## _cr1029

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---

### Overview and motivation
- Bolivia accumulated unprecedented levels of foreign reserves over the last few years, resulting in a sharp improvement of its international investment position to become a net external creditor in 2008.
- The main contributor was a record-high current account surplus following high export prices over 2005–08.
- As the cycle turns and the significant current account surplus vanishes, estimating an optimal level of reserves is highly relevant for economic policy design.

### Objective and model framework
- Aim: derive estimates of optimal levels of reserves for Bolivia, focusing on current account shocks as the key balance of payments risk.
- Rationale: Bolivia is a commodity exporter with little reliance on foreign capital inflows and is more exposed to fluctuations in export revenues than to sudden interruptions of capital inflows.
- Framework: standard precautionary savings model, with and without investment; borrowing constraints imposed to reflect limited access to international capital markets.
- In the model, consumers consume tradable goods (consumption = imports) and income = exports; households face liquidity constraints and uncertain future consumption from terms of trade and export volume shocks.

### External sector developments (key empirical drivers)
- Reserve accumulation in Bolivia stemmed primarily from a persistent current account surplus in a crawling peg regime.
- Drivers of the surplus included:
  - major terms of trade improvement after sharp increases in key export commodity prices during 2004–08;
  - important expansion in natural gas export volumes;
  - migrants remittances, which increased fivefold between 2003 and 2008 to about 6 percent of GDP.
- Bolivia also benefited from debt relief, which contributed substantially to the improvement in the country’s net foreign asset position.

### Rule-of-thumb reserve adequacy indicators
- Two popular thresholds indicate ample excess reserves for Bolivia:
  - relation of official reserves to imports, usually expressed in months of imports, with a threshold around three months;
  - Guidotti-Greenspan rule: reserves equivalent to 100 percent of short-term foreign debt.
- Bolivia’s short-term foreign debt is very low (even on a remaining maturity basis) given little integration with international capital markets and predominantly long-term public debt.

### Model-based optimal reserve estimates
- Model without investment:
  - Optimal level of reserves = 29 percent of GDP.
  - Actual reserves exceed this baseline optimal level by about 22 percentage points of GDP (or 12 percent under an alternative conservative definition excluding gold and NFPS dollar deposits).
- Model with investment:
  - Optimal level of reserves = 37 percent of GDP.
- Combined inference:
  - Optimal level of reserves for Bolivia lies between 29 to 37 percent of GDP.
  - The larger the role of entrepreneurs/investment, the closer the optimal level is to 37 percent of GDP.
- Notes on alternative definitions:
  - Conservative reserve measure excludes gold holdings and dollar-deposits from the public sector in the central bank (assuming gold would not be disposed of).

### Sensitivity analysis (Table 1 summary)
- Sensitivity to opportunity cost (β) and risk aversion (ρ) produces substantial variation, but even under conservative calibrations Bolivia is at worst close to, but above, the optimal.
- Selected values from Table 1 (Optimal Reserves, in percent of GDP):
  - Without Investment:
    - β = 0.92: ρ=1 → 25.4; ρ=2 → 27.9; ρ=3 → 29.8
    - β = 0.94 (baseline): ρ=1 → 26.6; ρ=2 → 29.4; ρ=3 → 31.8
    - β = 0.96: ρ=1 → 32.2; ρ=2 → 37.9; ρ=3 → 42.8
  - With Investment:
    - β = 0.92: ρ=1 → 25.7; ρ=2 → 32.5; ρ=3 → 39.0
    - β = 0.94 (baseline): ρ=1 → 28.4; ρ=2 → 37.4; ρ=3 → 46.1
    - β = 0.96: ρ=1 → 35.7; ρ=2 → 50.6; ρ=3 → 63.9
- Interpretation:
  - Increasing risk aversion (higher ρ) and reducing impatience (higher β) increase the optimal reserve level.
  - An extreme case of β = 0.96 and ρ = 3 implies Bolivia would still need to accumulate reserves, but β = 0.96 is characterized as an unrealistic opportunity cost given rates on existing foreign debt.
  - Baseline opportunity cost is of about 6 percent (β ≤ 0.94) — under this, even ρ = 3 leaves Bolivia above the optimum.

