## _cr1027 ## Source details **Canonical URL:** [_cr1027](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1027.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1027.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1027.pdf.json) --- ### Executive Summary — Macroeconomic context and recent performance - Export receipts increased by 230 percent between 2005 and 2008 driven by higher export volumes of gas and mining and commodity-price boom. - Real GDP growth: - Averaged 3.4 percent annually during 1996–2005. - Averaged 5.2 percent in 2006–08; peaked at 6.1 percent in 2008. - External and fiscal balances (2006–08): - External current account surpluses averaged 11.8 percent of GDP. - Fiscal surpluses averaged 3.8 percent of GDP. - Public debt (2008): - Gross public sector debt declined to less than 40 percent of GDP. - Net public sector debt declined to only 20 percent of GDP. ### Impact of the global recession and near-term outlook (2009–2010) - Recession impact: milder than in other countries in the region. - Growth and inflation: - Real output growth estimated to slow to 3¼ percent in 2009. - 12‑month inflation rate stood at 0.8 percent in October 2009 and is projected at 1 percent by end-2009; alternative updated figure: 0.26 percent in December 2009 (statement). - Real GDP growth forecast: 4 percent in 2010. - Inflation projected to rise to about 4 percent in 2010 (Box 4) / 4.0 percent projected end-2010 in other tables. - External accounts and reserves: - External current account narrowed sharply to about 3½ percent of GDP in 2009 (from 12 percent in 2008). - International reserves: equivalent to about 20 months of imports of goods and services and more than 100 percent of deposits in the banking sector; net international reserves reached US$ 8.6 billion by end-2009 (statement). - SDR allocation to Bolivia was equivalent to about US$200 million; authorities intend to maintain these resources as part of reserves. - Fiscal stance: - Combined fiscal surplus expected to narrow by 4 percentage points of GDP in 2009 to an almost balanced position, largely due to lower hydrocarbon and tax revenue (by 5 percentage points of GDP). - Proposed 2010 fiscal stance (nearly balanced) described as consistent with continued domestic and external stability. ### Fiscal and monetary policy response (2009–2010) - Fiscal policy actions and recommendations: - Staff welcomes consideration of reforms to reduce excessive reliance on hydrocarbon revenue, including stronger direct taxation, rebalancing of spending responsibilities and revenue assignments, and a fiscal framework for management of natural resources. - Monetary policy actions and recommendations: - Central bank reduced open market operations and let short-term policy interest rates decline to almost zero. - Deposit and loan rates have fallen to record low levels: 1½ percent and 8½ percent respectively (Executive Summary); alternative reported deposit and loan rates: 1.3 percent and 8.3 percent (statement). - Recommendation: tighten monetary policy as the economy gathers momentum and withdraw the monetary impulse—especially if external interest rates increase—to absorb excess bank liquidity and reduce risks of excessive credit creation, foreign-exchange pressures, and a pick-up in inflation. ### Exchange rate policy - Since October 2008 the central bank has effectively pegged the Boliviano to the U.S. dollar, after a period of negative crawl starting mid-2005. - Staff finds no significant evidence of exchange rate misalignment. - Authorities agree to resume adjustments under the crawling peg should external imbalances re-emerge. - Medium-term recommendation: consider moving from the crawling peg towards a more flexible exchange rate regime to enhance capacity to respond to external shocks, conditional on further substantial decline in dollarization. ### Financial sector soundness and policy - System characteristics: - Financial system assets amount to US$ 10.4bn (about 60 percent of GDP). - Commercial banks control over 78 percent of system assets (excluding mutual and pension funds). - Key indicators (October 2009 unless noted): - Capital adequacy ratio: around the mid-teens (example: 13.4 in 2009, October). - Non-performing loans: 4.1 (October 2009). - Provisions/Non-performing loans: 181.0 (October 2009). - Return on assets: around 1.6 (October 2009). - Return on equity: around 19.7 (October 2009). - Dollarization: - Declined markedly in recent years; strengthening fundamentals and measures to induce voluntary Bolivianization reduced dollarization. - U.S. dollar and dollar-indexed deposits (percent of total deposits): 84.2 (2005); 76.2 (2006); 65.0 (2007); 52.6 (2008); 53.0 (2009); 52.0 (2010) (Table highlights). - Regulatory measures: - Increased marginal reserve requirements on dollar deposits. - Tightened provisioning requirements, including higher provisioning for dollar-denominated loans. - Additional policy tools: 30 percent marginal cash reserve requirement on US$ deposits above September 30, 2008 levels; up to 1.5 percent additional provision for dollar-denominated “A” loans; financial transaction tax of 0.15 percent on dollar accounts; bid-ask FX spread increased to 1.4 percent since mid-2005. - Recommendations: - Press ahead with pending structural reforms and maintain vigilant supervision. - Establish deposit insurance scheme and finalize institutional framework for orderly exit of failed institutions. - Expand perimeter of regulation to non-bank intermediaries (cooperatives and other unregulated financial institutions). - Encourage update of FSAP (last in 2003). - Strengthen Financial Intelligence Unit (UIF) and incorporate definition/criminalization of terrorist financing into law; normalize relations with EGMONT Group and GAFISUD. ### Structural policies, social programs, and investment climate - Social and infrastructure focus: - Transfer programs target poorest segments; investments in water, sanitation, energy, and roads increased. - Selected social indicators and programs: - Poverty (2007): 60 percent of the population; extreme poverty 38 percent; extreme poverty among indigenous population 61 percent. - Renta Dignidad: universal pension introduced in 2008, equivalent to about US$340 per year; financed by fixed share of the special hydrocarbon tax (IDH) with contributions from all government levels. - Bono Juancito Pinto: established 2007, annual cash transfer equivalent to about US$30 for children attending public primary schools. - Bono Juana Azurduy: introduced 2009, conditional cash transfer equivalent of about US$150 for regular pre-natal and pediatric checkups. - Authorities reported reduction in extreme poverty of 4.8 percentage points in 2008 and decline in school dropout rates from 5.2 percent to 2.8 percent following Bono Juancito Pinto. - Policy recommendations: - Improve efficiency and equity of tax system; strengthen direct taxation to reduce reliance on hydrocarbon revenues. - Rebalance spending responsibilities and revenue across central and departmental levels. - Gradually reduce hydrocarbon subsidies to improve targeting of social policies. - Strengthen budget process and fiscal framework for natural resource management. - Ensure laws implementing constitutional mandates provide clear and stable framework for private investment. ### Box 4 — Dollarization Trends and Policies (highlights) - Dollarization trends and drivers: - Declined markedly due to improving macroeconomic fundamentals, policies to promote Boliviano instruments, and large net interest-rate differentials. - Temporary slight increase in dollar deposits at height of global crisis. - Policy measures to internalize dollarization risks: - Marginal cash reserve requirement: 30 percent on US$ deposits above September 30, 2008 level. - Provisioning: additional up to 1.5 percent for dollar-denominated “A” loans since early 2009. - Financial transaction tax: 0.15 percent on credits and debits on dollar accounts; Boliviano transactions exempt. - Bid-ask FX spread gradually raised (now at 1.4 percent) since mid-2005. - Macroeconomic outlook (Box 4 selected projections): - Real GDP growth: 2009 3.3; 2010 4.0. - CPI (end-of-period): 2009 1.0; 2010 4.0. - Overall fiscal balance (percent of GDP): 2009 0.1; 2010 -0.3. - Current account balance (percent of GDP): 2009 3.5; 2010 2.6. - Public enterprise investment: - YPFB investment in 2010 expected at US$ 600 million (3.1 percent of GDP) financed by special central bank credit line established by law in 2008. - 2009 Budget law approved central bank financing to YPFB for up to US$1 billion (about 6 percent of GDP) with disbursements envisaged over a 3-year period. - Downside risk example: - A decline in oil prices to just below US$50 per barrel in 2010—an event with a 15 percent probability per option contracts—would impact external balance by 4.8 percent of GDP and fiscal balance by 3.8 percent of GDP. - Reserve cushions adequate to prevent fiscal adjustment if shock temporary, but central administration financing could be difficult due to small Treasury cushion. ### Medium-term outlook, scenarios, and policy considerations - Baseline medium-term projections: - Growth: stabilize around 4 percent over the medium-term. - Inflation: low single digits. - Current account surplus: in the range of 2–2½ percent of GDP. - International reserves: continue to strengthen. - Gross and net public debt: follow downward trends. - Fiscal projections and public investment: - After a small deficit in 2010, overall balance would return to small surpluses of about ½ percent of GDP. - Hydrocarbon-related revenue stabilizes at about 10 percent of GDP. - Public investment increases to about 11½ percent of GDP. - Non-hydrocarbon deficit stabilizes at 8 percent of GDP during projection period. - Upside risks and investment plans: - Large investment plans (hydrocarbons, mining, electricity) could produce mounting appreciation pressures—requiring fiscal and exchange rate responses. - YPFB plan: increase production to 100 millions of cubic meters per day (mm3/d) in medium term from about 40 mm3/d in 2008. - Total hydrocarbons investments 2010–15: $11.3 billion (state company share $7.5 billion). - Lithium: pilot project aiming at 30,000 tons by 2014; estimated ~140 million tons of metallic lithium in Salar de Uyuni; potential investments in lithium area estimated at $800 million. - Electricity: six large projects 2010–25 to more than double capacity from about 1,100MW. - Intergenerational equity and saving: - Proven reserves expected to last about 50 years at current production levels. - Saving an additional 1 percent of GDP annually over next 50 years would extend hydrocarbon revenue stream by an additional 5 years. - Recommendation: build a special fiscal fund, over and above central bank international reserves accumulation, to allow use of hydrocarbon-related resources while maintaining adequate international reserves. - Policy advice: - Tighten monetary conditions as economy gathers momentum; absorb excess liquidity (about 12 percent of deposits in banking system per Box 4). - Withdraw monetary impulse to reduce risks of excessive credit creation, foreign-exchange pressures, and inflation pick-up. - Central bank readiness to resume crawling-peg adjustments upon emergence of external imbalances; consider replacing crawling peg with more flexible regime conditional on lower dollarization. - Avoid future central bank financing of government or public corporations to enhance monetary policy credibility. ### Energy subsidies and fiscal space - Direct budget cost of energy subsidies: about 2 percent of GDP in 2010. - Additional costs: domestic sales at prices below international references pressure public enterprises (notably YPFB) and represent significant opportunity cost. - Policy recommendation: gradually phase out fuel subsidies to create fiscal space for increased savings and targeted social spending. ### Staff appraisal — performance, vulnerabilities, and policy priorities - 2009 performance summary: - Decelerated real