## _cr0927

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### Economic and political setting
- Recent export boom led by hydrocarbons and mining improved growth and strengthened external and fiscal positions, but inflation accelerated and investment remained low amid persistent political tensions.
- Changes in the hydrocarbons taxation regime in 2005-06 boosted fiscal revenue and shifted public sector accounts from deficits to surpluses.
- Referendum scheduled for January 25, 2009; early general elections to be held in December 2009 if approved.
- Limited integration with international capital markets: global crisis transmits mainly through declines in commodity prices and remittances.
- Authorities maintained a fiscal surplus and greater exchange rate flexibility; several past Fund structural recommendations remain pending.

### 2008 developments — growth, inflation, external, and fiscal outcomes
- Real GDP growth: estimated at 5.9 percent in 2008 (from an average of 4.7 percent in 2006-07).
- External current account: recorded a surplus of 11 percent of GDP in 2008.
- Combined public sector overall surplus: estimated at 3.5 percent of GDP for 2008.
- Non-hydrocarbon deficit: rose to an estimated 8.5 percent of GDP in 2008.
- CPI inflation: twelve-month CPI inflation rose to 17 percent in the first half of 2008 and is projected at 12 percent for the year; twelve-month CPI inflation decelerated and projected at 12.0 (end-of-period) in Table series.
- Broad money growth and currency in circulation for 2008: 24 percent and 35 percent, respectively.
- Reserve accumulation: exceptional in 2008; partial sterilization left substantial monetary expansion early in the year.
- Exchange rate: nominal adjustments under the crawling peg; real effective appreciation over the past year.

### Banking and financial sector (2008 indicators and vulnerabilities)
- Bank capitalization / capital adequacy ratio: reported at 14 percent (Executive Summary) and series show 2008: 13.3 (Table 8).
- Nonperforming loans: 5 percent of total loans (Executive Summary); Table 8 series: 2008: 8.7; 2009: 5.6.
- Restructured loans: about 9 percent of total loans (Executive Summary) or 19.4 percent in Table 8 (2008); restructured loans about 9 percent of total loans (or 40 percent of equity) cited.
- Delinquency indicator for restructured loans: about 30 percent.
- Loan dollarization: dollar-denominated loans represent about 70 percent of bank credit (mission recommendation); dollarization series (end-period stocks) show deposits 2008: 55.9; 2009: 60.9 and credit 2008: 78.5; 2009: 81.1.
- Liquidity and reserves: NIR represent 120 percent of financial system deposits; deposits fell in September by about US$160 million (2.5 percent of the total) but stabilized.

### Empirical findings on inflation drivers
- General equilibrium model (1995Q1-2008Q1): food price shocks explain about half of inflation variability; domestic demand shocks 7.2 percent; interest rate on open market operations 26.4 percent.
- Bayesian VAR using currency stock: changes in currency stock explain 22 percent of inflation variability; domestic demand shocks 7 percent.

### 2009 outlook — baseline and sensitivity
- Baseline (consistent with October 2008 WEO vintage):
  - Real GDP growth: slows to 4 percent in 2009 (from 6 percent in 2008 per Executive Summary; elsewhere staff projection 2008: 4.0 in Table series).
  - Twelve-month inflation: declines to about 8 percent by end-2009.
  - Fiscal and external current accounts: projected to shift into small deficits in 2009.
  - Exports: projected to decline by 23 percent in 2009, to US$4.7 billion (Box).
  - Remittances: projected to decline by about 10 percent.
- Alternative adverse scenario (oil prices 25 percent lower than baseline):
  - External current account deficit: 4.3 percent of GDP in 2009.
  - Overall fiscal balance deficit: 2.8 percent of GDP in 2009.
  - Sensitivity rule of thumb: for each US$ 10 dollar/barrel reduction in oil prices, the overall fiscal balance and external current account deteriorate by 1½ percent and 2½ percent of GDP, respectively.

### Fiscal projections, vulnerabilities, and policy recommendations
- 2009 fiscal projection:
  - Overall fiscal position: projected to shift from a surplus of 3.5 percent of GDP in 2008 to a deficit of 0.5 percent of GDP in 2009.
  - Drivers: reduction in hydrocarbons-based tax revenue, lower YPFB operating surplus, and higher current spending (catch-up wages and pensions).
- Projected explicit hydrocarbons subsidies: about 1 percent of GDP in 2009.
- Projected implicit hydrocarbons subsidies: about 4 percent of GDP in 2009.
- Medium-term target:
  - Reduce the non-hydrocarbons deficit by about 3½ percentage points of GDP (to about 5 percent).
  - Achieving this would imply an overall surplus in the order of 3 percent of GDP under baseline assumptions.
- Recommended measures:
  - Consider gradual reduction of explicit and implicit hydrocarbons subsidies with part of savings used to protect vulnerable groups.
  - Wage and pension restraint and rigorous prioritization of investment projects.
  - Streamline capital expenditure in the event of revenue shortfalls, preserving critical investments and social spending.
- Tax reform proposals (Box 2):
  - Eliminate the transactions tax and the complementary tax to the VAT (RC-IVA) — associated revenue loss: about 2½ percent of GDP.
  - Offset measures: increase VAT rate (currently 13 percent), close corporate income tax loopholes, transfer special regime taxpayers to the regular tax regime, add turnover thresholds to VAT and corporate income tax.

### Monetary policy and exchange rate recommendations
- Monetary policy:
  - A more active monetary policy would help speed the decline in inflation to single digits.
  - Conduct open market operations to bring about higher interest rates on non-indexed bonds (currently negative in real terms) to help eliminate indexation incentives.
- Exchange rate assessment:
  - Boliviano assessed as broadly appropriate; standard estimates suggest a mild overvaluation (CGER MB: 8 percent overvaluation; ERER: 7 percent; external sustainability: 10 percent).
  - Recommendation for greater exchange rate flexibility (greater and/or more frequent adjustments under the existing crawling peg) to absorb negative external shocks while using intervention to forestall disruptive adjustments.
- External projections (Table series):
  - Merchandise exports (US$ millions): 2008: 6,104; 2009: 4,713; 2010: 5,208; 2011: 5,674; 2012: 5,855; 2013: 5,983.
  - Gross official reserves (US$ millions, end-of-period): 2008: 7,466; 2009: 7,909; projected baseline rise to US$11,767 by 2013 in Table series; alternative scenario projects reserves to US$8,826 by 2013.

### Medium-term outlook and scenarios
- Baseline medium-term:
  - Growth: Real GDP growth projected to slow to around 3½ percent toward the end of the projection period (2012-13).
  - Investment: El Mutun projected to add on average about 1 percent of GDP a year to private investment over the five-year period beginning in 2009.
  - External current account: projected to return to surplus in 2010.
  - Fiscal position: overall fiscal position shifts to small surpluses in 2010-11 but moves back to small deficits thereafter.
  - Inflation: projected to drop to single digits in 2009 and decline further over the medium term.
- Alternative medium-term (25 percent oil-price reduction):
  - Combined public sector overall balance (percent of GDP): 2009: -3.6; 2010: -1.3; 2011: -1.1; 2012: -1.3; 2013: -1.5.
  - Total net public debt (percent of GDP, alternative): 2009: 21.4; 2010: 19.8; 2011: 19.0; 2012: 18.8; 2013: 18.5.
  - Current account (percent of GDP, alternative): 2009: -4.3; 2010: -2.6; 2011: -1.2; 2012: -1.2; 2013: -1.5.
  - Gross international reserves under the scenario (US$ millions): 2009: 7,673; 2010: 7,829; 2011: 8,243; 2012: 8,626; 2013: 8,826.

### Debt sustainability and stress tests
- Public and external debts: longer-term projections suggest Bolivia’s public and external debts are likely to remain sustainable.
- Gross public debt-to-GDP ratio: 35 percent in 2008; projected gross public debt-to-GDP: 23 percent by 2013, and 16 percent in 2027 (Appendix).
- Net public debt (stock): 2008 estimate 17.0 percent of GDP; Table series show Total net public debt (percent of GDP): 2008: 17.9; 2009: 15.4; 2010: 13.5; 2011: 12.3; 2012: 12.3; 2013: 11.4.
- Standard stress tests: under extreme combined shocks the NPV of debt-to-GDP deteriorates significantly but remains below risky thresholds; Bolivia’s risk of debt distress assessed as very low.
- Selected debt indicators and projections:
  - NPV of external debt (2008–13 selected): 17.4, 16.3, 16.4, 16.0, 15.4, 14.5, 10.6, 5.2.
  - NPV of debt-to-exports ratio (2008–13 selected): 45.2, 55.2, 54.5, 51.8, 51.5, 51.3, 41.6, 22.3.
  - Gross international reserves (US$ millions): 2005: 2,042; 2006: 3,385; 2007: 5,587; 2008 (est.): 7,796; 2009 (proj.): 8,304.