### Conclusions and policy implications (reserves)
- Bolivia’s net foreign asset position improved markedly and became a net external creditor in 2008 following commodity price and export volume surges.
- Model calibration yields optimal reserves between 29 and 37 percent of GDP (29 percent without investment; 37 percent with investment).
- Rule-of-thumb measures indicate substantially larger apparent excess reserves than the model-based calculations.
- Policy message:
  - Reserve accumulation in Bolivia is consistent with a precautionary motive to shield the economy from future shocks.
  - It is important to account for country-specific balance of payments risks when deriving reserve adequacy indicators.
  - Even under conservative calibrations and alternative reserve definitions, Bolivia would be at worst close to, but above, the model-based optimum.

### Hydrocarbon revenue sharing arrangements — Revenue sharing structure and key allocations
- IDH (the most significant hydrocarbon revenue) is shared among the central government, prefectures, municipalities, and universities.
- Virtually all IDH revenue is either transferred to subnational governments, earmarked for development funds (Fondo de desarrollo indígena y campesino), social programs (Renta dignidad) or specific government functions.
- IDH is paid by YPFB and then transferred to the recipient entities of the public sector.
- Royalties are assigned primarily to the producing departments’ prefectures (⅔). The remainder goes to the Treasury and is not earmarked. Unlike IDH, the fraction of royalties that is assigned to prefectures is recorded as own hydrocarbon revenue.
- The excise tax on fuel consumption (IEHD) is shared among the central government (65 percent), prefectures (30 percent) and universities (5 percent).
- Over the last five years, the treasury’s expenditure on direct fuel subsidies roughly equaled the amount it received from IEHD.

### Quantitative breakdown (percent of GDP)
- Total non-financial public sector revenue and grants: 30.9 (2005), 34.3 (2006), 34.4 (2007), 38.9 (2008), 34.6 (2005-08)
- Hydrocarbon revenue (IDH, royalties, IEHD): 9.0 (2005), 11.6 (2006), 11.3 (2007), 10.6 (2008), 10.6 (2005-08)
- Total subnational transfers: 8.7 (2005), 11.3 (2006), 11.4 (2007), 10.5 (2008), 10.5 (2005-08)
- of which hydrocarbon revenue transfers: 4.3 (2005), 6.6 (2006), 6.6 (2007), 5.5 (2008), 5.7 (2005-08)

- Prefectures — Total transfers received: 4.0 (2005), 5.2 (2006), 5.2 (2007), 3.7 (2008), 4.5 (2005-08)
  - Prefectures — hydrocarbon revenue: 3.8 (2005), 4.8 (2006), 4.7 (2007), 3.2 (2008), 4.1 (2005-08)

- Municipalities — Total transfers received: 3.2 (2005), 4.3 (2006), 4.5 (2007), 5.1 (2008), 4.3 (2005-08)
  - Municipalities — of which hydrocarbon revenue: 0.3 (2005), 1.5 (2006), 1.5 (2007), 1.9 (2008), 1.3 (2005-08)

- Universities — Total transfers received: 1.5 (2005), 1.7 (2006), 1.7 (2007), 1.7 (2008), 1.6 (2005-08)
  - Universities — of which hydrocarbon revenue: 0.1 (2005), 0.4 (2006), 0.4 (2007), 0.4 (2008), 0.3 (2005-08)

- Source: MEF, Memoria Fiscal 2008, IMF Staff calculations. (percent of GDP)

### Geographic distribution and per-capita indicators (as presented)
- Note: includes shared hydrocarbon revenue received by the prefecture and all municipalities in each department.
- Bubble chart axes and indicators shown in source: Shared hydrocarbon rev (percent of GDP); Population (millions); Bubble size represents hydrocarbon revenue per capita. Departments listed include Chuquisaca, La Paz, Cochabamba, Oruro, Potosi, Tarija, Santa Cruz, Beni, Pando.

