## _cr07248 ## Source details **Canonical URL:** [_cr07248](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07248.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07248.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07248.pdf.json) --- ### Executive Summary — Main macroeconomic developments - Real GDP growth: around 4–4½ percent over the last two years. - External current account (2006): surplus of 12 percent of GDP. - Net international reserves (NIR): exceeding US$3.8 billion as of end-May 2007; central bank foreign exchange purchases surged by US$2.5 billion between June 2005 and May 2007. - Fiscal position (2002–06): overall shift from a deficit of about 9 percent of GDP to a surplus of about 4½ percent of GDP. - Hydrocarbons-based revenue contribution to fiscal improvement: about 8 percent of GDP. - Public debt: declined from about 70 percent of GDP in 2005 to about 35 percent of GDP in 2007 (including MDRI effects). - Inflation: twelve-month inflation rose from 4½ percent in September 2006 to 7 percent in March 2007 and remains at about 6 ½ percent; core and headline inflation have trended upward since late 2006. - Monetary expansion and base money: strong and only partially sterilized NIR accumulation has driven high growth in base money over the past two years. - Exchange rate: nominal appreciation since July 2005 of 2.7 percent to Bs7.85 per U.S. dollar; Fund reclassified Bolivia’s exchange rate regime as a de facto peg; BCB provides foreign exchange through the Bolsín (sales of up to US$15 million per day). - Financial sector: improved stability with comfortable liquidity and full NFA coverage of deposits; vulnerabilities remain (restructured but performing loans ≈ 90 percent of capital; unprovisioned nonperforming loans ≈ 9 percent of capital); dollarization remains among the highest in the region. - Hydrocarbons policy changes (2005–06): migration from risk-sharing contracts to arrangements where production is surrendered to state energy company YPFB; royalties increased from 18 percent to 50 percent of turnover; YPFB to regain control over five privatized hydrocarbons companies (only one company has returned so far). - Investment: overall investment-to-GDP ratio of 12 percent in 2006; public investment about 6½ percent of GDP in 2006; ratio of private to public investment about 90 percent; FDI concentrated in mining; private hydrocarbons-related investment depressed. - Poverty and inequality (2005): extreme poverty 37 percent of the population; absolute poverty 60 percent of the population; less than 2 percent of employment is in the hydrocarbons and mining sectors. ### Risks and vulnerabilities - Inflationary pressures: - Drivers: rapid monetary expansion, continued NIR accumulation, projected increases in government spending in the second half of the year. - Projected twelve-month inflation: in the range of 6–7 percent through the end of the year. - Exchange-rate and competitiveness risks: - Exchange-rate undervaluation risk and limited nominal appreciation; real effective exchange rate broadly flat after earlier depreciation. - Financial sector risks: - High credit risk from restructured loans and unprovisioned nonperforming loans; high dollarization increases credit risk from unhedged borrowers. - Fiscal execution risks: - Sustaining a fiscal surplus will require considerable control over expenditure, including at the subnational level. - Investment climate risks: - Political/institutional uncertainty, red tape, judicial inefficiencies, and inadequate infrastructure have depressed private investment. ### Short-term outlook and projections (2007) - Real GDP growth (2007): projected to slow to 4 percent, driven by mining and hydrocarbons, with agricultural output reduced by floods. - Fiscal surplus (2007): projected to decline to 1 percent of GDP due to increased capital expenditure (partly payments for nationalized refineries) and a reduction in hydrocarbons revenue related to implementation of new contracts. - External current account (2007): projected surplus close to 9 percent of GDP, translating into a further rise in NIR to US$4.3 billion. - Inflation (2007): twelve-month inflation projected to remain in the range of 6–7 percent through the end of the year. ### Policy recommendations and reform priorities - Fiscal policy - Maintain a fiscal surplus to help contain inflationary pressures associated with large hydrocarbons-based external receipts. - Exercise considerable control over expenditure, including at the subnational level, to sustain the surplus. - Structural fiscal reforms: reduce large and poorly targeted hydrocarbon product subsidies; improve the tax system, intergovernmental relations, and the budget process. Authorities indicated political sensitivities and potential linkage to the constitutional assembly outcome. - Monetary and exchange-rate policy - Step up the pace of nominal appreciation under the existing crawling peg to introduce greater exchange-rate flexibility in the short run. - Expand open market operations to help sterilize NIR accumulation. - Authorities open to the possibility of transitioning to a more flexible exchange rate regime over time. - Financial sector and regulatory reforms - Intensify efforts to address remaining financial sector vulnerabilities. Priority reforms include adoption of prudential regulations to mitigate market risk and credit risks from dollarization, and enactment of legislation governing corporate bankruptcy/restructuring. - Exchange rate appreciation would also help reduce dollarization pressures. - Supply-side and structural reforms to boost investment and growth - Recover private investment by improving the investment climate—address political/institutional uncertainty, red tape, judicial inefficiencies, and infrastructure gaps. - Implement nationalization policy through mutually acceptable arrangements with private investors to improve legal/institutional stability and attract investment. - In hydrocarbons, consolidate the recently negotiated framework and secure early agreement on critically needed new investments. ### Fiscal stance and detailed recommendations (section 10) - Maintain an overall fiscal surplus to protect macroeconomic stability and facilitate monetary management given potential for continued high current account surpluses over the medium term. - Caution about sharp increases in public expenditure budgeted for 2007 and envisaged under the National Development Plan, "averaging 14 percent of GDP in 2007–12, compared with 10½ percent of GDP in 2006". - Need to entrench savings out of the windfall to guard against risk of weakening hydrocarbons-based revenue ("11 percent of GDP in 2007") and for intergenerational equity. - Authorities indicated intention to maintain fiscal surpluses in the range of "1–2 percent of GDP in 2007 and over the medium term". - Structural fiscal proposals: - Reduce explicit and implicit hydrocarbons subsidies (currently estimated at "6–7 percent of GDP") gradually while compensating the poor through targeted assistance. - Reform the tax system, including by introducing a personal income tax with a high exemption threshold. - Approve a budget framework law and address intergovernmental fiscal relation weaknesses. - Pensions and public debt management: - Caution urged on pension reform (many proposals imply a reduction in retirement age). - Domestic debt management improvements: lengthening maturities and improving currency composition; decision to reduce gradually direct issuance of bonds to pension funds while raising the effective limit on their investments abroad from "3 percent to 13 percent of their assets". - Mission encouraged further relaxation of investment limits over time. ### Monetary and exchange-rate policy (detailed) - Recommendations: - Greater exchange rate flexibility and more active use of open market operations to contain inflationary pressures. - Short-run: greater flexibility under the crawling peg (e.g., accelerate pace of nominal appreciation). - Medium-term: move to a regime permitting greater exchange rate flexibility (e.g., a managed float). - Expand open market operations to manage excess liquidity, particularly as accumulation of government deposits at the central bank is expected to subside in the second half of the year. - Operational notes: - Authorities requested a technical assistance mission from MCM in late June to provide a roadmap for institutional adjustments for transition to a more flexible monetary policy framework. - Real interest rates on one-year instruments were about "1 percent as of end-May 2007 (based on surveys of expected inflation), compared to an average of 3 percent in 2006." ### Financial sector: stability, vulnerabilities, and reform priorities - Key findings and statistics (Box 3 / tables): - Deposit growth reached "16 percent in 2006". - Banks held about "50 percent of total deposits" in liquid assets. - Six largest banks out of 13 account for almost "82 percent" of banking system assets. - Profitability and capitalization improvements in 2006: return on assets "1.3 percent" and return on equity "13.3 percent" (from "0.7 percent" and "6.4 percent" in 2005); aggregate capital adequacy about "14 percent of risk weighted assets". - Asset quality and dollarization challenges: restructured and nonperforming loans—after provisioning—represent about "17 percent of net loans" or "100 percent of equity"; foreign exchange loans account for about "80 percent of total loans". - Micro-finance institutions: hold about "6 percent of financial system deposits" and "10 percent of credit outstanding (about US$350 million)". - Recommended actions: - Continue close monitoring of banks’ loan provisioning and solvency. - Introduce prudential regulations to enhance banks’ assessment of market risks and to internalize dollarization