### Structural priorities, investment climate, and social issues
- Priority to reduce dependency on volatile export-based revenue by narrowing the non-hydrocarbons deficit by about 3½ percentage points of GDP.
- Consider gradual reductions in hydrocarbons subsidies while protecting vulnerable groups.
- Improve the investment climate to raise private investment (private investment remains significantly below past-decade levels and well below the regional average).
- Authorities emphasize public sector-led development and expanded social transfers (Bono Juancito Pinto reached 1.6 million students; Renta Dignidad reached 676,000 people above age 60).
- Poverty: latest indicators date from 2006 and show stable poverty levels at 60 percent.
- Investment risks: May 2008 expropriation in hydrocarbons sector and interventions (ENTEL, electricity generation companies) have triggered or may trigger international arbitration demands; mission suggests pursuing nationalization-related actions through mutually agreeable arrangements with affected private parties.

### Monetary, financial, and supervisory reform priorities
- Staff welcomes plans to fully adopt IAS by January 2010 and ongoing efforts to improve banks’ risk management.
- Recommended prudential actions:
  - Introduce regulations to mitigate credit risks from dollarization and market risk.
  - Improve loan-loss provisioning (including countercyclical provisioning).
  - Ensure regulations on subordinated debt, foreign exchange exposures, and use of general provisions as tier II capital align with international best practices.
  - Continue field assessments of loan provisioning and solvency for all financial institutions.
  - Create a deposit insurance scheme (in due course).
  - Amend corporate bankruptcy/restructuring legislation.
  - Strengthen the Financial Intelligence Unit (staffing) and anti-money laundering legislation.
- Authorities considering an FSAP update in early 2010.

### Data, Fund relations, and external partners
- Data provision to the Fund: some shortcomings but broadly adequate for surveillance; Bolivia has participated in the GDDS since November 2000 and plans to subscribe to the SDDS (advanced stage).
- Fund relations (selected):
  - As of November 30, 2008, Bolivia did not have any outstanding purchases or loans.
  - Latest SBA expired on March 31, 2006.
  - Last Article IV consultation completed July 13, 2007.
  - IMF resident representative: Mr. Esteban Vesperoni since February 2006.
- Relations with multilateral partners:
  - World Bank: last ISN approved November 2006, concluded June 2008; Bank portfolio commitments US$272.8 million with US$196.2 million undisbursed.
  - IDB: approved loans to Bolivia amounted to US$4.11 billion as of November 30, 2008; outstanding debt to the IDB approximately US$530.0 millions with US$460.0 millions undisbursed approved funds.

*Source: Executive Summary and staff report excerpts from the IMF staff report provided in the content unit.*

### Executive Summary ......................................................................................................

### _cr0927 - Executive Summary

### Economic and political setting
- Recent export boom led by hydrocarbons and mining improved growth and strengthened external and fiscal positions, but:
  - Inflation accelerated and investment remained low amid persistent political tensions.
  - Changes in the hydrocarbons taxation regime in 2005-06 boosted fiscal revenue and shifted public sector accounts from deficits to surpluses.
  - Political tensions centered on constitutional reform; a referendum was scheduled for January 25, 2009, with early general elections to be held in December 2009 if approved.
- Bolivia’s limited integration with international capital markets means the global crisis transmits mainly through declines in commodity prices and remittances.
- Authorities maintained a fiscal surplus and greater exchange rate flexibility, but several past Fund structural recommendations remain pending.

### Developments in 2008
- Growth, external, and fiscal outcomes:
  - Real GDP growth estimated at 5.9 percent in 2008 (from an average of 4.7 percent in 2006-07).
  - External current account recorded a surplus of 11 percent of GDP.
  - Combined public sector overall surplus estimated at 3.5 percent of GDP for 2008.
  - Non-hydrocarbon deficit rose to an estimated 8.5 percent of GDP.
- Inflation and monetary developments:
  - Twelve-month CPI inflation rose to 17 percent in the first half of 2008 and is projected at 12 percent for the year.
  - Deceleration in late 2008 driven by moderation in food prices, slower monetary expansion, modest Boliviano appreciation, and trading-partners’ currency depreciations.
  - Broad money growth and currency in circulation for the year were, respectively, 24 percent and 35 percent.
- External reserves and exchange rate:
  - Exceptional reserve accumulation in 2008; partial sterilization left substantial monetary expansion early in the year.
  - Nominal exchange rate adjustments under the crawling peg; real effective appreciation over the past year.
- Banking sector:
  - Bank capitalization at 14 percent.
  - Nonperforming loans at 5 percent of total loans.
  - Restructured loans about 9 percent of total loans (or 40 percent of equity); delinquency indicator for restructured loans about 30 percent.
  - High loan dollarization exposes system to exchange-rate-induced credit risk.
- Empirical findings on inflation drivers (Box 1):
  - General equilibrium model (1995Q1-2008Q1): food price shocks explain about half of inflation variability; domestic demand shocks 7.2 percent; interest rate on open market operations 26.4 percent.
  - Bayesian VAR using currency stock: changes in currency stock explain 22 percent of inflation variability; domestic demand shocks 7 percent.

### Outlook for 2009
- Baseline staff projections (consistent with October 2008 WEO vintage):
  - Real GDP growth slows to 4 percent in 2009 (from 6 percent in 2008).
  - Twelve-month inflation declines to about 8 percent by end-2009 due to falling food prices.
  - Fiscal and external current accounts projected to shift into small deficits in 2009.
  - The outlook is highly sensitive to export-price developments; further weakening could create significant financing needs.
- Alternative scenario covered: staff analyzed an adverse scenario consistent with a 25 percent lower path for oil prices relative to the baseline.

### Fiscal policy projections and recommendations
- 2009 fiscal projection:
  - Overall fiscal position projected to shift from a surplus of 3.5 percent of GDP in 2008 to a deficit of 0.5 percent in 2009.
  - Drivers: reduction in hydrocarbons-based tax revenue, lower YPFB operating surplus, and higher current spending (catch-up wages and pensions).
- Medium-term target:
  - Authorities need to target a reduction in the non-hydrocarbons deficit by about 3½ percentage points of GDP (to about 5 percent).
  - Achieving this would imply an overall surplus in the order of 3 percent of GDP under baseline assumptions.
  - Recommended considerations: gradual reduction of explicit and implicit hydrocarbons subsidies with part of savings used to protect vulnerable groups; well-designed structural reforms to strengthen fiscal position.
- Contingency: In the event of further deterioration in exports and fiscal revenue, authorities would implement cuts in government capital expenditure, preserving critical investments and social spending.

### Monetary and financial sector policy recommendations
- Monetary policy:
  - A more active monetary policy would help speed the decline in inflation to single digits.
  - The central bank is encouraged to conduct open market operations to bring about higher interest rates on non-indexed bonds (currently negative in real terms) to help eliminate indexation incentives.
- Financial sector:
  - Financial sector currently appears stable and highly liquid, but vulnerabilities remain:
    - High level of restructured loans (about 9 percent of total loans or 40 percent of equity).
    - Loan dollarization remains high, creating credit risk from exchange-rate movements.
  - Staff welcomes plans to fully adopt international accounting standards and ongoing efforts to improve banks’ risk management.
  - Authorities encouraged to introduce prudential regulations to mitigate credit risks from dollarization and market risk.

### Exchange rate assessment
- The Boliviano is assessed as broadly appropriate:
  - Standard estimates suggest a mild overvaluation.
  - Current account deficit could be significant in 2009, but outlook points to subsequent improvement.
  - Greater exchange rate flexibility recommended to help absorb external shocks (e.g., adverse commodity-price movements).

### Medium-term structural priorities and investment climate
- Reduce dependency on volatile export-based revenue by narrowing the non-hydrocarbons deficit by about 3½ percentage points of GDP.
- Consider gradual reductions in hydrocarbons subsidies and protect vulnerable groups with part of the savings.
- Improve the investment climate to raise private investment, which remains significantly below past-decade levels and well below the regional average.
- Continue structural fiscal reforms to further strengthen Bolivia’s fiscal position.