### Macro-critical features of the revenue sharing arrangements
- The hydrocarbon revenue sharing arrangements are not accompanied by the devolution of spending responsibilities. Transfer size depends on tax collections—hydrocarbon prices and volumes—and not on spending needs of subnational entities.
- Spending responsibilities of subnational government have remained largely unchanged despite frequent changes in the hydrocarbon revenue sharing regime. Expenditure responsibilities remain shared across government levels (example: in education, building schools, hiring teachers and paying teachers rest at different government levels).
- Funding for the universal pension Renta Dignidad foresees mandatory contributions from shared hydrocarbon revenue by municipalities and prefectures to re-capture some transferred resources.

### Constraints on effective use at subnational level
- Earmarking, capacity constraints, and tight treasury controls limit effective use of hydrocarbon resources at the subnational level.
- All revenue from IDH is earmarked for capital spending (human and physical), designated development funds, or specific social programs based on the principle that proceeds from natural resources ought to be invested to develop other assets.
- At subnational levels, resources may be employed inefficiently and current spending needs may not be adequately addressed.
- Budget execution and release of funds to subnational governments is sometimes complicated by disputes over adequate reporting between the treasury and subnational governments.
- In 2008, municipalities (prefectures) spent just 70 (49) percent of the available resources from IDH revenues.

### Transparency, predictability, and data reporting
- The transfer system is transparent: revenue sharing agreements are well known and subject to public debate and analyses. The Ministry of the Economy and Public Finances publishes information on revenue sharing with individual prefectures and municipalities.
- Predictability is low: subnational budget allocations from revenue sharing arrangements are often underestimated and communicated late in the budget process, complicating the subnational budget process.
- The recent PEFA ranks the revenue scheme and the data reporting (at the level of the General Government) as high, but concludes that the provision of timely information to subnational governments about upcoming budgetary allocations could be improved significantly.

### Public deposits, fiscal liquidity, and pro-cyclicality
- Public deposits at the central bank are scattered across subsectors, preventing effective asset and liabilities management.
- The increase in hydrocarbon related revenue, combined with changes in revenue sharing agreements and spending rigidities, has allowed subnational governments to accumulate sizeable deposits and improve their net position at the central bank. Together with decentralized institutions and public enterprises, subnational governments account for over 85 percent of net public sector deposits with the central bank. The treasury has generally been in a net debtor position.
- Example table entries (Percent of GDP) — Net Position of the Non-financial Public Sector with the Central Bank, 2005–08:
  - Total: -0.6 (2005), 6.9 (2006), 7.8 (2007), 10.5 (2008)
  - Central Administration: -6.9 (2005), -2.4 (2006), -1.1 (2007), -0.6 (2008)
    - of which: Treasury: -8.3 (2005), -3.8 (2006), -2.5 (2007), -1.5 (2008)
  - Decentralized institutions: 1.7 (2005), 2.2 (2006), 2.0 (2007), 2.2 (2008)
  - Subnational governments: 4.0 (2005), 5.2 (2006), 5.5 (2007), 5.0 (2008)
  - Social Security Institutes: 0.4 (2005), 0.5 (2006), 0.7 (2007), 0.9 (2008)
  - Public Enterprises: 0.1 (2005), 1.4 (2006), 0.6 (2007), 3.0 (2008)
    - of which: YPFB: 0.0 (2005), 1.3 (2006), 0.2 (2007), 2.8 (2008)
  - Source: Central Bank of Bolivia. (Percent of GDP)
- Scattered deposits hinder effective general government asset management and may lead to suboptimal debt management outcomes (e.g., central government issuing debt to finance operations while subnational deposits sit idle).
- The current revenue sharing system has pro-cyclical features and is not conducive to macroeconomic stabilization. A sharp drop in hydrocarbon revenue could force the treasury to reduce expenditure or issue additional debt because it cannot access deposits held by subnational entities. Subnational governments may receive significantly less hydrocarbon transfers and be unable to utilize their deposits because of strict earmarking provisions, amplifying pro-cyclical effects.