risks in lending. - Enact corporate bankruptcy/restructuring legislation. - Subject second-tier public development bank (BDP) to standard prudential regulations; initial resource pool "US$60 million"; beneficiaries restricted to those with no outstanding credit with the financial system over the past 12 months; no envisaged treasury financing. ### Hydrocarbons sector, investment needs, and institutional issues - Investment needs: - Major investments amounting to approximately "US$3.5 billion" needed to enable export increases committed to Argentina and meet rising domestic demand in hydrocarbons. - Institutional and contractual changes: - YPFB restructuring and expansion planned; bill to Congress would enable YPFB to adjust salaries and create a new regulatory agency (the National Hydrocarbons Agency). - New operating contracts viewed as important to maintain production levels; challenge to secure additional investments for committed exports. - Mission recommended clear signal that nationalization policy applies only to enterprises privatized in the 1990s and that nationalization will be pursued through mutually agreeable arrangements. - Concern expressed over decision to exit from the World Bank’s investment disputes framework. ### Medium-term outlook and risks (2008–12) - Baseline projections: - Current account surplus declines from "11½ percent of GDP in 2006" to "5 percent in 2010–12". - GDP growth projected to average "about 5½ percent during 2008–12"; without key projects growth would remain around "4½ percent". - Public sector surplus maintained in the "1–2 percent of GDP range during 2007–12". - Natural gas exports to Argentina begin in 2010; El Mutun project expected to boost mining output starting in 2009. - With greater exchange rate flexibility, inflation projected to fall gradually to "4.5 percent". - Downside risks: - Need for substantial investments to expand natural gas exports and meet domestic demand. - Scenario sensitivity to assumption that El Mutun project proceeds. - Fiscal scenario assumes successful control of spending, including at subnational level. - Projected inflation path depends on implementing a more flexible exchange rate policy. - Potential institutional changes from the constitutional assembly could discourage investment and complicate macro management. ### Debt sustainability, alternative scenarios, and stress tests - MDRI and recent debt dynamics: - MDRI relief amounting to US$2.9 billion reduced public external debt to about US$2.1 billion at present (19 percent of the 2006 GDP). - Nominal public debt-to-GDP ratio: currently at the 35 percent level, down from 70 percent in 2005; projected to decline to 16 percent during the DSA’s projection period. - Public sector deposits in the financial system amount to about 17 percent of GDP at present. - Low oil price scenario: - Oil prices lower by 30 percent compared to baseline starting in 2008 would deteriorate the fiscal position; authorities could initially finance deficits by drawing on public sector deposits (17 percent of GDP). - Divergence from baseline net public debt-to-GDP ratio up to about 18 percent of GDP by 2027 under the low oil price scenario. - Selected projections and indicators (selected series as presented): - NPV of external debt (selected values): 32.3, 25.9, 24.4, 23.2, 22.1, 21.5, 21.4, 18.0, 12.1. - Debt service-to-exports ratio (percent): 18.9, 16.5, 12.6, 11.0, 9.6, 9.9, 9.2, 8.4, 7.6, 7.0, 5.9. - Public sector debt (percent of GDP, selected): 76.7, 70.0, 45.8, 34.7, 33.4, 32.4, 31.0, 30.1, 29.6, 24.7, 16.3. - Gross international reserves (millions of U.S. dollars, selected): 1,266; 1,474; 2,042; 3,385; 4,646; 5,725; 6,774; 7,902; 9,170; 10,478. - NIR (stocks, selected): 888; 1,076; 1,568; 3,040; 4,250. - Stress tests examined: - Historical averages, higher-cost new borrowing (interest rate +2 percentage points), lower real GDP growth, lower export value growth, lower net non-debt creating flows, and a one-time 30 percent nominal depreciation in 2008 among bound tests. - Most tests show indicators remaining manageable; some scenarios (historical trends) approach thresholds but remain within sustainable bounds. ### Relations with the Fund and other multilaterals (Appendix 1 highlights) - As of May 31, 2007, Bolivia’s outstanding purchases and loans amounted to SDR 9.66 million (5.63 percent of quota). - The latest SBA expired on March 31, 2006. - In 2006, Bolivia received a SDR 160.93 million in stock of debt relief from the Fund through the MDRI. - Last Article IV consultation completed by the Executive Board on July 17, 2006. - Central bank exchange arrangement: currency boliviano; exchange rate regime: crawling peg; on March 31, 2007, the official selling rate was US$7.99 per U.S. dollar. - Technical assistance and resident representative: Mr. Esteban Vesperoni has been IMF resident representative since February 2006; multiple TA missions across MAE, STA, FAD, MFD, LEG during 2002–06. *Source: IMF Staff report — Executive Summary and selected annexes (content unit: _cr07248).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Main macroeconomic developments - Real GDP growth: around 4–4½ percent over the last two years. - External current account (2006): surplus of 12 percent of GDP. - Net international reserves (NIR): exceeding US$3.8 billion as of end-May 2007; central bank foreign exchange purchases surged by US$2.5 billion between June 2005 and May 2007. - Fiscal position (2002–06): overall shift from a deficit of about 9 percent of GDP to a surplus of about 4½ percent of GDP. - Hydrocarbons-based revenue contribution to fiscal improvement: about 8 percent of GDP. - Public debt: declined from about 70 percent of GDP in 2005 to about 35 percent of GDP in 2007 (including MDRI effects). - Inflation: twelve-month inflation rose from 4½ percent in September 2006 to 7 percent in March 2007 and remains at about 6 ½ percent; core and headline inflation have trended upward since late 2006. - Monetary expansion and base money: strong and only partially sterilized NIR accumulation has driven high growth in base money over the past two years. - Exchange rate: Central Bank has modestly appreciated the Boliviano under the crawling peg; nominal appreciation since July 2005 of 2.7 percent to Bs7.85 per U.S. dollar. The Fund’s Monetary and Capital Markets Department reclassified Bolivia’s exchange rate regime as a de facto peg. The BCB provides foreign exchange through the Bolsín (sales of up to US$15 million per day). - Financial sector: stability has improved with comfortable liquidity and full NFA coverage of deposits, but vulnerabilities remain: restructured but performing loans amount to about 90 percent of capital; unprovisioned nonperforming loans represent about 9 percent of capital; dollarization remains among the highest in the region and exposes the system to credit risk from unhedged borrowers. - Hydrocarbons policy changes (2005–06): migration from risk-sharing contracts to arrangements where production is surrendered to state energy company YPFB; royalties increased from 18 percent to 50 percent of turnover; YPFB to regain control over five privatized hydrocarbons companies (only one company has returned so far). - Investment: overall investment-to-GDP ratio of 12 percent in 2006 (the lowest in the Latin American region); public investment about 6½ percent of GDP in 2006; ratio of private to public investment about 90 percent. Foreign direct investment concentrated in mining; private hydrocarbons-related investment depressed. - Poverty and inequality (2005): extreme poverty 37 percent of the population; absolute poverty 60 percent of the population; less than 2 percent of employment is in the hydrocarbons and mining sectors. ### Risks and vulnerabilities - Inflationary pressures: driven by rapid monetary expansion, continued NIR accumulation, and projected increases in government spending in the second half of the year. Projected twelve-month inflation: in the range of 6–7 percent through the end of the year. - Exchange-rate undervaluation risk and limited nominal appreciation: modest pace of appreciation and only mild reaction of policy interest rates have left the real effective exchange rate broadly flat after earlier depreciation. - Financial sector risks: high credit risk from restructured loans and unprovisioned nonperforming loans; high dollarization increases credit risk from unhedged borrowers. - Fiscal execution risks: sustaining a fiscal surplus will require considerable control over expenditure, including at the subnational level. - Investment climate: political/institutional uncertainty, red tape, inefficiencies in the judicial system, and inadequate infrastructure have depressed private investment. ### Outlook and projections (short term) - Real GDP growth (2007): projected to slow somewhat to 4 percent, driven by mining and hydrocarbons, with agricultural output reduced by floods. - Fiscal surplus (2007): projected to decline to 1 percent of GDP due to increased capital expenditure (partly payments for nationalized refineries) and a reduction in hydrocarbons revenue related to implementation of new contracts. - External current account (2007): projected surplus close to 9 percent of GDP, translating into a further rise in NIR to US$4.3 billion. - Inflation (2007): twelve-month inflation projected to remain in the range of 6–7 percent through the end of the year. ### Policy recommendations and reform priorities - Fiscal policy - Maintain a fiscal surplus to help contain inflationary pressures associated with large hydrocarbons-based external receipts. - Exercise considerable control over expenditure, including at the subnational level, to sustain the surplus. - Structural fiscal reforms to make the budget more effective for development and poverty reduction: reduce