*Source: Executive Summary of the IMF staff report provided in the content unit.*

### 13.      To strengthen the fiscal position, the authorities may need to consider a

### _cr0927 - 13.      To strengthen the fiscal position, the authorities may need to consider a

### Fiscal policy and hydrocarbons subsidies
- Projected explicit hydrocarbons subsidies: about 1 percent of GDP in 2009.
- Projected implicit hydrocarbons subsidies: about 4 percent of GDP in 2009.
- Recommendation: consider a reduction of explicit and implicit hydrocarbons subsidies while using part of the resulting fiscal savings to protect vulnerable groups.
- Rationale: consensus that these subsidies are inefficient, give rise to smuggling, and discourage investment and energy conservation.
- Additional fiscal recommendations: wage and pension restraint and a rigorous prioritization of investment projects.

### Box 2 — Structural Fiscal Issues
- Authorities concurred with the mission’s recommendations but expect limited progress until the ongoing constitutional reform process is completed.
- Tax reform:
  - Recommend eliminating the transactions tax and the complementary tax to the VAT (RC-IVA).
  - Associated revenue loss: about 2½ percent of GDP.
  - Proposed offset measures: increase in the VAT rate (currently 13 percent), closing of loopholes in the corporate income tax, transfer of special regime taxpayers to the regular tax regime.
  - Proposal to add appropriate turnover thresholds to VAT and corporate income tax, below which taxpayers would be exempt from the VAT and liable to presumptive taxation only under the corporate income tax.
- Intergovernmental relations:
  - Need to better balance expenditure allocations and resources at each level of government, rationalize the transfer system, and strengthen controls over sub national borrowing.
- Budget process:
  - Adoption of the draft Budget Framework Law prepared in 2005 would contribute importantly to strengthening the budget process.

### Monetary and exchange rate policy
- Recommendation for a more active monetary policy to reinforce the downward trend in inflation.
- Observations:
  - Lower food prices will facilitate progress toward price stability, but inflation is still high.
  - Real interest rates remain negative on non-indexed central bank instruments.
- Policy tools recommended:
  - Conduct open market operations consistent with bringing about higher interest rates on non-indexed bonds to impact inflation and reduce incentives for dollarization and indexation.
- Authorities’ view: supply-side factors (speculation, road blockades) have played a key role in fueling inflation.
- Exchange rate and external:
  - External current account projected to move into a deficit of 0.5 percent of GDP in 2009.
  - Exports projected to decline by 23 percent in 2009, to US$4.7 billion, reflecting mainly lower export prices.
  - Remittances projected to decline by about 10 percent.
  - Overall balance of payments projected to remain in surplus as continued FDI would more than cover the current account deficit.
- Exchange rate assessment:
  - Boliviano mildly overvalued according to CGER estimates, but broadly appropriate given uncertainty.
  - Recommendation for greater exchange rate flexibility (greater and/or more frequent adjustments under the existing crawling peg) to absorb negative external shocks while using intervention to forestall disruptive adjustments.

### Alternative scenario (oil prices 25 percent lower than baseline)
- Under a 25 percent lower oil-price scenario, 2009 outcomes:
  - External current account deficit: 4.3 percent of GDP.
  - Overall fiscal balance deficit: 2.8 percent of GDP.
- Authorities’ planned policy response:
  - First line of defense would be fiscal adjustment.
  - Compensate for lower revenue through cuts in government capital expenditure while preserving critical investments and social spending.
- Sensitivity rule of thumb:
  - For each US$ 10 dollar/barrel reduction in oil prices, the overall fiscal balance and external current account deteriorate by 1½ percent and 2½ percent of GDP, respectively.

### Box 3 — Exchange Rate Assessment (CGER-based estimates)
- Macroeconomic balance approach (MB):
  - Suggests an overvaluation of 8 percent.
  - Estimated underlying current account balance: surplus of 1.8 percent of GDP.
  - Estimated current account norm for Bolivia: 3.4 percent.
- Equilibrium exchange rate approach (ERER):
  - Suggests overvaluation of 7 percent.
  - Long-run relationship between real exchange rate and terms of trade, public consumption, productivity, FDI, and NFA.
- External sustainability:
  - Suggests overvaluation of 10 percent.
  - Bolivia would need a current account surplus of 4 percent of GDP to stabilize net foreign asset position, compared with estimated underlying current account surplus of 1.8 percent of GDP.
  - Exchange rate adjustment required to close the gap: about 10 percent.

### Financial sector issues
- System resilience:
  - Financial system broadly unaffected by global financial turmoil.
  - Deposits fell in September by about US$160 million (2.5 percent of the total) but have since stabilized.
  - No signs of existing international credit lines being curtailed or cancelled.
  - Recent drawdown in central bank reserves reflects a portfolio shift to rebuild dollar positions.
  - NIR represent 120 percent of financial system deposits.
- Dollarization:
  - Dollarization declined markedly in recent years, but a slight increase in the share of dollar deposits in recent months suggests a possible reversal risk.
  - Full-blown re-dollarization is not expected, but risk is high in the event of a sharp depreciation.
- Mission recommendations and authorities’ concurrence:
  - Continue efforts to reduce vulnerabilities despite apparent stability and high liquidity.
  - Plans welcomed to fully adopt IAS by January 2010.
  - Improve risk management practices in banks, including countercyclical loan-loss provisioning.
  - Ensure new regulations on subordinated debt, foreign exchange exposures, and use of general provisions as tier II capital align with international best practices.
  - Prudential regulations to mitigate credit risks from dollarization: dollar-denominated loans represent about 70 percent of bank credit.
  - Improve assessment of risk management procedures on household lending.
  - Supervisory agency to continue field assessments of loan provisioning and solvency for all financial institutions.
- Pending legal, prudential, and institutional actions:
  - Creation, in due course, of a deposit insurance scheme.
  - Amendments to legislation governing corporate bankruptcy/restructuring.
  - Strengthen the Financial Intelligence Unit (in particular staffing) and anti-money laundering legislation.
- Authorities considering an FSAP update in early 2010.

### Supply side, investment climate, and social issues
- Investment:
  - Private investment remains significantly below past-decade levels, contributing to growth below the regional average.
  - Investment picked up in 2008, concentrated on residential investment and completion of a large mining project.
  - Government actions: May 2008 expropriation in hydrocarbons sector and intervention in ENTEL; recent plans to recover control over three electricity generation companies—these actions have triggered or may trigger international arbitration demands.
  - Mission suggestion: pursue nationalization-related actions through mutually agreeable arrangements with affected private parties.
- Authorities’ stance:
  - Development strategy ascribes a leading role to public sector investment; expect private sector to take advantage of future infrastructure improvements.
- Social policy:
  - Authorities emphasize ongoing efforts to reduce poverty via transfer schemes targeted at youth and the elderly.
  - Mission welcomed initiatives and underscored need for more timely data to better assess progress in poverty reduction.
  - Latest poverty indicators date from 2006 and show stable poverty levels at 60 percent.

### Medium-term outlook (baseline and alternative)
- Baseline key elements:
  - Growth: Real GDP growth projected to slow to around 3½ percent toward the end of the projection period (2012-13) as mining output stabilizes.
  - Authorities’ note: growth could be sustained near 6 percent if envisioned hydrocarbons investments and production increases materialize; staff did not incorporate these elements due to lack of fleshed-out plans and financing.
  - Investment: Assumed growth consistent with private investment picking up from 2008, with El Mutun projected to add on average about 1 percent of GDP a year to private investment over the five-year period beginning in 2009.
  - External current account: projected to return to surplus in 2010, benefiting from a projected recovery in hydrocarbon prices and higher export volumes to Argentina.
  - Fiscal position: overall fiscal position shifts to small surpluses in 2010-11 but moves back to small deficits thereafter as hydrocarbons-based revenue declines in relation to GDP due to stable export volumes.
  - Inflation: projected to drop to single digits in 2009 and decline further over the medium term.
- Alternative medium-term scenario:
  - External current account and overall fiscal deficits would narrow somewhat in 2010, reflecting assumed higher natural gas export volumes to Argentina.
  - Central bank reserves: after a small decline in 2009, projected to rise gradually to US$8.8 billion by 2013 (compared with US$12.5 billion in the baseline scenario).

### Debt sustainability and staff appraisal
- Debt sustainability:
  - Longer-term projections suggest Bolivia’s public and external debts are likely to remain sustainable.
  - Standard stress tests indicate the debt ratio would rise in the event of severe exogenous shocks.
- Staff appraisal — key points:
  - Strong hydrocarbons and mining exports supported growth, fiscal, and external positions in 2008.
  - 2008 outcomes: pickup in real GDP growth, very large external current account surplus, record international reserves, combined public sector surplus, further reduction in deposit dollarization.
  - High rates of monetary expansion until recently contributed importantly to double-digit inflation; decline in inflation reflects moderation in food prices, slower monetary growth, and substantial real appreciation of the currency.
  - Policy challenge shift: from containing inflation to maintaining a sound fiscal position and external stability in light of major changes in the external environment.
  - Outlook sensitivity: Bolivia’s outlook is highly sensitive to developments in export prices; further weakening could generate significant financing needs and require strengthening of policies to ensure external and fiscal sustainability.