### Hydrocarbon revenue volatility and fiscal impact
- Hydrocarbon revenue is volatile and depends on prices and export volume; Bolivia remains vulnerable to demand for natural gas in neighboring Brazil and Argentina.
- Futures options (October 2009) indicate oil prices will range between USD 49 and 98 per barrel at end 2011 with a 68 percent probability. Assuming a direct link between crude oil and natural gas prices, this would translate into an overall fiscal balance of between -4.2 and 5.2 percent of GDP, respectively (approximation that disregards second round effects and accompanying economic developments).

### Opportunity for reform and policy recommendations
- Bolivia has yet to develop and formalize a long-term fiscal strategy for the management of natural resource wealth. The re-nationalization of the oil and gas industry and high taxation of natural resources has generated sizeable rents transferred to sectors and regions with developmental needs. Universal social transfer schemes and conditional cash transfer schemes (e.g. Renta Dignidad and the Bono Juancito Pinto) are financed from hydrocarbon revenue. Earmarking provisions governing IDH revenue are based on investing proceeds in the creation of new assets, both physical and human. Intergenerational equity considerations are not formalized but frontloaded exploitation may be argued given investment and social needs.
- Specific recommendations:
  - Review intergovernmental fiscal transfers to:
    - seek a better balance between revenue and expenditure at different levels of government,
    - reduce the complexity of the current system, and
    - make subnational transfers needs based and independent of hydrocarbon revenue levels.
    - Revisiting the automatic link between hydrocarbon and subnational revenue could reduce pro-cyclical features of subnational spending and improve subnational budget predictability; it could also help achieve fiscal neutrality of the decentralization process and rebalance the financial position of the central administration. Earmarking provisions for the use of hydrocarbon revenues could be revisited to achieve an optimal mix of current and capital expenditure.
  - Enhance the ability of the government to implement macro-stabilization policies by considering the creation of a savings fund.
    - A national savings fund can provide stabilization of domestic demand through a saving/withdrawal rule that smoothes hydrocarbon revenue fluctuations. Whenever actual collections exceed (fall short of) a projected amount, the fund is credited (debited) accordingly. Such a fund could also be a tool for effective and transparent management of hydrocarbon resources, and may help introduce intergenerational considerations in the exploitation of nonrenewable natural resources. Any fund could uphold the current use of hydrocarbon resources, namely to finance capital expenditure and social transfers, and the subnational assignment.
  - Develop a medium-term fiscal framework. A set of fiscal rules embedded in a fiscal responsibility law and flexible enough to allow for stabilization policies would be an important anchor for fiscal policy. It should embrace national as well as subnational public finances, and, consistent with a long term fiscal strategy for the use of natural resource wealth, the assessment of the fiscal position could be made on the basis of a non-natural-resource fiscal balance.

### Box — Oil and Gas Stabilization Funds in Practice (summary)
- Key policy objectives of oil/gas funds: (i) smoothing of government expenditure in view of volatile and unpredictable hydrocarbon revenue, (ii) intergenerational equity considerations, (iii) transparency in the management of natural resources.
- Operational objectives: smoothing the net flow of oil revenue into the budget, depositing a share of revenue into the fund, and providing information about oil revenue inflows and changes in gross financial assets. Operational rules guide accumulation and withdrawal ex-ante.
- Types of funds: price contingent deposit/withdrawal rules, revenue-share funds, and financing funds.
- Lessons: Rigid rules can be circumvented; successful management is enhanced by full integration in budget documentation, a clear investment strategy, and strong commitment to transparency and accountability.

*Source: _cr1029 (IMF staff summary of provided chapter content).*

### 1.      Over the last few years, Bolivia accumulated unprecedented levels of foreign

### _cr1029 - 1.      Over the last few years, Bolivia accumulated unprecedented levels of foreign

### Overview and motivation
- Bolivia accumulated unprecedented levels of foreign reserves over the last few years, resulting in a sharp improvement of its international investment position to become a net external creditor in 2008.
- The main contributor was a record-high current account surplus following high export prices over 2005–08.
- As the cycle turns and the significant current account surplus vanishes, estimating an optimal level of reserves is highly relevant for economic policy design.