large and poorly targeted hydrocarbon product subsidies; improve the tax system, intergovernmental relations, and the budget process. The authorities indicated political sensitivities and potential linkage to the constitutional assembly outcome. - Monetary and exchange-rate policy - Step up the pace of nominal appreciation under the existing crawling peg to introduce greater exchange-rate flexibility into the policy mix in the short run. - Expand open market operations to help sterilize NIR accumulation. - Authorities open to the possibility of transitioning to a more flexible exchange rate regime over time. - Financial sector and regulatory reforms - Intensify efforts to address remaining financial sector vulnerabilities. Priority reforms include adoption of prudential regulations to mitigate market risk and credit risks from dollarization, and enactment of legislation governing corporate bankruptcy/restructuring. - Exchange rate appreciation would also help reduce dollarization pressures. - Supply-side and structural reforms to boost investment and growth - Recover private investment to underpin sustained growth by improving the investment climate—address political/institutional uncertainty, red tape, judicial inefficiencies, and infrastructure gaps. - Implement nationalization policy through mutually acceptable arrangements with private investors to improve legal/institutional stability and attract investment. - In hydrocarbons, consolidate the recently negotiated framework and secure early agreement on critically needed new investments. *Source: IMF Staff report — Executive Summary (content unit: _cr07248 - Executive Summary).* ### 10. The mission argued that an overall fiscal surplus should be maintained to protect ### _cr07248 - 10. The mission argued that an overall fiscal surplus should be maintained to protect ### Fiscal stance and recommendations - Maintain an overall fiscal surplus to protect macroeconomic stability and facilitate monetary management given potential for continued high current account surpluses over the medium term. - Caution about sharp increases in public expenditure budgeted for 2007 and envisaged under the National Development Plan, "averaging 14 percent of GDP in 2007–12, compared with 10½ percent of GDP in 2006". - Need to entrench savings out of the windfall to guard against the risk of a weakening of hydrocarbons-based revenue ("11 percent of GDP in 2007") over the medium term and for long-term intergenerational equity. - Authorities indicated intention to maintain fiscal surpluses in the range of "1–2 percent of GDP in 2007 and over the medium term" and that current expenditure was being kept under control. - Mission inquired about ability to avoid expenditure increases, particularly by subnational governments; authorities affirmed resolve to contain central government expenditure growth and noted improved budget monitoring via information systems. ### Structural fiscal issues and tax/subsidy reform - Staff proposals: - Reduce explicit and implicit hydrocarbons subsidies (currently estimated at "6–7 percent of GDP") gradually while compensating the poor through targeted assistance. - Reform the tax system, including by introducing a personal income tax with a high exemption threshold. - Approve a budget framework law. - Address weaknesses in intergovernmental fiscal relations. - Expected outcomes: strengthen institutional environment, release fiscal resources to finance targeted public spending programs for the poor and/or strengthen the fiscal surplus. - Authorities agreed with the thrust but indicated action may await outcome of the constitutional assembly; they preferred delaying fuel subsidy reductions until envisaged increases in natural gas production permitted substitution from petroleum into gas products. ### Pensions and public debt management - Mission urged caution on pension reform and emphasized careful analysis of budgetary implications; many proposals imply a reduction in retirement age, which the mission cautioned would run counter to international reform trends. - Authorities prioritized keeping eventual pension reform costs within a prudent fiscal envelope. - Domestic debt management improvements welcomed: lengthening maturities and improving currency composition. - Recent decision to reduce gradually direct issuance of bonds to pension funds while raising the effective limit on their investments abroad from "3 percent to 13 percent of their assets". - Expected benefits: avoid unnecessary build-up of domestic debt, diversify pension fund portfolios, facilitate sterilization of foreign exchange receipts. - Mission encouraged further relaxation of investment limits over time. ### Monetary and exchange rate policy - Greater exchange rate flexibility and more active use of open market operations recommended to contain inflationary pressures. - Real exchange rate appreciation likely unavoidable due to magnitude of foreign inflows and estimates suggesting the exchange rate is undervalued; alternative estimates place misalignment within the range of "6–26 percent". - Short-run staff suggestion: greater flexibility under the crawling peg regime (e.g., some acceleration in the pace of nominal appreciation). - Medium-term staff suggestion: move to a regime permitting greater exchange rate flexibility (e.g., a managed float). - Monetary policy recommendation: expand open market operations further to manage excess liquidity, particularly as accumulation of government deposits at the central bank is expected to subside in the second half of the year. - Authorities have continued to appreciate the nominal exchange rate via small adjustments and have increased open market operations, with modest impact on policy interest rates (Table 3). - Authorities requested a technical assistance mission from MCM in late June to provide a roadmap for institutional adjustments needed for a transition to a more flexible monetary policy framework. - Real interest rates on one-year instruments were about "1 percent as of end-May 2007 (based on surveys of expected inflation), compared to an average of 3 percent in 2006." ### Financial sector: stability, vulnerabilities, and reforms - Authorities have maintained financial sector stability but issues require attention. - Areas highlighted: - Continue close monitoring of banks’ loan provisioning and solvency. - Introduce prudential regulations to enhance banks’ assessment of market risks. - Authorities did not agree at this time on prudential measures requiring banks to recognize dollarization risks in lending procedures or on raising capital requirements for market risks. - Broad agreement that pending structural reforms from the 2003 FSAP remain relevant, including strengthening corporate bankruptcy legislation. - Second-tier public development bank (BDP): - Will be subject to standard prudential regulations; initial resource pool of "US$60 million". - Beneficiaries restricted to those with no outstanding credit with the financial system over the past 12 months. - No envisaged treasury financing; expected financing from concessional donor funds. - Mission suggested credit procedures be subject to technical assessment by the Superintendency of Banks. Box 3 key financial system statistics and findings: - Deposit growth reached "16 percent in 2006". - Banks improved liquidity, holding about "50 percent of total deposits" in liquid assets. - Banking system concentration: six largest banks out of 13 account for almost "82 percent" of banking system assets. - Profitability and capitalization improvements in 2006: - Return on assets increased to "1.3 percent" and return on equity to "13.3 percent" (from "0.7 percent" and "6.4 percent" in 2005). - Aggregate capital adequacy about "14 percent of risk weighted assets". - Asset quality and dollarization challenges: - Restructured and nonperforming loans—after provisioning—represent about "17 percent of net loans" or "100 percent of equity". - Foreign exchange loans account for about "80 percent of total loans". - Micro-finance institutions: - Hold about "6 percent of financial system deposits" and "10 percent of credit outstanding (about US$350 million)". - Pending FSAP recommendations include: amend corporate bankruptcy legislation; ensure consolidated supervision; strengthen Financial Intelligence Unit and AML legislation; create deposit insurance scheme; internalize risks from dollarization via prudential regulations; adopt regulations to offset market risks. ### Supply-side policies and investment climate - Major investments amounting to approximately "US$3.5 billion" needed to enable export increases committed to Argentina and meet rising domestic demand in hydrocarbons. - Authorities expect current operators to submit substantial investment proposals; any shortfalls could be covered by direct investments from YPFB, possibly with friendly governments. - YPFB restructuring and expansion planned; a bill to Congress would enable YPFB to adjust its salary structure to industry standards and create a new regulatory agency (the National Hydrocarbons Agency). - Mission emphasized improvements in the investment climate are needed to kick start domestic and foreign investment and raise economic growth. - Recommended clear signal that nationalization policy applies only to enterprises privatized in the 1990s and that nationalization will be pursued through mutually agreeable arrangements. - Expressed concern over decision to exit from the World Bank’s investment disputes framework. - Noted that legal/institutional uncertainties from potential reforms linked to the constituent assembly could discourage investment. ### Medium-term outlook and risks (2008–12) - Baseline projections: - Current account surplus declines from "11½ percent of GDP in 2006" to "5 percent in 2010–12". - Terms