GDP growth due to lower gas exports and weakening domestic demand; inflation declined sharply. - External current account and public sector balances remained in surplus. - Net international reserves reached record high levels, reducing financial/external vulnerabilities. - Financial sector: sound, ample liquidity, low nonperforming loans, adequate provisioning. - Recommended policy adjustments: - Tighten monetary conditions in 2010 to prevent excess liquidity, excessive credit creation, foreign-exchange pressures, and inflation pick-up. - Prepare contingency financing plans to protect investment and social spending given central administration vulnerability to oil price falls. - Strengthen non-hydrocarbon balance and generate additional savings to extend hydrocarbon wealth beyond physical depletion. - Structural reforms: stronger direct taxation, simplification of tax system, rebalancing spending responsibilities and revenue assignments, framework for fiscal management of natural resources. - Avoid additional central bank financing of government or public corporations; minimize fiscal dominance via fiscal stabilization rules. - Continue pending structural reforms and strong financial supervision; create deposit insurance; finalize institutional framework for orderly exit of failed institutions. - Strengthen AML legislation and UIF operations. - Improve investment climate via legal reforms implementing constitution, modern enterprise restructuring procedures (including bankruptcy), and domestic credit market development. ### Debt sustainability and stress-test findings - Overall assessment: public and external indebtedness resilient to series of shocks; risk of debt distress is low. - Baseline fiscal and debt projections: - Gross non-financial public sector debt-to-GDP: 39 percent in 2009; projected decline to 34 percent by 2014 and to 14 percent in 2029. - Total stock of external debt (public and private): projected to fall to about 22 percent of GDP by 2014 and stabilize around 9 percent by 2029. - Key public sector debt (percent of GDP) selected series: - 2006: 55.2; 2007: 40.9; 2008: 37.5; 2009: 39.4; 2010: 37.4; 2014: 33.5; 2019: 24.3; 2029: 14.2. - PV of public sector debt (percent of GDP) selected: - 2006: 29.9; 2009: 39.5; 2010: 39.4; 2014: 39.4; 2019: 34.3; 2029: 20.6. - Stress tests: - Most extreme combined shocks raise NPV debt ratios in medium term (peaking around 2019) but trajectories return to downward path thereafter. - Even under combinations of adverse shocks, debt indicators remain well below risky levels and flow indicators (debt service, gross financing needs) remain manageable. - Example downside scenario: permanently lower GDP growth raises PV debt-to-GDP but remains within manageable bounds. - Gross financing need (percent of GDP) selected: - 2006: 5.6; 2009: 5.0; 2010: 5.6; 2014: 4.3; 2029: 3.3. - Debt-service-to-revenue ratio (percent) selected: - 2006: 22.4; 2009: 14.7; 2010: 13.3; 2014: 11.8; 2029: 11.7. ### Fund relations, technical assistance, and data issues (Annex highlights) - As of November 30, 2009, Bolivia had no outstanding purchases or loans; latest SBA expired March 31, 2006. - Last Article IV consultation completed January 14, 2009; next Article IV proposed on standard 12-month cycle. - Exchange rate regime reclassified from crawling peg to a stabilized arrangement against the U.S. dollar; official selling rate unchanged at US$7.07 per U.S. dollar since October 2008. - Bolivia has received wide-ranging TA across FAD, STA, MCM during 2005–09 (listed missions and dates in Annex). - Data provision: some shortcomings but broadly adequate for surveillance; Bolivia participates in GDDS since November 2000 and Data ROSC published August 13, 2007. - IMF resident representative: Mr. Luis Breuer since June 2009. *Source: _cr1027 - International Monetary Fund, Staff Report for the 2009 Article IV Consultation (Informational Annex and Executive Summary; December 23, 2009; Statement dated January 15, 2010).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Macroeconomic context and recent performance - Bolivia benefited from a sharp improvement in terms of trade driven by increased export volumes of gas and mining and a concurrent boom in commodities prices, leading to a 230 percent increase in export receipts between 2005 and 2008. - Real GDP growth averaged 3.4 percent annually during 1996–2005 and increased to an average of 5.2 percent in 2006–08, peaking at 6.1 percent in 2008. - External current account surpluses averaged 11.8 percent of GDP and fiscal surpluses averaged 3.8 percent of GDP in 2006–08. - Gross public sector debt declined to less than 40 percent of GDP by 2008 and net public sector debt to only 20 percent of GDP. ### Impact of the global recession and near-term outlook (2009–2010) - The impact of the global recession on Bolivia has been milder than in other countries in the region. - Real output growth is estimated to slow to 3¼ percent in 2009, driven by lower export volumes (mostly reduced gas demand from Brazil) and falling remittances. - Inflation: 12‑month inflation rate stood at 0.8 percent in October and is projected at 1 percent by end-2009. - External current account: narrowed sharply to about 3½ percent of GDP in 2009, compared with 12 percent of GDP in 2008. - International reserves: equivalent to about 20 months of imports of goods and services and more than 100 percent of deposits in the banking sector. - SDR allocation to Bolivia was equivalent to about US$200 million; authorities intend to maintain these resources as part of reserves. ### Fiscal and monetary policy response in 2009 and 2010 - Fiscal stance: - The combined fiscal surplus is expected to narrow by 4 percentage points of GDP in 2009 to an almost balanced position. - The narrowing is largely due to lower hydrocarbon and tax revenue (by 5 percentage points of GDP). - The proposed fiscal stance for 2010—including a nearly balanced budget—is described as consistent with continued domestic and external stability. - Staff welcomes authorities’ consideration of reforms to reduce excessive reliance on hydrocarbon revenue, including stronger direct taxation, rebalancing of spending responsibilities and revenue assignments across different levels of government, and a fiscal framework for the management of natural resources. - Monetary stance: - The central bank reduced open market operations and let short-term policy interest rates decline to almost zero. - Deposit and loan rates have fallen to record low levels: 1½ percent and 8½ percent respectively. - Recommendation: As the economy gathers momentum, a tighter monetary policy is needed to reduce the risks of excessive credit creation, foreign-exchange pressures, and a pick-up in inflation. The monetary impulse should be withdrawn—especially if external interest rates were to increase—to absorb excess bank liquidity. ### Exchange rate policy - Since October 2008 the central bank has effectively pegged the Boliviano to the U.S. dollar, following a period of negative crawl that started in mid-2005. - Staff finds no significant evidence of exchange rate misalignment. - Authorities agree they should resume adjustments under the crawling peg should external imbalances re-emerge. - Over the medium term, staff recommends considering a move from the crawling peg towards a more flexible exchange rate regime to enhance the capacity to respond to external shocks. ### Financial sector soundness and policy - The financial system was barely affected by the global crisis due to limited integration with international capital markets and negligible foreign credit lines in banks’ balance sheets. - Financial system assets amount to US$ 10.4bn (about 60 percent of GDP), with commercial banks controlling over 78 percent of the system’s assets (excluding mutual and pension funds). - Key indicators and trends: - Capital adequacy ratio for Bolivia around the mid-teens (e.g., 13.4 in 2009, October). - Non-performing loans declined to 4.1 (October 2009). - Provisions/Non-performing loans increased to 181.0 (October 2009). - Return on assets around 1.6 (October 2009). - Return on equity around 19.7 (October 2009). - Dollarization trends: strengthening fundamentals and measures to induce voluntary Bolivianization of financial assets have led to a significant decline in dollarization. - Regulatory measures: authorities increased marginal reserve requirements on dollar deposits and tightened provisioning requirements, including higher provisioning for dollar-denominated loans. - Recommendation: Recent regulations to strengthen liquidity and credit risk management are appropriately focused. Staff suggests pressing ahead with pending structural reforms and maintaining vigilant supervision. ### Structural policies and investment climate - The administration has focused on expanding the social safety net and improving infrastructure; transfer programs target the poorest segments and investments in water, sanitation, energy, and roads have increased. - Social indicators and programs: - In 2007, 60 percent of the population lived in poverty, and 38 percent in extreme poverty; extreme poverty among the indigenous population was 61 percent. - Renta Dignidad: universal pension introduced in 2008, equivalent to about US$340 per year; financed by a fixed share of the special hydrocarbon tax (IDH) with contributions from all levels of government. - Bono Juancito Pinto: established in 2007, annual cash transfer equivalent to about US$30 for children attending public primary schools. - Bono Juana Azurduy: introduced in 2009, conditional cash transfer equivalent of about US$150 for regular pre-natal and pediatric medical checkups. - Authorities reported a reduction in extreme poverty of 4.8 percentage points in 2008 and a decline in school dropout rates from 5.2 percent to 2.8 percent following the Bono Juancito Pinto. - Policy recommendations: - Improve the efficiency and equity of the tax system and strengthen direct taxation to reduce reliance on hydrocarbon revenues. - Better balance spending responsibilities and revenue across central and departmental levels to address regional tensions and fiscal coordination. - Gradually reduce hydrocarbon subsidies to improve targeting of social policies. - Strengthen the budget process and fiscal framework for natural resource management. - Ensure laws implementing constitutional mandates provide a clear and stable framework for private investment to improve the investment climate. ### Medium-term considerations and vulnerabilities - Despite favorable trends during the boom, private investment remained subdued amid political tensions and uncertainty about property rights. - The external and fiscal buffers built during 2005–08 provide protection, but addressing structural issues and improving the investment climate remain top priorities. - Staff highlights the need for continued structural reforms to support medium-term growth and reduce vulnerabilities associated with hydrocarbon revenue dependence. *Source: _cr1027 - Executive Summary* ### Box 4. Dollarization Trends and Policies ### Box 4. Dollarization Trends and Policies ### Dollarization trends and empirical findings - Dollarization has declined markedly in recent years, attributed to improving macroeconomic fundamentals, authorities’ efforts to promote market instruments in Bolivianos, and large net interest-rate differentials. - Empirical evidence for Bolivia suggests that improvements in the fiscal balance and the reserve position have a large negative impact on the demand for dollar denominated debt instruments. - There was a slight increase in the share of dollar deposits at the height of the global crisis, reflecting a temporary rebalancing of private sector portfolios and lower interest-rate differentials. - Banking system deposit dollarization is shown historically for Bolivia, Uruguay, and Peru (chart years 2001–2009). - Expected returns and dollarization of bank deposits charted for 2000–2009 show: - Dollarization (RHS) - Expected return of boliviano