### Objective and model framework
- Aim: derive estimates of optimal levels of reserves for Bolivia, focusing on current account shocks as the key balance of payments risk.
- Rationale: Bolivia is a commodity exporter with little reliance on foreign capital inflows and is more exposed to fluctuations in export revenues than to sudden interruptions of capital inflows.
- Framework: standard precautionary savings model, with and without investment; borrowing constraints imposed to reflect limited access to international capital markets.
- In the model, consumers consume tradable goods (consumption = imports) and income = exports; households face liquidity constraints and uncertain future consumption from terms of trade and export volume shocks.

### External sector developments (key empirical drivers)
- Reserve accumulation in Bolivia stemmed primarily from a persistent current account surplus in a crawling peg regime.
- Drivers of the surplus included:
  - major terms of trade improvement after sharp increases in key export commodity prices during 2004–08;
  - important expansion in natural gas export volumes;
  - migrants remittances, which increased fivefold between 2003 and 2008 to about 6 percent of GDP.
- Bolivia also benefited from debt relief, which contributed substantially to the improvement in the country’s net foreign asset position.

### Rule-of-thumb reserve adequacy indicators
- Two popular thresholds indicate ample excess reserves for Bolivia:
  - relation of official reserves to imports, usually expressed in months of imports, with a threshold around three months;
  - Guidotti-Greenspan rule: reserves equivalent to 100 percent of short-term foreign debt.
- Bolivia’s short-term foreign debt is very low (even on a remaining maturity basis) given little integration with international capital markets and predominantly long-term public debt.

### Model-based optimal reserve estimates
- Model without investment:
  - Optimal level of reserves = 29 percent of GDP.
  - Actual reserves exceed this baseline optimal level by about 22 percentage points of GDP (or 12 percent under an alternative conservative definition excluding gold and NFPS dollar deposits).
- Model with investment:
  - Optimal level of reserves = 37 percent of GDP.
- Combined inference:
  - Optimal level of reserves for Bolivia lies between 29 to 37 percent of GDP.
  - The larger the role of entrepreneurs/investment, the closer the optimal level is to 37 percent of GDP.
- Notes on alternative definitions:
  - Conservative reserve measure excludes gold holdings and dollar-deposits from the public sector in the central bank (assuming gold would not be disposed of).

### Sensitivity analysis (Table 1 summary)
- Sensitivity to opportunity cost (β) and risk aversion (ρ) produces substantial variation, but even under conservative calibrations Bolivia is at worst close to, but above, the optimal.
- Selected values from Table 1 (Optimal Reserves, in percent of GDP):
  - Without Investment:
    - β = 0.92: ρ=1 → 25.4; ρ=2 → 27.9; ρ=3 → 29.8
    - β = 0.94 (baseline): ρ=1 → 26.6; ρ=2 → 29.4; ρ=3 → 31.8
    - β = 0.96: ρ=1 → 32.2; ρ=2 → 37.9; ρ=3 → 42.8
  - With Investment:
    - β = 0.92: ρ=1 → 25.7; ρ=2 → 32.5; ρ=3 → 39.0
    - β = 0.94 (baseline): ρ=1 → 28.4; ρ=2 → 37.4; ρ=3 → 46.1
    - β = 0.96: ρ=1 → 35.7; ρ=2 → 50.6; ρ=3 → 63.9
- Interpretation:
  - Increasing risk aversion (higher ρ) and reducing impatience (higher β) increase the optimal reserve level.
  - An extreme case of β = 0.96 and ρ = 3 implies Bolivia would still need to accumulate reserves, but β = 0.96 is characterized as an unrealistic opportunity cost given rates on existing foreign debt.
  - Baseline opportunity cost is of about 6 percent (β ≤ 0.94) — under this, even ρ = 3 leaves Bolivia above the optimum.

