## _cr11124 ## Source details **Canonical URL:** [_cr11124](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11124.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11124.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11124.pdf.json) --- ### Background and recent context - Bolivia posted solid macroeconomic performance driven by strong terms of trade and prudent policies. - Export receipts doubled between 2005 and 2010; real GDP growth rose from 3.1 percent (first half of the past decade) to 4.6 percent (second half). - Net international investment position switched to a credit balance in 2008 and rose to the equivalent of 17½ percent of GDP in 2010. - Authorities’ development plan envisages investment plans amounting up to 100 percent of current GDP over the next few years; implementation has suffered delays and private investment remains low. - The 2009 constitution requires amending key economic laws, including those on the central bank, financial sector, natural resources, and inter-governmental fiscal relations. ### Recent developments and short-term outlook - Real GDP grew by 4.2 percent in 2010; staff project 4.5 percent in 2011. - External current account surplus: 4.8 percent of GDP in 2010; projected to remain in surplus at 4 percent of GDP in 2011. - Public finances: - Overall public sector surplus rose to 2.0 percent of GDP in 2010 (from 0.3 percent in 2009). - Central government estimated deficit of 2 percent of GDP in 2010; rest of public sector surplus of 4 percent of GDP. - Fiscal surplus projected to narrow to below 1 percent of GDP in 2011 (staff projection: 0.7 percent of GDP). - Inflation and monetary conditions: - Twelve-month inflation: 7.2 percent in December 2010; 11 percent in March 2011. - Staff projects inflation to decline gradually to 8 percent by end-2011; alternative staff projection in PIN: 7.9 percent by end-2011; authorities expect 6 percent in 2011. - Monetary conditions accommodative: banks’ excess liquidity reported at 8 percent of deposits (staff) and around 5 percent of deposits (authorities, April 2011); excess liquidity declined to 4 percent of deposits by end-April 2011. - M1 and bank credit growing at near 20 percent; M3 growth reported as 11 percent year-on-year by authorities. - Reserves and exchange rate: - Net international reserves reported at 50 percent of GDP and 80 percent of broad money (PIN); gross Central Bank foreign reserves (US$ millions): 5,319; 7,722; 8,580; 9,730; 10,440; 11,434; 12,540; 13,477; 14,415; 15,538 (2007–2016). - Boliviano appreciated around 1 percent since late 2010; de-jure regime described as a crawling peg; staff CGER average undervaluation estimate: 8.5 percent. ### Selected economic indicators (reported and projected) - Real GDP (percent change): 2008 = 6.1; 2009 = 3.4; 2010 = 4.2; 2011 = 4.5. - CPI (end of period percent change): 2008 = 11.8; 2009 = 0.3; 2010 = 7.2; 2011 = 7.9. - Overall fiscal balance (percent of GDP): 2008 = 2.8; 2009 = 0.3; 2010 = 2.0; 2011 = 0.7. - Non-hydrocarbons fiscal balance (percent of GDP): 2008 = -7.5; 2009 = -12.1; 2010 = -8.4; 2011 = -9.0. - Current account balance (percent of GDP): 2008 = 12.1; 2009 = 4.7; 2010 = 4.8; 2011 = 3.8. - Key CPI component (February data): Food and Beverages (weight) 27.37; Feb-10 = -2.21; Feb-11 = 17.04; Contribution to February 2011 Inflation = 48.0. - Exchange rate assessment (REER misalignment): MB Approach = -4.6; ES Approach = -12.3; ERER Approach = -8.6; Average = -8.5 (Undervaluation). ### Fiscal policy, buffers, and public investment capacity - Fiscal space and investment capacity: - Staff concluded an increase in total spending of 2 percent of GDP above baseline during 2012–16 would result in a stable net debt ratio by 2016 while maintaining strong fiscal position. - Spending projected to gradually rise to 35 percent of GDP (medium-term baseline); hydrocarbon revenues implied about 12 percent of GDP for the public sector and above one-third of total revenue. - Public debt projected to decline gradually to 30 percent of GDP by 2016 under baseline. - Fiscal savings and institutional recommendations: - Staff supported a multi-year medium-term fiscal framework to guide policy and budget planning. - Staff suggested expanding the fiscal fund’s revenue base—at present it only takes into account two-thirds of total hydrocarbon royalties—and establishing clearer rules for use of resources. - Recommended establishment of a fiscal savings fund to facilitate anti-cyclical policy and limit risky fiscal claims on the central bank; adopt multi-year budgeting. - Central bank financing of public sector and SOEs: - 2011 Budget authorizes central bank credits to SOEs up to 30 percent of net international reserves, in addition to US$2 billion previously committed (equivalent to 20 percent of current reserves). - Staff warned this large potential fiscal claim risks confidence, independence of monetary policy, and external vulnerabilities; recommended strengthening public debt strategy and transparency in SOE credit assessment. - Authorities indicated part of foreign reserves could be used to set up the envisaged fiscal fund while maintaining a strong reserve cushion. ### Decentralization law and intergovernmental fiscal relations - Law on Autonomies and Decentralization (approved July 2010) implements political and economic decentralization from the Constitution. - Key features: - Enables subnational political and fiscal autonomy; creates autonomous territories for indigenous populations; allows regions as intermediate governments; opens competencies including education and health. - A new Autonomies Service (SEA) to cost competencies, assess capacities, and provide technical assistance; Autonomies Council (CAN) for political coordination. - No specific timeline for transfers; redistribution of revenue requires a Fiscal Pact and completion of national population census to start toward the first quarter of 2012. - Preliminary breakdown of public spending by level (percent of cash collections): - Central 65.2%; Departments (Provinces) 8.8%; Municipalities 21.6%; Universities 3.8%; Total 100%. - Fiscal responsibility: - Subnational external debt requires Congress authorization; domestic debt issuance requires central government authorization without central government guarantee. - Central government cannot finance deficits of autonomous territories. - Congress required to pass legislation on Public Indebtedness and on Rules and Principles of Fiscal Responsibility. ### Financial sector soundness, FSAP findings, and recommended actions - Improvements since 2003: banks rebuilt capital buffers, capital ratios strong, institutions broadly resilient; significant reduction in dollarization. - Financial indicators: - NPL to total loans declined to 3.5 percent in 2010 (nonperforming loans series: 8.7, 5.6, 4.3, 3.5, 2.2 for 2006–2010). - Capital adequacy ratios presented: 13.3, 12.6, 13.7, 13.3, 11.9 (2006–2010). - Composition of bank deposits (percent): Dollar deposits 76.2, 65.0, 52.6, 51.7, 43.8, 39.4 (2006–2011). - Key vulnerabilities and recommendations: - Negative real interest rates: remuneration of 3-month deposits averages 0.5 percent nominal; average bank loan rates slightly above 10 percent. Staff urged gradual but consistent rate rise via open market operations and refrain from moral suasion to expand credit. - Prudential norms used for developmental objectives reduced bank buffers; staff recommended development policies be supported through the budget and modernization of insurance regulation. - Supervision: ASFI mandate expansion requires resources and institution building; preserve adequate independence and review remuneration to avoid large gaps with supervised institutions. - Crisis management: central bank liquidity mechanisms and resolution framework in place, but system lacks a deposit insurance scheme; staff recommended development of deposit insurance and monitoring macroprudential indicators. - AML/CFT: money laundering made an autonomous crime; passage of a law penalizing financing of terrorism is pending. - Pension funds: managing assets requires a specialized agency and qualified personnel; staff recommended avoiding abrupt asset allocation shifts given banks’ funding dependence on pension fund deposits. ### Pension reform (ANNEX II) — design, financing, and risks - Reform overview: - New Pensions Law (late 2010) replaces 1996 law; law effective immediately with short transition. - Nationalization of administration: Public Pension Funds Administration (PPFA) to take over two private administrators. - Retirement ages reduced: statutory retirement age reduced from 65 to 58 years; miners retire at 56; workers under unhealthy conditions at 51; women at 55 with one-year advance per child born alive up to three years. - Three subsystems: contributive, semi-contributive (solidarity), non-contributive. - Solidarity pension (semi-contributive) design and financing: - Solidarity pension complements contributive pensions below thresholds; available to participants with a minimum of 10 years of contributions. - Employers contribute 3 percent of salaries to the Solidarity Fund (SF); workers contribute 0.5 percent of monthly contributions to SF; 20 percent of premia for non-work related death and illness insurance funds SF; high income individuals contribute 1–10 percent on income in excess of US$1,850 per month. - Authorities expect to raise US$130 million for the Solidarity Fund; one-off transfer in 2011: SF will receive about US$85 million from the Basic Pension Account. - Authorities estimate US$30 million would be spent from SF in the first year; Ministry of Finance estimated 40,000 people would retire in the first year, 30,000 under solidarity pensions; over time authorities estimate 80 percent of workers would benefit from the solidarity pension. - Contribution changes (percent of wages summary): - Employee contribution to individual account: Old System 10%; New System 10%. - Administration fee: 0.5% (old and new). - Non-work related death and illness insurance: 1.71% (old and new; 20 percent of this funds SF in new system). - Work related death and illness insurance: New System 1.71%. - Contribution to Solidarity Fund: New System 0.5%. - Additional contribution from high income workers: New System 1–10%. - Total worker’s contribution (minimum): Old System 12.21%; New System 12.71%; Independent: Old System 13.92%; New System 14.42%. - Employer’s total contribution: Old System 1.71%; New System 4.71%. - Note: contribution rate in the new system is 2% higher for the mining sector. - Pension payments and assets (US$ millions): - Total pension payments: 2005 = 358.6; 2006 = 418.8; 2007 = 452.1; 2008 = 539.3; 2009 = 647.0; 2010 = 657.8. - Pension funds assets (stocks, US$ millions): Dec-2007 = 2,910; Dec-2008 = 3,885; Dec-2009 = 4,626; Dec-2010 = 5,468. - Staff cautioned actuarial risks given retirement age reductions; authorities have not published actuarial analysis but claim positive cash flow next 25 years and sustainability for 30 years. ### Debt sustainability and external sector projections (baseline and stresses) - Baseline macro assumptions: - Average annual real GDP growth: 4.5 percent until 2016; 4 percent until 2031. - Inflation: 5.0 percent in 2012 and 4.0 percent between 2013 and 2031. - Commercial debt expected to remain nil; CAF expected as main financing source; central government to rely on domestic financing until revenue/responsibility distribution clarified. - Public sector debt (percent of GDP) — baseline projections: - 2008 = 37.5; 2009 = 40.5; 2010 = 39.9; 2011 = 36.1; 2012 = 34.4; 2013 = 33.4; 2014 = 32.7; 2015 = 31.4; 2016 = 30.0; 2021 = 24.7; 2031 = 16.3. - PV of public sector debt (percent of GDP): 2008 = 23.2; 2009 = 25.4; 2010 = 31.9; 2011 = 29.7; 2016 = 30.7; 2031 = 18.2. - External debt indicators: - External debt (nominal percent of GDP): 2008 = 22.0; 2009 = 22.4; 2010 = 21.6; 2011 = 20.0; 2016 = 19.5; 2031 = 12.6. - PV of external debt (percent of GDP, selected): 2011 = 13.6; 2016 = 19.3; 2021 = 20.1; 2031 = 14.5. - Debt service-to-exports ratio: 2008 = 8.3; 2009 = 5.2; 2010 = 4.9; 2011 = 4.6; 2016 = 3.4; 2031 = 0.6. - Stress tests: - Standard stress tests indicate resilience; extreme combined shocks deteriorate ratios somewhat but keep them below risky levels. - Oil price adverse scenario: 30 percent decline in oil prices in 2012-16 moves non-interest current account from surplus ~4 percent of GDP to nearly balanced; net international reserves would remain broadly stable and decline to about 35 percent of GDP in 2016. - Executive and authorities’ view: - Staff and authorities concur on low risk of debt distress; authorities see upside growth risks from industrialization of minerals and hydrocarbons. ### Policy discussions, staff recommendations, and authorities’ views - Monetary and exchange rate policy: - Staff priority: secure return to low inflation; recommended tighter policy mix in 2011 (stepped-up open market operations; higher reserve requirements for domestic currency deposits). - Staff suggested faster appreciation of the boliviano given estimated moderate undervaluation. - Staff encouraged moving to a more flexible exchange rate regime over the medium term as dollarization