denominated deposits - Expected return of FX denominated deposits - Sources: Central Bank of Bolivia, and Fund staff estimates. - Notes: - 1/ One-month deposits. - 2/ Moving average effective interest rate adjusted by depreciation. ### Policy measures to internalize dollarization risks - Marginal cash reserve requirements: - Financial intermediaries are subject to a marginal cash reserve requirement of 30 percent of deposits in US$ above the level observed on September 30, 2008. - Provisioning requirements for dollar-denominated loans: - Since early 2009, dollar-denominated loans classified as “A” (best quality) are required to constitute an additional provision of up to 1.5 percent. - Financial transaction tax: - A tax at a rate of 0.15 percent for both credits and debits applies on dollar denominated accounts while transactions in Bolivianos are exempted. - Bid-ask FX spread: - Since mid-2005 the central bank began gradually increasing the differential between the buying and selling rate (now at 1.4 percent) to discourage currency shifts. ### Macroeconomic outlook (selected indicators and projections) - The macroeconomic outlook for 2010 is favorable: Real GDP growth expected to pick up to 4 percent; inflation projected to rise to about 4 percent; external current account surplus expected to narrow to 2½ percent of GDP. - Selected economic indicators (Est./Proj. and historical): - Real GDP (percent change): 2006 4.8, 2007 4.6, 2008 6.1, 2009 3.3, 2010 4.0 - CPI (end-of-period, percent change): 2006 4.9, 2007 11.7, 2008 11.8, 2009 1.0, 2010 4.0 - Overall fiscal balance (percent of GDP): 2006 4.5, 2007 1.9, 2008 2.8, 2009 0.1, 2010 -0.3 - Non-hydrocarbons fiscal balance (percent of GDP): 2006 -5.7, 2007 -5.9, 2008 -8.4, 2009 -8.3, 2010 -7.7 - Current account balance (percent of GDP): 2006 11.3, 2007 12.0, 2008 12.1, 2009 3.5, 2010 2.6 - Public enterprise investment: - Investment at YPFB in 2010 expected at US$ 600 million (in 2010, or 3.1 percent of GDP), to be financed by a special credit line from the central bank established by law in 2008. - 2009 Budget law approved central bank financing to YPFB for up to US$1 billion (about 6 percent of GDP); agreement envisages disbursements up to this total over a 3-year period. ### Risks, scenarios, and staff advice - Downside risk: lower commodity prices and export volumes if the global rebound falters. - Staff estimate: a decline in oil prices to just below US$50 per barrel in 2010—an event with a 15 percent probability according to current option contracts on oil futures—would impact the external balance by 4.8 percent of GDP and the fiscal balance by 3.8 percent of GDP. - In this scenario, overall reserve cushions would be adequate to prevent adjustment of fiscal policy if the shock were temporary, but the central administration could face financing difficulties due to a relatively small financial cushion of the Treasury. - Staff recommendations on monetary and exchange rate policy: - Tighten monetary conditions as the economy gathers momentum and government implements investment plans; absorb excess liquidity in the banking system (which stands at about 12 percent of deposits). - Withdraw monetary impulse to reduce risks of excessive credit creation, foreign-exchange pressures, and pick-up in inflation—particularly if external interest rates increase. - Central bank readiness to resume adjustments under the crawling peg, in either direction, upon emergence of external imbalances. - Staff advised that exchange rate adjustments resume as soon as external conditions imply significant bank intervention would be needed to maintain the current rate. - Staff encouraged consideration of replacing the crawling peg, over the medium term, with a more flexible exchange rate regime to enhance capacity to respond to external shocks, conditional on a further substantial decline in dollarization. - To facilitate the move toward greater exchange rate flexibility, staff suggested a fiscal rule to smooth out commodity-price fluctuations and recommended avoiding future central bank financing of the government or public corporations to enhance monetary policy credibility. ### Exchange rate assessment (Box 5 summary) - Staff estimates using CGER methodologies (MB, ERER, ES) suggest the Boliviano is broadly in line with fundamentals, with evidence of some undervaluation. - Estimates of undervaluation: - MB approach: no REER misalignment; REER would need to appreciate by 1¼ percent to close the gap between underlying CAB (3½ percent of GDP) and estimated equilibrium CAB (2.8 percent of GDP). - ES approach: small undervaluation of about 3 percent, assuming Bolivia’s net foreign assets stabilize at end-2008 levels. - ERER approach: undervaluation of about 9 percent relative to estimated equilibrium (recent REER depreciation after trading partners’ currencies recovered). - Average undervaluation across approaches: -4.4 (undervaluation indicated as negative). - Caveats and uncertainties: - Methodologies do not fully incorporate implications of exhaustion of a natural resource within a predictable time-frame and associated intergenerational considerations. - High current account volatility due to commodity price fluctuations complicates separation of underlying trends from temporary changes. - Large structural changes in recent years imply past fundamentals may be poor guides for future appropriate levels. ### Structural and fiscal policy priorities - Structural reforms and legal changes: - Around 100 laws expected to be approved to implement the new constitution, including on intergovernmental relations, exploitation of natural resources, and land. - Supply-side strategy: - Authorities aim to expand natural resource production and industrialization with strategic partnerships with the private sector, allowing private participation in capital and management of public enterprises or production/service agreements. - Legal reforms to foster efficiency of public corporations, including wage policy and procurement; work on legislation for a guarantee fund for medium-size businesses and insurance for agricultural activities. - Staff advised modern procedures for restructuring private firms, including bankruptcy, to improve creditor protection. - Fiscal reforms (five important issues identified): - Tax reform: broaden the non-hydrocarbon tax base to reduce fiscal vulnerability to commodity price shocks and improve efficiency and equity; authorities are working on measures with Fund technical assistance to make the tax system more progressive. - Reform of intergovernmental fiscal relations: implement Law of Autonomies (expected in 2010) and manage reorganization via the Fiscal Pact to better align revenue assignments and spending responsibilities; current revenue-sharing directs around 55 percent of hydrocarbon revenue and 20 percent of other tax revenue to subnational governments and universities. - Long-term framework for management of natural resource wealth: consider formal framework with saving/withdrawal rule and financial savings placed in a special government fund with the central bank; assess fiscal position on the basis of the non-natural-resource balance. - Public enterprise reform: subject state-owned firms to annual independent audits, eliminate fiscal or quasi-fiscal functions, expand coverage of public sector accounts to include all public enterprises, and develop Ministry of Economy and Public Finance expertise in financial operations of large firms, particularly YPFB. - Public sector financial management: improve the budget process and public sector financial administration with Fund technical assistance. *Source: _cr1027 - Box 4. Dollarization Trends and Policies* ### 20. Staff encouraged the authorities to revisit the policy on energy subsidies, with a ### _cr1027 - 20. Staff encouraged the authorities to revisit the policy on energy subsidies, with a ### Energy subsidies and fiscal space - Staff encouraged authorities to revisit the policy on energy subsidies to create additional fiscal space for better-focused social programs. - Direct budget cost of energy subsidies: about 2 percent of GDP in 2010. - Additional costs arise from domestic sales at prices below international reference prices that pressure public enterprises (notably YPFB) and represent a significant opportunity cost. - Policy recommendation: - Gradually phase out fuel subsidies to create fiscal space to increase savings and targeted social spending. ### Financial sector policies and supervision - Recent regulations to strengthen liquidity and credit risk management were welcomed. - Staff suggestions and concerns: - Press ahead with pending structural reforms and maintain strong supervision. - Concern that the new constitution, by eliminating the ability of the central bank to assume any liabilities of failed banks, may limit bank resolution capacity. - Encourage establishment of a deposit insurance scheme, in line with FSAP recommendations. - Priority for supervision: closely supervise credit developments. - Support ASFI’s policy to expand the perimeter of regulation to non-bank intermediaries, including cooperatives and other unregulated financial institutions. - Authorities encouraged to request an update of the original FSAP assessment conducted in 2003. - Financial intelligence and AML/CFT: - Activities of the Financial Intelligence Unit (UIF) should be strengthened. - Legislation on anti-money laundering appears adequate, but the definition of terrorist financing activities and its criminalization should be incorporated into the law. - Normalize relations with the EGMONT Group and with GAFISUD to avoid reputational effects and to benefit from international cooperation, best practices, information exchange, training, and expertise sharing. - Assess adequacy of UIF size and budget to ensure effective operations. - Authorities indicated financial safety net arrangements were under review and would be addressed with new financial legislation. ### Medium-term outlook (baseline projections and scenarios) - Growth, inflation, and external balances: - Growth projected to stabilize around 4 percent over the medium-term. - Inflation projected to remain in the low single digits. - External current account surplus projected to be maintained. - Drivers and balances: - Growth driven mainly by expansion in the hydrocarbon and mining sectors, and somewhat higher public investment. - Current account surplus projected in the range of 2–2½ percent of GDP, reflecting higher gas exports (recovery of international prices and higher export volumes to Brazil) and higher imports associated with investment projects in hydrocarbon and mining. - International reserves would continue to strengthen while gross and net public debt would follow downward trends. - Fiscal projections and public investment: - After a small deficit in 2010, the overall balance would return to small surpluses, of about ½ percent of GDP. - Hydrocarbon-related revenue would stabilize at about 10 percent of GDP. - Public investment would increase to about 11½ percent of GDP. - The non-hydrocarbon deficit would stabilize at 8 percent of GDP during the projection period. - Policy considerations: - Upside risks from additional investment could produce mounting appreciation pressures to be addressed by fiscal and exchange rate adjustment. - Move to a more flexible exchange rate regime would help policy responsiveness. - Intergenerational equity: at current production levels, proven reserves expected to last about 50 years. - Saving an additional 1 percent of GDP annually over the next 50 years would extend the hydrocarbon revenue stream by an additional 5 years. - Recommendation to build a special fiscal fund, over and above central bank international reserves accumulation, to allow use of hydrocarbon-related resources while maintaining adequate international reserves. - Authorities noted intergenerational benefits must be balanced against development-related expenditure and broader natural resource management (including lithium development). ### Box 