of trade fall during 2008–12, driven by declines in mineral prices and leveling off in natural gas export prices. - Public sector surplus reduced but fiscal surplus maintained in the "1–2 percent of GDP range during 2007–12" as reduced prices are compensated by higher export volumes. - Natural gas exports to Argentina begin in 2010; El Mutun iron/ore steel project expected to boost mining-related output starting in 2009. - GDP growth projected to average "about 5½ percent during 2008–12". - Without these projects, real GDP growth would remain broadly around "4½ percent". - Without the increase in exports to Argentina from the new pipeline, public sector revenue would weaken starting in 2010, and the shortfall compared to the baseline could reach "2½ percent of GDP by 2012". - Net international reserves (NIR) would continue to increase, possibly partly allocated to a hydrocarbons stabilization/savings fund. - With greater exchange rate flexibility, inflation projected to fall gradually to "4.5 percent". - Downside risks highlighted: - Substantial investments required domestically and abroad to expand natural gas exports and meet domestic consumption increases. - Scenario sensitive to assumption that the El Mutun mining/steel mill project will proceed. - Fiscal scenario assumes successful control of spending, including at subnational level, which may be challenging in an electoral environment. - Projected inflation path depends on implementation of a more flexible exchange rate policy (more frequent and/or greater adjustments than in prior two years). - Potential wide-ranging institutional changes from the constitutional assembly could discourage investment and complicate macroeconomic management. *Source: _cr07248 - 10. The mission argued that an overall fiscal surplus should be maintained to protect* ### 22. Over the past year, the economy continued to benefit from high and rising ### _cr07248 - 22. Over the past year, the economy continued to benefit from high and rising ### Macroeconomic performance - Over the past year, the economy benefited from high and rising hydrocarbons and mining exports, leading to increased accumulation of external reserves and a large fiscal surplus. - GDP growth: described as “continued at a satisfactory rate.” - Inflation: “remained moderate, albeit with some pick up in recent months that is partly attributable to exogenous shocks.” - Financial system: “remained stable”; dollarization “still exceptionally high” but “has maintained a declining trend.” - Public debt: “substantially reduced,” reflecting further debt relief under the MDRI and a sizable fiscal surplus. ### Fiscal policy and public finance - Authorities commended for strong emphasis on safeguarding macroeconomic stability and prudent expenditure management, notably in current spending and wages. - Maintaining the fiscal surplus: - Not predicated on new fiscal measures, but requires “considerable control over expenditure, including at the subnational level.” - Authorities urged to exercise caution in assessing proposals to modify the pension system and to craft changes “consistent with demographic trends.” - Fiscal balances and debt (selected figures from Tables): - Overall balance (percent of GDP): -7.9, -5.5, -2.3, 4.6, 1.0 (for years shown). - Total gross public debt (percent of GDP): 74.1, 76.7, 70.0, 45.8, 34.8 (for years shown). - Total net public debt (percent of GDP): 66.4, 67.8, 60.0, 31.4, 18.2 (for years shown). - Primary balance (percent of GDP): -5.1, -2.6, 0.8, 7.2, 3.4 (for years shown). - Budget structure improvements encouraged: - Consider cuts in large and poorly targeted hydrocarbon product subsidies. - Structural reforms to improve the tax system, intergovernmental relations, and the budget process. - Gradual rise in hydrocarbon product prices toward market levels over the medium term, paired with initiatives to protect the most vulnerable. - Eliminate distortionary taxes while broadening the tax base. - Remove imbalances between revenue sharing arrangements and expenditure assignments across levels of government. - Enact a budget framework law to strengthen the budget process and increase control over subnational spending. - Introduce a personal income tax with a high exemption threshold to make the tax system more equitable. ### Exchange rate, monetary policy, and reserves - Exchange rate: - Analytical work indicates the Boliviano is undervalued; staff recommends greater exchange rate flexibility and more active use of open market operations. - Under the crawling peg, recent slight nominal appreciations were “insufficient to address the misalignment” from rapid energy export development. - Scope exists to adjust the frequency and/or magnitude of exchange rate adjustments under the current regime. - Staff welcomes authorities’ indication they will exercise greater exchange rate flexibility and requested MCM technical assistance on requirements for a potential move to a more flexible exchange rate arrangement. - Monetary operations: - Open market operations usage should be stepped up to tighten monetary conditions given very high base money growth. - Although base money growth has been consistent with higher real demand for the Boliviano as dollarization declined, excess liquidity could rise if real demand growth subsides. - Reserves (selected figures from Table 1 and Table 3): - Gross international reserves (in millions of U.S. dollars): 1,266; 1,474; 2,042; 3,385; 4,646; 5,725; 6,774; 7,902; 9,170; 10,478 (series shown). - Gross international reserves (percent of broad money): 42.0, 49.6, 57.8, 79.7, 90.9, 94.9, 97.7, 100.3, 105.7, 112.7 (series shown). - Net international reserves (in millions of U.S. dollars) from Table 5 (stocks): 888; 1,076; 1,568; 3,040; 4,250 (series shown). ### Financial sector stability and vulnerabilities - Authorities successful in maintaining financial sector stability; recommended continued efforts to address remaining vulnerabilities. - Key recommendations: - Monitor banks’ loan provisioning and solvency closely. - Introduce prudential regulations to mitigate credit risks from dollarization and market risk, particularly if exchange rate flexibility increases. - Amend corporate bankruptcy/restructuring legislation. - Strengthen the Financial Intelligence Unit and anti–money laundering legislation. - Consider creating a deposit insurance scheme to provide better tools to deal with systemic crises. - Development bank: - Staff welcomes authorities’ indication the recent creation of a development bank is not meant to compete with the micro-finance system and that it will be subject to standard prudential requirements. - Financial soundness indicators (selected figures from Tables): - Non-performing loans (NPL) as percent of gross loans: 14.4, 17.7, 16.7, 14.0, 11.3, 8.7, 8.8 (series shown). - Provisions as percent of NPL: 63.7, 63.7, 74.0, 84.3, 81.1, 90.7, 88.4 (series shown). - Regulatory capital as percent of risk-weighted assets: 14.6, 16.1, 15.3, 14.9, 14.7, 13.3, 13.5 (series shown). - Foreign currency deposits as percent of total deposits (dollarization): 92.3, 89.0, 84.2, 76.2, 71.0 (series shown). ### Hydrocarbons sector and investment - New operating contracts with foreign energy companies seen as an important step toward a more favorable investment climate and have virtually ensured maintenance of current production levels. - Challenge: secure major additional investments needed to enable committed export increases (notably to Argentina) and to avoid domestic bottlenecks with rising local demand. - Authorities encouraged to seek mutually acceptable arrangements with foreign investors, particularly those affected by ongoing nationalization of companies privatized in the 1990s. - State company YPFB: - Pivotal role in the new hydrocarbons framework; planned restructuring as an autonomous public enterprise following international best practices is a “high priority.” - Need for efficient management of any nationalized enterprises. ### Private investment, growth risks, and structural policy - Recovery in private investment is imperative; private investment has been depressed for several years. - Public investment has a key role, but recovery in domestic and foreign private investment is critical to underpin sustained growth and reduce medium-term risks, which are highly dependent on large hydrocarbons and mining projects. - Improving the investment climate requires greater legal/institutional stability. - Authorities should carefully assess potential impacts on investment and growth of possible constitutional changes, including in land tenure and other aspects of property rights. ### Data, statistics, and consultations - ROSC: Bolivia’s economic statistics deemed “of adequate quality, timeliness, and coverage” to allow Fund surveillance. Authorities encouraged to address expeditiously areas identified in the ROSC for improvement. - It is proposed that the next Article IV consultation with Bolivia be held on the standard 12-month cycle. *Source: IMF staff report excerpt (document _cr07248).