declines and domestic financial markets deepen. - Authorities: containing inflation is a priority but judge recent resurgence temporary; expect inflation to decline to 6 percent in 2011 and growth to reach 5 percent; view sterilization and liquidity absorption as main tools and attribute inflation primarily to external factors. - Fiscal policy and public investment: - Staff: fiscal space exists to increase productive and social investment provided current expenditure is contained and investment effectiveness is improved; recommended multi-year budgeting and establishment of a fiscal savings fund; cautioned that envisaged fiscal impulse of about 1½ percent of GDP for 2011 may run counter to inflation objective. - Authorities plan public investment around US$2.4 billion in 2011 (around 10 .8 percent of GDP) financed in part by fiscal savings and 50 percent public-private partnerships. - SOEs and use of reserves: - Staff warned against large central bank credits to SOEs (authorization up to 30 percent of net international reserves) and recommended alternative financing sources, increased transparency, and stronger public debt strategy. - Authorities consider part of reserves as financing cushion for public investment and seek to operationalize stabilization and development fund. - Structural and growth policies: - Staff highlighted need to improve business environment—Bolivia fell from 126th to 161th in the World Bank Ease of Doing Business index (2006 to 2010) and ranks 108th out of 139 in WEF Global Competitiveness Index. - Staff recommended gradual increase in domestic fuel prices to market levels with compensatory measures and revisiting natural resource taxation to spur exploration; authorities expect exploration by public corporations and do not foresee tax changes near-term. - Agriculture: staff advocated policies to facilitate technology adoption and reduce property-rights uncertainty; authorities emphasize EMAPA and new public bank loan programs to support small farmers. - Social policies: - Cash-transfer programs reduced extreme poverty from about 30 percent in 2008 to 26 percent in 2009; extreme poverty remains above Latin America average of 12.6 percent. - Staff recommended improving targeting of transfers to enable removal of generalized fuel subsidies and allow price signals to stimulate agricultural production, with compensatory measures for vulnerable groups. - Renta Dignidad funded with earmarks on hydrocarbon revenue. *Source: IMF staff report content provided in document _cr11124.* ### ANNEX I. KEY PROVISIONS OF THE DECENTRALIZATION LAW ______________________ 35 ### ANNEX I. KEY PROVISIONS OF THE DECENTRALIZATION LAW ### Background and recent context - Bolivia posted a solid macroeconomic performance in recent years, driven by strong terms of trade and prudent economic policies. - Export receipts doubled between 2005 and 2010, while real GDP growth rose from 3.1 percent in the first half of the past decade to 4.6 percent in the second half. - Net international investment position switched to a credit balance in 2008 and rose to the equivalent of 17½ percent of GDP in 2010. - The 2009 constitution requires amending key economic laws, including those governing the central bank, the financial sector, natural resources exploitation, and inter-governmental fiscal relations. - The authorities’ development plan envisages expansion and industrialization of natural resource production, with investment plans amounting up to 100 percent of current GDP over the next few years; implementation of projects has suffered delays and private investment remains low. ### Social outcomes - Cash transfer programs reduced extreme poverty from about 30 percent in 2008 to 26 percent in 2009. - The percentage of the population living in extreme poverty remains above the Latin America average of 12.6 percent. - Persistent disparities exist in infant mortality, school desertion, and access to basic services across territorial, ethnic, and gender lines. ### Recent developments (selected findings) - Real GDP grew by 4.2 percent in 2010, driven by higher hydrocarbons production; adverse weather reduced agricultural output while construction grew briskly. - External current account surplus rose to 4.8 percent of GDP in 2010. - Net international reserves stand at 50 percent of GDP and 80 percent of broad money. - Twelve-month inflation rose to 7.2 percent in December 2010 and 11 percent in March 2011. - Monetary conditions remain accommodative: banks’ excess liquidity amounts to 8 percent of deposits; M1 and bank credit are growing at near 20 percent. - The boliviano appreciated around 1 percent since late 2010; the de-jure exchange-rate regime is a crawling peg without pre-announcement of future adjustments. - Overall public sector surplus rose to 2.0 percent of GDP in 2010 from 0.3 percent in 2009; central government registered an estimated deficit of 2 percent of GDP and the rest of the public sector a surplus of 4 percent of GDP. - Financial sector indicators: banks profitable, well capitalized, low NPLs; boliviano-denominated credit and deposits about 55 percent of the total. - Deposits fell 3.5 percent (mostly U.S. dollar) in three days during a systemic December 2010 run; deposits have started to recover. - Congress approved a road map for fiscal decentralization and a pension reform: pension reform creates a semi-contributory regime with stepped up benefits for low-income households, funded by higher contributions from employers and employees; introduces lower retirement age (58 years for men and 55 for women) and nationalizes administration of pension funds. ### Outlook (staff projections and risks) - Short-term projections: - Real GDP growth projected at 4.5 percent in 2011. - External current account projected to remain in surplus at 4 percent of GDP in 2011. - Fiscal surplus projected to narrow to below 1 percent of GDP in 2011. - Inflation projected to decline gradually to 8 percent by end-2011. - Medium-term baseline: - Growth stabilizes at 4.5 percent (or slightly above long-term trend) under staff baseline. - Hydrocarbon revenues implied at about 12 percent of GDP for the public sector and above one-third of total revenue. - Spending projected to gradually rise to 35 percent of GDP (in line with 2008–09 levels). - Overall fiscal balance would remain in surplus (1–1½ percent of GDP). - Non-hydrocarbon deficit around 9½ percent of GDP. - Public debt projected to decline gradually to 30 percent of GDP by 2016. - Downside risks: - Possibly lower commodity prices and export volumes. - Adverse domestic market sentiment if inflation continues rising. - Domestic pressures with economy operating close to potential. ### Selected economic indicators (as reported) - Real GDP (percent change): 2008 = 6.1; 2009 = 3.4; 2010 = 4.2; 2011 = 4.5 - CPI (end of period percent change): 2008 = 11.8; 2009 = 0.3; 2010 = 7.2; 2011 = 7.9 - Overall fiscal balance (percent of GDP): 2008 = 2.8; 2009 = 0.3; 2010 = 2.0; 2011 = 0.7 - Of which: Non-hydrocarbons fiscal balance (percent of GDP): 2008 = -7.5; 2009 = -12.1; 2010 = -8.4; 2011 = -9.0 - Current account balance (percent of GDP): 2008 = 12.1; 2009 = 4.7; 2010 = 4.8; 2011 = 3.8 ### Policy discussions and recommendations - Policy priority: secure a return to low inflation, given low macro-financial risks in the short term. - Staff recommended a tighter policy mix in 2011 to contain inflationary pressures: - Central bank should tighten monetary conditions further through stepped-up open market operations and higher reserve requirements for domestic currency deposits. - Faster appreciation of the boliviano was suggested, as it is estimated to be moderately undervalued. - The envisaged fiscal impulse (about 1½ percent of GDP for 2011) may run counter to the inflation objective; staff noted the central bank would face increased burden to withdraw liquidity and increase interest rates. - Authorities’ view: containing inflation is a priority but recent resurgence judged temporary; they expect inflation to decline to 6 percent in 2011 and growth to reach 5 percent, spurred by public investment. Authorities expect central bank sterilization to absorb liquidity and consider the main driver of inflation to be external. *Source: ANNEX I. KEY PROVISIONS OF THE DECENTRALIZATION LAW, from the Bolivia 2011 Article IV Report (staff text provided).* ### 20. Given the strength of financial ### _cr11124 - 20. Given the strength of financial ### Investment capacity and short-term fiscal space - Staff concluded that an increase in total spending of 2 percent of GDP above baseline projections during 2012–16 would result in a stable net debt ratio by 2016, while maintaining Bolivia’s strong fiscal position. - Higher public investment could benefit economic growth if accompanied by efforts to boost investment effectiveness, requiring enhanced implementation capacity across all levels of government. - Authorities agreed on the need to maintain current spending under control and noted that boosting public investment was necessary for GDP diversification. ### Strengthening the policy framework - Fiscal savings and buffers - Bolivia has built large macroeconomic buffers by largely avoiding spending the hydrocarbon-revenue windfall from high gas prices. - Staff supported the authorities’ work on a multi-year medium-term fiscal framework to guide fiscal policy and budget planning, to be sent to congress to complement annual budget discussion. - Authorities plan to base budget projections on prudent estimates of oil and gas prices to generate savings in periods of high prices; these savings would be accumulated in a fiscal fund for stabilization and development purposes. - Staff suggested expanding the fiscal fund’s revenue base—at present, it only takes into account two-thirds of total hydrocarbon royalties—and establishing clearer rules for the use of the resources. - Central bank financing of public sector and SOEs - The 2011 Budget authorizes the central bank to provide large credits to SOEs (up to 30 percent of net international reserves), in addition to US$2 billion already committed in previous years (equivalent to 20 percent of current reserves). - Staff warned that such a large potential fiscal claim on the central bank risks jeopardizing confidence in the policymaking framework, compromising independent monetary policy and raising external vulnerabilities. - Staff recommended strengthening the public debt strategy to identify alternative financing sources and increasing transparency in credit assessment of public corporations. - Authorities indicated part of foreign reserves could be used to set up the envisaged fiscal fund, while maintaining a strong reserve cushion. - Intergovernmental fiscal relations - Revenue assignments and spending responsibilities are imbalanced: most natural resource revenue is earmarked to sub-national governments, which have low spending responsibilities and execution capacity; the central government’s fiscal position has deteriorated while sub-national governments and public corporations remain in surplus. - Revision of revenue assignments and spending responsibilities will take time under the decentralization law’s road map; interim measures discussed include tapping subnational surpluses voluntarily via issuance of central government paper to municipalities and departments. - Staff commended decentralization law provisions aiming at sustainable local public finance management and reaffirmed the need to avoid an increase in consolidated public spending from decentralization. - Public enterprise reform - Expansion of SOEs could lead to significant fiscal risks without greater transparency and accountability. - Staff recommended SOEs minimize quasi-fiscal operations, address constraints to investment execution, be subject to independent audits, and have expanded public sector accounts coverage to include all SOEs. - Ministry of Economy and Public Finance should develop technical expertise on large firms (in particular YPFB). - Authorities are working on a framework law for public corporations to improve management and governance. - Exchange rate and monetary policy regime - Staff encouraged moving to a more flexible exchange rate regime over the medium term to enhance shock response capacity and to develop an independent monetary policy framework focused on keeping inflation at low levels. - Authorities concurred that monetary policy should prioritize price stability and allow the exchange rate to adjust, but noted that further declines in dollarization and deepening of domestic financial markets are viewed as preconditions for a more flexible exchange rate regime. ### Maintaining financial sector soundness - Financial sector improvements - The FSAP-Update found important improvement since 2003: banks rebuilt capital buffers, capital ratios are strong, institutions appear broadly resilient, and a significant reduction in dollarization lowered foreign-currency exposures. - The banking sector is fairly competitive, efficient, and profitable despite recent declines in interest rates. - Key vulnerabilities and recommended actions - Negative real interest rates - Negative real interest rates are a source of macroeconomic