7 — Upside risks to potential growth (summary of large investment projects) - Hydrocarbons: - YPFB’s plan envisages an increase in production to 100 millions of cubic meters per day (mm3/d) in the medium term, from about 40 mm3/d in 2008. - Plan elements: new markets, large investments in exploration and exploitation, transportation and storage, refining capacity, and about 900,000 new household connections in the national gas network. - Industrialization projects: two separation plants to increase GLP volumes, liquids-from-gas project, fertilizers plant. - Total investments under the plan for 2010-15: $11.3 billion, of which $7.5 billion would correspond to the state company. - Mining (lithium focus): - Plans for production and industrialization of lithium; pilot project aiming at producing 30,000 tons by 2014 in Salar de Uyuni. - Estimated approximately 140 million tons of metallic lithium in Salar de Uyuni. - Authorities estimate total potential investments in lithium area at $800 million. - Electricity: - Six large projects—mostly hydroelectric—are in the pipeline for 2010–25, which would more than double current production capacity of about 1,100MW. - Implementation approach: - Authorities plan to attract FDI and develop public-private partnerships, promoting risk-sharing contracts between public enterprises and foreign investors. - Key legal reforms needed to attract foreign investment and implement investment plans; reform of legal and institutional framework is a priority. ### Staff appraisal — macroeconomic performance and policy advice - Performance and vulnerabilities: - Despite the global crisis, Bolivia performed well in 2009: decelerated real GDP growth due to lower gas exports and weakening domestic demand; inflation declined sharply. - External current account and public sector balances remained in surplus despite shocks. - Net international reserves (NIR) reached record high levels, reducing financial/external vulnerabilities. - Financial sector: sound, with ample liquidity, low nonperforming loans, and adequate provisioning. - Policy assessment: - Central bank action to halt boliviano appreciation provided a stable nominal anchor and used reserves to address temporary capital outflows in late 2008. - Interest rate reductions stimulated credit demand and supported domestic activity. - Fiscal policy protected social and infrastructure spending while accommodating cyclical revenue downturn; execution delays affected infrastructure spending. - Recommended policy adjustments: - As economy rebounds in 2010, tighten monetary conditions to prevent excess banking liquidity, excessive credit creation, foreign-exchange pressures, and a pick-up in inflation. - Prepare contingency financing plans to protect investment and social spending given central administration vulnerability to oil price falls. - Strengthen the non-hydrocarbon balance and generate additional savings to extend hydrocarbon wealth beyond physical depletion. - Structural reforms encouraged, including stronger direct taxation, simplification of the tax system, rebalancing spending responsibilities and revenue assignments across government levels, and a framework for fiscal management of natural resources. - Avoid additional central bank financing of government or public corporations; minimize fiscal dominance, including through fiscal stabilization rules, to facilitate credible and independent monetary policy. - Continue focus on pending structural reforms and strong financial supervision; create a deposit insurance scheme and finalize institutional framework for orderly exit of failed institutions. - Strengthen AML legislation and UIF operations. - Improve the investment climate via consistent legal reforms to implement the constitution, introduce modern procedures for restructuring private firms (including bankruptcy), and develop the domestic credit market. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1027.pdf* ### 34. It is proposed that the next Article IV consultation with Bolivia be held on the ### It is proposed that the next Article IV consultation with Bolivia be held on the standard 12-month cycle. ### Real Sector Developments - Real GDP growth is expected to decelerate to 3¼ percent in 2009. - Bolivia's rate of growth is described as the highest in the region in 2009. - Inflation is projected at 1 percent by end-2009. - Causes of slowdown: lower gas exports to Brazil, weakening of domestic demand, falling remittances. - Private investment remains low relative to historical averages and to regional standards. - CPI-inflation (y-y in percent) series shown for 2004–2009 (Bolivia and Latin America). - Domestic Demand Growth (in real terms, in percent) plotted for 2005–2009. - Real GDP Growth (in percent) series for 2004–2009. ### External Developments - External current account surplus will narrow sharply in 2009 mainly on account of lower export prices. - Bolivia turned into a net external creditor in 2008. - Net international reserves remain high, offering ample coverage of monetary aggregates. - The external current account surplus will decline substantially in 2009 due to lower gas and mining exports, and lower remittances. - The fall in gas exports stems from a decline in both prices and volumes. - Terms of trade have deteriorated in 2009, but "remain at historically high levels." - FDI inflows have been affected by global turmoil. - Natural Gas Exports represented 45% of total exports in 2008 (chart annotation). - External Current Account (in percent of GDP) plotted for 2003–2009. - Exports and Remittances (in percent of GDP) series for 2002–2009. - FDI (millions of USD) plotted for 2004–2009. - Terms of Trade (2004=100) series for 2004–2009. ### Fiscal Developments - Lower commodity prices and export volumes, combined with subdued domestic demand, are projected to shift Bolivia's fiscal position roughly into balance in 2009, after three years of substantial surpluses. - Public sector debt has decreased significantly and domestic debt vulnerabilities have been reduced. - The 2009 fiscal balance reversal of 4 percent of GDP mainly reflects a weakening in revenue. - The drop in revenues comes after a period of strong fiscal performance. - Fiscal drivers: automatic stabilizers and a decline in hydrocarbon related revenue. - Domestic debt vulnerabilities reduced via extended maturities and reduced foreign currency exposure. - Overall balance, non-hydrocarbon balance, public sector revenue and public enterprise operating balance series shown for 2003–2009. - Public sector debt: charts of gross and net non-financial public sector debt (percent of GDP) for 2003–2009. ### Monetary Developments - Monetary policy has been eased since July with the central bank reducing the net placements of open market operations. - The reduction in FX inflows, partially sterilized in boom years, led to a rapid deceleration in monetary aggregates' growth. - The central bank has maintained a de facto peg for the last 12 months to confront the effects of the global crisis and limit volatility in the FX market. - OMOs rates fell near zero and gradually transmitted to deposit rates. - NIR Accumulation and Sterilization (12-month flows in US$ billions) shown for 2005–2009. - Monetary aggregates y-y growth series for 2003–2009. - Nominal Exchange rate (Bs/US$) series for 2001–2009 (levels shown between 6.0 and 8.5 in chart). - Net BCB monthly purchases in FX market (in US$ millions) plotted for 2004–2009. - Monetary aggregates and interest rates monthly series displayed (Dec 2008 through Sep). ### Selected Social and Economic Indicators (Table 1 highlights) - Area (sq. km) 1,084,380 - Population (2008) Total (million) 9.7 - Annual rate of growth, 1991-2002 (percent a year) 3.5 - Density (per sq. km.) 8.9 - GDP per capita (US$) 2008 1,714.3 - Poverty rate in percent (2006) 59.9 - Unemployment rate in percent (2006) 8.0 - Access to electricity (2006) Percent of dwellings 76.2; Urban 95.2; Rural 23.9 - Access to safe water (2006) Percent of population 86.0; Urban 96.0; Rural 69.0 - Life expectancy at birth in years (2007) 65.5 - Infant mortality (per thousand live births, 2007) 47.6 - Adult literacy rate in percent (2007) 90.7 - GDP (2008) Billions of U.S. Dollars 16.6; Billions of bolivianos 120.7 ### Macro Projections and Indicators (selected series from Table 1) - Real GDP: 2006 4.8; 2007 4.6; 2008 6.1; 2009 3.3; projections 2010–2014 all 4.0 (annual percent changes). - GDP deflator: 2006 13.7; 2007 7.4; 2008 10.4; 2009 -1.5; 2010 4.1; 2011 3.4; 2012 2.7; 2013 2.8; 2014 2.8. - CPI inflation (period average): 2006 4.3; 2007 8.7; 2008 14.0; 2009 3.5; 2010 3.3; 2011 3.7; 2012 3.5; 2013 3.5; 2014 3.5. - Total investment (percent of GDP): 2006 13.9; 2007 15.2; 2008 17.6; 2009 16.1; projections ~17.7–17.8. - Gross national savings (percent of GDP): 2006 26.4; 2007 28.6; 2008 29.0; 2009 19.6; projections 2010–2014 around 19.4–19.9. - Combined public sector revenues and grants (percent of GDP): 2006 34.3; 2007 34.5; 2008 38.9; 2009 32.5; projections 2010–2014 ~34.0–35.1. - Hydrocarbons related revenue (percent of GDP): 2006 10.2; 2007 9.3; 2008 12.8; 2009 9.4; projections 2010–2014 roughly 10.5–10.9. - Overall balance (percent of GDP): 2006 4.5; 2007 1.7; 2008 2.8; 2009 0.1; 2010 -0.3; 2011 0.2; 2012 0.4; 2013 0.4; 2014 0.4. - Total net public debt (percent of GDP): 2006 41.9; 2007 26.8; 2008 20.6; 2009 19.6; projections down to 12.7 by 2014. - External Current Account (percent of GDP) series: 2006 12.0; 2007 12.1; 2008 3.5; 2009 2.6; projections 2010–2014 around 2.0–2.2. ### Operations of the Combined Public Sector (Tables 2 & 3 highlights) - Total revenue and grants (percent of GDP): 2006 34.3; 2007 34.5; 2008 38.9; 2009 32.5; projections 2010–2014 ~34.0. - Tax revenue (percent of GDP): 2006 27.8; 2007 27.8; 2008 28.5; 2009 27.4; projections ~26.7–27.4. - IDH and royalties (percent of GDP): 2006 9.4; 2007 9.0; 2008 8.5; 2009 8.6; projections ~8.3–8.6. - Total spending (percent of GDP): 2006 29.8; 2007 31.8; 2008 34.6; 2009 32.1; projections ~33.6–34.6. - Capital expenditure (percent of GDP): 2006 10.2; 2007 11.8; 2008 11.9; 2009 9.8; projections 2010–2014 11.3–11.5. - Overall balance before nationalization (percent of GDP): 2006 4.5; 2007 2.6; 2008 4.3; 2009 0.4; 2010 -0.3; 2011 0.2; 2012 0.4; 2013 0.4; 2014 0.4. - Non-hydrocarbon balance, before nationalization (percent of GDP): 2006 -5.7; 2007 -5.9; 2008 -8.4; 2009 -8.3; projections ~-7.7 to -8.7. - In levels (millions of Bolivianos): Total revenue and grants 2006 31,473; 2007 35,428; 2008 46,953; 2009 39,944; 2010 45,629; projections through 2014 up to 59,318. ### Summary Balance of Payments (Table 4 highlights, US$ millions) - Current account (US$ millions): 2006 1,591; 2007 2,015; 2008 620; 2009 489; projections 2010–2014 412–541. - Trade balance (US$ millions): 2006 1,004; 2007 1,467; 2008 445; 2009 332; projections 2010–2014 356–475. - Exports, f.o.b. (US$ millions): 2006 4,458; 2007 6,448; 2008 4,831; 2009 5,527; projections to 2014 up to 7,028. - Natural gas exports (US$ millions): 2006 1,971; 2007 3,158; 2008 1,975; 2009 2,468; projections 2010 2,777; 2011 2,893; 2012 3,022; 2013 3,147. - To Brazil (US$ millions): 2006 1,357; 2007 1,606; 2008 2,850; 2009 1,581; projections 2010–2014 up to 2,608. - To Brazil: volume (mmm3 p/day) series includes 24.4, 26.9, 30.5, 22.3, 24.0, 27.0, 28.0, 29.0, 30.0. - To Brazil: price ($/000cf3) series includes 4.3, 4.6, 7.2, 5.5, 6.3, 6.5, 6.6, 6.7, 6.7. - Imports, c.i.f. (US$ millions): 2006 -3,455; 2007 -4,980; 2008 -4,386; 2009 -5,195; projections -5,673 to -6,591. - Services (net) (US$ millions): 2006 -189; 2007 -200; 2008 -245; 2009 -315; projections -393 to -508. - Income (net) (US$ millions): 2006 -489; 2007 -536; 2008 -598; 2009 -609; projections -675 to -733. - Interest due on external public sector debt series: -133, -109, -111, -98, -119, -116, -114, -120, -128 (2006–2014). - Transfers (net) (US$ millions): 2006 1,266; 2007 1,284; 2008 1,018; 2009 1,081; projections 2010–2014 1,124–1,345. - Capital and financial account (US$ millions): 2006 361; 2007 359; 2008 -59; 2009 -75; projections -93 to -178. - Direct investment (net) (US$ millions): 2006 366; 2007 513; 2008 274; 2009 246; projections 2010–2014 298–300. - Overall balance (US$ millions): 2006 1,952; 2007 2,374; 2008 561; 2009 414; projections 2010–2014 319–363. - Gross official reserves (end-of-period, US$ millions): 2006 5,319; 2007 7,722; 2008 8,843; 2009 9,257; 2010 9,576; 2011 9,892; 2012 10,256; 2013 10,618. ### Central Bank of Bolivia (Table 5 highlights) - Net international reserves (flows in US$ millions): 2005 503; 2006 1,289; 2007 1,999; 2008 2,400; 2009 340; 2010 414. - Net international reserves (stocks in millions of U.S. dollars): 2005 4,105; 2006 10,270; 2007 15,491; 2008 17,449; 2009 2,372; 2010 2,788 (table shows flows and stocks with valuation adjustments). - Net domestic assets (percent changes): 2005 -51.6; 2006 -124.2; 2007 -115.8; 2008 -104.3; 2009 -11.8; 2010 -7.0. - Currency issue (average stock in percent of GDP) memorandum: 5.6 (2005); 7.1 (2006); 9.8 (2007); 12.7 (2008); 14.3 (2009); 14.8 (2010). - NIR coverage of broad money (percent) listed as 39.4 (2005), 61.9 (2006), 75.1 (2007), 84.7 (2008). ### Financial System Survey (Table 6 highlights) - Broad money (flows in millions of Bolivianos): 2005 4,251; 2006 6,423; 2007 12,913; 2008 11,875; 2009 10,671; 2010 9,199. - Broad money (stocks in millions of Bolivianos): 2005 34,765; 2006 40,706; 2007 53,588; 2008 63,523; 2009 73,657; 2010 82,856. - Credit to the private sector (stocks in millions of Bolivianos): 2005 30,778; 2006 32,171; 2007 36,537; 2008 38,926; 2009 40,547; 2010 48,056. - Broad money (changes in percent of beginning-of-period broad money): 2005 14.1; 2006 18.5; 2007 31.7; 2008 22.2; 2009 16.8; 2010 12.5. - Financial system NFA coverage of deposits (percent): 66.8 (2005); 96.3 (2006); 115.7 (2007); 131.9 (2008); 117.6 (2009); 110.1 (2010). - Dollarization (end-period stocks): Foreign currency and dollar-indexed deposits 84.2 (2005); 76.2 (2006); 65.0 (2007); 52.6 (2008); 53.0 (2009); 52.0 (2010). Foreign currency and dollar-indexed credit 92.6 (2005); 86.9 (2006); 79.1 (2007); 66.3 (2008); 69.1 (2009); 69.2 (2010). ### Consolidated Commercial Banks and Non-bank Depository Institutions (Table 7 highlights) - Deposits (stocks in millions of Bolivianos): 2005 29,171; 2006 32,694; 2007 40,470; 2008 47,715; 2009 57,575; 2010 65,328. - Local currency deposits (stocks in millions of Bolivianos): 2005 4,611; 2006 7,771; 2007 14,177; 2008 22,604; 2009 27,060; 2010 31,357. - Foreign currency deposits (stocks in millions of Bolivianos): 2005 24,559; 2006 24,922; 2007 26,293; 2008 25,112; 2009 30,515; 2010 33,971. - U.S. dollar and dollar-indexed deposits (percent of total deposits): 84.2 (2005); 76.2 (2006); 65.0 (2007); 52.6 (2008); 53.0 (2009); 52.0 (2010). - U.S. dollar and dollar-indexed credit (percent of total credit): 92.6 (2005); 86.9 (2006); 79.1 (2007); 66.3 (2008); 69.1 (2009); 69.2 (2010). ### Selected Vulnerability Indicators (Table 8 highlights) - Net international reserves (US$ millions): 2005 1,714; 2006 3,178; 2007 5,319; 2008 7,722; 2009 8,453. - NIR coverage (percent of dollar deposits): 2005 56.9; 2006 101.6; 2007 156.8; 2008 223.6; 2009 193.1. - NIR coverage (percent of total deposits): 2005 47.9; 2006 77.4; 2007 101.9; 2008 117.7; 2009 102.3. - NIR coverage (percent of broad money): 2005 39.4; 2006 61.9; 2007 75.1; 2008 98.1; 2009 80.0. - NFA coverage of dollar deposits (percent): 2005 79.4; 2006 126.4; 2007 178.1; 2008 250.7; 2009 220.7. - Total gross NFPS debt (percent of GDP): 2005 80.4; 2006 55.2; 2007 40.9; 2008 37.5; 2009 39.4 (table notes debt and fiscal figures are end-2009 projections). - Hydrocarbon revenue (in percent of total revenues): 2004 23.4; 2005 33.0; 2006 30.0; 2007 40.6; 2008 30.9. - Non-hydrocarbon fiscal balance (in percent of GDP): 2004 -8.9; 2005 -5.7; 2006 -5.9; 2007 -8.4; 2008 -8.3. - Gas exports (in percent of total exports): 2004 38.9; 2005 43.1; 2006 44.2; 2007 49.0; 2008 49.9. - Banking sector: Nonperforming loans (percent of total loans) 2005 11.3; 2006 8.7; 2007 5.6; 2008 4.3; 2009 4.1. - Capital adequacy ratio: 14.7 (2005); 13.3 (2006); 12.6 (2007); 13.7 (2008); 13.4 (2009). - Profits after tax (percent of equity): 6.4 (2005); 13.3 (2006); 21.2 (2007); 20.3 (2008); 19.7 (2009). - Composition of bank deposits (percent): Dollar deposits 84.2 (2005); 76.2 (2006); 65.0 (2007); 52.6 (2008); 55.8 (2009). ### Millennium Development Goals (Table 9 highlights) - Target 1 / Population below US$1 a day (in percent): 41.2 (1990); 36.7; 37.7; ...; 24.1 (target for 2015). - Target 2 / Prevalence of child malnutrition (percent of children under 3): 38.3 (1990); 25.5 (2003); target 19.0. - Net primary enrollment ratio (percent of relevant age group): 94.0 (first observation); later entries up to 100.0 (target). - Infant mortality rate (per 1,000 live births): 89 (1990); 47.6 (observed); target 30.0. - Immunization against measles (percent of children under 12-months): 68 (1994); 84.5; 82.6; target 95.0. - Maternal mortality ratio (modeled estimate, per 100,000 live births): 416 (1990); later 290; target 104. - Proportion of births attended by skilled health personnel (percent): 27 (1995); 59.6; 61.9; target 70.0. - HIV prevalence, total (percent ages 15-24): 1.8 (1990); 13.4; 19.3; 19.2; target 13.0. - Incidence of malaria (per 1,000 people): 7.5 (1990); 4.1; 5.5; 5.2; target 2.0. - Access to potable water (percent of population): 57.5 (1992); 72.3; 71.7; 73.1; target 78.5. - Access to improved sanitation facilities (percent of population): 28 (1992); 41.6; 43.5; 55.7; target 64.0. - Mobile and fixed-line telephone subscribers (per 100 people): 2.7 (1990); 26.9; 33.4; 37.9; 41.3. *Source: Central Bank of Bolivia; Ministry of the Economy and Public Finances; Bolivian authorities; World Bank Development Indicators; and Fund staff estimates and projections.* ### ANNEX 1. SUMMARY OF ANNEXES ### ANNEX 1. SUMMARY OF ANNEXES ### Fund relations - As of November 30, 2009, 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 January 14, 2009. - The Bolivian exchange rate regime has been reclassified from a crawling peg to a stabilized arrangement against the U.S. dollar. - Bolivia has received wide-ranging TA in recent years. - Mr. Luis Breuer has been the IMF regional resident representative (based in Lima, Peru) since June 2009. ### Relations with the World Bank Group - A new Interim Strategy Note (ISN) for FY10-11 was discussed and approved by the Board on June 2, 2009. - The ISN has a total envelope of US$137 million of IDA resources. - The lending program amounts to US$90 million in predefined operations while US$47 million has been left available for flexible use. - The flexible US$47 million is intended to respond to unforeseen needs, support the Government’s efforts to stem the impact of the global crisis, and to reduce extreme poverty. - The World Bank’s portfolio in Bolivia comprises 11 investment projects for a total amount of US$302.8 million of which US$190.6 remain undisbursed. ### Relations with the Inter-American Development Bank - As of November 30, 2009, Bolivia’s outstanding debt to the IDB was approximately US$562 millions with undisbursed approved funds for US$587.8 millions. - New IDB lending to Bolivia will follow newly adopted operational guidelines for concessional funds under the Fund of Special Operations performance-based allocation system. - The Bank’s 2009 operative program contains a portfolio of sovereign guaranteed operations of 6 loans for a total amount of US$191 millions for the year, concentrated in water, housing and agricultural productivity sectors. - An additional of 9 loans for US$200 millions has been identified and are already in the Bank’s lending pipeline for the 2010 cycle. ### 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. ### External and Public Debt Sustainability Analysis — Summary findings - Following MDRI debt relief, Bolivia’s public debt sustainability has continued to improve as a result of overall fiscal surpluses, and the risk of debt distress is low. - Debt ratios continue to display ample margins with respect to risk thresholds and are expected to decline further under the baseline scenario. - Debt service is projected to remain low, reflecting predominantly long maturities of remaining stocks of both domestic and foreign debt. - The path of debt ratios would deteriorate somewhat under standard stress tests, but would remain within manageable bounds over the medium- and long run. ### Background - Between 2004 and 2008, gross public debt fell by 50 percentage points of GDP to 38 percent of GDP in 2008. - Multilateral external debt has fallen sharply; bilateral external debt has increased, driven by higher lending from South American countries, mainly Venezuela. - Since 2005, average maturities have been successfully extended and foreign currency exposure has been reduced. - Deposits of the non-financial public sector in the financial system amount to about 21 percent of GDP at present, improving solvency when measuring net public debt (gross debt minus those deposits). - On account of declining gross debt, net debt ratios would reach very low levels during the projection period. ### Baseline Scenario (2009–29) — Main assumptions and projections - Average annual real GDP growth: 4 percent until 2029. - Average deflator inflation: 2.4 percent per year on average until 2014, increasing to 3.5 percent over the long term. - Export and import growth: in line with the medium-term staff projections and the assumption of stable import and export ratios to GDP over the long term. - Financing strategy: commercial debt is expected to remain nil, with CAF expected to remain as the main source of financing. - Net external financing flows are expected to be positive until 2014 despite the overall balanced fiscal position. - Complex intergovernmental fiscal relations may require some additional domestic financing. - Excess funds at the level of the non-financial sector will continue to be accumulated as deposits. - Average concessionality of public sector borrowing: projected to evolve, in the medium-term, based on projected disbursements of official loans. - Fiscal projection: after a projected small deficit in 2010, the fiscal position would return to small surpluses in 2011–2014, with an average overall surplus of about 0.4 percent of GDP, and would remain at this level throughout the projection period. - Gross non-financial sector public debt-to-GDP ratio: 39 percent in 2009, projected to decline to 34 percent by 2014, and to 14 percent in 2029. - Total stock of external debt (public and private): projected to fall to about 22 percent of GDP by 2014, and to stabilize around 9 percent of GDP by 2029. - Bolivia is classified as a medium performer by the three-year average of the World Bank’s CPIA scores; all debt burden indicators are well below indicative thresholds for medium performers. ### Stress Tests - The assessment that the risk of debt distress is low would hold even under significant stress tests. - The path of debt ratios would deteriorate somewhat under standard stress tests but remain within manageable bounds over the medium- and long run. *Prepared by the Staff of the International Monetary Fund; Approved by Antônio Furtado and Michele Shannon; December 23, 2009.