*IMF staff report content.*

### 30.      In the event of a deterioration in exports and related fiscal revenue, the first line

### _cr0927 - 30.      In the event of a deterioration in exports and related fiscal revenue, the first line

### Fiscal policy: first line of defense
- In the event of a deterioration in exports and related fiscal revenue, the first line of defense in the policy adjustment should be on the fiscal front.
- Staff welcomes the authorities’ approach, which includes cuts in government capital expenditure—where there is scope for streamlining—while preserving social spending.
- Authorities need to target a reduction in the non-hydrocarbons fiscal deficit over the medium term—in the order of 3½ percent of GDP.
- Consider gradual reduction of explicit and implicit hydrocarbons subsidies while using part of the resulting fiscal savings to protect vulnerable groups.
- Exercise wage and pension restraint, and a rigorous prioritization of investment projects.

### Structural fiscal reforms
- Modify the tax system to simplify it and improve its efficiency and equity.
- Staff suggests:
  - Eliminating the transactions tax and the complementary tax to the VAT.
  - Increasing the VAT rate.
  - Closing loopholes in the corporate income tax.
  - Transferring special regime taxpayers to the regular tax regime.
- Rationalize intergovernmental relations to better balance expenditure allocations and available resources at each level of government.
- Improve the budget process; a blueprint is available in the draft Budget Framework Law prepared back in 2005.

### Monetary policy and inflation
- A more active monetary policy would help speed up the decline in inflation, currently in the double digits.
- The central bank is encouraged to conduct open market operations in a manner consistent with bringing about higher interest rates on non-indexed bonds, which are negative in real terms, and thereby eliminate the incentive for indexation.
- Higher real interest rates and lower inflation would also help consolidate the reduction in dollarization achieved in recent years.

### Exchange rate and regime
- The exchange rate of the Boliviano is broadly appropriate.
- Standard estimates suggest a mild overvaluation, and indeed the current account deficit could be significant in 2009, but the outlook points to a subsequent improvement in the external current account.
- The inflationary process—associated in part, until recently, with large unsterilized intervention—has highlighted the need for greater exchange rate flexibility.
- Greater flexibility would help to minimize deviations from the real equilibrium exchange rate, as well as to absorb possible negative external shocks stemming from adverse movements in commodity prices.

### Financial sector stability and vulnerabilities
- The financial sector appears to be stable and highly liquid, but efforts to reduce vulnerabilities should continue.
- Staff welcomes plans to fully adopt international accounting standards and ongoing efforts to improve risk management practices in banks.
- Authorities are encouraged to introduce prudential regulations to mitigate credit risks from dollarization and market risk.
- Priorities to reduce potential vulnerabilities include:
  - Establishing a deposit insurance scheme.
  - Adopting legislation governing corporate bankruptcy/restructuring.
  - Strengthening further the Financial Intelligence Unit and legislation on anti-money laundering.

### Investment climate
- Improving the investment climate remains a top priority for Bolivia, as its private investment rate remains significantly below the levels observed in the past decade and well below the regional average.
- The investment climate would benefit from restraint with regard to nationalizations—which should be pursued, as far as possible, through mutually agreeable arrangements with the concerned private parties.

### Data provision to the Fund
- Bolivia’s data provision to the Fund has some shortcomings, but is broadly adequate for surveillance.

*Source: IMF staff report content provided in the supplied document excerpt.*

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

### _cr0927 - 37.      It is proposed that the next Article IV consultation with Bolivia be held on the

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

### Macroeconomic outlook (selected indicators and projections)
- Real GDP (Est./Proj.): 2008: 4.0; 2009: 4.0; 2010: 4.2; 2011: 3.9; 2012: 3.6; 2013: 3.4.
- GDP deflator (annual percent change, Est./Proj.): 2008: -2.3; 2009: 10.0; 2010: 6.2; 2011: 5.3; 2012: 6.9; 2013: (table 1 shows 6.9 earlier and Table 7 projected sequence -7.9, 10.8, 6.2, 4.9, 6.7 for 2009–2013 in alternative scenario).
- CPI inflation (period average): 2008: 8.1; 2009: 7.5; 2010: 6.5; 2011: 4.9; 2012: 4.0; 2013: 4.0.
- CPI inflation (end-of-period): 2008: 8.0; 2009: 7.0; 2010: 6.0; 2011: 4.0; 2012: 4.0; 2013: 4.0.

### Fiscal position — combined public sector (levels and percent of GDP)
- Total revenue and grants (In millions of Bolivianos): 2008: 45,209; 2009: 42,924; 2010: 48,930; 2011: 53,853; 2012: 57,538; 2013: 61,469.
- Current revenue (In millions of Bolivianos): 2008: 37,882; 2009: 38,275; 2010: 43,293; 2011: 47,485; 2012: 50,815; 2013: 54,360.
- Tax revenue (In millions of Bolivianos): 2008: 34,327; 2009: 34,196; 2010: 38,728; 2011: 42,491; 2012: 45,418; 2013: 48,474.
- Total spending (In millions of Bolivianos): 2008: 40,905; 2009: 43,539; 2010: 48,602; 2011: 53,127; 2012: 57,353; 2013: 61,979.
- Current expenditure (In millions of Bolivianos): 2008: 25,023; 2009: 28,133; 2010: 30,930; 2011: 33,466; 2012: 35,912; 2013: 38,465.
- Capital expenditure and net lending (In millions of Bolivianos): 2008: 15,882; 2009: 15,406; 2010: 17,672; 2011: 19,661; 2012: 21,441; 2013: 23,514.
- Overall balance before nationalization (deficit -) (In millions of Bolivianos): 2008: 4,304; 2009: -615; 2010: 328; 2011: 726; 2012: 185; 2013: -510.
- Overall balance after nationalization (In millions of Bolivianos): 2008: 2,944; 2009: -1,526; 2010: 328; 2011: 726; 2012: 185; 2013: -510.
- Non-hydrocarbons balance (percent of GDP, Table 3): 2008: -11.9; 2009: -12.6; 2010: -12.8; 2011: -13.9; 2012: -15.1; 2013: -15.8.
- Revenues and grants (percent of GDP, Table 3): 2008: 36.3; 2009: 34.0; 2010: 33.8; 2011: 33.7; 2012: 33.0; 2013: 31.9.
- Expenditure (percent of GDP, Table 3): 2008: 34.0; 2009: 35.2; 2010: 33.6; 2011: 33.2; 2012: 32.9; 2013: 32.2.
- Hydrocarbons related revenue (In millions of Bolivianos): 2008: 14,840; 2009: 11,032; 2010: 13,122; 2011: 14,659; 2012: 15,281; 2013: 15,307.
- Hydrocarbons related revenue (percent of GDP, Table 3 memorandum): 2008: 11.9; 2009: 8.7; 2010: 9.1; 2011: 9.2; 2012: 8.8; 2013: 7.9.

### Public debt and financing
- Total net public debt (percent of GDP, Table 1): 2008: 17.9; 2009: 15.4; 2010: 13.5; 2011: 12.3; 2012: 12.3; 2013: 11.4.
- Financing of overall balance (percent of GDP, Table 3): External financing (2009–2013): 1.0, 0.5, 0.4, 0.3, 0.2; Domestic financing (2009–2013): 0.2, -0.7, -0.8, -0.4, 0.1.

### External sector and balance of payments (selected)
- Current account (In millions of U.S. dollars, Table 6): 2008: 1,889; 2009: -792; 2010: 365; 2011: 665; 2012: 684; 2013: 10.
- Current account (percent of GDP, Table 6 memorandum): 2008: 1.0; 2009: -0.4; 2010: 1.2; 2011: 2.7; 2012: 2.5; 2013: 1.6.
- Merchandise exports (In millions of U.S. dollars): 2008: 6,104; 2009: 4,713; 2010: 5,208; 2011: 5,674; 2012: 5,855; 2013: 5,983.
- Of which: Natural gas exports (In millions of U.S. dollars): 2008: 2,948; 2009: 2,159; 2010: 2,504; 2011: 2,716; 2012: 2,772; 2013: 2,792.
- Merchandise imports (c.i.f., In millions of U.S. dollars): 2008: -5,013; 2009: -5,242; 2010: -5,415; 2011: -5,600; 2012: -5,824; 2013: -6,137.
- Gross official reserves / gross international reserves (end-of-period, In millions of U.S. dollars, Table 6 memorandum): 2008: 7,466; 2009: 7,909; 2010: 8,693; 2011: 9,782; 2012: 10,885; 2013: 11,767.
- Gross official reserves (in months of imports of goods and services): 2008: 15.0; 2009: 15.3; 2010: 16.3; 2011: 17.6; 2012: 18.6; 2013: 17.1.