* ### APPENDIX 1. SUMMARY OF ANNEXES ### APPENDIX 1. SUMMARY OF ANNEXES ### Fund relations (key facts and figures) - As of May 31, 2007, Bolivia’s outstanding purchases and loans amounted to SDR 9.66 million (5.63 percent of quota). - The latest SBA expired on March 31, 2006. - In 2006, Bolivia received a SDR 160.93 million in stock of debt relief from the Fund through the MDRI. - The last Article IV consultation was completed by the Executive Board on July 17, 2006 (IMF Country Report No. 06/270). - Mr. Esteban Vesperoni has been the IMF resident representative since February 2006. - An update of the safeguards assessment was completed in September, 2004, which confirmed that identified vulnerabilities had been addressed, except for those requiring a change in the central bank law. ### Fund relations (detailed membership, accounts, and obligations) - Membership Status: Joined December 27, 1945; accepted its obligations under Article VIII on June 5, 1967. The exchange system is free of restrictions on current international payments and transfers. - General Resources Account (SDR Million / Percent of Quota): - Quota 171.50 100.00 - 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 26.62 99.68 - Outstanding Purchases and Loans (SDR Million / Percent of Quota): - Stand-By Arrangements 9.66 5.63 - Financial Arrangements (type, approval date, expiration date, amount approved (SDR million), amount drawn (SDR million)): - Stand-By 4/02/03 3/31/06 145.78 111.50 - PRGF 9/18/98 6/07/02 100.96 63.86 - PRGF 12/19/94 9/09/98 100.96 100.96 - Projected Obligations to the Fund (SDR million; based on existing use of resources and present holdings of SDRs): - Expectations Basis: - 2007 Principal 2.42 - 2008 Principal 4.83 - 2009 Principal 2.42 - Charges/Interest 2007 0.38; 2008 0.29; 2009 0.05; 2010 0.00; 2011 0.00 - Total 2007 2.79; 2008 5.12; 2009 2.46; 2010 0.00; 2011 0.00 - Obligations Basis: - Charges/Interest 2007 0.40; 2008 0.51; 2009 0.29; 2010 0.05; 2011 0.00 - Principal 2007 2.42; 2008 4.83; 2009 2.42 - Total 2007 0.40; 2008 2.93; 2009 5.12; 2010 2.46; 2011 0.00 ### HIPC and MDRI implementation - HIPC Initiative: - Decision point date: Sep 1997 (original framework); Feb 2000 (enhanced framework). - Assistance committed by all creditors (US$ Million): 448.00 (original); 854.00 (enhanced). - Of which: IMF assistance (US$ million) 29.00 (original); 55.32 (enhanced). - (SDR equivalent in millions) 21.25 (original); 41.14 (enhanced). - Completion point date: Sep 1998 (original); Jun 2001 (enhanced). - Disbursement of IMF assistance (SDR Million): Assistance disbursed to the member 21.25 (original); 41.14 (enhanced); 62.39 (total). - Additional disbursement of interest income: 3.09 - Total disbursements: 21.25 (original); 44.23 (enhanced); 65.48 (total). - MDRI Assistance: - Total Debt Relief (SDR Million): 160.93 - Of Which: MDRI 154.82 - HIPC 6.11 - Debt Relief by Facility (SDR Million): - Eligible Debt Delivery Date January 2006: GRAPRGFTotal — 6.70 71.15 77.85 - January 2006 83.08 N/A 83.08 ### Safeguards assessment and exchange arrangement - Safeguards Assessment: - A safeguards assessment was completed June 27, 2003, with no systemic risks identified, but concerns about lack of operational independence and program monetary data. - Update assessment completed September 27, 2004 in conjunction with an augmentation of the SBA; confirmed measures implemented to address previously identified vulnerabilities except those requiring a change in the central bank law. - Exchange Arrangement: - Currency: boliviano; exchange rate regime: crawling peg. - Central bank holds a daily foreign exchange auction accepting all bids at least equal to the central bank’s minimum price; if acceptable bids exceed amount offered, lowest acceptable bids prorated. - Minimum price adjusted from time to time based on evaluation of Bolivia’s real exchange rate with respect to key trading partners. - On March 31, 2007, the official selling rate was US$7.99 per U.S. dollar. - Article IV Consultation: - Last Article IV consultation completed by the Executive Board on July 17, 2006 (Country Report No. 06/270). - Bolivia is on a standard 12-month consultation cycle. ### Technical assistance and resident representative - Technical Assistance, 2002–06 (department, purpose, date highlights): - 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; Tax administration Dec. 2002, Aug.2004; Tax Administration May 2003; Customs administration Jan. 2004, Apr. 2005; Pension reform April 2004; Public expenditure management: the budget process April 2005; Tax policy August 2005; Decentralization and public expenditure management October 2005; PSIA October 2004. - MFD: AML/CFT training of bank supervisors July 2003; Banking sector July 2004; Banking sector August 2004; Promote use of domestic currency October 2004. - MFD/LEG: AML/CFT legal drafting/Financial intelligence unit September 2004. - STA: Monetary statistics March 2006; ROSC Data Module January 2007. - Resident Representative: - Mr. Esteban Vesperoni took over the post of IMF resident representative in February 2006. --- ### Relations with the World Bank (program, portfolio, and planned projects) - ISN and scope: - World Bank support delivered according to the Interim Strategy Note (ISN), approved November 2006, covering a two-year period (FY07–FY08). - ISN priorities: enhancing good governance and transparency; fostering jobs through growth; providing better services to the poor. - ISN lending includes only IDA resources to finance ten investment projects for approximately US$140 million over the two-year framework, and six Economic and Sector Works (EWS). - Current portfolio (six projects under implementation; total commitments US$221 million; US$129 million undisbursed): - Institutional Reform Project I US$30 million, closing date May 2007. - Health Sector Reform APL II US$35 million, expected close September 2007. - Road Rehabilitation and Maintenance Project US$77 million, expected close December 2007. - Decentralized Infrastructure for Rural Transformation US$20 million, closing date December 2007. - Urban Infrastructure for the Poor Project US$30 million, closing date November 2010. - Rural Alliances Project US$28 million, closing date September 2011. - Trust funds: - Grant US$300 thousand to strengthen the Technical Secretariat of the Constituent Assembly. - Grant US$212 thousand for strengthening the Congress Budget Commission. - Studies completed in 2006 (published in Spanish and English; presented to Civil Society): - Policy Notes on 23 different economic and social issues (presented March 2006 to Government; end-2006 to Civil Society). - Country Social Analysis (CSA) on indigenous rights, land and territory, decentralization and access to justice (presented March 2007). - Institutional Governance Review (IGR) on second-phase decentralization at departmental level (presented March 2007). - Projects under discussion for FY07 (project name and proposed amount): - Productivity and Job Creation Project US$15 million. - Community-Based Land Administration Project US$15 million. - Participatory Rural Investment Project II US$17 million. - Secondary Education Project US$10 million. - Lake Titicaca Local Sustainable Development Project US$15 million. - Ongoing technical assistance and economic sector work: - Informality study: in-depth analysis of constraints to productivity and productivity differentials between informal and formal firms; sector-specific and general policy recommendations. - Social Safety Net study: analytical tools for implementing the Government’s Social Protection strategy; define target populations and programs; propose institutional arrangements. - Public Expenditure and Financial Accountability (PEFA): validate quality and performance of Public Financial Management; baseline for reforms and donor coordination. - Operational Review of the Fondo de Inversión Productiva y Social (FPS): evaluate core capabilities, identify gaps and risks, deliver recommendations to improve performance. ### Relations with the Inter-American Development Bank (IDB) - As of December 31, 2006: - IDB approved loans to Bolivia amounting to US$3.93 billion, disbursements totaling US$3.25 billion. - Bolivia’s outstanding debt to the IDB was US$1.28 billion. - Undisbursed balances as of March 27, 2007: US$493 million. - Active non-reimbursable technical cooperation projects amounting to US$21.6 million, of which US$13.8 million is undisbursed. - 2006 approvals: - Total of US$145 million in new concessional lending approved for Bolivia’s public sector. - Largest: US$120 million loan to support road rehabilitation and improve the Northern Corridor Highway from La Paz to Rurrenabaque. - IDB action on MDRI (Board of Governors decision March 16, 2007): - Approved 100% debt relief on loan balances outstanding as of December 31, 2004 from its Fund for Special Operations (FSO) for Bolivia (and other countries). - In the context of the MDRI, the IDB will forgive approximately $3.4 billion in principal payments and $1.0 billion of future interest payments for five HIPC beneficiary countries. - For Bolivia specifically: approximately US$ 1 billion in IDB debt relief (including cancelled loan balances of -US$ 736.4 million (7% of GDP) and foregone future interest - payments-of US$307.3 million (generating annual fiscal space of more than US$18 million on average)). ### Statistical issues - Timeliness and coverage: - The timeliness and coverage of economic statistics in Bolivia is generally adequate for surveillance purposes. - A data ROSC mission in early 2007 confirmed advances in recent years, and reiterated the existence of shortcomings that might hamper the formulation of appropriate policies. - Dissemination and standards: - Many national agencies, including the National Institute of Statistics (INE), post statistical information on the Internet. - Bolivia has participated in the GDDS since November 2000 and plans to subscribe to the SDDS are at an advanced stage. *Source: APPENDIX 1. SUMMARY OF ANNEXES (Staff Report for the 2007 Article IV Consultation—Informational Annex, June 27, 2007).