* ### 4. Standard stress tests suggest that the sustainability of Bolivia’s public and ### _cr1027 - 4. Standard stress tests suggest that the sustainability of Bolivia’s public and external indebtedness is resilient to a series of shocks. ### Summary finding: overall resilience - Under the most extreme stress test to external debt—a combined shock to debt concessionality, GDP growth, export growth, and external inflation—the ratio of the NPV of debt to GDP "deteriorates somewhat and eventually returns to a downward trajectory." - "In all cases, it would remain well below risky levels." - Flow indicators also remain manageable under all stress tests. - For public debt, the biggest risk stems from a temporary or permanently lower GDP growth; however, tests indicate that ratios remain within manageable levels. ### Key fiscal-debt indicators (selected actuals and projections) - Public sector debt (percent of GDP): - 2006: 55.2 - 2007: 40.9 - 2008: 37.5 - 2009: 39.4 - 2010: 37.4 - 2011: 36.1 - 2012: 35.1 - 2013: 34.4 - 2014: 33.5 - 2019: 24.3 - 2029: 14.2 - Public sector debt (foreign-currency denominated, percent of GDP): - 2006: 37.4 - 2007: 25.0 - 2008: 21.6 - 2009: 22.1 - 2010: 21.3 - 2011: 21.0 - 2012: 20.9 - 2013: 20.9 - 2014: 20.8 - 2019: 15.3 - 2029: 9.0 - Change in public sector debt (percent of GDP): - 2006: -25.1 - 2007: -14.3 - 2008: -3.5 - 2009: 1.9 - 2010: -2.0 - 2011: -1.3 - 2012: -1.0 - 2013: -0.7 - 2014: -0.8 - 2019: -2.2 - 2029: -1.4 - Identified debt-creating flows (percent of GDP): - 2006: -20.0 - 2007: -11.0 - 2008: -10.9 - 2009: -0.8 - 2010: -2.8 - 2011: -2.7 - 2012: -2.7 - 2013: -2.5 - 2014: -2.5 - 2019: -2.3 - 2029: -1.4 - Primary deficit (percent of GDP) entries include: - 2006: -7.0 - 2007: -5.1 - 2008: -6.4 - 2009: -0.1 - 2010: 5.4 - 2011: -2.7 - 2012: -1.9 - 2013: -2.3 - 2014: -2.5 - 2019: -2.3 - 2029: -2.3 - Revenue and grants (percent of GDP): - 2006: 34.3 - 2007: 34.4 - 2008: 38.9 - 2009: 32.5 - 2010: 34.3 - 2011: 34.7 - 2012: 35.1 - 2013: 34.0 - 2014: 34.0 - 2019: 35.6 - 2029: 32.3 - PV of public sector debt (percent of GDP): - 2006: 29.9 - 2007: 26.5 - 2008: 36.3 - 2009: 39.5 - 2010: 39.4 - 2011: 39.2 - 2012: 39.1 - 2013: 39.4 - 2014: 39.4 - 2019: 34.3 - 2029: 20.6 - PV of public sector debt (foreign-currency denominated, percent of GDP): - 2006: 12.1 - 2007: 10.5 - 2008: 20.4 - 2009: 22.2 - 2010: 23.3 - 2011: 24.1 - 2012: 24.8 - 2013: 25.9 - 2014: 26.7 - 2019: 25.3 - 2029: 15.4 - Gross financing need (percent of GDP): - 2006: 5.6 - 2007: 9.8 - 2008: 3.6 - 2009: 5.0 - 2010: 5.6 - 2011: 4.8 - 2012: 4.4 - 2013: 4.4 - 2014: 4.3 - 2019: 3.9 - 2029: 3.3 - Debt service-to-revenue and grants ratio (percent): - 2006: 22.4 - 2007: 35.3 - 2008: 21.9 - 2009: 14.7 - 2010: 13.3 - 2011: 12.5 - 2012: 12.0 - 2013: 11.9 - 2014: 11.8 - 2019: 10.4 - 2029: 11.7 - Primary deficit that stabilizes the debt-to-GDP ratio (percent of GDP): - 2006: 18.1 - 2007: 9.2 - 2008: -2.9 - 2009: -4.6 - 2010: 0.1 - 2011: -1.0 - 2012: -1.5 - 2013: -1.6 - 2014: -1.5 - 2019: 0.4 - 2029: -0.2 ### External debt indicators (selected) - External debt (nominal, percent of GDP): - 2006: 38.4 - 2007: 25.3 - 2008: 22.0 - 2009: 22.6 - 2010: 21.9 - 2011: 21.7 - 2012: 21.6 - 2013: 21.8 - 2014: 21.8 - 2019: 16.0 - 2029: 9.1 - External public and publicly guaranteed (PPG) debt (percent of GDP): - 2006: 28.2 - 2007: 16.1 - 2008: 14.3 - 2009: 15.3 - 2010: 15.2 - 2011: 15.4 - 2012: 15.8 - 2013: 16.3 - 2014: 16.6 - 2019: 12.4 - 2029: 7.4 - PV of external debt (percent of GDP, selected projection entries): - 2010: 19.4 - 2011: 21.2 - 2012: 22.4 - 2013: 23.3 - 2014: 24.0 - 2019: 25.1 - 2029: 26.0 - PV of PPG external debt (percent of GDP, selected entries): - 2010: 11.6 - 2011: 13.9 - 2012: 15.7 - 2013: 17.0 - 2014: 18.2 - 2019: 19.6 - 2029: 20.8 - Debt service-to-exports ratio (percent) (selected): - 2006: 23.5 - 2007: 34.1 - 2008: 19.0 - 2009: 8.2 - 2010: 7.4 - 2011: 7.3 - 2012: 7.3 - 2013: 6.9 - 2014: 6.9 - 2019: 7.6 - 2029: 5.5 - PPG debt service-to-exports ratio (percent) (selected): - 2006: 16.4 - 2007: 28.0 - 2008: 16.9 - 2009: 5.5 - 2010: 4.9 - 2011: 4.6 - 2012: 4.5 - 2013: 4.2 - 2014: 4.4 - 2019: 5.8 - 2029: 4.6 ### Key macroeconomic and fiscal assumptions used in projections - Real GDP growth (in percent): baseline entries include 4.8, 4.6, 6.1, 3.8, 2.3, with repeated projection baseline values of 4.0 and 3.9 in later averaged rows; projected steady values include 4.0 and 3.9. - Average nominal interest rate on forex debt (in percent) entries: 3.5, 4.8, 5.7, 4.1, 1.1, 6.1, 5.7, 6.0, 6.0, 6.0, 6.1, 6.0, 6.5, 8.3, 7.1. - Average real interest rate on domestic debt (in percent) entries: -6.8, 0.0, -2.7, -2.0, 2.9, 8.9, 2.6, 3.3, 3.9, 4.0, 3.9, 4.4, 1.8, 7.1, 3.4. - Inflation rate (GDP deflator, in percent) entries include 13.7, 7.4, 10.4, 7.5, 3.6, -1.5, 4.1, 3.4, 2.8, 2.7, 2.8, 2.4, 3.5. - Growth of exports of G&S (US dollar terms, in percent) (selected): 32.7, 13.9, 40.1, 18.6, 14.8, -23.6, 13.2, 8.4, 5.2, 5.6, 5.1, 2.3, 7.8. - Growth of imports of G&S (US dollar terms, in percent) (selected): 20.7, 19.8, 37.1, 10.8, 14.5, -10.0, 17.3, 9.3, 4.8, 5.4, 6.1, 5.5, 7.9. - Grant-equivalent financing (in percent of GDP) projection entries: 1.3, 1.5, 1.6, 1.6, 1.6, 1.6, 1.5, 1.3, 1.4. - Grant-equivalent financing (in percent of external financing) projection entries: 28.3, 29.5, 33.7, 36.6, 35.4, 35.5, 42.4, 56.1, 46.4. - Memorandum: Nominal GDP (Billions of US dollars): - 2006: 11.5 - 2007: 13.3 - 2008: 16.6 - 2009: 17.6 - 2010: 19.1 - 2011: 20.5 - 2012: 21.9 - 2013: 23.4 - 2014: 25.0 - 2019: 36.2 - 2029: 75.9 ### Sensitivity analysis and stress-test scenarios (high-level) - Table 2a: Sensitivity Analysis for Key Indicators of Public Debt 2009-2029 presents: - Baseline PV of Debt-to-GDP Ratio series around "39 39 39 39 39 39 34 21" for selected years; detailed scenario labels and numeric series include: - A1. Real GDP growth and primary balance at historical averages: PV of Debt-to-GDP Ratio entries include "39 41 43 45 48 50 52 47". - A2. Primary balance unchanged from 2009: "39 38 38 37 37 37 28 7". - A3. Permanently lower GDP growth: "39 40 40 40 41 42 44 50". - Bound tests B1-B5 and shocks such as a one-time 30 percent real depreciation in 2010 and a 10 percent of GDP increase in other debt-creating flows in 2010 are reported with corresponding indicator paths. - Table 3a and 3b: External Debt Sustainability Framework, Baseline Scenario, 2006-2029: - Alternative scenarios and bound tests cover shocks to real GDP growth, export value growth, US dollar GDP deflator, net non-debt creating flows, combinations of shocks, and a one-time 30 percent nominal depreciation relative to baseline. - In specified figures, the "most extreme stress test" is the test that yields the highest ratio in 2019; for external debt indicators the most extreme shock varies by subfigure (e.g., One-time depreciation shock; Terms shock; Exports shock). - Figures (descriptive): - Figure 1: Shows PV of Debt-to-Revenue Ratio, PV of Debt-to-GDP Ratio, and Debt Service-to-Revenue Ratio under Baseline, Fix Primary Balance, Most extreme shock, and Growth scenarios for 2009-2029. - Figure 2: Shows public and PPG external debt indicators under alternative scenarios for 2009-2029; captions note which scenario produced the most extreme result in each panel. ### Notable stress-test outcomes (qualitative) - The most extreme stress tests increase NPV debt ratios in the medium term (notably to peaks in 2019 in the exercise), but after the peak the trajectories return to downward paths in the baseline projections. - One-time 30 percent real/nominal depreciation scenarios and less-favorable-financing (terms) scenarios are among the more severe individual shocks for external debt indicators. - Even under combinations of adverse shocks (e.g., lower growth, lower export values, worse financing terms), the tests indicate public and external debt indicators remain below identified "risky levels" and flow indicators (debt service, gross financing needs) remain manageable. ### Key definitions and methodology notes (as provided) - Gross financing need is defined as "the primary deficit plus debt service plus the stock of short-term debt at the end of the last period." - Debt service is defined as "the sum of interest and amortization of medium and long-term debt." - PV of external debt assumes PV of private sector debt is equivalent to its face value for calculation. - Stress-test footnotes detail construction of scenarios: e.g., A1 uses historical averages; A2 assumes higher interest on new borrowing by 2 percentage points (footnote 2); depreciation shocks are percentage declines in the dollar/local currency rate (footnote 5); combination shocks use one-half standard deviation scaling. *Source: INTERNATIONAL MONETARY FUND, Staff Report for the 2009 Article IV Consultation—Informational Annex (December 23, 2009).* ### 1. Fund Relations .......................................................................................... ### _cr1027 - 1. Fund Relations .......................................................................................... ### I. 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. ### II. General Resources Account - Quota: 171.50 SDR Million (100.00 percent of Quota) - Fund holdings of currency: 162.64 SDR Million (94.83 percent of Quota) - Reserve position in Fund: 8.87 SDR Million (5.17 percent of Quota) ### III. SDR Department - Net cumulative allocation: 164.13 SDR Million (100.00 percent of Allocation) - Holdings: 164.91 SDR Million (100.47 percent of Allocation) ### IV. Outstanding Purchases and Loans - None ### V. Financial Arrangements (Approved and Drawn) - Stand-By: Approval date 4/02/03; Expiration date 3/31/06; Amount approved (SDR million) 145.78; Amount drawn (SDR million) 111.50 - PRGF: Approval date 9/18/98; Expiration date 6/07/02; Amount approved (SDR million) 100.96; Amount drawn (SDR million) 63.86 - PRGF: Approval date 12/19/94; Expiration date 9/09/98; Amount approved (SDR million) 100.96; Amount drawn (SDR million) 100.96 ### VI. Projected Obligations to the Fund (SDR million; based on existing use of resources and present holdings of SDRs) - Charges/Interest: - 2009: 0.01 - 2010: 0.01 - 2011: 0.01 - 2012: 0.01 - Principal and Total: reported as 0.00 for 2009, 2010, 2011, 2012 ### VII. Implementation of HIPC Initiative - Decision point dates: Original framework Sep 1997; Enhanced framework Feb 2000 - Assistance committed by all creditors (US$ Million): Original 448.00; Enhanced 854.00 - Of which: IMF assistance (US$ million): Original 29.00; Enhanced 55.32 - (SDR equivalent in millions): Original 21.25; Enhanced 41.14 - Completion point dates: Original Sep 1998; Enhanced Jun 2001 - Disbursement of IMF assistance (SDR Million): - Assistance disbursed to the member: 21.25 (Original); 41.14 (Enhanced); Total 62.39 - Completion point balance: 21.25 (Original); 41.14 (Enhanced); Total 62.39 - Additional disbursement of interest income (Enhanced): 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), Delivery Date January 2006: - GRA 6.70; PRGF 71.15; Total 77.85 - GRA 83.08; PRGF N/A; Total 83.08 ### VIII. Safeguards Assessment - A safeguards assessment of the Central Bank of Bolivia (CBB) was completed on June 27, 2003 (with respect to the April 2, 2003 SBA); no systemic risks identified but uncertainties noted about de facto lack of operational independence and program monetary data. - Update assessment completed September 27, 2004 (in conjunction with SBA augmentation) confirmed measures implemented to address previously identified vulnerabilities, except those requiring a change in the central bank law. - Currently, CBB is not subject to the policy. ### IX. Exchange Arrangement - Currency: Boliviano. - Exchange rate regime: a stabilized arrangement against the U.S. dollar; authorities indicate de jure regime is a crawling peg adjusted from time to time. - Official selling rate unchanged at US$7.07 per U.S. dollar since October 2008. ### X. Article IV Consultation - Last Article IV consultation completed by the Executive Board on January 14, 2009 (IMF Country Report No. 09/27). - Bolivia is on a standard 12-month consultation cycle. ### XI. Technical Assistance, 2005–09 (Department — Purpose — Date) - 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 - FAD — Tax policy — March 2008 - STA — National Accounts — August 2008 - FAD — Treasury Operations, Cash and Debt Management — November 2008 - FAD — Expenditure Policy (Fiscal and distributional implications of petroleum product pricing) — March 2009 - FAD — Public Financial Management (Intergovernmental fiscal relations) — July/August 2009 - FAD — Tax Policy (Tax reform and taxation of natural resources) — July/August 2009 - STA — National Accounts — October 