### Monetary and financial sector (central bank and financial system)
- Central Bank net international reserves (stocks, In millions of U.S. dollars, Table 4): 2008: 7,467; 2009: 7,910.
- Central Bank currency issue (stocks in millions of Bolivianos, Table 4): 2008: 19,008; 2009: 20,637.
- NFA of the financial system (changes in percent of broad money at beginning of period, Table 5): 2008: 5.6; 2009: 5.6.
- Broad money (stocks in millions of Bolivianos, Table 5): 2008: 64,270; 2009: 67,036.
- Credit to the private sector (stocks, In millions of Bolivianos, Table 5): 2008: 40,995; 2009: 42,520.
- Credit to private sector (average stock in percent of GDP, Table 5 memorandum): 2008: 33.1; 2009: 31.8; 2010: 32.5 (Table 5 shows 42.3, 39.6, 34.7 earlier for 2004–06; use the memorandum series for later years).
- Dollarization (end-period stocks, Table 5 memorandum): Foreign currency and dollar-indexed deposits: 2008: 55.9; 2009: 60.9. Foreign currency and dollar-indexed credit: 2008: 78.5; 2009: 81.1.

### Banking sector indicators and vulnerabilities (Table 8 and selected)
- Nonperforming loans (in percent of total loans, Table 8): 2004: 17.6; 2005: 16.7; 2006: 14.0; 2007: 11.3; 2008: 8.7; 2009: 5.6; 2010: 4.7.
- Restructured loans (in percent of total loans): 2004: 31.9; 2005: 33.9; 2006: 33.1; 2007: 25.8; 2008: 19.4; 2009: 13.0; 2010: 9.0.
- Nonperforming and restructured loans (percent of total loans): 2004: 49.5; 2005: 50.6; 2006: 47.1; 2007: 37.1; 2008: 28.1; 2009: 18.6; 2010: 13.7.
- Capital adequacy ratio: 2004: 16.1; 2005: 15.3; 2006: 14.9; 2007: 14.7; 2008: 13.3; 2009: 12.6; 2010: 13.8.
- Total gross public debt (percent of GDP, Table 8 debt ratios): 2004: 69.1; 2005: 74.1; 2006: 76.8; 2015 (projected/target in table): 40.4.

### Alternative medium-term scenario (Table 7 memorandum and projections)
- Scenario reflecting a 25 percent reduction in oil prices relative to the baseline (Table 7 caption).
- Selected projections under alternative scenario (percent of GDP, Table 7):
  - Total investment: 2009: 19.7; 2010: 21.3; 2011: 20.9; 2012: 20.9; 2013: 20.5.
  - Gross national savings: 2009: 15.4; 2010: 18.6; 2011: 19.7; 2012: 19.8; 2013: 19.0.
  - Combined public sector revenues and grants (percent of GDP): 2009: 33.7; 2010: 33.2; 2011: 33.1; 2012: 32.5; 2013: 31.6.
  - Combined public sector overall balance (percent of GDP): 2009: -3.6; 2010: -1.3; 2011: -1.1; 2012: -1.3; 2013: -1.5.
  - Total net public debt (percent of GDP, alternative scenario table): 2009: 21.4; 2010: 19.8; 2011: 19.0; 2012: 18.8; 2013: 18.5.
  - Current account (percent of GDP, alternative scenario): 2009: -4.3; 2010: -2.6; 2011: -1.2; 2012: -1.2; 2013: -1.5.
  - Gross international reserves under the scenario (In millions of U.S. dollars): 2009: 7,673; 2010: 7,829; 2011: 8,243; 2012: 8,626; 2013: 8,826.

### Millennium Development Goals and social indicators (Table 9, selected)
- Population below US$1 a day (percent): 1990: 41.2; 2004: 36.7; 2005: 37.7; 2006: 24.1.
- Net primary enrollment ratio (percent of relevant age group): 2004: 94.0; 2005: 94.5; 2006: 92.2; 2015 target: 100.0.
- Immunization against measles (percent of children under 12-months): baseline 1994: 68; 2004 onward: 84.5, 82.6, 95.0 target.
- Access to potable water (percent of population): 1992: 57.5; 2004 onward: 72.3, 71.7, 73.1, 78.5 target.

*Sources: Bolivian authorities; Central Bank of Bolivia; and Fund staff estimates and projections.*

### ANNEX 1. SUMMARY OF ANNEXES

### ANNEX 1. SUMMARY OF ANNEXES

### Fund relations
- As of November 30, 2008, Bolivia did not have any outstanding purchases or loans.  
- The latest SBA expired on March 31, 2006.  
- The last Article IV consultation was completed by the Executive Board on July 13, 2007 (IMF Country Report No. 07/248).  
- An update safeguards assessment was completed in 2004; it confirmed measures had been implemented to address all previously identified vulnerabilities, except for those requiring a change in the central bank law. Currently, the Central Bank of Bolivia is not subject to the policy.  
- Mr. Esteban Vesperoni has been the IMF resident representative since February 2006.

Appendix 1: Fund relations (As of November 30, 2008) — selected items
- I. Membership Status: Joined December 27, 1945; accepted its obligations under Article VIII on June 5, 1967.  
- II. General Resources Account:  
  - Quota 171.50 SDR Million Percent of Quota 100.00  
  - Fund holdings of currency 162.64 SDR Million 94.83  
  - Reserve position in Fund 8.87 SDR Million 5.17  
- III. SDR Department:  
  - Net cumulative allocation 26.70 SDR Million Percent of Allocation 100.00  
  - Holdings 27.47 SDR Million 102.89  
- IV. Outstanding Purchases and Loans: None  
- V. 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  
- VI. Projected Obligations to the Fund (SDR million): Forthcoming 2009 2010 2011 2012 — Principal Charges/Interest 0.00 0.00 0.00 0.00; Total 0.00 0.00 0.00 0.00  
- VII. Implementation of HIPC Initiative:  
  - Decision point date Sep 1997; Enhanced framework Decision point date Feb 2000  
  - Assistance committed by all creditors (US$ Million) 448.00 (original framework) and 854.00 (enhanced framework)  
  - Of which: IMF assistance (US$ million) 29.00 (original), 55.32 (enhanced) (SDR equivalent in millions) 21.25 and 41.14  
  - Completion point dates Sep 1998 and Jun 2001  
  - Disbursement of IMF assistance (SDR Million): Assistance disbursed to the member 21.25 and 41.14 totaling 62.39; Additional disbursement of interest income 3.09; Total disbursements 21.25, 44.23, 65.48  
- III. Implementation of MDRI Assistance: Total Debt Relief (SDR Million) 160.93; Of Which: MDRI 154.82; HIPC 6.11  
- Eligible Debt Delivery Date: January 2006 GRA 6.70 PRGF 71.15 Total 77.85; January 2006 83.08 N/A 83.08  
- VIII. Safeguards Assessment: Safeguards assessment completed June 27, 2003; update assessment completed September 27, 2004. No systemic risks identified in 2003; uncertainties about de facto lack of operational independence and program monetary data; 2004 assessment confirmed measures implemented except those requiring change in central bank law. Currently, CBB is not subject to the policy.  
- IX. Exchange Arrangement: Bolivian currency is the Boliviano; exchange rate regime is a crawling peg. On November 30, 2008, the official selling rate was US$7.07 per U.S. dollar.  
- X. Article IV Consultation: Last completed July 13, 2007; Bolivia is on a standard 12-month consultation cycle.  
- XI. Technical Assistance, 2004–08 (Department, Purpose, Date):  
  - FAD Tax administration Aug.2004  
  - FAD Customs administration Jan. 2004, Apr. 2005  
  - FAD Pension reform April 2004  
  - MFD Banking sector July 2004; MFD Banking sector August 2004  
  - MFD/LEG AML/CFT legal drafting/Financial intelligence unit September 2004  
  - FAD PSIA October 2004  
  - MFD Promote use of domestic currency October 2004  
  - FAD Public expenditure management: the budget process April 2005  
  - FAD Tax policy August 2005; FAD Decentralization and public expenditure management October 2005  
  - STA Monetary statistics March 2006  
  - FAD Public finance information system December 2006  
  - STA ROSC Data Module January 2007  
  - MCM Inflation targeting June 2007  
  - STA National Accounts September 2007; STA National Accounts August 2008  
  - FAD Tax policy March 2008  
  - FAD Treasury Operations, Cash and Debt Management November 2008  
- XII. Resident Representative: Mr. Esteban Vesperoni took over the post in February 2006.