* ### 3. Sustainable poverty reduction remains the overarching objective of the Bank’s ### 3. Sustainable poverty reduction remains the overarching objective of the Bank’s country strategy with Bolivia ### Bank strategy and objectives - Overarching objective: sustainable poverty reduction. - Three main areas of support: - (a) improving the managerial capacity and transparency of the public sector, - (b) supporting productivity and employment growth, - (c) providing basic social services to the poorest regions. - The IDB is updating its country strategy on the basis of new priorities established by the Morales Administration since January, 2006 and the policy framework in the National Development Program. - The Bank expects to conclude preparation of a new transitional strategy in the second half of 2007. ### Lending program, modalities, and instruments - IDB lending to Bolivia in 2007/8 contemplates new loans amounting to approximately US$ 74 million per year. - Proposed lending program for 2007/2008 consists of six loans totaling approximately US$156 million (in support of small impoverished rural communities (Comunidades en Acción), water services, transport infrastructure, development banking and institutional strengthening in the public sector). - Lending modalities and safeguards: - Subject to newly adopted operational guidelines for the FSO featuring a performance-based allocation system and a parallel lending modality, consistent with the application of the Debt Sustainability Framework. - Loans to Bolivia would continue to benefit from a high concessionality element to ensure the sustainability of the debt relief and support the achievement of the Millennium Development Goals. - Emergency response: the Bank is supporting emergency clean up, impact evaluation, rehabilitation and disaster prevention and protection of public infrastructure at risk, including activation of a previously approved emergency loan in response to damage caused by recent intense rains and flooding. ### Implementation context, priorities, and focus - Implementation backdrop characterized by: - widespread reorientation of the reform process, - need for continued fiscal consolidation, - weak policy implementation and institutional capacity, - overarching political agenda dominated by the constituent assembly and the referendum for regional autonomy. - The country-strategy update conceived as a process where the Bank, with the Government and development partners: - (i) remains engaged in high priority areas to attenuate economic risks and preserve social gains of the last decade (pension and tax administration, microfinance), - (ii) continues cooperating to improve planning, budgeting and the ongoing fiscal decentralization process, - (iii) sharpens focus on local/rural development (concentrating on municipalities with productive potential) and provision of productive infrastructure. ### Statistical issues and data coverage (Appendix IV) - General: timeliness and coverage of economic statistics generally adequate for surveillance; Data ROSC mission in early 2007 confirmed advances and identified remaining shortcomings. - Participation and plans: Bolivia has participated in the GDDS since November 2000 and plans to subscribe to the SDDS are at an advanced stage; national agencies post data on the Internet. - Real sector: - INE has begun a thorough revision of national accounts including the base year and intensified implementation of the SNA 1993; expected to be completed over the next three years. - Efforts hampered by an inadequate statistical law and insufficient resources for censuses and surveys (manufacturing, foreign direct investment, tourism). - Labor market surveys quality deteriorated; the quarterly employment survey was discontinued in 2003. - CPI covers four largest cities with base year 1991; household budget survey began June 2, 2003 to update CPI base year. Industrial PPI and external trade unit values need revision (base year 1990=100). - Fiscal sector: - Ministry of Finance provides timely monthly information on revenue, current and investment spending, and financing for consolidated general government, public enterprises and the central bank. - Data do not cover all operations of decentralized agencies and operations channeled through special funds. - Ongoing implementation of a comprehensive financial management system, funded by the IDB, to improve monitoring of public sector financial operations including local debt and social spending. - External sector: - Central Bank of Bolivia (BCB) provides balance of payments and international investment position statistics to STA; classification broadly in line with the fifth edition of the Balance of Payments Manual. - Quarterly BOP data available before year-end but submitted to STA only once a year; monthly trade data provided with import data lagging. - Foreign direct investment survey discontinued in the third quarter of 2004; coverage of certain services and financial transactions in the BOP needs expansion. - Bolivia is disseminating the Data Template on International Reserves and Foreign Currency Liquidity though not yet an SDDS subscriber. - Monetary sector: - Coverage, sectorization, and timeliness broadly in line with the Monetary and Financial Statistics Manual. - Monetary data based on balance sheets of central bank, commercial banks, credit unions, savings and loans associations, and private investment funds; survey to be expanded to investment funds managing societies (SAFIS). - STA mission April 2006 found weaknesses in deposit institution data; revisions to report forms and Superintendency instructions addressed issues. - BCB started compiling a monthly survey on other financial corporations (pension funds, insurance corporations, NAFIBO, FONDESIF) to improve quarterly flow of funds accounts and produce a balance sheet approach matrix. ### External and public debt sustainability findings and projections - Context and recent developments: - The sustainability of Bolivia’s public debt improved substantially due to the MDRI (stock debt relief equivalent to about 25 percent of the GDP) and a shift into an overall fiscal surplus since 2006. - Debt ratios are at very manageable levels and expected to decline further under baseline policies. - Remaining stocks of domestic and foreign debt are of long maturities; debt service projected to remain low. - Declining path of the debt ratio shows an inflexion under standard stress tests and an alternative scenario of lower oil prices but remains within sustainable bounds in the long run. - Recent changes in debt stock: - Public debt (external and domestic) decreased significantly since last Article IV consultation thanks to lower fiscal financing needs and delivery of the MDRI installment by the IADB for US$ 1.2 billion. - Nominal public debt-to-GDP ratio: currently at the 35 percent level, down from 70 percent in 2005; projected to decline gradually to 16 percent during the DSA’s projection period. - NPV of debt-to-GDP ratio: projected to reach levels below 15 percent, compared to 33 percent at present. - Public sector deposits in the financial system amount to about 17 percent of GDP at present. - MDRI impact and external debt composition: - MDRI relief amounting to US$2.9 billion, equivalent to almost 25 percent of the GDP, reduced public external debt to about US$2.1 billion at present (19 percent of the 2006 GDP) since end-2005. - Multilateral debt share decreased from 90 percent to about 80 percent of total external debt; Corporación Andina de Fomento (CAF) remains main creditor with 37 percent of total external debt. - Remaining external debt mainly from official sources on non-commercial terms, limiting rollover risk and making external debt service manageable given strong hydrocarbon and mining export earnings. - Main assumptions of the baseline scenario (2007–27): - Average annual real GDP growth: 5 percent until 2012, and 4 percent during 2013–27. - Average inflation: 5 percent per year. - Export growth: 8 percent until 2012, and 4½ percent afterwards. - Import growth: 10 percent in the 2007–12 period; average of 4 percent per year in the long term. - Natural gas price: contract prices until 2012 moving with WEO projections; for 2013–27 constant in real terms at US$5 dollars per thousand cubic feet. - Natural gas volumes: average of 35 million of cubic meters per day until 2010; increasing to up to 60 million of cubic meters per day early in the next decade and stable after 2013. - FDI: in line with expected investments for hydrocarbons and mining. - Profile of average concessionality of public sector borrowing projected to evolve in line with existing official loans in the pipeline and to decrease gradually in the longer run. - Evolution of domestic public debt consistent with path for overall fiscal balance and available domestic financing. - Projected outcomes and risk assessment: - External debt expected to remain sustainable throughout projection period. - Fiscal position: overall surpluses between 1 and 2 percent of GDP in 2007–12; small surpluses of about 0.5 percent of GDP in outer years reflecting declining hydrocarbon-based revenues relative to GDP. - Stock of total public and private external debt-to-GDP ratio expected to fall to about 24 percent by 2012 and stabilize at the range of 15 percent by 2027. - NPV of debt-to-GDP ratio would reach single digits by 2027. - Bolivia’s risk of debt distress is low. - Stress testing: - Standard stress testing shows favorable external debt situation fairly resilient to severe exogenous shocks. - NPV of debt-to-GDP deteriorates most under the simulation based on historical averages (which reflect the crisis period of 2002–03 when the primary fiscal deficit reached over 6 percent of the GDP) and approaches LIC DSA thresholds by end of projection period. - All stress tests lead to higher but stabilizing ratios below levels considered risky; flow indicators remain manageable under most stress tests except the historical trends simulation which results in a return to still sustainable but very high debt levels. *Prepared by IDB staff; excerpts and analysis as presented in the source document.