### Conclusions and policy implications
- Bolivia’s net foreign asset position improved markedly and became a net external creditor in 2008 following commodity price and export volume surges.
- Model calibration yields optimal reserves between 29 and 37 percent of GDP (29 percent without investment; 37 percent with investment).
- Rule-of-thumb measures indicate substantially larger apparent excess reserves than the model-based calculations.
- Policy message:
  - Reserve accumulation in Bolivia is consistent with a precautionary motive to shield the economy from future shocks.
  - It is important to account for country-specific balance of payments risks when deriving reserve adequacy indicators.
  - Even under conservative calibrations and alternative reserve definitions, Bolivia would be at worst close to, but above, the model-based optimum.

*Prepared by Fabian Valencia (summarizes a forthcoming working paper); technical model details are in the working paper version.*

### 10.      Hydrocarbon revenue sharing arrangements are complex (Figures 2 and 3).

### _cr1029 - 10.      Hydrocarbon revenue sharing arrangements are complex (Figures 2 and 3).

### Revenue sharing structure and key allocations
- IDH (the most significant hydrocarbon revenue) is shared among the central government, prefectures, municipalities, and universities.  
- Virtually all IDH revenue is either transferred to subnational governments, earmarked for development funds (Fondo de desarrollo indígena y campesino), social programs (Renta dignidad) or specific government functions.  
- IDH is paid by YPFB and then transferred to the recipient entities of the public sector.  
- Royalties are assigned primarily to the producing departments’ prefectures (⅔). The remainder goes to the Treasury and is not earmarked. Unlike IDH, the fraction of royalties that is assigned to prefectures is recorded as own hydrocarbon revenue.  
- The excise tax on fuel consumption (IEHD) is shared among the central government (65 percent), prefectures (30 percent) and universities (5 percent).  
- Over the last five years, the treasury’s expenditure on direct fuel subsidies roughly equaled the amount it received from IEHD.

### Quantitative breakdown (percent of GDP)
- Total non-financial public sector revenue and grants: 30.9 (2005), 34.3 (2006), 34.4 (2007), 38.9 (2008), 34.6 (2005-08)
- Hydrocarbon revenue (IDH, royalties, IEHD): 9.0 (2005), 11.6 (2006), 11.3 (2007), 10.6 (2008), 10.6 (2005-08)
- Total subnational transfers: 8.7 (2005), 11.3 (2006), 11.4 (2007), 10.5 (2008), 10.5 (2005-08)
- of which hydrocarbon revenue transfers: 4.3 (2005), 6.6 (2006), 6.6 (2007), 5.5 (2008), 5.7 (2005-08)

- Prefectures — Total transfers received: 4.0 (2005), 5.2 (2006), 5.2 (2007), 3.7 (2008), 4.5 (2005-08)  
  - Prefectures — hydrocarbon revenue: 3.8 (2005), 4.8 (2006), 4.7 (2007), 3.2 (2008), 4.1 (2005-08)

- Municipalities — Total transfers received: 3.2 (2005), 4.3 (2006), 4.5 (2007), 5.1 (2008), 4.3 (2005-08)  
  - Municipalities — of which hydrocarbon revenue: 0.3 (2005), 1.5 (2006), 1.5 (2007), 1.9 (2008), 1.3 (2005-08)

- Universities — Total transfers received: 1.5 (2005), 1.7 (2006), 1.7 (2007), 1.7 (2008), 1.6 (2005-08)  
  - Universities — of which hydrocarbon revenue: 0.1 (2005), 0.4 (2006), 0.4 (2007), 0.4 (2008), 0.3 (2005-08)

- Source: MEF, Memoria Fiscal 2008, IMF Staff calculations. (percent of GDP)

### Geographic distribution and per-capita indicators (as presented)
- Note: includes shared hydrocarbon revenue received by the prefecture and all municipalities in each department.  
- Bubble chart axes and indicators shown in source: Shared hydrocarbon rev (percent of GDP); Population (millions); Bubble size represents hydrocarbon revenue per capita. Departments listed include Chuquisaca, La Paz, Cochabamba, Oruro, Potosi, Tarija, Santa Cruz, Beni, Pando.