risk; if maintained, they are likely to lead to unsound credit growth and possibly credit bubbles. - Footnote: remuneration of 3-month deposits averages 0.5 percent in nominal terms; average bank loan rates are slightly above 10 percent. - Staff urged a gradual but consistent rate rise (through open market operations) to manage a soft landing, and to refrain from moral suasion on banks to expand credit. - Prudential norms and developmental objectives - Since 2009 prudential norms have been used to pursue developmental objectives (lower provisioning and reserve requirements to spur domestic currency loans), which has reduced bank buffers against distress. - Staff indicated development policies would be more appropriately supported through the budget and recommended modernization of the insurance regulatory framework (corporate governance, information disclosure, reserve calculation, restructuring powers). - Banking supervision and institutional capacity - Supervision has strengthened with a more risk-oriented approach and improvements in Basel Core Principles compliance. - Expanded ASFI mandate (consumer protection, supervision of exchange houses and other non-bank intermediaries) will demand higher resources and institution building, including maintaining an adequate cycle of on-site inspections. - FSAP-Update noted importance of preserving adequate independence and legal protection of staff at the central bank, ASFI, and insurance and pensions regulator, and recommended reviewing their remuneration to avoid large gaps with supervised institutions. - Crisis management and deposit insurance - Central bank has effective liquidity mechanisms and a bank resolution framework in line with best practices, but the system lacks a deposit insurance scheme to protect small depositors in liquidation events. - Authorities should develop and monitor macroprudential indicators for systemic risk. - AML/CFT and financial integrity - Legal reforms have strengthened the anti-money laundering framework (money laundering made an autonomous crime; penal code additions related to corruption, smuggling, trafficking). - A pending key action is passage of a law penalizing the financing of terrorism; authorities are considering steps to strengthen the financial intelligence unit. - Pension fund asset management - Managing pension funds assets will require a specialized agency with qualified personnel and investment norms. - Authorities are working on implementing legislation for the pension law; the law specifies only minor changes in intended allocation to benefit small firms without credit ratings. - Given many banks’ funding dependence on pension fund deposits, staff recommended avoiding abrupt short-run asset allocation changes while developing guidelines for allocation of pension funds deposits across banks. ### Enhancing medium-term growth and social protection - Opportunity and challenges - The external environment presents a unique opportunity for sustained growth above historical rates; key challenges must be addressed to capitalize on it. - Business environment and private investment - Low private investment reflects longstanding business environment challenges; weaknesses exist in institutional indicators and goods-and-labor-markets efficiency indices. - In the World Bank’s Ease of Doing Business index, Bolivia fell from the 126th position in 2006 to the 161th position (out of 183 countries) in 2010. It ranks 108th (out of 139 countries) in the World Economic Forum’s Global Competitiveness Index. - FDI rose in 2010 (including manufacturing and gas), but non-FDI private capital flows remain negative. Authorities report progress in developing micro-enterprises and expect this to raise investment and growth. - Hydrocarbon and mining sector exploration - Investment in exploration of gas, oil, and mining has declined sharply due mainly to uncertain rules for these activities and legal frameworks under discussion. - Domestic fuel pricing and royalties reduce incentives: below-market fuel prices limit price paid to private upstream contractors to US$27 dollars a barrel; two royalties equivalent to 50 percent of the value of production further reduce exploration incentives. - Result: private production is declining and the state-owned company needs to import rising volumes of fuels (mainly diesel). - Staff suggested gradual increase in domestic fuel prices to market levels with appropriate compensatory measures to provide fiscal space for developmental and social objectives, and revisiting taxation in natural resources to spur exploration and production, particularly in smaller fields. - Authorities stated exploration by public corporations is ongoing and taxation in these sectors is unlikely to change in the near future. - Agricultural development - Bolivia lags in agricultural productivity; harvested areas have been stagnant through the food-price boom. - Investment and credit access are constrained by uncertainties about property rights; legislation establishes harsh penalties, including seizure, for violations of social, labor, or use-of-land prescriptions. - Staff argued for policies to facilitate adoption of new technology, eliminate uncertainties preventing bank financing, and cautioned that prolonged use of food-price controls or agreements could adversely affect domestic supply and encourage smuggling. - Authorities described a strategy centered on empowering small farmers via EMAPA (a public corporation that lends mostly in kind at subsidized rates and buys their production) and noted new loan programs by public banks (e.g., for sugar cane producers) will include incentives to increase productivity. *2011 ARTICLE IV REPORT BOLIVIA* ### 25. The government’s social policies have ### _cr11124 - 25. The government’s social policies have ### Social policies and Millennium Development Goals - The government’s cash-transfer programs—for the elderly, schooling, and pregnant mothers and early childhood—have been a pillar of Bolivia’s inroads toward achieving its Millennium Development Goals. - These programs are being complemented with plans to enhance the delivery of education and health services, motivated by still high levels of infant mortality and child malnutrition. - Staff commended the authorities for this success, while noting the need to ensure the sustainability of these plans in adverse scenarios. - Staff recommended: - developing capacity to enhance targeted social policies, to facilitate the reduction of fuel subsidies and minimize the use of price controls in agriculture. - improving targeting of transfer programs to enable removal of generalized fuel subsidies and to allow price signals to stimulate agricultural production, contingent on adequate compensatory measures to the most vulnerable groups. - Note on financing: Renta Dignidad, the noncontributory pension for the elderly, is funded with earmarks on hydrocarbon revenue. ### Pension reform: design, risks, and participation incentives - The pension reform introduces progressivity and could improve participation, but raises several challenges. - In the absence of actuarial calculations, staff was unable to judge the fiscal impact of the reform. - Short-run outlook: the new solidarity fund is expected to register a surplus. - Medium-term risks: actuarial risks exist, especially given the reduction in the retirement age. - Incentive effects identified by staff: - Low income earners and workers close to retirement would have higher incentives to participate due to the new guaranteed pension. - Higher contribution rates may reduce incentives for labor formalization overall. - Authorities’ stance and proposed measures: - Authorities agreed the medium-term challenge is to secure higher participation rates. - They proposed stronger penalties on evasion and introduction of innovative modalities to facilitate contributions by self-employed workers. ### 2010 performance and near-term outlook - 2010 performance: - Despite adverse weather shocks, the Bolivian economy performed well in 2010. - Real GDP growth rose, supported by favorable terms-of-trade and higher hydrocarbon production and exports. - The external current account and public sector balances remained in surplus. - Net international reserves climbed to new record highs. - The financial sector remains sound, with low nonperforming loans and adequate provisioning. - Growth outlook for 2011: - Real GDP growth is expected to gather further momentum, reflecting continued recovery of hydrocarbon production, higher public investment, and very favorable export prices. - The external current account and the fiscal balance are expected to remain in surplus. ### Inflation trends, inflation expectations, and monetary policy implications - Recent inflation developments: - Twelve-month inflation rose to 10 percent in February. - Measures of inflation: - core inflation: 9.8 percent - underlying inflation: 8.4 percent - official inflation objective for 2011: 6 percent - Drivers: higher international food prices, adverse weather supply shocks in agriculture, and social unrest (temporary regional price hikes). - Monthly and component details: - Monthly inflation averaged 1.4 percent during October-February, compared with the monthly average for the first half of 2010 of 0.1 percent. - Food products account for 27 percent of the CPI basket. - Food prices rose 17 percent year-over-year in February, explaining 48 percent of total inflation. - Historical pass-through from world to domestic food prices: 20−25 percent; recent developments point to faster and stronger impact. - Some sub-indices (clothing, furniture and domestic articles, services, and restaurants and hotels), representing altogether 31 percent of the basket, have all risen above 6 percent in the last twelve months. - Inflation expectations: - Expectations have increased in tandem with actual inflation, signaling a risk of inflation becoming more entrenched and requiring a more aggressive policy response. - Policy implications and recommendations: - Easy monetary conditions have contributed to generalized price increases. - With the fiscal impulse envisaged for 2011, the central bank should exit faster from the very strong monetary stimulus provided over the past two years. - A more rapid appreciation of the currency, which is estimated to be moderately undervalued, would also help reduce external inflationary pressures. ### Fiscal policy, structural balances, and public investment - Fiscal stance analysis: - The Structural Balance (SB) methodology was applied with hydrocarbon-related items adjusted out of public sector revenues and expenditures. - Potential output estimation used the HP filter; over the last 22 years, potential growth has averaged around 4 percent. - Revenue and expenditure elasticities: an aggregated revenue elasticity of 1 was applied; expenditure assumed structural (elasticity of expenditure to output = 0). - Recent fiscal impulses and projections: - Results indicate fiscal policy sustained demand and GDP growth in 2008-09 despite non-hydrocarbon GDP being slightly above potential. - Results indicate a strong negative stimulus in 2010—mostly on account of underexecution of public investment. - For 2011, the fiscal impulse is estimated at about 1½ percent of GDP. - Policy space and recommendations: - Given strong public financial cushions and favorable outlook for gas prices, there is fiscal space to undertake additional public investment, provided efforts continue to boost its effectiveness. - Staff projects that, under current policies, public debt will be on a downward path over the next few years. - Authorities could increase productive and social investment while containing current expenditure to address development needs. - This will require stepping up efforts to ensure the effectiveness of public spending and enhancing implementation capacity across all levels of government. - Recommended institutional reforms: - Proceed expeditiously with establishment of a fiscal savings fund to facilitate anti-cyclical fiscal policy and limit risky fiscal claims on the central bank. - Adopt multi-year budgeting to strengthen fiscal policy and improve investment planning. - Move towards greater exchange rate flexibility as lower dollarization becomes more entrenched and domestic financial markets develop further. ### Financial sector stability and regulatory priorities (FSAP update) - FSAP update findings and policy actions: - Important improvements in the financial sector, but further strengthening of macro-financial stability is required. - Authorities need to manage a soft landing from historically-low interest rates while ensuring appropriate levels of bank liquidity. - Capital buffers should be sustained through regulation focused on risks faced by banks rather than developmental objectives. - Further efforts are needed to align resources, capacity, and processes to the growing responsibilities of the financial sector supervisor, while ensuring adequate independence. - The central bank has effective mechanisms to provide liquidity and the bank resolution framework is in line with best practices. - Crisis management could be strengthened with a deposit insurance scheme to protect small depositors in