### Relations with the World Bank Group
- The World Bank’s Interim Strategy Note (ISN) approved in November 2006 concluded in June 2008. The Bank and the Government are negotiating a new strategy; preliminary discussions focused on extreme poverty eradication.  
- Lending under the last ISN included only IDA resources, which financed 11 investment projects, with disbursements of US$140 millions over the last two years. The Bank’s current portfolio in Bolivia comprises eleven projects under implementation, with total commitments of US$272.8 million of which US$196.2 million remain undisbursed.

World Bank portfolio (projects, Commitment US$ million, Closing date)
- Decentralized Infrastructure for Rural Transformation 20 June 2009  
- Road Rehabilitation and Maintenance 77 December 2009  
- Land for Agricultural Development 15 June 2010  
- Urban Infrastructure for the Poor 30 November 2010  
- Secondary Education Transformation 10 December 2010  
- Emergency Recovery and Disaster Management 16.9 June 2011  
- Rural Alliances 28.4 September 2011  
- Investing in Children and Youth 17 December 2013  
- Participatory Rural Investment II 20 March 2013  
- Lake Titicaca Local Sustainable Development 20 June 2013  
- Expanding Access to Reduce Health Inequities 18.5 January 2014

Other World Bank program items
- Trust Funds and Global Programs: five grants amounting to $8.7 million: Global Partnership on Output Based Aid ($5.2 million), GAIN Global Food Fortification ($2.6 million), Strengthening of the Deputies Chamber Finance Commission ($0.2 million), Capacity Building to Support Carbon Finance Transactions ($0.5 million), Strengthening Donor Aid Coordination ($0.1 million).  
- Completed studies under the last ISN included: Policies for Increasing Firms’ Formality and Productivity; Two phases of the Programmatic Social Protection Study; Strengthening Competitiveness for Export Diversification and Inclusive Growth; Operational Review of the Fondo de Inversión Productiva y Social.  
- Project pipeline and preparation: Two investment projects in the pipeline are being advanced; three projects originally included in the last ISN were postponed (Job Creation and Competitiveness; Building Government Monitoring and Evaluation Systems; Strengthening State Efficiency and Transparency). Additional financing for the Rural Alliances Project is under consideration. Studies on municipal services and finances, and on food inflation are being prepared to be delivered in FY09.

### Relations with the Inter-American Development Bank (IDB)
- As of November 30, 2008, approved loans to Bolivia amounted to US$4.11 billion, with disbursements totaling US$3.34 billion. Bolivia’s outstanding debt to the IDB was approximately US$530.0 millions with undisbursed approved funds for US$460.0 millions.  
- Net cash flows to the country were negative during 2006 and 2007, a trend expected to continue during 2008.  
- The last round of IDB debt relief wrote off a total of US$741.1 million in principal payments and US$307.3 millions of future interest payments, generating an estimated annual fiscal space of more than US$18.0 millions on average.

IDB lending framework and portfolio
- New criteria of allocation of concessional lending will follow the Fund of Special Operations performance-based allocation system. Parallel lending operations will be the preferred instrument up to 2015. During the 2007-2008 transitional period, the concessional element of the blend will amount 37% of an estimated annual allocation of US$74.3 millions.  
- Under the 2008-2010 Bank’s country strategy, four main strategic areas: (i) productivity, competitiveness and productive infrastructure; (ii) water, sanitation and social development; (iii) building opportunities for the majority and development with identity; and (iv) institutional strengthening of the state at national and sub-national levels.  
- As of November 30, 2008 the portfolio of executing sovereign guaranteed operations consists of 28 loans totaling US$826.0 millions, of which 45% has already been disbursed. The undisbursed sovereign portfolio is concentrated (53%) in the transportation sector.  
- The non-sovereign guaranteed executing portfolio consists of 3 loans totaling US$114.0 millions, of which 81.6% has already been disbursed. Seven additional loans for US$130.0 millions have been identified and are in the Bank’s lending pipeline.

Risks and implementation challenges
- Conditions for the strategy’s implementation remain complex, with important institutional, social and political definitions yet to be clarified, representing direct and indirect risks to the fulfillment of strategy objectives.  
- Widespread economic reform reorientation, macroeconomic and financial stability concerns, vulnerability to changing external conditions and natural disasters, and weak policy implementation and institutional capacity are identified as risks to be mitigated.

### Statistical issues
- Data provision to the Fund has some shortcomings, but is broadly adequate for surveillance.  
- 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.  
- Bolivia has participated in the GDDS since November 2000 and plans to subscribe to the SDDS are at an advanced stage.

*Prepared by the Western Hemisphere Department — December 11, 2008*

### APPENDIX 4. BOLIVIA: STATISTICAL ISSUES

### APPENDIX 4. BOLIVIA: STATISTICAL ISSUES

### Real sector
- National accounts
  - The National Institute of Statistics (INE) has begun a thorough revision of the national accounts statistics, including updating of the base year (currently dating from 1990) and intensified implementation of the System of National Accounts 1993 (SNA 1993).
  - The National Accounts Directorate (NAD) is compiling a set of integrated economic accounts by institutional sectors and sub sectors.
  - The IMF Statistics Department has provided technical assistance to INE on the ongoing revision.
- Labor market
  - Quality of household and employment surveys has deteriorated in the last few years due mainly to financial constraints.
  - The quarterly employment survey was discontinued in 2003, resulting in a lack of quarterly information on unemployment, employment and wages.
- Prices
  - In April 2008, INE released a revamped consumer price index (CPI) covering the nine largest cities and based on expenditure weights derived from a 2003/04 household budget survey.
  - Industrial producer price indices and external trade unit values are compiled by INE but need revision in concepts and definitions consistent with SNA 1993 and in treatment of seasonal products, missing items, quality changes, and introduction of new products.

### Fiscal sector
- Data provision
  - The Ministry of Finance (MoF) provides timely information on operations for the consolidated general government (central government and decentralized entities), public enterprises and the central bank.
  - MoF provides annual data to STA on operations of the consolidated central government, and regional and local governments for publication in Government Finance Statistics Yearbook.
  - These data do not cover all operations of decentralized agencies and operations channeled through special funds.
- Reform/support
  - Ongoing implementation of a comprehensive financial management system, with funding from the IDB, is expected to improve monitoring of public sector financial operations including local debt and social spending.

### External sector
- Balance of payments and external debt
  - 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 are submitted to STA only once a year.
  - The BCB provides monthly trade data to the Fund for publication in International Financial Statistics (IFS) upon request; Fund staff has access to more detailed and timely balance of payments and external debt data.
- Private sector external positions
  - Authorities have disseminated on the World Bank QEDS website gross liabilities of short and long-term private debt.
  - Improvements in coverage of private capital flows and positions followed the 2007 foreign direct investment survey by the central bank.
  - Coverage of certain services and financial transactions in the balance of payments needs expansion (as noted by the January 2007 Data ROSC mission).
- Reserves reporting
  - Although not yet an SDDS subscriber, Bolivia is disseminating the Data Template on International Reserves and Foreign Currency Liquidity.
  - STA has extended an invitation to Bolivia to disseminate its Reserves Template on the Fund’s website.

### Monetary sector
- Monetary statistics
  - Coverage, sectorization, and timeliness of monetary statistics are in line with the Monetary and Financial Statistics Manual.
  - Monetary data are based on balance sheets of the central bank, commercial banks, credit unions, savings and loans associations, and private investment funds.
  - The survey has been expanded to cover investment funds managing societies (SAFIS).
  - The BCB has started compiling a monthly survey on other financial corporations, with data from pension funds, insurance corporations, Nacional Financiera Boliviana (NAFIBO), and Fondo de Desarrollo del Sistema Financiero (FONDESIF).
  - This survey will help improve the quarterly flow of funds accounts currently compiled by the BCB.

