favorable but fiscal outlook is highly dependent on hydrocarbons-based revenues. - To reduce vulnerability, authorities are working on a tax reform to widen the tax base and increase revenues. - YPFB is working on new investment settlements to sustain hydrocarbons production at current levels. - Government attaches great importance to diversification of the economy to gradually reduce dependence on hydrocarbons and mining sectors and lessen vulnerability to external shocks. - Authorities express gratitude to the Fund for debt relief under the MDRI and underscore the importance of the longstanding relationship with the Fund and candid dialogue. *Source: _cr06270 - 5. The authorities highlight the need to attain greater equity, transparency, and (PDF).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06270.pdf_