2009 ### XII. Resident Representative - Mr. Luis Breuer took over the post of IMF resident representative in June 2009. ### Relations with the World Bank (Summary) - Interim Strategy Note (ISN) for FY10-11 approved June 2, 2009: total envelope US$137 million of IDA resources (US$90 million predefined operations; US$47 million flexible). - Four strategic areas: (i) productive development and support to production; (ii) sustainable development; (iii) human development; (iv) governance and support to public sector. - World Bank portfolio: 11 investment projects totaling US$302.8 million; undisbursed US$190.6 million; disbursed US$112.2 million. - Notable project commitments and disbursements: - Road rehabilitation and Maintenance: Commitment US$77.0 million; Disbursed US$61.6 million; Closing Date December 2009 - Rural Alliances: Commitment US$58.4 million; Disbursed US$15.4 million; Closing Date March 2014 - Expanding Access to Reduce Health Inequalities: Commitment US$18.5 million; Disbursed US$0.0 million; Closing Date January 2014 - (Full project table reported: TOTAL Commitment US$302.8 million; TOTAL Disbursed US$112.2 million) - Pipeline operations: Monitoring and Evaluation of MDGs, Urban Alliances, Innovation and Agricultural Services, Rural Roads, Community Driven Development to Support the Eradication of Poverty. - Government is considering access to IBRD funding in addition to IDA; Bolivia is a blend country since FY2002 but has only accessed IDA to date. - Trust Funds and Global Programs: three grants totaling US$5.5 million (Global Partnership on Output Based Aid US$5.2 million; Strengthening of the Deputies Chamber Finance Commission US$0.2 million; Strengthening Donor Aid Coordination $0.1 million); South-South Trust Fund US$0.1 million approved. ### Relations with the Inter-American Development Bank (IDB) (Summary) - As of November 30, 2009: - IDB approved loans to Bolivia: US$4.31 billion - Disbursements: US$3.72 billion - Outstanding debt to IDB: approximately US$562 millions - Undisbursed approved funds: US$587.8 millions - IDB participation in MDRI: unilaterally wrote off US$741.1 million in principal payments and US$307.3 millions of future interest payments; estimated annual fiscal space generated of more than US$18 millions on average. - New concessional lending allocation criteria: Bolivia to be allocated 30 percent of concessional element under IDB’s blended financial conditions; temporary annual allocation of US$191 millions for 2009 and US$200 millions for 2010. - 2008-2010 Bank country strategy aligned with Bolivia’s National Development Plan; four strategic areas: (i) productivity, competitiveness and productive infrastructure; (ii) water, sanitation and social development; (iii) building opportunities for the majority and development with identity; (iv) institutional strengthening of the state. - Portfolio as of November 30, 2009: - Sovereign-guaranteed executing portfolio: 33 loans totaling US$1.03 billions, 43 percent disbursed; undisbursed sovereign portfolio concentrated 53 percent in transportation. - Non-sovereign-guaranteed executing portfolio: 3 loans totaling US$114 millions, 86.8 percent disbursed. - 2009 operative program: portfolio of sovereign guaranteed operations of 6 loans for US$191 millions. - 2010 pipeline: additional 9 loans for US$200 millions identified. ### Statistical Issues and Data Adequacy (As of November 4, 2009) - General: Data provision has some shortcomings, but is broadly adequate for surveillance. - National Accounts: INE has begun thorough revision, including updating base year (currently 1990) and intensified implementation of SNA 1993. - Labor market: Quality of household and employment surveys has deteriorated due to financial constraints; quarterly employment survey discontinued in 2003. - Prices statistics: Industrial producer price indices and external trade unit values compiled by INE but need revision for concepts/definitions consistent with SNA 1993 and treatment of seasonal products, missing items, quality changes, and new products. - Government finance statistics: Annual consolidated central government data do not cover all operations of decentralized agencies and special funds; implementation of a comprehensive financial management system (IADB/WB funded) expected to improve monitoring of public sector financial operations and reporting of public enterprise operations and debt. - Balance of payments: Coverage of certain services and financial transactions needs expansion despite recent improvements. ### Data Standards and Quality - Bolivia has participated in the General Data Dissemination System (GDDS) since November 2002. - Data ROSC published on August 13, 2007. ### Selected Indicators Required for Surveillance (latest observation / date received / frequency) - Exchange Rates: Daily / Daily / Daily - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Daily / Daily / Daily - Reserve/Base Money: Sep. 2009 / Oct. 2009 / Monthly - Broad Money: Sep. 2009 / Oct. 2009 / Monthly - Central Bank Balance Sheet: Sep. 2009 / Oct. 2009 / Monthly - Consolidated Balance Sheet of the Banking System: Sep. 2009 / Oct. 2009 / Monthly - Interest Rates: Oct. 2009 / Nov. 2009 / Weekly (reported frequency Weekly; publication Monthly) - Consumer Price Index: Oct. 2009 / Nov. 2009 / Monthly - Revenue, Expenditure, Balance and Composition of Financing – General Government: Jul. 2009 / Oct. 2009 / Monthly - Stock of Central Government and Central Government-Guaranteed Debt: Jun. 2009 / Nov. 2009 / Monthly - External Current Account Balance: Q2 2009 / Sep. 2009 / Quarterly - Exports and Imports of Goods and Services: Q2 2009 / Sep. 2009 / Quarterly (monthly for goods only) - GDP/GNP: Q2 2009 / Sep 2009 / Quarterly - Gross External Debt: Oct. 2009 / Nov. 2009 / Monthly - International Investment Position: Q2 2009 / Sep. 2009 / Quarterly *Statement by the Staff Representative on Bolivia — January 15, 2010* ### 1. This statement provides additional information that has become available since the ### _cr1027 - 1. This statement provides additional information that has become available since the ### Recent information and immediate developments - The statement provides additional information available since the issuance of the staff report and "does not alter the thrust of the staff appraisal." - The 12-month inflation rate declined to 0.26 percent in December, "the lowest rate in the last 20 years." - The government announced an increase in the minimum wage of 5 percent in 2010, to the equivalent of US$97 dollars a month, covering all public and private sector employees. - Net International Reserves reached US$ 8.6 billion by end-2009, equivalent to more than 80 percent of broad money and over 20 months of imports of goods and services. - The 2010 Budget Law was enacted on December 31, 2009; its spending envelope is consistent with the staff report projections and includes provisions to improve cash-management, oversight of multiyear investment projects, and information on budget execution. - The law establishes a new central bank facility for financing to public enterprises, with a limit of US$1 billion (about 5.2 percent of GDP), earmarked for investment projects to address food and energy security concerns; specific spending allocations are not yet in the budget. ### Macroeconomic background and recent performance - Between 2005 and 2008 export receipts increased by 230 percent. - Real GDP growth averaged 3.4 percent annually during 1996–2005 and increased to an average of 5.2 percent in 2006–08, peaking at 6.1 percent in 2008. - External current account and fiscal surpluses averaged 11.8 percent of GDP and 3.8 percent of GDP respectively in 2006–08. - Bolivia became a net external creditor in 2008 following reserve accumulation and MDRI debt relief. - Gross public sector debt declined to less than 40 percent of GDP by 2008 and net public sector debt to only 20 percent of GDP. ### 2009 developments and near-term projections - Real output growth is projected to slow to 3¼ percent in 2009 due to lower export volumes (mostly reduced gas demand from Brazil) and weakened domestic absorption. - The 12-month inflation rate declined to 0.3 percent by end-2009 (alternative figure in updated paragraph: 0.26 percent in December). - External current account surplus narrowed to about 3½ percent of GDP in 2009, compared with 12 percent of GDP in 2008. - Combined fiscal surplus expected to narrow by 4 percentage points of GDP to an almost balanced position in 2009, largely due to lower hydrocarbon and tax revenue (by 5 percentage points of GDP). - Monetary policy: the central bank reduced open market operations and let short-term policy interest rates decline to almost zero; deposit and loan rates remain at 1.3 percent and 8.3 percent respectively (record low levels reported). - Exchange rate policy: since October 2008 the central bank has effectively pegged the Boliviano to the U.S. dollar, following a period of negative crawl starting mid-2005. - Financial sector remained barely affected by the global crisis; banks remained liquid, profitable, and well capitalized; authorities increased marginal reserve requirements on dollar deposits and tightened provisioning requirements, including higher provisioning for dollar-denominated loans. - Real GDP growth forecast: 4 percent in 2010, reflecting recovery of hydrocarbon exports and public investment, with inflation projected to rise to about 4 percent. - External current account surplus expected to narrow to 2½ percent of GDP in 2010; overall balance of payments projected to remain positive with further accumulation of international reserves. ### Executive Board assessment and key policy messages - Directors commended continued sound macroeconomic management and effective policy response to the global crisis. - Key challenges identified: - Maintain long-term fiscal sustainability through prudent management of natural resource wealth. - Reduce high poverty rate by boosting growth through structural reforms and increased investment. - Monetary policy guidance: - Support for a gradual tightening of monetary conditions as the economy rebounds to mop up abundant banking-sector liquidity and prevent excessive credit creation, foreign-exchange pressures, or a pick-up in inflation. - Staff assessment found no significant evidence of exchange-rate misalignment; authorities welcomed to revise the rate of crawl when fundamentals and market conditions warrant. - Over the medium term, most Directors encouraged greater exchange rate flexibility once low dollarization is entrenched and domestic financial markets deepen; a few Directors saw no need to move away from the current regime. - To strengthen monetary policy independence, central bank financing of the government or public corporations should be avoided. - Fiscal policy guidance: - Public debt expected to continue declining gradually. - Encourage strengthening the non-hydrocarbon balance to generate additional savings over the medium- and long-term. - Need to balance intergenerational equity with near-term physical and human capital needs. - Support for fiscal reforms: strengthen direct taxation, simplify the tax system, rebalance spending and revenue assignments across national and subnational governments, and establish a formal framework for fiscal management of natural resources. - Gradual phasing out of fuel subsidies recommended to create fiscal space for development spending and social programs. - Financial sector recommendations: - Priorities: create a deposit insurance scheme, finalize a preventative institutional framework for resolving insolvent financial institutions, and expand regulation and supervision to cooperatives and other unregulated financial institutions. - Support for an FSAP update; a few Directors encouraged strengthening anti-money laundering legislation and the Financial Intelligence Unit. - Structural reform and investment climate: - Improve investment climate and promote public-private partnerships. - Upcoming legal and institutional