### Macro-critical features of the revenue sharing arrangements
- The hydrocarbon revenue sharing arrangements are not accompanied by the devolution of spending responsibilities. Transfer size depends on tax collections—hydrocarbon prices and volumes—and not on spending needs of subnational entities.  
- Spending responsibilities of subnational government have remained largely unchanged despite frequent changes in the hydrocarbon revenue sharing regime. Expenditure responsibilities remain shared across government levels (example: in education, building schools, hiring teachers and paying teachers rest at different government levels).  
- Funding for the universal pension Renta Dignidad foresees mandatory contributions from shared hydrocarbon revenue by municipalities and prefectures to re-capture some transferred resources.

### Constraints on effective use at subnational level
- Earmarking, capacity constraints, and tight treasury controls limit effective use of hydrocarbon resources at the subnational level.  
- All revenue from IDH is earmarked for capital spending (human and physical), designated development funds, or specific social programs based on the principle that proceeds from natural resources ought to be invested to develop other assets.  
- At subnational levels, resources may be employed inefficiently and current spending needs may not be adequately addressed.  
- Budget execution and release of funds to subnational governments is sometimes complicated by disputes over adequate reporting between the treasury and subnational governments.  
- In 2008, municipalities (prefectures) spent just 70 (49) percent of the available resources from IDH revenues.

### Transparency, predictability, and data reporting
- The transfer system is transparent: revenue sharing agreements are well known and subject to public debate and analyses. The Ministry of the Economy and Public Finances publishes information on revenue sharing with individual prefectures and municipalities.  
- Predictability is low: subnational budget allocations from revenue sharing arrangements are often underestimated and communicated late in the budget process, complicating the subnational budget process.  
- The recent PEFA ranks the revenue scheme and the data reporting (at the level of the General Government) as high, but concludes that the provision of timely information to subnational governments about upcoming budgetary allocations could be improved significantly.

### Public deposits, fiscal liquidity, and pro-cyclicality
- Public deposits at the central bank are scattered across subsectors, preventing effective asset and liabilities management.  
- The increase in hydrocarbon related revenue, combined with changes in revenue sharing agreements and spending rigidities, has allowed subnational governments to accumulate sizeable deposits and improve their net position at the central bank. Together with decentralized institutions and public enterprises, subnational governments account for over 85 percent of net public sector deposits with the central bank. The treasury has generally been in a net debtor position.  
- Example table entries (Percent of GDP) — Net Position of the Non-financial Public Sector with the Central Bank, 2005–08:  
  - Total: -0.6 (2005), 6.9 (2006), 7.8 (2007), 10.5 (2008)  
  - Central Administration: -6.9 (2005), -2.4 (2006), -1.1 (2007), -0.6 (2008)  
    - of which: Treasury: -8.3 (2005), -3.8 (2006), -2.5 (2007), -1.5 (2008)  
  - Decentralized institutions: 1.7 (2005), 2.2 (2006), 2.0 (2007), 2.2 (2008)  
  - Subnational governments: 4.0 (2005), 5.2 (2006), 5.5 (2007), 5.0 (2008)  
  - Social Security Institutes: 0.4 (2005), 0.5 (2006), 0.7 (2007), 0.9 (2008)  
  - Public Enterprises: 0.1 (2005), 1.4 (2006), 0.6 (2007), 3.0 (2008)  
    - of which: YPFB: 0.0 (2005), 1.3 (2006), 0.2 (2007), 2.8 (2008)  
  - Source: Central Bank of Bolivia. (Percent of GDP)

- Scattered deposits hinder effective general government asset management and may lead to suboptimal debt management outcomes (e.g., central government issuing debt to finance operations while subnational deposits sit idle).

- The current revenue sharing system has pro-cyclical features and is not conducive to macroeconomic stabilization. A sharp drop in hydrocarbon revenue could force the treasury to reduce expenditure or issue additional debt because it cannot access deposits held by subnational entities. Subnational governments may receive significantly less hydrocarbon transfers and be unable to utilize their deposits because of strict earmarking provisions, amplifying pro-cyclical effects.