* ### 5. However, the outlook for public debt sustainability could be less favorable under ### _cr07248 - 5. However, the outlook for public debt sustainability could be less favorable under ### Low oil price scenario and net public debt - Alternative scenario: oil prices lower by 30 percent compared to baseline, starting in 2008. - Public sector deposits stand at 17 percent of GDP. - Under the low oil price scenario: - The fiscal position deteriorates throughout most of the projection period. - Authorities could initially finance fiscal deficits by drawing on public sector deposits (17 percent of GDP) before resorting to new borrowing. - The alternative scenario would diverge from the baseline net public debt-to-GDP ratio by up to about 18 percent of GDP by 2027 (Figure 1). - Similar deterioration in debt sustainability could occur under: - a scenario of disruption in hydrocarbons production, or - delayed implementation of new natural gas production/pipeline projects to enable increased exports to Argentina. ### Debt dynamics, projections, and key indicators (selected figures from staff projections and tables) - Net Debt-to-GDP ratio: baseline vs. low oil price scenario shown for 2006–2027 (Figure 1); divergence up to about 18 percent of GDP by 2027 under low oil price. - Table highlights and projection snippets (preserve source terminology and numbers as presented): - Identified net debt-creating flows: values shown across years (e.g., -10.6, -8.3, -24.1, -12.2, ...). - Residuals include significant reserve accumulation expected during the projection period due to the strength of the balance of payments. - NPV of external debt (selected projection values): 32.3, 25.9, 24.4, 23.2, 22.1, 21.5, 21.4, 18.0, 12.1 (years as in table). - NPV of PPG external debt (selected projection values): 21.0, 16.0, 15.6, 15.2, 14.7, 14.7, 14.8, 13.3, 9.7. - Debt service-to-exports ratio (in percent): 18.9, 16.5, 12.6, 11.0, 9.6, 9.9, 9.2, 8.4, 7.6, 7.0, 5.9. - PPG debt service-to-exports ratio (in percent): 14.9, 11.8, 7.5, 6.6, 5.5, 5.8, 5.5, 5.0, 4.5, 4.5, 4.4. - Total gross financing need (billions of U.S. dollars): 0.0, 0.0, -1.2, -1.1, -0.8, -0.6, -0.8, -1.0, -1.2, -1.7, -2.5. - Public sector debt (Table 3, selected levels and dynamics): - Public sector debt (in percent of GDP): 76.7, 70.0, 45.8, 34.7, 33.4, 32.4, 31.0, 30.1, 29.6, 24.7, 16.3 (years as shown). - Change in public sector debt: 2.6, -6.7, -24.2, -11.1, -1.3, -1.0, -1.4, -0.9, -0.6, -1.0, -0.7. - Revenue and grants (percent of GDP): 26.8, 31.3, 35.2, 32.3, 32.0, 31.3, 31.6, 31.9, 32.3, 30.6, 27.1. - Primary (noninterest) expenditure (percent of GDP): 29.4, 30.5, 28.0, 28.9, 28.8, 28.0, 28.0, 28.1, 28.4, 27.5, 25.8. - Automatic debt dynamics: -4.3, -3.5, -8.3, -3.1, -1.4, -0.7, -0.7, -0.1, 0.4, -0.2, -0.3. - NPV of public sector debt-to-revenue ratio (projection excerpts): 143.1, 114.1, 104.9, 101.5, 100.2, 94.7, 90.8, 87.4, 73.6, 52.2. - Gross financing need (percent of GDP, selected): 14.9, 12.2, 0.7, 2.6, 2.3, 3.6, 2.9, 2.3, 1.8, 1.2, 1.3. ### Sensitivity and stress tests - Stress scenarios examined include: - Key variables set at historical averages. - New public sector loans on less favorable terms (interest rate on new borrowing higher by 2 percentage points than baseline). - Bound tests: lower real GDP growth (historical average minus one standard deviation), lower export value growth, lower US dollar GDP deflator, lower net non-debt creating flows, one-time 30 percent nominal depreciation in 2008. - Table 2 and Figure 2 display sensitivity of: - NPV of debt-to-GDP ratio, NPV of debt-to-exports ratio, NPV of debt-to-revenue ratio, debt service-to-exports ratio, debt service-to-revenue ratio under alternative scenarios and bound tests. - Memorable stress-test outcome: - One-time 30 percent nominal depreciation relative to the baseline in 2008 is included among bound tests and produces notable divergences in debt indicators (specific scenario outcomes shown in Table 2). ### Key macroeconomic context and selected indicators (from Public Information Notice and tables) - Recent macro performance: - Real GDP growth has been around 4–4½ percent, mainly driven by hydrocarbons and mining. - External current account recorded large surpluses; net international reserves rose to historically high levels. - Fiscal position improved sharply; public debt declined markedly reflecting debt relief under the MDRI and active debt management. - Inflation picked up in recent months; part of price increases associated with floods and one-time administered-price adjustments; core and headline inflation trended upward since Q4 2006. - Selected headline figures (Bolivia: Selected Economic Indicators): - Real GDP (annual percentage changes): 2.7 (2003), 4.2 (2004), 4.0 (2005), 4.6 (2006), 4.0 (2007 proj.). - GDP deflator (annual percent changes): 6.3 (2003), 8.0 (2004), 5.1 (2005), 12.2 (2006), 7.4 (2007 proj.). - CPI inflation (period average): 3.3 (2003), 4.4 (2004), 5.4 (2005), 4.3 (2006), 6.6 (2007 proj.). - Revenues and grants (percent of GDP): 24.1 (2003), 26.8 (2004), 31.3 (2005), 35.2 (2006), 32.3 (2007 proj.). - Royalties on hydrocarbons (percent of GDP): 2.8 (2003), 3.4 (2004), 6.6 (2005), 9.7 (2006), 9.3 (2007 proj.). - Overall balance (percent of GDP): -7.9 (2003), -5.5 (2004), -2.3 (2005), 4.6 (2006), 1.0 (2007 proj.). - Total public debt (percent of GDP): 74.1 (2003), 76.7 (2004), 70.0 (2005), 45.8 (2006), 34.8 (2007 proj.). - Gross international reserves (millions of U.S. dollars): 1,266 (2003), 1,474 (2004), 2,042 (2005), 3,385 (2006), 4,646 (2007 proj.). - Gross international reserves (percent of broad money): 42.0 (2003), 49.6 (2004), 57.8 (2005), 79.7 (2006), 90.9 (2007 proj.). - NFA of the financial system (changes in percent of broad money): 3.2 (2003), 2.9 (2004), 20.7 (2005), 31.3 (2006), 22.6 (2007 proj.). - Credit to the private sector (percent of GDP): 47.6 (2003), 42.3 (2004), 39.6 (2005), 34.7 (2006), 34.2 (2007 proj.). ### Policy observations and recommendations from the Executive Board assessment - Directors welcomed strong performance driven by hydrocarbon and mining exports, accumulation of external reserves, and a large fiscal surplus. - Key policy messages emphasized by Directors include: - Maintain macroeconomic stability and a fiscal surplus consistent with prudent long-term use of hydrocarbon resources. - Exercise considerable control over expenditure, including at the subnational level. - Develop a realistic medium-term expenditure framework that accounts for the country’s absorptive capacity. - Implement structural reforms to make the budget a more effective developmental and poverty-reducing tool. - Consider reducing large and poorly targeted hydrocarbon subsidies while introducing properly designed measures to protect the poor. - Improve the tax system, intergovernmental relations, and the budget process to release fiscal resources for development and poverty-reducing spending. - Improve the investment climate to encourage recovery of private investment and diversification of the economy, including legal and institutional stability and a rules-based approach toward private investment. - Reconsider exiting the World Bank’s investment dispute settlement framework (some Directors encouraged reconsideration). - On exchange rate policy: - Many Directors welcomed the authorities’ intention to exercise greater exchange rate flexibility within the crawling peg regime. - They saw greater flexibility as helping to reduce dollarization and to forestall adverse distributional effects from inflationary pressures. - A gradual, properly sequenced transition to a more flexible exchange rate regime could be considered, with Fund technical assistance to help provide a roadmap. - Some Directors expressed concern about greater flexibility due to competitiveness, balance-sheet, inflation, and dollarization risks. - Directors encouraged more active use of open market operations to tighten monetary conditions and reduce inflationary pressures. - On financial sector policies: - Continue implementing the 2003 Financial Sector Assessment Program recommendations. - Priority actions include closer monitoring of banks’ loan provisioning and solvency; introducing prudential regulations to mitigate credit and market risks (particularly from dollarization); amending corporate bankruptcy/restructuring legislation; strengthening the Financial Intelligence Unit and anti–money laundering legislation; and eliminating the financial transactions tax because of its adverse effect on financial development. - Subject the recently created development bank to standard prudential requirements and prevent undue competition with the microfinance sector. - In the hydrocarbons sector: - The new operating contracts were considered an important step toward a more favorable investment climate. - Authorities face the challenge of securing major additional investments needed to fulfill export commitments to Argentina while satisfying rising local demand. - Directors encouraged authorities to continue to seek mutually acceptable arrangements with foreign investors. *Source: IMF staff projections, simulations, and Public Information Notice No. 07/80 (July 17, 2007).