reforms should provide a clear and stable environment for private investment and introduce better procedures for enterprise restructuring to develop the domestic credit market. ### Bolivia: Selected Economic Indicators (reported values) - Real GDP (annual percent change): 2006: 4.8; 2007: 4.6; 2008: 6.1; 2009: 3.3; 2010 (Proj.): 4.0 - GDP deflator (annual percent change): 2006: 13.7; 2007: 7.4; 2008: 10.4; 2009: -1.5; 2010 (Proj.): 4.1 - CPI inflation (period average): 2006: 4.3; 2007: 8.7; 2008: 14.0; 2009: 3.5; 2010 (Proj.): 3.3 - CPI inflation (end-of-period): 2006: 4.9; 2007: 11.7; 2008: 11.8; 2009: 0.3; 2010 (Proj.): 4.0 - Combined public sector revenues and grants (% of GDP): 2006: 34.3; 2007: 34.5; 2008: 38.9; 2009: 32.5; 2010 (Proj.): 34.3 - Hydrocarbons related revenue (% of GDP): 2006: 10.2; 2007: 9.3; 2008: 12.8; 2009: 9.4; 2010 (Proj.): 10.5 - Expenditure (% of GDP): 2006: 29.8; 2007: 32.8; 2008: 36.5; 2009: 32.6; 2010 (Proj.): 34.7 - Overall balance (% of GDP): 2006: 4.5; 2007: 1.7; 2008: 2.8; 2009: 0.1; 2010 (Proj.): -0.3 - Total gross public debt (% of GDP): 2006: 55.2; 2007: 40.9; 2008: 37.5; 2009: 39.4; 2010 (Proj.): 37.4 - Current account (% of GDP): 2006: 11.3; 2007: 12.0; 2008: 12.1; 2009: 3.5; 2010 (Proj.): 2.6 - Merchandise exports (% of GDP): 2006: 33.6; 2007: 33.5; 2008: 38.8; 2009: 27.4; 2010 (Proj.): 29.0 - Natural gas (% of GDP): 2006: 14.5; 2007: 14.8; 2008: 19.0; 2009: 11.2; 2010 (Proj.): 12.9 - Merchandise imports (% of GDP): 2006: 24.4; 2007: 26.0; 2008: 30.0; 2009: 24.9; 2010 (Proj.): 27.2 - Gross international reserves (millions of U.S. dollars): 2006: 3,193; 2007: 5,319; 2008: 7,722; 2009: 8,567; 2010 (Proj.): 9,257 - Reserves in percent of broad money: 2006: 62; 2007: 75; 2008: 85; 2009: 82; 2010 (Proj.): 78 - Changes in percent of broad money at the beginning of the period — NFA of the banking system: 2006: 31.3; 2007: 35.4; 2008: 34.6; 2009: 10.2; 2010 (Proj.): 5.8 - NDA of the banking system (changes in percent of broad money): 2006: -12.9; 2007: -3.7; 2008: -12.5; 2009: 6.6; 2010 (Proj.): 6.7 - Credit to the private sector (in percent of GDP): 2006: 34.7; 2007: 33.1; 2008: 30.3; 2009: 33.0; 2010 (Proj.): 36.1 - Broad money (changes in percent): 2006: 18.5; 2007: 31.7; 2008: 22.2; 2009: 16.8; 2010 (Proj.): 12.5 - Interest rates (percent, end-of-period): Yield on treasury bills in local currency: 2006: 5.4; 2007: 7.3; 2008: 8.6 - Yield on treasury bills in U.S. dollars: 2006: 4.9; 2007: 4.6; 2008: 4.0 ### Government statement highlights (Statement by Pablo Pereira and Victor Hugo De la Barra) - 2009 growth of 3.3 percent achieved despite international shock; public investment planned at approximately US$ 2 billion in 2010 (around 10 percent of GDP), with a significant part financed by fiscal savings. - State oil company to engage in an ambitious investment program financed in part by a billion-dollar loan from the Central Bank of Bolivia (CBB). - Social expenditures and cash transfers (Bono Juancito Pinto, Renta Dignidad, Bono Juana Azurduy) will be maintained; the Extreme Poverty Eradication Plan started in 2009 will continue. - Minimum wage to increase by 5 percent in 2010. - Authorities committed to improving tax collection efficiency, gradually implementing tax reform over the medium term, diminishing dependence on oil revenues through diversification, and considering targeted or differentiated subsidies only after establishing a well-targeted safety net. - Authorities expect the fiscal stance to be balanced by the end of 2010. *IMF Public Information Notice and staff report content as provided in the source text.* ### 7. The need to balance the accumulation of financial savings for intergenerational equity ### 7. The need to balance the accumulation of financial savings for intergenerational equity ### Sovereign fund, reserves, and public savings - The 2006 National Development Plan envisaged creation of a fund financed out of public savings; a formal framework and a draft law (including a sovereign fund as a stabilizer for development purposes) were conceived and drafted in early 2006 before hydrocarbon nationalization. - Political delays in the Senate prevented enactment; authorities expect creation of the sovereign fund to be expeditiously considered in 2010 after the government gained a majority in both chambers of the National Assembly. - In practice, international reserves accumulated since 2006 have served as a stabilization fund and may be used as a financing cushion for public investment, a key driver for growth and employment in Bolivia. ### Monetary policy stance and inflation - The Central Bank of Bolivia (CBB) eased monetary policy since end-2008 and cut its benchmark rate sharply in 2009 to lower commercial lending rates and boost banking credit to the private sector. - Open market operations were reversed in 2009 to allow a moderate expansionary stance to boost domestic demand. - Bolivia recorded inflation of 0.26 percent in 2009 alongside economic expansion of 3.3 percent. - The monetary expansionary policy will continue in 2010 with adjustments as warranted to control inflation developments; expected developments allow a forecasted inflation of less than 4 percent for 2010. - Authorities authorized the CBB to finance YPFB for prioritized investments in 2010: YPFB will temporarily borrow $1 billion from the CBB to undertake projects to augment hydrocarbon production capacity. - The 2010 Budget Law included a special authorization for the CBB to grant an additional loan amounting to another $1 billion for other strategic public enterprises. - These measures are described as temporary while other financing sources (including tapping international financial markets) are being designed. ### Exchange rate policy and external sector outlook - The crawling peg regime has been maintained; nominal exchange rate remained relatively unchanged since October 2008 to avoid inflationary pressures and preserve de-dollarization gains. - By Q4 2009 the boliviano started to depreciate in real terms while the current account kept a positive stance and international reserves reached record levels. - The CBB will continue using the crawling peg regime and stands ready for a more flexible exchange rate as warranted; CBB authorities are committed to maintain the exchange rate around its equilibrium level in real terms. - Bolivia’s current-account surplus for 2010 is expected to be 2.6 percent of GDP. - Demand and prices for natural-gas exports expected to remain subdued relative to 2008 levels; imports may increase due to the public investment program. - Metal prices and other commodity prices are showing positive recovery; remittances to Bolivia are projected to recover in 2010. - International reserves are expected to increase while public debt sustainability has improved. ### External ratings - Fitch upgraded Bolivia in September 2009: Foreign and Local Currency Issuer Default Ratings went up from “B-” to “B”. - Moody’s moved Bolivia’s Long-Term Foreign Currency Debt Rating up to “B2” from “B3”. ### Banking sector and financial developments - Bolivia’s banking sector is described as healthy, liquid, profitable and well capitalized. - In 2009: nonperforming loans fell; provisions increased; profitability improved. - Banking supervision was enhanced through countercyclical measures, such as additional provision on foreign-currency denominated loans. - Deposit interest rates are at a very low level; credit has not grown as much as deposits but is expected to rebound in 2010 owing to fiscal impulse in 2009 and significant public investment in 2010. - Banking supervision authority is strengthening supervisory capabilities; ASFI now supervises securities and insurance sectors. - Presence of a state-owned bank operating under market rules has improved service quality. - Microcredit is expected to play an increasing role as more operators seek full license from ASFI. - Authorities are considering reviewing the financial safety net during mandatory modifications of financial system laws under the New Constitution. - Authorities are preparing legislation on guarantees and collateral to foster borrower profiles and remove credit constraints; work is underway on insurance schemes for microfinances and raising additional funds for the state-owned bank. - Authorities have expressed interest in an FSAP for Bolivia’s financial system; the last FSAP was conducted in 2003. ### Financial dollarization and exchange-rate policy link - Financial dollarization has significantly decreased since 2006. - By the end of 2009, domestic-currency deposits amounted to 44.2 percent compared to 42.4 percent in 2008. - Factors cited: macroeconomic policy developments, exchange rate trend, widening spread between buying and selling exchange rates, the financial transaction tax (now levied only on foreign currency denominated operations), and settling of inflation-indexed financial instruments whose use has slowed. - Authorities intend to preserve bolivianization levels and cautiously manage exchange rate and monetary policies. ### Development policy, structural reforms, and investment plans - New Constitution (in place since January 2009) underlies structural reforms to support greater growth and social inclusion; Law of Autonomies to enhance decentralization and assign new capabilities and responsibilities. - Laws to modify existing financial system, foreign investment, hydrocarbons, and other laws will be drafted and sent to the National Assembly. - Government elaborated a new five-year plan coherent with National Development Plan 2006-2010, based on four strategies: 1) economic (increase productivity); 2) social-community (improve social safety net); 3) international relationship (insert Bolivia into international community with enhanced negotiation capacity); and 4) political and cultural (social empowerment and strengthen democracy through social inclusion). - In 2009 Bolivia executed a project to become an illiterate-free country by teaching illiterate youth and adults. - Hydrocarbons: - State oil company planned investments in the next five years amounting to more than $11 billion in exploration and production seeking to reach 100 million of m3/day. - Main partners will be Brazil and Argentina; a new contract is being sought with Argentina. - YPFB’s investment program projects to be implemented on their own or in association with foreign or domestic private enterprises. - Mining and electricity: - Government is seeking partners to invest in production and industrialization of lithium. - Bolivia is considered to hold half of the world’s lithium reserves from the Salar de Uyuni located in Potosi. - Authorities plan large electricity generation projects to substantially increase generation capacity. - Public investment is expected to induce a greater growth rate relative to 2009 across the whole economy. - Authorities emphasize public investment as a complement and catalyst for private investment; delays in some sectors (e.g., hydrocarbons) were attributed to internal issues in YPFB and unfinished technical discussions with partners, plus global effects of the financial crisis and domestic electoral activity in 2009. - The government program for 2010-2015 and the National Development Plan stress dealing with private entrepreneurs while keeping sovereign rights and pursuing sustainable development; aim to streamline procedures for investors and expand small and medium-sized enterprises to reduce unemployment. ### Concluding assessment - The overall good performance of Bolivia’s economy in recent years is attributed to macroeconomic and development policies with social inclusion prominent on the policy agenda. - The administration of President Morales is described as fully committed to fiscal discipline and pro-poor and pro-growth development policies; brighter economic prospects lie ahead. *Source: IMF country report chapter "7. The need to balance the accumulation of financial savings for intergenerational equity"* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1027.pdf_