### Hydrocarbon revenue volatility and fiscal impact
- Hydrocarbon revenue is volatile and depends on prices and export volume; Bolivia remains vulnerable to demand for natural gas in neighboring Brazil and Argentina.  
- Futures options (October 2009) indicate oil prices will range between USD 49 and 98 per barrel at end 2011 with a 68 percent probability. Assuming a direct link between crude oil and natural gas prices, this would translate into an overall fiscal balance of between -4.2 and 5.2 percent of GDP, respectively (approximation that disregards second round effects and accompanying economic developments).

### Opportunity for reform and policy recommendations
- Bolivia has yet to develop and formalize a long-term fiscal strategy for the management of natural resource wealth. The re-nationalization of the oil and gas industry and high taxation of natural resources has generated sizeable rents transferred to sectors and regions with developmental needs. Universal social transfer schemes and conditional cash transfer schemes (e.g. Renta Dignidad and the Bono Juancito Pinto) are financed from hydrocarbon revenue. Earmarking provisions governing IDH revenue are based on investing proceeds in the creation of new assets, both physical and human. Intergenerational equity considerations are not formalized but frontloaded exploitation may be argued given investment and social needs.

- Specific recommendations included in the source:  
  - Review intergovernmental fiscal transfers to (i) seek a better balance between revenue and expenditure at different levels of government, (ii) reduce the complexity of the current system, and (iii) make subnational transfers needs based and independent of hydrocarbon revenue levels.  
    - Revisiting the automatic link between hydrocarbon and subnational revenue could reduce pro-cyclical features of subnational spending and improve subnational budget predictability; it could also help achieve fiscal neutrality of the decentralization process and rebalance the financial position of the central administration. Earmarking provisions for the use of hydrocarbon revenues could be revisited to achieve an optimal mix of current and capital expenditure.  
  - Enhance the ability of the government to implement macro-stabilization policies by considering the creation of a savings fund.  
    - A national savings fund can provide stabilization of domestic demand through a saving/withdrawal rule that smoothes hydrocarbon revenue fluctuations. Whenever actual collections exceed (fall short of) a projected amount, the fund is credited (debited) accordingly. Such a fund could also be a tool for effective and transparent management of hydrocarbon resources, and may help introduce intergenerational considerations in the exploitation of nonrenewable natural resources. Any fund could uphold the current use of hydrocarbon resources, namely to finance capital expenditure and social transfers, and the subnational assignment.  
  - Develop a medium-term fiscal framework. A set of fiscal rules embedded in a fiscal responsibility law and flexible enough to allow for stabilization policies would be an important anchor for fiscal policy. It should embrace national as well as subnational public finances, and, consistent with a long term fiscal strategy for the use of natural resource wealth, the assessment of the fiscal position could be made on the basis of a non-natural-resource fiscal balance.

### Box — Oil and Gas Stabilization Funds in Practice (summary of practices)
- Key policy objectives of oil/gas funds: (i) smoothing of government expenditure in view of volatile and unpredictable hydrocarbon revenue, (ii) intergenerational equity considerations, (iii) transparency in the management of natural resources.  
- Operational objectives: smoothing the net flow of oil revenue into the budget, depositing a share of revenue into the fund, and providing information about oil revenue inflows and changes in gross financial assets. Operational rules guide accumulation and withdrawal ex-ante.  
- Types of funds: price contingent deposit/withdrawal rules (examples cited), revenue-share funds (predetermined share deposited), and financing funds (linked directly to budget non-oil deficit).  
- Lessons: Rigid rules can be circumvented; successful management is enhanced by full integration in budget documentation, a clear investment strategy, and strong commitment to transparency and accountability. (Source: Ossowski et al. (2007) as cited in the text.)

*Source: _cr1029 - 10.      Hydrocarbon revenue sharing arrangements are complex (Figures 2 and 3). IMF staff summary of provided chapter content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1029.pdf_