the event of bank liquidation. - AML/CFT regulations and practices should be strengthened to comply with international norms. ### Investment climate and structural considerations - Challenges to sustaining high, stable medium-term growth: - Bolivia has yet to reverse the drop in private investment levels that began in the early 2000s. - Key challenge: adapt the legal framework for natural resources and private investment to the mandates of the Constitution in a way that ensures clear and stable rules for the private sector. ### Key quantitative indicators and contributions (selected) - Inflation and inflation components (February): - Headline Inflation (weight): 100.00 - Food and Beverages (weight): 27.37; Feb-10: -2.21; Feb-11: 17.04; Contribution to February 2011 Inflation: 48.0 - Alcoholic Beverage and Tobacco (weight): 0.89; Feb-10: 4.91; Feb-11: 15.71; Contribution: 1.4 - Apparel and Footwear (weight): 6.28; Feb-10: 0.46; Feb-11: 6.24; Contribution: 4.2 - Housing & Basic Services (weight): 11.10; Feb-10: 2.34; Feb-11: 4.15; Contribution: 5.1 - Furniture & Domestic Articles (weight): 6.71; Feb-10: 2.12; Feb-11: 6.84; Contribution: 4.9 - Health (weight): 2.51; Feb-10: 2.44; Feb-11: 4.71; Contribution: 1.3 - Transportation (weight): 12.51; Feb-10: 0.10; Feb-11: 2.55; Contribution: 7.5 - Communications (weight): 3.47; Feb-10: -0.60; Feb-11: -2.60; Contribution: -0.7 - Culture & Recreation (weight): 6.32; Feb-10: -0.84; Feb-11: 4.43; Contribution: 3.1 - Education (weight): 4.72; Feb-10: 1.35; Feb-11: 5.32; Contribution: 2.7 - Restaurants & Hotels (weight): 11.07; Feb-10: 2.72; Feb-11: 15.21; Contribution: 17.4 - Other Goods & Services (weight): 7.05; Feb-10: 1.46; Feb-11: 6.55; Contribution: 5.0 - Exchange rate assessment: - Staff CGER approaches point to undervaluation of the Boliviano, averaging 8.5 percent. *Source: BOLIVIA 2011 ARTICLE IV REPORT — INTERNATIONAL MONETARY FUND* ### 4.6 percent would be needed to close the ### _cr11124 - 4.6 percent would be needed to close the ### Exchange Rate Assessment - Underlying CAB of 4 percent of GDP and estimated equilibrium current account (current account norm) of 2.8 percent of GDP imply: - "4.6 percent would be needed to close the difference between the underlying current account balance (CAB) and the estimated equilibrium current account (current account norm)." - Drivers of the current account norm: - "mainly relatively high petroleum trade balances and low old-age dependency ratios." - REER misalignment estimates: - MB Approach: -4.6 (Undervaluation) - ES Approach: -12.3 (Undervaluation) - Assumes Bolivia’s net foreign assets stabilize at end-2009 level (18 percent of GDP), which would require a CAB of 0.9 percent of GDP. - ERER Approach: -8.6 (Undervaluation) - Model explains REER on the basis of the terms of trade, net foreign assets, public expenditure, FDI, and relative productivity. - Average: -8.5 (Undervaluation) - REER chart: Actual REER vs Equilibrium REER using ERER approach (REER index 2005=100) shown for Dec-92 through Dec-10. *Source: Fund staff estimates.* ### Real Sector Developments - GDP growth: - "GDP growth estimated at 4.2 percent in 2010." - Bolivia recovered in 2010 "at lower pace than its neighbors." - Growth composition (2010): - Main contributors: hydrocarbons, construction, transportation, and financial services. - Lagging sectors: agriculture; contraction: mining. - Labor market and prices: - "unemployment declining and real wages rising somewhat." - "Inflation has picked up significantly, reflecting higher food prices and easy monetary conditions." - Price volatility: "price swings appear more volatile than in other countries in the region." - Monthly Economic Activity Indicator (Jan-Oct 2010): Total index: 3.97 (y/y percent change). ### External Developments - Current account: - "Current account remained in surplus" with improving terms of trade. - Table 4 memoranda: Current account (percent of GDP) series: 12.0, 12.1, 4.7, 4.8, 3.8, 4.4, 4.3, 3.4, 3.0, 3.3 (years 2007–2016). - Exports and imports: - Exports, f.o.b. and composition detailed (natural gas, mining, soy-related, other). - "Increase in gas exports stems from an increase in both prices and volumes." - "Imports increased by 20 percent with the largest increase in primary materials imports." - Capital flows: - "Capital account is driven by slightly increasing FDI while the rest of private capital flows remain negative." - "Private capital flows excluding FDI remained negative, while net FDI increased." - Reserves: - "Central Bank’s foreign reserves reached historic highs of 50 percent of the GDP." - Gross Central Bank foreign reserves (millions of U.S. dollars): 5,319; 7,722; 8,580; 9,730; 10,440; 11,434; 12,540; 13,477; 14,415; 15,538 (years 2007–2016). ### Fiscal Developments - Fiscal position (2010): - "The 2010 fiscal surplus increased to 2 percent of GDP , amid a lower non-hydrocarbon balance." - Overall balance after nationalization costs (percent of GDP) series (Table 1): 1.7, 2.8, 0.3, 2.0, 0.7, 1.2, 1.3, 1.4, 1.4, 1.5 (2007–2016). - Revenue and spending: - Combined public sector revenues and grants (percent of GDP): 34.4, 38.9, 36.1, 33.9, 34.8, 35.2, 35.7, 36.4, 36.6, 36.6 (2007–2016). - Hydrocarbons related revenue (percent of total revenues): highlighted as significant driver. - Real primary spending declined in 2010, mainly due to lower investment. - Debt: - "Sustained fiscal surpluses, together with debt relief, allowed for a significant reduction in public sector debt." - Total net NFPS debt (percent of GDP) series (Table 1): 26.8, 20.6, 22.8, 18.3, 15.5, 13.1, 11.6, 10.2, 9.0, 7.8 (2007–2016). - Domestic debt vulnerabilities reduced: maturities extended and foreign currency exposure reduced. ### Monetary Developments and Financial Sector - Monetary stance: - "Monetary policy remains accommodating with short-term rates at virtually zero." - "Central bank resumed the appreciation adjustments of the Boliviano under the crawling peg." - Open market operations (90 days rate) and deposit rates declined markedly (Feb-09 to Feb-11 shown). - Monetary aggregates: - Currency in circulation and credit growth picked up; M3 slowed due to lower deposit growth. - November 2010: central bank resumed negative crawl of the Boliviano; strong central bank purchases of FX in December. - Financial soundness: - "Banks’ financial soundness indicators have improved with declining NPLs and adequate capital." - NPL to total loans declined to 3.5 percent in 2010 (Table 8: Nonperforming loans series 8.7, 5.6, 4.3, 3.5, 2.2 for 2006–2010). - Capital adequacy ratio: 13.3, 12.6, 13.7, 13.3, 11.9 (2006–2010). - Banks' profitability (ROA/ROE) and liquidity indicators presented; profitability "has declined somewhat since 2007 amid some compression of spreads." ### Key Statistical Highlights (selected exact figures from tables) - GDP and inflation: - Real GDP growth: 4.6, 6.1, 3.4, 4.2, 4.5, 4.5, 4.5, 4.5, 4.5, 4.5 (2007–2016, Table 1). - CPI inflation (period average): 8.7, 14.0, 3.3, 2.5, 10.4, 5.4, 4.5, 4.0, 4.0, 4.0 (2007–2016). - External sector (percent of GDP): - Merchandise exports: 33.5, 38.8, 28.2, 32.5, 30.3, 29.6, 29.1, 28.5, 27.8, 27.8 (2007–2016). - Merchandise imports: 26.0, 30.0, 25.4, 27.7, 26.3, 25.7, 26.0, 26.7, 26.5, 26.3 (2007–2016). - Reserve adequacy and dollarization: - NIR coverage of broad money (percent): 61.9, 75.1, 84.7, 80.4, 79.5, 73.9 (2006–2011, Table 5). - Composition of bank deposits (percent): Dollar deposits 76.2, 65.0, 52.6, 51.7, 43.8, 39.4 (2006–2011, Table 8). ### Policy-relevant Observations and Implications - Exchange rate: - Multiple approaches indicate undervaluation (MB: -4.6 percent; ES: -12.3 percent; ERER: -8.6 percent; average -8.5 percent), implying room for real appreciation pressures given external surpluses and reserve accumulation. - Fiscal policy: - Strong hydrocarbon-related revenues underpin fiscal surpluses and debt reduction, but "Non-hydrocarbon balance" remains in deficit (example: -5.9, -7.5, -12.1, -8.4 percent of GDP in selected years). - Continued attention to non-hydrocarbon balances and public investment composition is warranted to sustain fiscal gains. - Monetary and financial stability: - Expansionary monetary stance and low short-term rates contributed to rising credit and currency in circulation; monitoring of inflation and credit growth dynamics is important. - Improving bank soundness indicators support financial stability, yet continued vigilance on asset quality and dollarization trends is needed. *Source: Fund staff estimates.* ### ANNEX I. KEY PROVISIONS OF THE ### ANNEX I. KEY PROVISIONS OF THE DECENTRALIZATION LAW ### Overview - The Law on Autonomies and Decentralization, approved in July 2010, implements political and economic decentralization envisaged in the New Constitution of Bolivia. - Key objectives: - Enable subnational governments to obtain political and fiscal autonomy. - Create new autonomous territories for indigenous populations. - Allow departments and municipalities to create an intermediate level of government—the region. - Open new competencies for subnational governments, including education and health. - Institutional features: - Subnational political administration typically includes an executive power and a legislature. - Departments and municipalities must prepare statutes or organic charters defining competencies and seeking assurances of adequate resources. - Decentralization may be asymmetrical (differing breadth and velocity across subnational governments). - Competencies will be costed; institutional capacity of subnational governments will be assessed. - A new State Office (Autonomies Service, SEA) will be established to cost competencies, assess capacities, and provide technical assistance. - Political coordination by the Autonomies Council (CAN), led by the president, ministers of Planning, Presidency, and Autonomies, the governors of all nine departments, and representatives from municipalities and indigenous communities. - Timing and fiscal redistribution: - No specific timeline for transfer of competencies and changes to revenue sharing; process envisaged as gradual and taking several years. - Full implementation requires redistribution of revenue across jurisdictions via a Fiscal Pact, which requires completion of the national population census to start towards the first quarter of 2012. ### Statutes / Organic charters - Subnational governments prepare statutes/organic charters setting their basic institutional and political organization. - Approval process: - After approval by subnational legislatures, statutes assessed by the Constitutional Tribunal (not yet established) for compatibility with constitutional provisions. - Statutes then approved by referendum in the respective jurisdiction. - Timing for transfer of spending responsibilities to be agreed later in a flexible agreement among levels of government. - Dispute resolution: - Conflicts settled by conciliation with SEA and, as a last resort, by the Constitutional Tribunal. - SEA setup: - Steps to set up the SEA are fairly advanced; operations could start as soon as its budget is approved. ### Breakdown of public spending by level of government (authorities' preliminary estimates; Percent of cash collections) - Total: Central 65.2%, Departments (Provinces) 8.8%, Municipalities 21.6%, Universities 3.8%, Total 100% - By function (Percent): - General Public Services: Provinces 0.8%, Municipalities 1.9%, Universities 0.0%, Central Government 15.2%, Total 18% - Defense: Provinces 0.0%, Municipalities 0.0%, Universities 0.0%, Central Government 3.8%, Total 4% - Public Security: Provinces 0.1%, Municipalities 0.2%, Universities 0.0%, Central Government 4.5%, Total 5% - Economic Affairs: Provinces 5.5%, Municipalities 5.7%, Universities 0.1%, Central Government 13.5%, Total 25% - Environment: Provinces 0.3%, Municipalities 1.3%, Universities 0.3%, Central Government 2%, Total (implicit) - Housing and Communal Services: Provinces 0.3%, Municipalities 4.4%, Universities 0.5%, Central Government 5%, Total (implicit) - Health: Provinces 0.3%, Municipalities 2.4%, Universities 0.1%, Central Government 6.9%, Total 10% - Recreation Activities, Culture and Religion: Provinces 0.2%, Municipalities 1.7%, Universities 0.0%, Central Government 0.2%, Total 2% - Education: Provinces 0.7%, Municipalities 3.5%, Universities 3.3%, Central Government 9.8%, Total 17% - Social Protection: Provinces 0.6%, Municipalities 0.5%, Universities 0.2%, Central Government 10.5%, Total 12% ### Sources and distribution of revenue - The law defines tax domains and revenue sources at municipal, provincial, and national levels without meaningful changes to the current situation. - Revenue sharing provisions are consistent with pre-existing arrangements. - Notes in authorities' breakdown: - The law does not reference distribution of royalties on minerals or hydrocarbon production; current arrangements were added for completeness. - IDH distribution noted in Table AI.2: IDH 3/ appears as 19.8, 5.3, 25.3, 28.6, 100 (percent of cash collections) as presented in the table format. ### Fiscal responsibility and indebtedness - Subnational governments may contract debt subject to an analysis of repayment. - External