* ### 1. We thank the staff for their assessment of the current situation in Bolivia as well as ### _cr07248 - 1. We thank the staff for their assessment of the current situation in Bolivia as well as ### Background and overview - GDP growth rate in 2006 was 4.5 percent, the highest since 1998. - GDP growth rate for 2007 is projected to be 4 percent, due to floods in the first quarter that affected agriculture. - Exports in 2006 reached $3.9 billion. - Trade surplus in 2006 was $1.1 billion. - International reserves reached a historic record level of $3.3 billion. - Projections for the current account are positive because of international prices and increased exports tied to agreements with foreign oil and mining companies. - In 2006 the government negotiated an increase in the price of exported natural gas with Argentina and signed a new contract for additional gas exports to Argentina. - In 2007 Bolivia reached an agreement to modify the price of exported gas in one of the contracts signed with Brazil. - Political situation described as stable, with President Evo Morales having high acceptance and popularity as measured by recent independent polls. - Constitutional Assembly formed in August 2006; sessions extended until December 2007 to reach consensus on a broad agenda including regional autonomy. - If the Constitutional Assembly approves modifications to the structure of the Executive and Legislative branches, the administration might call an early general election. ### Fiscal policy: consolidation, revenues, and expenditures - Overall fiscal surplus for 2006 was 4.5 percent of GDP, described as the highest surplus in 66 years, mainly due to hydrocarbon revenue and the 2005 Hydrocarbon Law. - Increased hydrocarbon intake allows expansion of expenses for health, education, and infrastructure. - Authorities aim to keep the public sector balance positive while using fiscal expenditure to enhance capacity and reduce poverty, especially in rural areas. - Revenues, expenditures, and composition of financing are being addressed for greater efficiency and sustainability. - Revenues expected to remain over 30 percent of GDP, supported by modifications of gas export prices to Argentina and Brazil. - Plans to extend the tax base by revising taxes on the gambling sector and coca leaf production; taxation on informal commerce is under evaluation for gradual medium-term application. - Administrative measures to enhance tax collection include special tax audits and on-site inspections by tax officers. - Expenditure-side actions: - Wage bill for top officers reduced in 2006, allowing reallocation to education and health. - Some budget items suppressed in 2007, such as "Reserves for Expenditures". - Capital expenditure in 2007 is greater than in 2006, aligned with the National Development Plan goals for infrastructure and social spending. - New and existing public investment projects prioritized, focusing on roads to link regions and cities. - Central government can monitor sub-national government spending through financial accounts; sub-national projected expenditures must be included in the national budget. - Authorities concerned about revenue sharing and expenditure allocation system creating structural imbalances; objective to reduce earmarking. - Intention to deposit receipts from the difference between new and current prices of natural gas exports to Argentina and Brazil in a fund managed by the Ministry of Finance. - Expectation that the Constitution would set new spending obligations for sub-national entities, enabling central reallocation to prioritized national projects. - Temporary freeze on fuel prices described as necessary to avoid adverse social reactions; price increases expected to resume after changing the energy matrix over the medium term to increase domestic gas consumption and reduce fuel subsidies and smuggling. Noted that it is not prudent to move to a fully "automatic" price-adjustment mechanism. - Pension system reform under evaluation, with authorities aware of need to preserve macroeconomic stability while addressing demands of affiliates affected by the 1996 Pension Law requirements. ### Monetary, exchange rate, and financial policies - Monetary policy geared to preserve adequate liquidity conditions and monitor inflation developments. - Foreign currency inflows grew with higher exports and remittances; international reserves continued to grow during 2006 and 2007 and base money has expanded. - Additional Open Market Operations (OMO), accumulation of public deposits at the Central Bank of Bolivia (CBB), and exchange rate appreciation have partially offset base money expansion. - Base money expansion partially matched by increased real demand for domestic currency related to strong economic growth and reduction of financial dollarization. - CBB has absorbed liquidity mostly in domestic currency instruments and lengthening maturities. - Increased placements in local currency mitigate debt-management risks and help reduce financial dollarization. - Exchange rate policy: - Crawling peg regime historically contributed to competitiveness via small devaluations; from July 2005 the CBB reversed the crawling peg to appreciation amid increasing foreign currency flows and a positive current account. - Exchange rate regime remains a crawling peg; authorities will exercise more exchange rate flexibility as needed to prevent inflationary pressures, combined with other anti-inflationary measures. - Being land-locked and lacking sufficient road infrastructure raises transportation costs, harming export competitiveness. - In the medium term, as external and fiscal sectors strengthen, a more flexible exchange rate regime will be considered. - To manage growing international reserves and base money effects, authorities seek more dynamic use of OMO and measures to offset base money impact: - Creation of a new CBB security to be issued directly to the public; CBB preparing necessary conditions to avoid unwanted outcomes. - Expanding use of bank accounts for employees (approximately 340,000) whose salaries are not yet delivered through the banking system. - Pension Fund Administrators allowed to increase foreign investment share from 3 percent to 13 percent; if necessary, could increase up to 50 percent as stated in the Pension Law. - Central Bank will introduce higher legal reserve requirements and adjust the policy interest rate if needed. - Financial sector stability improved in 2006 and 2007: nonperforming loans reduced, provisions increased, profitability improved. - Remaining vulnerabilities in some banking entities acknowledged; close supervision will be applied. - Credit risk regulations assist borrowers with domestic-currency revenues affected by exchange rate depreciation. - Bank Superintendence preparing new prudential regulations for market risk and working on 2003 FSAP recommendations. - Financial dollarization decreased from 90 percent in December 2003 to 73 percent in June 2007. - Factors contributing to reduced dollarization include real and fiscal developments, exchange rate trend, widening spread between buying and selling exchange rates, financial transaction tax now levied only on foreign currency denominated operations, and settling of inflation-indexed financial instruments. ### Development policy and structural reforms - Hydrocarbons sector development is key to Bolivia's future and sustainable poverty reduction; authorities aim to create a framework that allows private investment while ensuring a fair share of benefits for the Bolivian people. - State oil company YPFB reinstated as main player; to be strengthened and capitalized for investments alone or in association with friendly governments or foreign enterprises. - New contracts between YPFB and foreign oil companies signal government willingness to welcome foreign investment in hydrocarbon sector as partnerships or other contracts. - Foreign investment diminished in 2006 but expected to expand from 2007 onwards due to new contracts allowing faster investment recovery and legal safety conferred by Congressional approval. - Mining sector reforms: modifications to royalties and tax regimes so the Ministry of Finance obtains a fair share while allowing private enterprises to operate under new rules. - Authorities about to sign a contract with an international company to exploit and industrialize large iron deposits in the east; contract expected to positively impact the current account from the year 2010 onwards. - Public policy corrects biases and distortions of privatization contracts from 1993–1996 that led to an unfair share for the state; renegotiation applied only to privatized enterprises, not to the rest of the private sector. - Government implementing a five-year National Development Plan based on four strategies: - Economic: increase productivity. - Social-community: improve social safety net. - International relationship: enhance external sector in economic, political, and cultural ambits. - Social empowerment: strengthen democracy and social inclusion. - Private investment emphasized as important for growth and job creation; public investment to be complementary. - Government supports enlargement of small and medium-sized companies and facilitates credit access. - Establishment of a second-tier public development bank (BDP) to finance micro-entrepreneurships while preserving financial-system competition. - Engagement in obtaining access to foreign markets for non-traditional exports; extension of the Andean Trade Preference Drug Eradication Act (APTDEA) in the United States Congress enables duty-free access to U.S. markets for a number of nontraditional Bolivian exports. - Land tenure: Congress modified the Land Law in 2006 to redistribute unproductive or illegally obtained land; no further developments expected in the Constitutional Assembly. ### Conclusions and policy intent - Overall economic performance attributed to positive 2006 international environment and macroeconomic policies and changes in relationships with foreign companies. - Monetary and fiscal policies described as sound and adequately managed to keep inflation under control. - Changes in government relationship with foreign oil companies led to higher fiscal revenue and a considerable fiscal surplus, enabling programs to help the poor (e.g., incentives for low-income students). - Government intends to continue on the path of fiscal discipline and pro-poor and pro-growth development policies. *Source: _cr07248* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07248.pdf_