### Indicators required for surveillance (selected entries, as of December 2, 2008)
- Exchange Rates: Date of latest observation Oct. 2008; Date received Nov. 2008; Frequency of Data D; Frequency of Reporting D; Frequency of publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Sep. 2008; Date received Nov. 2008; Frequency D; Data Quality–Accuracy and reliability M.
- Reserve/Base Money: Date of latest observation Oct. 2008; Date received Nov. 2008; Frequency M; Data Quality–Methodological soundness M; Data Quality–Accuracy and reliability M.
- Broad Money: Date of latest observation Aug. 2008; Date received Oct. 2008; Frequency M; Data Quality–Methodological soundness M; Data Quality–Accuracy and reliability M.
- Central Bank Balance Sheet: Date of latest observation Oct. 2008; Date received Nov. 2008; Frequency M; Data Quality–Methodological soundness M; Data Quality–Accuracy and reliability M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation Aug. 2008; Date received Oct. 2008; Frequency M; Data Quality–Methodological soundness M; Data Quality–Accuracy and reliability M.
- Interest Rates: Date of latest observation Oct. 2008; Date received Nov. 2008; Frequency W; Frequency of publication M.
- Consumer Price Index: Date of latest observation Oct. 2008; Date received Nov. 2008; Frequency M; Data Quality–Methodological soundness M; Data Quality–Accuracy and reliability M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation Sep. 2008; Date received Nov. 2008; Frequency M; Frequency of publication M.
- GDP/GNP: Date of latest observation Jun. 2008; Date received Oct. 2008; Frequency Q; Frequency of publication Q.

Note: Data quality assessments reflect the January 24–February 7, 2007 Data ROSC mission (published August 13, 2007) and use the O / LO / LNO / NO scale for methodological soundness and accuracy/reliability.

### External and Public Debt Sustainability Analysis — summary
- Background findings
  - Following MDRI debt relief, Bolivia’s public debt sustainability has continued to improve due to overall fiscal surpluses.
  - Gross public debt-to-GDP ratio: 35 percent in 2008.
  - Projected gross public debt-to-GDP ratio: 23 percent by 2013, and 16 percent in 2027.
  - NPV of public debt-to-GDP ratio: projected decline from 33 percent in 2008 to 16 percent during the DSA’s projection period.
  - Deposits of the nonfinancial public sector in the financial system amount to about 18 percent of GDP at present; net public debt (gross debt minus those deposits) has improved even more significantly.
- Baseline scenario assumptions (period 2008–27)
  - Average annual real GDP growth: 4.2 percent until 2013, declining to 4 percent during 2014–27.
  - Average deflator inflation: 6.7 percent per year until 2013, declining to 4 percent over the long term.
  - Export and import growth: in line with medium-term staff projections and assumption of 7½ percent growth beyond 2013 (implying stable import and export ratios to GDP over the long term).
  - FDI: in line with expected investments for the hydrocarbons and mining sectors.
  - Financing strategy: commercial debt is expected to remain nil, with CAF expected to remain as the main source of financing.
  - Average concessionality of public sector borrowing: projected to evolve in the medium-term according to the pipeline of official loans and to decrease gradually over the longer run.
- Baseline projections and assessment
  - After a projected small deficit in 2009, the fiscal position would remain close to balance in 2010–2013, with an average overall surplus of about 0.1 percent of GDP.
  - Afterwards, the fiscal position would weaken gradually, reaching a deficit of about 1 percent of GDP by the end of the projection period.
  - Total stock of external debt (public and private) is projected to fall to about 16 percent of GDP by 2013, and to stabilize around 5½ percent of GDP by 2027.
  - Given predominantly long maturities of remaining domestic and foreign debt, debt service is projected to remain low.
  - Bolivia’s risk of debt distress is assessed as very low and remains so under significant stress tests.

*Prepared by the staff of the International Monetary Fund (appendix content as provided).*

### 4.      Standard stress tests suggests that Bolivia’s low external indebtedness is resilient

### 4.      Standard stress tests suggests that Bolivia’s low external indebtedness is resilient

### Main finding
- Standard stress tests indicate that Bolivia’s low external indebtedness is resilient to severe exogenous shocks.
- Under the most extreme stress test—a combined shock to debt concessionality, GDP growth, export growth, and external inflation—the ratio of the NPV of debt to GDP “deteriorates significantly but eventually stabilizes.” In all cases, it would remain below risky levels.
- The World Bank’s three-year average IDA Resource Allocation Index (IRAI) classifies Bolivia as a medium performer; the related risk thresholds on NPV of debt-to-GDP and debt-to-exports ratios are 40 percent and 150 percent, respectively, leaving the country’s current levels with significant safety margins.

### Stress-test outcomes and debt indicators
- NPV of external debt (selected series shown in the source):
  - 2008–13: 17.4, 16.3, 16.4, 16.0, 15.4, 14.5, 10.6, 5.2
- NPV of debt-to-exports ratio (selected series shown in the source):
  - 2008–13: 45.2, 55.2, 54.5, 51.8, 51.5, 51.3, 41.6, 22.3
- NPV of PPG external debt (selected series shown in the source):
  - 2008–13: 11.4, 10.5, 11.0, 10.9, 10.6, 10.1, 7.5, 3.7
- Debt service-to-exports ratio (selected historical values in percent):
  - 2005: 16.5; 2006: 12.6; 2007: 21.5; later series include 14.5, 17.5, 16.4, 15.0, 14.4, 13.8, 11.2, 5.7
- Public sector debt (selected historical and projection values, in percent of GDP):
  - Public sector debt (actual): 2005: 80.4; 2006: 55.2; 2007: 40.9; 2008: 35.0; 2009: 35.7; 2010: 30.9; 2011: 27.6; 2012: 25.2; 2013: 23.1; projection 2018: 17.9; 2027: 16.0
- NPV of public sector debt (selected series, in percent of GDP):
  - 2008–13 (selected): 32.9, 34.1, 29.2, 25.3, 22.4, 21.0, 17.3, 15.9
- Gross international reserves (millions of U.S. dollars):
  - Historical and near-term: 2005: 2,042; 2006: 3,385; 2007: 5,587; 2008 (est.): 7,796; 2009 (proj.): 8,304
- Current account (in percent of GDP):
  - 2008 (est.): 11.0; 2009 (proj.): -0.4
- Combined public sector overall fiscal surplus:
  - 2008 (estimate): 3.5 percent of GDP (from 2.6 percent of GDP in 2007)
- Non-hydrocarbon deficit:
  - 2008 (estimate): 8.5 percent of GDP
- Total net public debt:
  - 2008 (est.): 17.0 percent of GDP; 2009 (proj.): 17.9 percent of GDP

### Key macroeconomic assumptions and projections (selected)
- Real GDP growth:
  - 2008 (estimated): 5.9 percent
  - 2009 (projection): 4.0 percent
- GDP deflator (change in percent):
  - 2008 (est.): -2.3
- CPI inflation (end of period):
  - 2008 (est.): 12.0; 2009 (proj.): 8.0
- Growth of exports of goods & services (US$ terms, in percent):
  - 2008 (historical spikes shown): 32.9; subsequent projection series include -20.8, 9.9, 8.5, 3.3, 2.4, 6.0
- Effective interest rate (percent) and related projections appear in the underlying tables (selected historical values: 3.0, 3.5, 4.6; projected series: 6.1, 5.6, 5.4)

### Flow and financing indicators
- Identified net debt-creating flows (selected values):
  - Historical/early projections include -8.3, -24.1, -21.8, -13.4, -2.5, -4.9, -6.4, -6.0, -5.0, -2.6, -0.2
- Non-interest current account deficit (selected values):
  - Historical/early projections include -8.4, -13.7, -14.6, -3.6, 7.4, -12.2, -0.5, -2.7, -4.0, -3.7, -2.9, -1.2
- Total gross financing need (billions of U.S. dollars, selected):
  - Series in the table include values such as 0.0, -1.2, -1.2, -1.1, 0.6, 0.1, -0.2, -0.3, -0.2, 0.2, 0.9

### Sensitivity and scenario analysis (selected results)
- Table 2 and Table 4 present multiple alternative scenarios and bound tests for 2008–27, including:
  - A2 (New public sector loans on less favorable terms in 2008-27): raises several indicators relative to baseline (exact series shown in the source tables).
  - Bound tests include shocks such as Real GDP growth at historical average minus one standard deviation, Export value growth shocks, US dollar GDP deflator shocks, net non-debt creating flows shocks, combinations of shocks, and a one-time 30 percent nominal depreciation relative to the baseline.
- Figures in the source show that under the “most extreme shock” the NPV of debt-to-GDP ratio and other indicators increase materially but remain below their respective risk thresholds over the projection horizon.