debt contracting allowed only if authorized by Congress. - Domestic debt issuance requires authorization from the central government; the central government will not guarantee it. - Central government cannot finance deficits of autonomous territories. - If fiscal sustainability is at risk, subnational governments may request an agreement with the Ministry of Finance to establish targets and policies to control indebtedness and improve fiscal performance. - Congress required to pass legislation on Public Indebtedness and on Rules and Principles of Fiscal Responsibility for national and subnational governments. ### Hydrocarbon fund (Productive Development and Solidarity Fund) - Congress called to legislate a Productive Development and Solidarity Fund to finance strategic projects and promote more homogeneous geographical development. - Funding source: - The Fund will be fed with resources from the IDH—a royalty on hydrocarbon production—in excess of budget projections due to higher prices (no reference to differences in volumes of production). - Implementing law will set parameters to establish budget prices. - Three functions of the Fund: - Solidarity: contribute to financing of less developed territories. - Savings and stabilization: accumulate resources when prices are high and use them when tax collections are low. - Productive development: finance strategic projects; investments favor departments with lower socioeconomic development; funds could be used to rebuild infrastructure and other spending needed to overcome natural disasters. --- ### ANNEX II. MAIN FEATURES OF THE PENSION SYSTEM REFORM ### Reform overview - Congress approved pension system reform in late 2010; new Pensions Law replaces a 1996 law that introduced individual capitalization accounts and private administration. - The law is effective immediately with a short transition period to finalize operational issues. - Pre-reform system: - About half of the 1.2 million registered contributors made payments regularly. - System administered by two private pension fund administrators. - Collected contributions of about US$450 million per year and accumulated total assets of US$5.5 billion by end 2010. - Footnote: legislation establishes amounts in Bolivianos, converted here at the prevailing exchange rate. ### Key elements of the reform - Nationalization of administration of system’s assets: - Newly created Public Pension Funds Administration (PPFA) will take over the two existing private administrators. - Establishment of a semi-contributive system: - Employees with minimum years of contributions and whose savings imply pensions below certain thresholds will receive an additional payment (solidarity pension). - Retirement age changes: - Statutory retirement age reduced from 65 to 58 years. - Further reductions for specific groups: miners retire at 56; workers under unhealthy conditions at 51; women at 55 and entitled to advance retirement age by one year for each child born alive, up to three years. - Three subsystems (regimes): - Contributive, semi-contributive, and non-contributive. - Contributive subsystem: - Continues based on individual accounts. - Workers contribute 10 percent of their salaries to their accounts. - Pensions have no ceiling and continue to be computed according to the amount saved in personal accounts. ### Pension payments and assets (selected figures) - Total pension payments (US$ million): - 2005: 358.6 - 2006: 418.8 - 2007: 452.1 - 2008: 539.3 - 2009: 647.0 - 2010: 657.8 - Pay-as-you-go system beneficiaries and payments: - Beneficiaries (2005–2010): 134,677; 132,833; 130,851; 128,216; 125,366; 122,862 - Payments (US$ million) (2005–2010): 335.3; 346.6; 361.4; 415.4; 476.2; 483.5 - Pension funds assets (stocks in US$ millions): - December 2007: Total 2,910 - December 2008: Total 3,885 - December 2009: Total 4,626 - December 2010: Total 5,468 - Components include Treasury bills, Financial system placements, Investment funds, Other, Foreign investment, Private Trust Funds (detailed by year in table). ### Non-contributive subsystem - Dignity Bond (Bono Dignidad) remains unchanged: - Universal transfer to population above 60 years of age instituted in 2007. - Every beneficiary receives US$340 a year if not receiving any other pension, and US$255 a year otherwise. - Funded by a fraction of the hydrocarbons tax (about 25 percent of the collections of IDH, which is a 32 percent royalty on hydrocarbon production). - Staff estimates indicate this is sufficient to finance outlays of this subsystem, which stand about US$250 million a year. ### Solidarity pensions (semi-contributive subsystem) - Solidarity pension design: - Complements contributive pensions when they are lower than a certain threshold. - Threshold for each participant defined as the earnings base times a replacement rate that increases with years of contributions, subject to maximum and minimum bounds. - Earnings base: the average monthly salary during the last 2 years of contributions (new Law). Footnote: before the reform, earnings base for PAYG system was average of last 5 years. - Solidarity pension equals the necessary transfer (if any) to meet the threshold and is available to all participants with a minimum of 10 years of contributions. - The pillar will be fully financed by higher contribution rates introduced by the new Law. - Table AII.3 — Solidarity Pension Allowances (Years of Contributions; Replacement Rate; Min. Solidarity Limit; Max. Solidarity Limit) - 10 - 15 years: Replacement Rate 56%, Min. Solidarity Limit US$103, Max. Solidarity Limit US$122 - 16 - 20 years: Replacement Rate 60%, Min. Solidarity Limit US$127, Max. Solidarity Limit US$220 - 25 years: Replacement Rate 65%, Min. Solidarity Limit US$157, Max. Solidarity Limit US$314 - 30 years: Replacement Rate 70%, Min. Solidarity Limit US$171, Max. Solidarity Limit US$343 - 35 years: Replacement Rate 70%, Min. Solidarity Limit US$186, Max. Solidarity Limit US$371 - Note: Replacement rates and limits increase linearly with years of contributions above 16. Effective replacement rates are higher for miners. Values may be revised every 5 years. ### Financing the Solidarity Fund (SF) and contribution changes - SF funding sources: - Employers will contribute the equivalent to 3 percent of the salaries of all public and private employees. - High income individuals will contribute according to a progressive schedule ranging from 1–10 percent of monthly income in excess of US$1,850. - 0.5 percent of the monthly contributions by every individual will be devoted to the SF. - SF will also receive 20 percent of the premia paid to cover pensions arising from illnesses and accidents. - Contribution changes summary (Table AII.4; Percentage of wages): - Employee contribution to individual account: Old System 10%, New System 10% - Administration fee: Old System 0.5%, New System 0.5% - Non-work related death and illness insurance: Old System 1.71%, New System 1.71% (in the new system, 20 percent of this contribution will fund the SF) - Work related death and illness insurance: Old System -, New System 1.71% - Contribution to the Solidarity Fund: Old System -, New System 0.5% - Additional contribution from high income workers: Old System -, New System 1–10% - Total worker’s contribution (minimum): Old System 12.21%, New System 12.71% (Independent: Old System 13.92%, New System 14.42%) - Employer’s contribution: - Seguro de invalidez y muerte por riesgo profesional: Old System 1.71%, New System 1.71% - Contribution to Solidarity Fund: Old System -, New System 3% - Total Employer’s contribution: Old System 1.71%, New System 4.71% - Notes: - 1/ In the new system, 20 percent of the non-work related death and illness insurance contribution will fund the SF. - 2/ Additional contributions for high income workers: 1%, 5% and 10% for wages in excess of US$1850, US$3570 and US$5000, respectively. - 3/ The contribution rate in the new system is 2% higher for the mining sector. ### Investment guidelines for capitalization funds - Limits: - On a single issuer: Max. 10% of administered funds - On a single issuance: Max. 60% of issuance - On unrated small and medium enterprises: Max. 5% of administered funds - On a single corporation: Max. 20% of the corporate capital - On foreign instruments: Max. 50% of administered funds - Investments in central bank and treasury paper not subject to these limits. - Additional provision: - PPFA allowed to invest up to 5 percent of the funds in bonds from unrated small and medium enterprises, with an investment committee assessing prospects. - Financial instruments acquired by pension funds need authorization to trade in securities markets and should have a risk rating (exception for SMEs). ### Expected financing - The authorities expect to raise US$130 million for the Solidarity Fund. *Source: IMF staff summary of ANNEX I and ANNEX II as presented in the provided document.* ### 2011. According to their estimates, this total is ### _cr11124 - 2011. According to their estimates, this total is ### Solidarity Fund (SF) and pension program details - Breakdown of the total funding sources: - 67 percent from the employer’s contribution - 11 percent from the workers’ contribution - 16 percent from pension risk - 6 percent from high income individuals - One-off transfer in 2011: - The SF will receive about US$85 million currently in the Basic Pension Account (used to finance minimum pensions in the old pay-as-you-go regime). - Authorities’ estimates on initial spending and coverage: - The authorities estimate that US$30 million would be spent from the Solidarity Fund in the first year. - The Ministry of Finance estimated that 40,000 people would retire in the first year of the program, 30,000 of them under a solidarity pension. - Over time, authorities estimate that 80 percent of workers would benefit from the solidarity pension. - Sustainability and actuarial analysis: - The authorities have not yet published their actuarial analysis. - They claim that the system will have a positive cash flow in the next 25 years and that its sustainability can be assured for the next 30 years. ### Bolivia: Fund relations (as of April 11, 2011) - Membership and exchange regime: - Joined December 27, 1945; accepted Article VIII obligations on June 5, 1967. - Exchange system free of restrictions on current international payments and transfers. - Boliviano exchange rate regime: stabilized arrangement against the U.S. dollar; de jure regime indicated as a crawling peg. - Since November 2010, authorities resumed the negative crawling peg and the official selling rate appreciated from Bs7.07 per U.S. dollar to Bs7.00. - Quota and SDR holdings (SDR Million; Percent of Quota / Allocation): - Quota 171.50 100.00 - Fund holdings of currency 162.64 94.83 - Reserve position in Fund 8.87 5.17 - Net cumulative allocation 164.13 100.00 - Holdings 164.91 100.48 - Outstanding purchases and loans: None. - Financial arrangements (selected): - Stand-By: Approval date 4/02/03; Expiration date 3/31/06; Amount approved (SDR million) 145.78; Amount drawn (SDR million) 111.50 - ECF (9/18/98–6/07/02): Amount approved 100.96; Amount drawn 63.86 - ECF (12/19/94–9/09/98): Amount approved 100.96; Amount drawn 100.96 - Projected obligations to the Fund: Principal and Charges/Interest for 2011–2014 all listed as 0.00. - HIPC and MDRI implementation (selected figures): - Assistance committed by all creditors (US$ million): Original Framework 448.00; Enhanced Framework 854.00 - Of which: IMF assistance (US$ million): 29.00 (Original); 55.32 (Enhanced) - Disbursements of IMF assistance (SDR million): 21.25 and 41.14; Total disbursements 21.25/44.23 and 65.48 (table entries) - Total debt relief (SDR Million): 160.93; Of which MDRI 154.82; HIPC 6.11 - Eligible Debt Delivery Date January 2006: GRAP 6.70 PRGF 71.15 Total 77.85; January 2006 83.08 N/A 83.08 - Safeguards assessment: - A safeguards assessment for the Central Bank of Bolivia (CBB) completed June 27, 2003; update on September 27, 2004. Currently, CBB is not subject to the policy. - Article IV consultation: - Last Article IV consultation completed by the Executive Board on January 15, 2010 (Country Report No. 10/27). Bolivia is on a standard 12-month consultation cycle. - Technical assistance (2006–11) — selected entries: - STA: Monetary statistics, March 2006 - FAD: Public finance information system, December 2006 - MCM: Inflation targeting, June 2007 - FAD: Tax policy, March 2008 - FAD: Integration of tax and customs administrations, January 2011 - Resident Representative: - Mr. Luis Breuer took over the post of IMF resident representative in June 2009. ### World Bank relations and Bank-Fund collaboration under JMAP - World Bank ISN (FY2010–2011) and financing: - ISN total envelope US$151 million of concessional IDA resources allocated to: - Strengthening of the Statistical Capacity Project for US$50 million (approved January 2011) — to finance population and agricultural censuses and enhance the household survey. - National Roads and Airport Infrastructure Project for US$100 million (expected approval May 2011) — to support northern La Paz development via San Buenaventura–Ixiamas road and Rurrenabaque airport upgrading. - Current World Bank portfolio comprises 12 investment projects for US$353 million, of which US$206 million remain undisbursed. - World Bank portfolio (as of February 2011) — selected project commitments, disbursed, undisbursed, closing dates: - Decentralized Infrastructure for Rural Transformation: Commitment 20.0; Disbursed 13.1; Undisbursed 10.0; Closing Date May 2011 - Road Rehabilitation and Maintenance: Commitment 77.0; Disbursed 73.5; Undisbursed 19.1; Closing Date June 2011 - Strengthening of the Statistical Capacity: Commitment 50.0; Disbursed 0.0; Undisbursed 49.4; Closing Date June 2015 - Total portfolio: 352.8 committed; 167.7 disbursed; 205.5 undisbursed - Analytical and advisory work: - Delivered ESW including PEFA and Distributional Impact of Food Inflation; further ESW ready for delivery include Agricultural Public Expenditure Review, Municipal and Service Finance Review, Financial Sector Review. - Non-lending technical assistance provided across multiple areas (Urban Alliances; Water-related Adaptation to Climate Change and Variability; Multi-Dimensional Poverty; Social Safety Nets IV; Public Sector Governance; Support to Ministry of Education). - Medium-term engagement: - Bank developing a Country Partnership Strategy (CPS) for the next four years; indicative envelope unknown; expectation that Bolivia would receive an IDA allocation similar to the current one; IDA hardened terms to be applied as Bolivia’s GNI per capita has remained above the operational cut-off for more than three consecutive years; potential access to IBRD during CPS midpoint. - Tentative lending program (next two years) includes: - Agricultural Innovation and Services - Rural Investment in Rural Areas - Decentralized Infrastructure for Rural Transformation II - Bank-Fund JMAP priorities for Bolivia: - Strengthening fiscal framework: reform of intergovernmental relations, transparent management of hydrocarbon-related revenue, reinforcement of multi-annual budget process; public sector management and procurement capacity weak. - Maintaining adequate financial sector supervision: sector is liquid and solvent; challenges to deepen sector while strengthening supervision and safety net. - Improving business climate to bolster investment: private investment rate remains significantly below past decade levels and below regional average; reconcile private sector role with government increasing state role. - Reducing poverty: challenges in access to quality basic education and health, employability of low income youth, and social protection network. - Division of labor under JMAP: - Fund leads on tax policy and administration. - Fund provides TA on fiscal federalism; Bank advises on public investment management and intergovernmental coordination. - Bank and IADB prepared a PEFA-based Public Financial Management evaluation. - Bank leads on social protection, health, education, and analytical work on poverty and targeting. - Bank continues financing and analytical work on private sector development in agriculture, rural development, and community-driven development. - Fund continues financial sector surveillance; Bank to work with Supervision Authority on analytical work; FSAP update in early 2011 covering financial stability and development issues. ### Inter-American Development Bank (IDB) relations - IDB lending and disbursement (as of December 31, 2010): - Approved loans to Bolivia totaling US$4.41 billion; disbursements totaling US$3.45 billion. - Bolivia’s outstanding debt to the IDB approximately US$629.4 millions with undisbursed approved funds for US$668.5 millions. - Net cash flows to the country were positive for the second year in a row in 2010; trend expected to continue in the base scenario to 2015. - IDB debt relief and concessional lending: - IDB unilaterally joined the IMF-WB MDRI initiative at end-2007, writing off US$741.1 million in principal payments and US$307.3 millions of future interest payments, generating an estimated annual fiscal space of more than US$18.0 millions on average. - New allocation criteria for concessional lending consistent with the Debt Sustainability Framework and the Fund of Special Operations performance-based allocation system. - Parallel lending (blended ordinary and concessional funding) preferred up to 2015. - New country strategy (2011–2015) and allocations: - IDB decided to increase financial flows to Bolivia. - Beginning 2011, Bolivia allocated 25 per cent of concessional element under IDB’s blended financial conditions (instead of 30 percent approved up to 2010). - New strategy includes provisions/triggers to consider further envelope increases by decreasing concessional component to up to 20 percent. - During 2010 Bolivia enjoyed an annual allocation of US$200.3 millions; base scenario for 2011–2015 is approval of new loans US$252.0 millions per year. *Prepared by the Western Hemisphere Department (In collaboration with other departments), April 28, 2011 — source: IMF staff report content provided above.* ### 4. Under the draft of the 2011-2015 ### 4. Under the draft of the 2011-2015 ### Country strategy and sectoral focus - Main objectives: sustainable growth and poverty-inequality reduction. - Alignment: Bank will align its actions with Bolivia’s National Development Plan. - Target sectors: - (i) Transport - (ii) Water and sanitation - (iii) Energy - (iv) Early Childhood Development (ECD) - (v) Health - (vi) Education - (vii) Institutional and Sustainability Strengthening - Transversal focuses: climate change and indigenous population/diversity issues. ### Portfolio of executing operations (sovereign and non‑sovereign) - As of December 31, 2010: - Sovereign guaranteed executing portfolio: 30 loans, totaling US$1.18 billion, of which 49 percent has already been disbursed. - Current executing portfolio supports mostly transport, water and sanitation, and energy infrastructure. - Undisbursed sovereign portfolio concentration: 83 percent in the above-mentioned sectors. - Non-sovereign guaranteed executing portfolio: 5 loans totaling US$128.0 million, of which 91.8 percent has already been disbursed. - Bank’s 2011 operative program: - Sovereign guaranteed operations: 7 loans for a total amount of US$252.0 millions for the year, including US$62,0 million for programmatic budget support. - Remaining approvals concentrated in water and sanitation, energy, health and ECD sectors. - Nine additional loans for US$285.0 millions identified and in the Bank’s lending pipeline for the 2011 cycle. ### Conditions and implementation risks for the strategy - Implementation conditions described as complex with important institutional, social and political definitions yet to be clarified. - Identified macroeconomic, institutional and regulatory risks posing direct and indirect challenges: - Financial implications of the country’s excessive dependence on oil revenues. - Weak policy implementation and institutional capacity affecting the public investments programs. - Problematic regulatory environment downgrading the investment climate. ### Assessment of data adequacy for surveillance (As of April 11, 2011) - General: Data provision has some shortcomings, but is broadly adequate for surveillance. - National Accounts: - INE is revising national accounts statistics, including updating the base year (currently dating from 1990) and intensified implementation of SNA 1993. - Labor market: - Quality of household and employment surveys has deteriorated in recent years due mainly to financial constraints. - Quarterly employment survey discontinued in 2003, leading to lack of quarterly information on unemployment, employment and wages. - Yearly information on wages is still compiled by INE. - Prices statistics: - Industrial producer price indices and external trade unit values compiled by INE, but need revision regarding concepts and definitions consistent with SNA 1993, seasonal products, missing items, quality changes, and introduction of new products. - Government finance statistics: - Annual data on consolidated central government operations do not cover all operations of decentralized agencies and operations channeled through special funds. - Ongoing implementation of a comprehensive financial management system (funding from IADB/WB) expected to improve monitoring of public sector financial operations including subnational fiscal operations, debt and social spending. - Need to improve reporting of operations and debt of public enterprises. - Balance of payments: - Despite improvements in coverage of private capital flows, coverage of certain services and financial transactions needs to be expanded (as noted by January 2007 Data ROSC mission). ### Participation in data standards - Bolivia has participated in the General Data Dissemination System (GDDS) since November 2002. - Data ROSC published on August 13, 2007. ### Bolivia: Indicators Required for Surveillance (As of April 12, 2011) - Table summarizes latest observation dates, dates received, frequency of data, frequency of reporting, frequency of publication, and data quality assessments (methodological soundness and accuracy/reliability) for key macroeconomic and financial indicators (exchange rates; international reserve assets and reserve liabilities; reserve/base money; broad money; central bank balance sheet; consolidated banking system balance sheet; interest rates; consumer price index; revenue, expenditure, balance and composition of financing—general government and central government; stock of central government and central government-guaranteed debt; external current account balance; exports and imports of goods and services; GDP/GNP; gross external debt; international investment position). - Notable date entries: - Reserve/Base Money: Feb. 2011 (latest observation), Mar. 2011 (date received), Monthly frequency. - Broad Money: Feb. 2011 (latest observation), Mar. 2011 (date received), Monthly frequency. - Consumer Price Index: Feb. 2011 (latest observation), Mar. 2011 (date received), Monthly frequency. - External Current Account Balance: Q4 2010 (latest observation), Mar. 2011 (date received), Quarterly frequency. - GDP/GNP: Q4 2010 (latest observation), Mar. 2011 (date received), Quarterly frequency. - Gross External Debt: Q4 2010 (latest observation), Mar. 2011 (date received), Monthly frequency. ### External and public debt sustainability — background - Recent evolution: - Between 2003 and 2010, gross public debt fell from 96 to 40 percent of GDP. - External public debt declined from 66 to 15 percent of GDP. - MDRI accounted for 2.9 billion dollars in 2006 and 2007. - Changes reducing vulnerabilities: - Since 2005, average maturities extended and foreign currency exposure reduced. - Net deposits of the non-financial public sector at the Central Bank amount to about 21 percent of GDP at present. - Net public debt declined from 71 percent in 2005 to 18 percent of GDP in 2010. - Average maturity of outstanding external public debt remains longer than 20 years at year-end 2010 (65 percent of total debt concentrated between 11 to 30 years; 32 percent beyond 31 years). - Effective average interest rate of total public debt was about 3.6 percent at year end 2010. ### Baseline scenario (2011–2031) — main assumptions - Average annual real GDP growth: 4.5 percent until 2016 and 4 percent until 2031. - Inflation: 5.0 percent in 2012 and 4.0 percent between 2013 and 2031. - Export and import growth: in line with medium-term staff projections and assumption of stable import and export ratios to GDP over the long term. - Net FDI: assumed to remain broadly stable in real terms of GDP, mainly influenced by operations of foreign companies in the natural resource sector. - Financing strategy: - Commercial debt expected to remain nil. - CAF expected to remain as the main source of financing. - Central government will continue relying on domestic financing until distribution of revenues and responsibilities among different levels of government is clarified. - 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 be around 15 percent in the medium-term, based on projected disbursements of official loans and concessional financing conditions (grace period of about 7 years and interest rates below market rates). ### Baseline scenario — projections and assessment - Public and external debt expected to remain sustainable throughout the projection period; risk of debt distress assessed as low. - Bolivia classified as a medium performer in policy and institutional capacity (three-year average of World Bank’s CPIA scores). - Debt indicators: - Gross non-financial sector public debt-to-GDP ratio: 40 percent in 2010; projected to decline to 30 percent by 2016, and to 16 percent in 2031. - Total stock of external debt (public and private): projected to fall to 19.5 percent of GDP by 2016, and to stabilize at 12.6 percent of GDP by 2031. - Remittances: - Remittances represent about 5 percent of GDP. - Excluding remittances does not cause breaches of thresholds under baseline or stress tests; inclusion does not change the risk rating (remains low). - High levels of residuals in the external DSA explained by accumulation of foreign exchange reserves over the projection period, consistent with projected fiscal stance and accumulation