### Policy analysis and recommendations from the Executive Board
- Risks have increased due to sharp deterioration in the global environment; lower energy and mineral prices and declining remittances could slow growth and push fiscal and external accounts into deficits.
- Directors emphasized the need for a proactive fiscal response:
  - Welcome authorities’ strategy to cut lower-priority capital expenditure while preserving social spending.
  - Need to target a reduction in the non-hydrocarbons fiscal deficit over the medium term to reduce dependence on volatile export revenues and ensure inter-generational sharing of hydrocarbon wealth.
  - Encourage using part of fiscal savings from reducing hydrocarbon subsidies to protect vulnerable groups; recommend appropriate wage restraint and rigorous prioritization of investment projects.
- Structural reform recommendations:
  - Simplify the tax system to improve efficiency and equity (streamline VAT framework, close corporate income tax loopholes).
  - Better balance expenditure allocations and improve the budget process across levels of government.
- Monetary and exchange rate policy recommendations:
  - Most Directors saw merit in a more active monetary policy to speed the decline in inflation to single digits; encourage open market operations to bring about positive real interest rates on non-indexed bonds and eliminate incentives for indexation.
  - Higher real interest rates and lower inflation would help consolidate de-dollarization.
  - Many Directors viewed the real effective exchange rate as broadly appropriate; greater exchange rate flexibility could help absorb negative external shocks, though some Directors cautioned that increased flexibility might rekindle inflationary pressures and reverse de-dollarization gains.
- Financial sector recommendations:
  - Continue efforts to reduce vulnerabilities: adopt international accounting standards, improve risk management, introduce prudential regulations to mitigate market risks and credit risks from dollarization, introduce deposit insurance, adopt corporate bankruptcy/restructuring legislation, and strengthen anti-money laundering measures.
  - Support for a proposed FSAP update in 2010.
- Investment climate:
  - Directors stressed improving the investment climate (including constructive negotiations with investors in disputed contracts) to raise private investment, foster broad-based growth, and reduce poverty.

*Source: Staff simulations, projections, and IMF Executive Board assessment as presented in the provided document.*

### 1.      Since the last Article IV Consultation, Bolivia has shown a satisfactory

### _cr0927 - 1.      Since the last Article IV Consultation, Bolivia has shown a satisfactory

### Overview and growth drivers
- Growth in 2008 reached more than 6 percent.
- Foreign direct investment increased vis-à-vis 2006 and 2007.
- Supply-side drivers in 2008: mining, construction, and hydrocarbons.
- Agriculture: affected by adverse climate conditions during the first quarter, recovered to 2.4 percent after being negative in 2007; the agricultural production frontier was extended in 2008.
- Demand-side support: domestic consumption and investment.
- Inflation in 2008 was almost similar to 2007 (around 11.7 percent), after reaching 17.3 percent by mid-year.

### Balance of payments, reserves, and external position
- Capital good imports increased more than 43 percent, enhancing production capacity.
- Exports increased to $6.1 billion and the trade surplus was $1.1 billion.
- International reserves reached a historic level of $7.8 billion (around 45 percent of GDP in 2008; in 2005 they were approximately 21 percent).
- Authorities expect the country will not be immune to the global downturn and are prepared to apply stimulus to boost the economy.
- Authorities project GDP for 2009 will be greater than projected in the staff report: 5 percent compared to 4 percent (staff).
- Authorities envisage $1,850 million in public investment (around 9.8 percent of GDP) in 2009, as budgeted, with possible additional borrowing: YPFB to borrow $1 billion from the Central Bank of Bolivia (CBB) if Congress authorizes.

### Fiscal policy performance and social spending
- Fiscal authorities obtained a surplus in the last three years up to 2008.
- Fiscal outcome in 2008: surplus of more than 6 percent of GDP.
- Drivers: additional income from the tax and royalty structure on hydrocarbons (approved in 2005) and the 2008 tax reform for the mining sector.
- Social programs expanded: Bono Juancito Pinto reached 1.6 million students; Renta Dignidad reached 676,000 people above the age of 60; combined they represent 23 percent of the population.
- Poverty reduced to 60 percent from 64 percent before 2007.
- Authorities preparing an Extreme Poverty Eradication Plan to be put into action in 2009.
- 2009 budget envisages a small surplus; public sector wages to be increased only for teachers, health workers, and police officers.
- Planned social benefits (Bono Juancito Pinto and Renta Dignidad) will not be increased as previously planned due to potential decline in fiscal revenue.
- Non-oil revenue increased from 68 percent of tax revenue in 2007 to 70 percent in 2008.
- Fuel subsidies: authorities recognize need to eliminate them but plan to implement a well-targeted safety net first; priority could be addressed after approval of the New Constitution.
- Public investment allocation priorities: infrastructure and public enterprises to supply paper, milk, cement, sugar, and food.
- Tax reform for mining: rates streamlined and differentiated levies introduced depending on product type and export prices; surtaxes on mining and hydrocarbons were suppressed.
- Ongoing administrative adjustments to improve efficiency of tax-collecting agencies; reform of taxation in sectors such as informal commerce under evaluation for gradual application.

### Pension reform
- Pension system reform draft law presented to Congress and approved by the House of Representatives.
- Reform creates a complimentary pension system with a minimum pension benefit, fully-funded through contributions from high-income affiliates.
- Current defined-contribution pension funds will not be modified; there will be no additional fiscal cost.

### Monetary policy and exchange rate
- Authorities attribute inflation mainly to supply shocks (including natural disasters affecting agricultural output), imported inflation, partial monetization of foreign flows, and expectations exacerbated by speculative operations in key products.
- Staff calls for more active monetary policy to curb inflation; authorities prefer a cautious stance due to uncertain global slowdown effects.
- Authorities expect inflation to recede due to diminishing political tension and lower international food prices; food items were main drivers of headline inflation.
- Monetary policy tools: Open Market Operations (OMOs) to attain lower inflation; in 2008 CBB absorbed liquidity through non-indexed and indexed domestic currency instruments and by lengthening maturities; CBB implemented OMOs for non-financial institutions and citizens.
- By December 2008, the CBB had raised rates on non-indexed instruments; financial institutions did not change their rates for banking deposits in domestic currency.
- Real interest rates on CBB securities have been positive since the third quarter of 2008, vis-à-vis the relevant expected inflation rate.
- Staff report notes that 22 percent of inflation could be explained by changes in money stock; authorities emphasize the role of dedollarization and conversion of dollar banknotes circulating outside the financial system into domestic currency, increasing base money and international reserves.
- Exchange rate regime: crawling peg with appreciation up to early October 2008, contributing to dedollarization (banking deposits dollarization reached a low of 50 percent).
- CBB considers the real exchange rate to be in equilibrium, supported by positive fiscal and balance of payments positions since 2006 and reserves of $7.8 billion.
- Authorities will continue the crawling peg, avoid labels of overvaluation that could create depreciation expectations, and exercise greater flexibility as needed to preserve external stability and prevent inflationary pressures.

### Financial sector developments and risks
- Financial system remained stable in 2008: nonperforming loans reduced, provisions increased, and profitability improved.
- Banking deposits grew 27 percent while credit increased by 17 percent in 2008.
- Credit to the private sector is expected to increase in 2009 due to political stability and fiscal stimulus.
- Liquidity risk is low; CBB prepared to provide resources to the financial system.
- International reserves cover 120 percent of bank deposits (staff observation).
- Remaining vulnerabilities in certain banking entities: close supervision to be applied.
- Superintendency of Banks (SB) conducting stress tests and preparing action plans; CBB and SB preparing joint contingency plans.
- Credit risk related to exchange rate for borrowers with foreign-currency liabilities and domestic-currency revenues is recognized; SB preparing prudential regulations including changes in the provision regime.
- SB working on 2003 FSAP recommendations and willing to undergo a FSAP in 2010.

### Development policy and structural reforms
- Foreign investment expanded in 2008 and expected to grow further in 2009; mining and hydrocarbons remain key sectors.
- Public policy in strategic sectors (mining, hydrocarbons, telecommunications) sought to correct biases and distortions of privatization contracts signed between 1993 and 1996; changes in government relationships with foreign companies enabled new programs to address poverty while preserving fiscal stability.
- Public sector led investment in the last two years; authorities emphasize private investment is important for growth and job creation and expect public investment to be complementary.
- Government supports enlargement of small and medium-sized companies by facilitating credit access; these sectors are labor intensive and their expansion would help reduce unemployment.
- Government engaged in obtaining access to foreign markets for non-traditional exports to offset the effects of the suspension of trade preferences with the United States.

*Source: _cr0927 - 1.      Since the last Article IV Consultation, Bolivia has shown a satisfactory*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0927.pdf_