of public sector deposits at the central bank. ### Stress tests - Standard stress tests indicate resilience of Bolivia’s low public and external indebtedness to a series of shocks. - Under the most extreme stress test to external debt (combined shock to debt concessionality, GDP growth, export growth, and external inflation): - Ratio of NPV of debt to GDP deteriorates somewhat and eventually returns to a downward trajectory; in all cases remains well below risky levels. - Flow indicators remain manageable under all stress tests. - Public debt sensitivity: - Biggest risk arises from temporary or permanent lower GDP growth; tests indicate ratios remain within manageable levels. - Oil price adverse scenario: - Assuming oil prices decline by 30 percent in 2012-16, Bolivia’s non-interest current account would move from a surplus of about 4 percent of GDP to a nearly balanced position. - With same projected external debt levels, net international reserves would remain broadly stable and decline gradually in terms of GDP, to about 35 percent of GDP in 2016; this level is judged to be still strong and external debt indicators would remain below the thresholds. *Source: _cr11124 - 4. Under the draft of the 2011-2015* ### 7. Bolivian authorities agree with the ### 7. Bolivian authorities agree with the ### Assessment of debt distress and authorities' view - Staff and Bolivian authorities concur on a low risk of debt distress. - Discussion points: - Assumptions underlying the assessment were discussed with the authorities. - Strong dependence of the external and fiscal positions on hydrocarbon revenues was emphasized. - Authorities' perspective: - See upside risks to growth in the medium-term. - Confident that their policies (i.e., industrialization of minerals and hydrocarbons) will result in more stable external and fiscal positions, making them less vulnerable to terms of trade shocks. ### Public sector debt — Baseline scenario (selected indicators and projections) - Public sector debt (in percent of GDP): - 2008: 37.5 - 2009: 40.5 - 2010: 39.9 - 2011: 36.1 - 2012: 34.4 - 2013: 33.4 - 2014: 32.7 - 2015: 31.4 - 2016: 30.0 - 2021: 24.7 - 2031: 16.3 - Of which foreign-currency denominated (percent of GDP): - 2008: 23.0 - 2009: 23.4 - 2010: 22.6 - 2011: 21.0 - 2012: 20.6 - 2013: 20.6 - 2014: 20.6 - 2015: 20.3 - 2016: 19.9 - 2021: 16.8 - 2031: 12.5 - Change in public sector debt (percent of GDP): - 2008: -3.5 - 2009: 3.0 - 2010: -0.5 - 2011: -3.8 - 2012: -1.7 - 2013: -1.0 - 2014: -0.7 - 2015: -1.3 - 2016: -1.4 - 2021: -1.0 - 2031: -0.7 - Identified debt-creating flows (percent of GDP): - 2008: -10.5 - 2009: -0.6 - 2010: -6.0 - 2011: -6.7 - 2012: -3.7 - 2013: -3.1 - 2014: -2.9 - 2015: -3.6 - 2016: -3.6 - 2021: -3.0 - 2031: -2.3 - Primary deficit (percent of GDP, multiple year entries present in source table): - 2008: -6.3 - 2009: -2.3 - 2010: -3.5 - 2011: -0.4 - 2012: 5.3 - 2013: -2.1 - 2014: -2.4 - 2015: -2.4 - 2016: -2.4 - 2021: -2.3 - 2031: -2.3 - Revenue and grants (percent of GDP): - 2008: 38.9 - 2009: 36.1 - 2010: 33.9 - 2011: 34.8 - 2012: 35.2 - 2013: 35.7 - 2014: 36.4 - 2015: 36.6 - 2016: 36.6 - 2021: 34.8 - 2031: 31.5 - Primary (noninterest) expenditure (percent of GDP): - 2008: 32.6 - 2009: 33.8 - 2010: 30.4 - 2011: 32.7 - 2012: 32.8 - 2013: 33.3 - 2014: 34.0 - 2015: 34.3 - 2016: 34.3 - 2021: 32.8 - 2031: 30.0 - Automatic debt dynamics (contribution, percent of GDP): - 2008: -5.8 - 2009: 1.4 - 2010: -2.5 - 2011: -4.6 - 2012: -1.3 - 2013: -0.8 - 2014: -0.5 - 2015: -1.3 - 2016: -1.3 - 2021: -1.0 - 2031: -0.7 - Residual, including asset changes (percent of GDP): - 2008: 7.1 - 2009: 3.5 - 2010: 5.5 - 2011: 2.9 - 2012: 2.0 - 2013: 2.2 - 2014: 2.2 - 2015: 2.3 - 2016: 2.2 - 2021: 2.0 - 2031: 1.6 - PV of public sector debt (percent of GDP): - 2008: 23.2 - 2009: 25.4 - 2010: 31.9 - 2011: 29.7 - 2012: 29.5 - 2013: 30.1 - 2014: 30.8 - 2015: 30.8 - 2016: 30.7 - 2021: 29.6 - 2031: 18.2 - Gross financing need (percent of GDP): - 2008: -0.8 - 2009: 2.9 - 2010: 1.6 - 2011: 2.6 - 2012: 1.9 - 2013: 1.8 - 2014: 1.7 - 2015: 1.5 - 2016: 1.3 - 2021: 0.5 - 2031: -0.2 - PV of public sector debt-to-revenue and grants ratio (in percent): - 2008: 59.7 - 2009: 70.4 - 2010: 94.0 - 2011: 85.5 - 2012: 83.8 - 2013: 84.4 - 2014: 84.7 - 2015: 84.2 - 2016: 83.7 - 2021: 85.1 - 2031: 57.7 - Debt service-to-revenue and grants ratio (in percent): - 2008: 10.4 - 2009: 6.1 - 2010: 6.7 - 2011: 6.1 - 2012: 5.5 - 2013: 5.1 - 2014: 4.5 - 2015: 4.2 - 2016: 3.8 - 2021: 2.2 - 2031: 1.0 ### Sensitivity analysis — public debt (selected scenario outcomes) - Table 2a — PV of Debt-to-GDP Ratio (selected years under scenarios): - Baseline (2011, 2012, 2013, 2014, 2015, 2016, 2021, 2031): 30 30 30 31 31 31 30 18 - A1. Real GDP growth and primary balance at historical averages: 30 32 34 37 40 41 49 48 - A2. Primary balance unchanged from 2011: 30 30 31 32 32 32 32 31 16 - A3. Permanently lower GDP growth: 30 30 31 32 32 33 36 37 - B4. One-time 30 percent real depreciation in 2012: 30 36 37 39 39 39 38 24 - B5. 10 percent of GDP increase in other debt-creating flows in 2012: 30 40 40 41 41 40 38 26 - PV of Debt-to-Revenue Ratio (selected outcomes): - Baseline: 85 84 84 85 85 84 85 58 - A1: 85 90 97 103 108 113 139 152 - A2: 85 85 86 87 87 87 87 51 - B4: 85 103 105 106 106 106 110 76 - Debt Service-to-Revenue Ratio (selected outcomes): - Baseline: 65 55 44 42 21 - A1: 66 57 77 78 12 - A3: 65 55 44 48 ### External debt — Baseline scenario (selected indicators and projections) - External debt (nominal, percent of GDP): - 2008: 22.0 - 2009: 22.4 - 2010: 21.6 - 2011: 20.0 - 2012: 19.7 - 2013: 19.9 - 2014: 20.1 - 2015: 19.9 - 2016: 19.5 - 2021: 16.5 - 2031: 12.6 - Of which public and publicly guaranteed (PPG) (percent of GDP): - 2008: 14.3 - 2009: 15.0 - 2010: 15.0 - 2011: 14.4 - 2012: 14.6 - 2013: 15.0 - 2014: 15.4 - 2015: 15.4 - 2016: 15.3 - 2021: 13.4 - 2031: 10.8 - Change in external debt (percent of GDP): - 2008: -3.3 - 2009: 0.4 - 2010: -0.8 - 2011: -1.6 - 2012: -0.4 - 2013: 0.2 - 2014: 0.2 - 2015: -0.2 - 2016: -0.4 - 2021: -0.5 - 2031: -0.3 - Identified net debt-creating flows (percent of GDP): - 2008: -20.2 - 2009: -8.1 - 2010: -10.1 - 2011: -8.0 - 2012: -8.1 - 2013: -8.0 - 2014: -7.1 - 2015: -7.1 - 2016: -7.4 - 2021: -6.7 - 2031: -5.9 - Non-interest current account deficit (percent of GDP): - 2008: -12.7 - 2009: -5.0 - 2010: -5.1 - 2011: -4.1 - 2012: -4.6 - 2013: -4.5 - 2014: -3.5 - 2015: -3.1 - 2016: -3.4 - 2021: -2.9 - 2031: -2.2 - PV of external debt (percent of GDP, selected years): - 2011: 13.6 - 2012: 13.6 - 2013: 14.8 - 2014: 16.5 - 2015: 18.2 - 2016: 19.3 - 2021: 20.1 - 2031: 14.5 - PV of PPG external debt (percent of GDP, selected years): - 2011: 7.0 - 2012: 8.0 - 2013: 9.7 - 2014: 11.6 - 2015: 13.5 - 2016: 14.9 - 2021: 15.9 - 2031: 12.7 - Debt service-to-exports ratio (in percent): - 2008: 8.3 - 2009: 5.2 - 2010: 4.9 - 2011: 4.6 - 2012: 4.3 - 2013: 4.2 - 2014: 3.9 - 2015: 3.7 - 2016: 3.4 - 2021: 1.5 - 2031: 0.6 - Total gross financing need (Billions of U.S. dollars): - 2008: -1.7 - 2009: -0.6 - 2010: -0.8 - 2011: -0.9 - 2012: -1.1 - 2013: -1.1 - 2014: -0.9 - 2015: -0.9 - 2016: -1.1 - 2021: -1.7 - 2031: -3.1 ### External debt — key macro assumptions (selected) - Real GDP growth (percent): - 2008: 6.1 - 2009: 3.4 - 2010: 4.2 - 2011: 4.5 - 2012–2016: 4.5 (repeated entries) - 2017–2031 average: 4.0 - Growth of exports of G&S (US dollar terms, percent): - 2008: 44.6 - 2009: -23.7 - 2010: 27.9 - 2011: 9.5 - 2012: 8.3 - 2013: 2.5 - 2014: 2.0 - 2015: 3.6 - 2016: 6.5 - 2021: 5.4 - 2031: 6.1 - Government revenues (excluding grants, percent of GDP): - 2008: 37.7 - 2009: 34.9 - 2010: 32.8 - 2011: 34.8 - 2012: 35.2 - 2013: 35.6 - 2014: 36.3 - 2015: 36.6 - 2016: 36.6 - 2021: 34.8 - 2031: 33.8 - Grant-equivalent financing (in percent of GDP, selected years): - 2012: 0.5 - 2013: 0.5 - 2014: 0.5 - 2015: 0.5 - 2016: 0.5 - 2017–2031 average entries: 0.4, 0.3, 0.2, 0.3 ### Sensitivity analysis — external debt (selected scenario outcomes) - Table 3b provides scenario and bound-test outcomes for indicators such as PV of debt-to-GDP+remittances ratio, PV of debt-to-exports+remittances ratio, PV of debt-to-revenue ratio, and debt service ratios under: - A1. Key variables at historical averages in 2011-2031 - A2. New public sector loans on less favorable terms in 2011-2031 - B1–B6. Bound tests including shocks to real GDP growth, export value growth, US dollar GDP deflator, net non-debt creating flows, combinations of shocks, and one-time 30 percent nominal depreciation in 2012 - Examples of selected outcomes (PV of Debt-to-GDP+remittances ratio, headline baseline and stress results in percent): - Baseline (2011–2031 summary row): 89 111 131 415? (note: table contains many columnar entries; see full table for exact year-by-year values) - A2 (less favorable financing): examples include 28 10 13 15 17 19 23 21 (from table rows) - B6 (One-time 30 percent nominal depreciation relative to baseline in 2012): outcomes show marked increases in many indicators across 2012 and later years (specific year-by-year values provided in table) ### Figures (descriptive summary) - Figure 1: Presents trajectories for PV of Debt-to-GDP Ratio, PV of Debt-to-Revenue Ratio, and Debt Service-to-Revenue Ratio under Baseline, Fix Primary Balance, Most extreme shock, Combination, and Historical scenario from 2011 through 2031. - Figure 2: Presents indicators of public and PPG external debt under alternative scenarios (panels A–F), including: - Debt accumulation rate, grant-equivalent financing (percent of GDP), grant element of new borrowing (right scale). - PV of debt-to-GDP+remittances ratio, PV of debt-to-exports+remittances ratio, PV of debt-to-revenue ratio, debt service-to-exports ratio, and debt service-to-revenue ratio. - Notes indicate the most extreme stress test varies by panel (e.g., One-time depreciation shock in some panels; Exports shock in others). ### Notes and methodological points (as stated in source) - Public sector debt defined as non financial public sector gross debt. - 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. - Revenues excluding grants are used for certain ratios. - Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. - Debt service is defined as the sum of interest and amortization of medium and long-term debt. - External debt framework includes both public and private sector external debt; PV of private sector debt is assumed equivalent to face value for projections. - Endogenous debt dynamics formula and other definitions are provided in the tables' footnotes. *Sources: Country authorities; and staff estimates and projections. Statement by the Staff Representative on Bolivia, May 23, 2011.* ### 1. This statement provides additional information that has become available since the ### _cr11124 - 1. This statement provides additional information that has become available since the ### Recent macroeconomic developments - Monthly inflation declined to 0.02 percent in April 2011, down from 0.8 percent in March, bringing the 12-month inflation rate to 11 percent. - The April 2011 monthly inflation outcome is largely explained by a large drop in food prices (0.9 percent). - Monthly non-food inflation declined from 1 percent in March to 0.4 percent in April. - Official GDP figures indicate growth of 4.1 percent for 2010, broadly in line with earlier estimates (4.2 percent). - Net international reserves have risen to US$10.6 billion. - Exchange rate has remained broadly unchanged at (B$6.89‒6.99 per dollar). - The central bank stepped up open market operations at slightly higher rates. - Excess liquidity in the banking sector declined to 4 percent of deposits by end-April. - The authorities reported that a draft law criminalizing the financing of terrorism will be submitted to congress in the first half of 2011. ### Executive Board assessment and background - Directors welcomed Bolivia’s strong economic performance and prudent macroeconomic policies. - External current account and overall public sector balances remain in surplus; record-high net international reserves provide strong protection against external shocks. - Economy expected to gather further momentum from continued recovery of hydrocarbon production, higher public investment, and favorable export prices. - Short-term priority: contain inflation. - Medium-term priorities: meet development needs and reduce poverty. - Recommended near-term policy actions included: faster exit from monetary stimulus, moderate appreciation of the currency, greater exchange rate flexibility over the medium term as de-dollarization proceeds, use of fiscal space for additional productive and social investment, improve effectiveness of public spending and implementation capacity across government levels, introduce multi-year budgeting and a fiscal savings fund, limit fiscal claims on the central bank, enhance transparency and accountability of state-owned enterprises, ensure appropriate bank liquidity and capital buffers, avoid using interest rate policy and prudential rules for development purposes, improve financial sector supervision, and consider a deposit insurance scheme. ### Fiscal policy, public investment, and social spending (authorities' statement) - Fiscal outcome: overall public sector surplus rose to 2.0 percent of GDP in 2010, from 0.3 percent in 2009. - Authorities intend to apply a fiscal stimulus in 2011 through an ample program of public investment, financed in part by fiscal savings from previous years. - Government plans public investment of around US$ 2.4 billion in 2011 (around 10 .8 percent of GDP), with significant financing from fiscal savings and a strategy of 50 percent partnerships with private entrepreneurs. - Public investment allocation: infrastructure and public enterprises; projects include hydrocarbons exploration, hydroelectric plants, major road constructions, and enhancements to education and health infrastructure. - Social programs maintained: conditional cash-transfers to keep school attendance and pre-natal/pediatric checkups, non-conditional universal retirement pension for the elderly, and continuation of the Extreme Poverty Eradication Plan started in 2009. - EMAPA (State Company to Support Food Production) will be reformed to produce main food grains (soy, rice, wheat, corn) to support food security and help tackle inflationary pressures from food supply shortcomings. - Fuel subsidy removal is not on the 2011 policy agenda; fuel subsidies will remain until consensus with social movements is reached. ### Inflation dynamics and monetary policy debate - Staff projection: inflation of 7.9 percent by end-2011. - Authorities’ projection: inflation rate of 6 percent for 2011. - Authorities attribute the 2010 upturn in inflation to speculation and misinformation around the attempted fuel-price correction in December 2010, leading to de-anchored expectations, rather than to demand-driven overheating. - Authorities note that monthly inflation spiked in late December 2010, driving accumulated inflation up to 7.2 percent. - The Central Bank of Bolivia (CBB) actions cited by authorities: gradual removal of monetary impulse applied in 2008–2009 via increased open market operations (OMO), sales of larger amounts of securities starting Q1 2010, increases in reserve requirements, and more dynamic OMO for individuals at higher interest rates. - Authorities argue recent liquidity withdrawal pace in Q1 2011 "triples the liquidity withdrawn vís-a-vís what the Fund’s estimates appropriate for the whole year." - Authorities contend credit growth is not excessive; M1 growth around 20 percent reflects de-dollarization and currency preference shifts, while M3 growth is 11 percent year-on-year. - Authorities report the ratio of "excess liquidity/deposits" around 5 percent (April 2011), lower than staff calculation of 8 percent and down from 19 percent in early 2010. - Real interest rates are currently negative; authorities view this as temporary and not indicative of demand-driven inflation. ### Financial sector and de-dollarization - Banks are profitable, well capitalized, and have low nonperforming loan ratios. - De-dollarization progress: Boliviano-denominated credit and deposits stand at about 55 percent of the total. - Net international reserves reported in the PIN: 50 percent of GDP and 80 percent of broad money (as of the PIN discussion). - Directors welcomed FSAP update improvements and urged maintenance of appropriate liquidity and capital buffers, stronger supervision, and consideration of deposit insurance. ### Key economic indicators (selected figures from the report) - Real GDP (annual percentage changes): 2007–2011 row shows: 4.6, 6.1, 3.4, 4.2, 4.5. - GDP deflator (annual percentage changes): 7.4, 10.4, -2.4, 6.3, 9.5 (for 2007–2011). - CPI inflation (period average): 8.7, 14.0, 3.3, 2.5, 10.4 (for 2007–2011). - CPI inflation (end-of-period): 11.7, 11.8, 0.3, 7.2, 7.9 (for 2007–2011). - Combined public sector revenues and grants (percent of GDP): 34.4, 38.9, 36.1, 33.9, 34.8 (2007–2011). - Hydrocarbons related revenue (percent of GDP): 9.4, 13.4, 13.1, 10.9, 11.4 (2007–2011). - Expenditure (percent of GDP): 31.8, 34.6, 35.5, 31.9, 34.1 (2007–2011). - Overall balance (percent of GDP): 1.7, 2.8, 0.3, 2.0, 0.7 (2007–2011). - Total gross public debt (percent of GDP): 40.9, 37.5, 40.5, 39.9, 36.2 (2007–2011). - Current account (percent of GDP): 12.0, 12.1, 4.7, 4.8, 3.8 (2007–2011). - Merchandise exports (percent of GDP): 33.5, 38.8, 28.2, 32.5, 30.3 (2007–2011). - Natural gas exports (percent of GDP): 14.8, 19.0, 11.3, 14.4, 14.3 (2007–2011). - Merchandise imports (percent of GDP): 26.0, 30.0, 25.4, 27.7, 26.3 (2007–2011). - Gross international reserves (millions of U.S. dollars): 5,319; 7,722; 8,580; 9,730; 10,440 (2007–2011). - Gross international reserves (percent of broad money): 75, 85, 81, 80, 74 (2007–2011). - NFA of the banking system (changes in percent of broad money at the beginning of the period): 35.4, 34.6, 10.2, 8.2, 7.4 (2007–2011). - NDA of the banking system (changes in percent of broad money at the beginning of the period): -3.7, -12.5, 6.6, 6.0, 2.3 (2007–2011). - Credit to the private sector (in percent of GDP): 33.1, 30.3, 33.0, 32.4, 35.3 (2007–2011). - Broad money (changes in percent of broad money at the beginning of the period): 31.7, 22.2, 16.8, 14.2, 9.7 (2007–2011). - Interest rates (percent, end-of-period) — Deposits in local currency 61-90 days: 3.7, 5.7, 0.4, 0.5, ... (2007–2011); Deposits in foreign currency 61-90 days: 2.6, 3.3, 0.5, 0.2, ... (2007–2011). *Public Information Notice (PIN) No. 11/65* ### 0.02 percent (the lowest in 2011), while inflation for the same month year-on-year (11.04 ### _cr11124 - 0.02 percent (the lowest in 2011), while inflation for the same month year-on-year (11.04 ### Monetary policy, exchange rate, and sterilization - Recent monthly inflation observations: - Monthly inflation: 0.02 percent (the lowest in 2011). - Year-on-year inflation for the same month: 11.04 percent. - March year-on-year inflation: 11.1 percent. - Interpretation: the comparison of 11.04 percent versus 11.1 percent signals a downward trend. - Staff recommendation (paragraph 21): monetary policy should focus on price stability and the exchange rate should move toward a more flexible regime. - Bolivian policy approach and instruments: - Bolivia’s monetary policy is described as non-orthodox and counter-cyclical. - Instruments used in addition to sterilization: - Limits on long positions for balance sheets in foreign currency. - Regulation on liquidity to avoid significant increases in interest rates. - Credit policies for public entities. - Coordination and regulatory measures implemented by CBB, ASFI, and the Ministry of Economy and Finance: - Measures to limit excessive spreads between loan and deposit rates. - Regulation of commissions and fund transfers to other countries. - Limits on financial investments in foreign markets by commercial banks, pension administrators, and insurance companies. - Exchange rate policy details: - Objective: control excessive volatility while avoiding persistent undervaluation or overvaluation. - Operational approach: - Widened spread between buying and selling exchange rate to internalize dollarization costs for agents. - Limits on profit margins for exchange rate operations. - Regime: crawling peg reaffirmed with small nominal appreciations since November 2010 to moderate external inflationary pressures at a gradual pace suitable for a partially-dollarized economy like Bolivia’s. - Risks of sudden exchange rate movements: may affect household and financial entity balance sheets and risk the de-dollarization process. ### Use of international reserves and financing of SOEs - Staff concern (paragraph 21): use of international reserves for financing SOEs may affect confidence in public policies and monetary policy independence, and increase external vulnerability. - Authorities’ position and context: - Level of international reserves: almost 50 percent of GDP, described as high in the world and above the optimum level according to research conducted in Bolivia and by the IMF. - Authorities’ rationale for using reserves: - Expand the GDP base and tackle poverty, inequality, and unemployment by financing key SOE investment projects in electricity and hydrocarbons. - External financing for such projects is not available at this time. - Financial convenience given current low yields for international reserves investments. - Transparency and safeguards: - CBB has laid down rules for handling credits to SOEs. - Fiscal authorities approved a procedure for credit to SOEs within the budget framework. - A law for public enterprises is being drafted to strengthen safeguards and establish a streamlined legal framework, including a supervisory body for fiscal supervision and accountability. ### Fund for excess reserves and sovereign fund plans - Staff recommendation: create a fund with excess international reserves. - Existing and planned frameworks: - The 2006 National Development Plan already envisages the creation of a Fund for Stabilization and Development with objectives to: - Preserve fiscal sustainability and macroeconomic stability. - Reduce volatility and uncertainty about international reserves. - Ensure better income distribution. - Take care of intergenerational equity. - Promote development of production base and labor mobility. - Autonomy Law established a fund intended for stabilization (if fiscal revenue falls short) and development (financing public investment); authorities are engaged in making this fund operative and expect it to be considered in 2011. - Interim strategy: use accumulated international reserves since 2006 as a financing cushion for public investment. ### Anti-money laundering / counter-terrorism financing (AML/CFT) - Staff observation (paragraph 23): criminalizing the financing of terrorism is a pending action. - Authorities’ progress: - Important progress in drafting and internally discussing the legal provision. - Legislative process involves the Executive, its agencies, the Judiciary, and the National Assembly. - Initial provision included in the Anticorruption Law Draft; National Assembly decided to place it in a separate law. - The Minister of Finance attended the 2010 FAFT Plenary and committed to send a new draft in the first semester of 2011. ### Development policies, social issues, and structural reforms - Social and political context: - Staff notes disputes between sub-national and central governments and social tensions, but authorities report these tensions have calmed down substantially. - Negotiations with unions, social movements, and regions involve pressure tactics but are not seen as implying economic or political risk. - Social indicators and public expenditure (paragraph 3 critique): - Staff statement: poverty, infant mortality, and other social indicators are above average in Latin America. - Authorities’ corrective context: - Bolivia is a poor country with poor infrastructure, making progress on social indicators difficult. - In the last five years the Administration reports unprecedented levels of social expenditure and development of social safety nets, achieving more progress than before. - Role of mining and hydrocarbons: - Authorities prioritize mining and hydrocarbons to finance improvements in education, health, and sanitation to reduce poverty and inequality and strengthen infrastructure. - Government stance: private investment is important; legal framework imposes no restrictions and some regions have special incentives. - Policy goal: economic diversification to reduce dependence on hydrocarbons and mining and lessen vulnerability to external shocks. - Pension reform: - New Pension Law passed after long discussions with unions. - Key features: - Creates a solidarity pension for affiliates lacking sufficient funds in individual accounts. - Financing mechanisms: - Small increase in the basic workers’ contribution. - Reinstatement of the employers’ contribution cut off in 1997. - Additional progressive contribution from workers with high income. - Sets minimum retirement age at 58, given low life expectancy in Bolivia. - Establishes special retirement ages for miners and mothers. - Fiscal impact: no fiscal impact expected in the medium and long term, as MEFP’s actuarial projections render financial sustainability for the following 30 years. - Institutional review provisions: the law anticipates assessments every five years. - Agriculture and growth drivers: - Agriculture output likely to increase as harvest should be good with no severe weather conditions in the agricultural year. - Recent growth has been driven by impulse to domestic demand since 2006 via: - Transfers to municipalities for small infrastructure projects. - Conditional and non-conditional transfers to individuals. - Consumption increases extended beyond food to basic services like water and electricity, producing positive spillover effects across the economy. - Trade-offs and policy priorities: - Authorities balance accumulation of financial savings for intergenerational equity against urgent demands for economic and social infrastructure. - The sovereign fund and accumulated international reserves are viewed as instruments to finance public investment, a key driver for growth and employment. *Source: IMF staff report excerpts (document text provided).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11124.pdf_