## _cr1436

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### Background and recent macroeconomic performance
- Since the mid-2000s, macroeconomic performance and social policies nearly tripled income per capita and reduced extreme poverty.
- Prudent fiscal policies saved a sizable portion of the hydrocarbon revenue windfall.
- Real GDP growth accelerated to 6.6 percent by September 2013 (5.2 percent in 2012); staff expects output growth of 6.7 percent for 2013 (the highest in thirty years).
- External current account surplus projected to narrow to 4 percent of GDP in 2013, from 7.8 percent of GDP in 2012.
- Gross international reserves projected at 49 percent of GDP at end-2013.
- Inflation:
  - Headline inflation hovered around 5 percent (y/y) in the first seven months of 2013; staff projects headline inflation to rise to 7.5 percent by end-2013, from 4.5 percent in 2012.
  - Core inflation edged up to 4.9 percent (y/y), from 4 percent in January.
- Monetary policy:
  - Anchored on a stable nominal exchange rate vis-à-vis the U.S. dollar; liquidity management via open market operations.
  - Central bank immobilized banks’ excess reserves in domestic currency at a remunerated rate of 1.8 percent.
  - Auction rate of the 91 day t-bill rose to 1.9 percent in November from 0.35 percent at end-2012; yield of the 1-year t-bill increased to 4.08 percent in November 2013 from 0.75 percent at end-2012.
- Fiscal developments:
  - Fiscal outturns through October showed strong overall performance supported by hydrocarbon and tax revenues.
  - Staff projects an overall fiscal surplus of 0.6 percent of GDP for 2013 (1.8 percent of GDP in 2012); implies a pro-cyclical impulse of about 0.8 percent of GDP.
  - Gross public debt projected to decline to 32.5 percent of GDP by end-2013.
- Banking sector:
  - Credit to the private sector moderated to 19 percent nominal growth in November.
  - Banks’ capital adequacy ratio stood at 12.9 percent in November (regulatory minimum 10 percent).
  - NPL ratio declined to 1.7 percent (from 8.7 percent at end-2006).
  - Return-on-equity at 12.9 percent in November (21.2 percent in 2007).
  - Dollarization ratio fell to 23 percent of total deposits in September from 53 percent in 2008.
  - Reserve requirements on foreign currency deposits scheduled to rise to 66.5 percent by 2016, from 21.5 percent in 2008.
- Financial Services Law:
  - Establishes broad legal framework subordinating financial sector activities to social objectives; gives broad powers to the Executive and may create regulatory uncertainty.
  - Main features include regulating lending rates and lending targets, discretion to set floors on deposit rates, and mechanisms to enhance consumer protection and rural financial access. Law came into effect in November; specific regulations to be defined by Supreme Decrees.
- Market access:
  - October 2012: 10 year bond for US$0.5 billion at yield 4.875 percent.
  - August 2013: second issuance US$0.5 billion at yield 6.25 percent.

### Outlook and key projections (staff)
- Real GDP growth: 2013: 6.7; 2014: 5.4; 2015–2018: 5.0 each year.
- Inflation (end of period): 2013: 7.5; 2014: 5.5; 2015: 5.2; 2016–2018: 5.0.
- Fiscal balance (overall): 2013: 0.6; 2014: -0.4; 2015: -0.1; 2016: -0.1; 2017: -0.4; 2018: -0.7.
- Nonhydrocarbon balance: 2013: -10.2; 2014: -10.4; 2015: -10.1; 2016: -9.5; 2017: -9.3; 2018: -9.3.
- Public debt: 2013: 32.5; 2014: 29.7; 2015: 27.8; 2016: 25.9; 2017: 24.1; 2018: 22.3.
- Net public debt: 2013: 9.5; 2014: 8.9; 2015: 8.3; 2016: 7.7; 2017: 7.4; 2018: 7.4.
- Current account: 2013: 4.0; 2014: 3.1; 2015: 1.9; 2016: 1.4; 2017: 1.1; 2018: 0.9.
- Reserves: 2013: 48.8; 2014: 48.3; 2015: 48.1; 2016: 47.3; 2017: 46.5; 2018: 45.5.
- Reserves (in months of imports): 2013: 16.3; 2014: 16.1; 2015: 16.3; 2016: 16.6; 2017: 17.1; 2018: 17.9.
- External debt: 2013: 20.2; 2014: 19.1; 2015: 18.4; 2016: 17.7; 2017: 17.0; 2018: 16.3.

### Risks and buffers
- External downside risks:
  - Weaker growth in Argentina and Brazil: share of Argentina and Brazil in Bolivian exports rose to around 50 percent in 2013 (from 25 percent in early 2000s).
  - Empirical estimate: a one percentage point reduction in Brazil’s output growth would lower Bolivia’s output growth by 1/3 percentage point on impact and by close to 0.8 percent over a twelve month period.
  - Lower world commodity prices, particularly hydrocarbons: close to 90 percent of Bolivia’s exports are commodity based, with natural gas roughly 50 percent of total exports; hydrocarbon revenues account for nearly 35 percent of total revenue and grants.
- Buffers:
  - International reserves and government deposits at the central bank projected at 49 and 26 percent of GDP by end-2013, respectively.
- Domestic risks:
  - Delays in key laws and business climate improvements could keep private investment subdued.
  - New Financial Services Law may weaken credit conditions and banks’ balance sheets and may not provide level playing field for public and private banks.
  - Upside: fiscal stimulus could be stronger than staff baseline (general election in late 2014); quicker National Public Investment System implementation could accelerate investment planning and execution.

### Policy discussions and staff recommendations
- Fiscal framework and non-hydrocarbon balance:
  - Staff recommended aiming for a neutral fiscal stance in 2014 given strong growth and a closed output gap; save stimulus for downside external shocks and consider tightening if inflation persists.
  - Improving the non-hydrocarbon fiscal balance is critical for medium term sustainability: non-hydrocarbon primary deficit widened from 3.2 percent of GDP in 2006 to projected 9.1 percent of GDP in 2013.
  - Staff estimates sustainable non-hydrocarbon primary deficit around 3¼ percent of GDP on current proven gas reserves — requiring improvement of 5¾ percent of GDP from 2013 projected level.
  - Authorities prioritize investment in gas exploration with 18 new contracts expected by 2025 and disagree that current non-hydrocarbon deficit level is problematic.
- Fiscal consolidation measures (expenditure and revenue):
  - Expenditure-side: gradual reform of fuel subsidies to target the most vulnerable; enhancements in the quality of capital expenditure.
  - Revenue-side: (i) introducing personal income taxes or reforming existing VAT complementary system; (ii) strengthening compliance of the corporate income tax; (iii) reforming revenue agencies; (iv) quantifying and reporting tax expenditures with potential curtailment of those with high cost-benefit ratios.
  - Fiscal transparency: prepare a comprehensive risk statement in the budget to identify quasi-fiscal risks from public corporations and financial institutions.
- Medium-Term Fiscal Framework (MTFF) and fiscal rule:
  - Staff recommends developing a fully-fledged MTFF as part of budget documentation, include mechanisms to insulate fiscal sector from commodity price volatility, and consider a fiscal rule targeting the structural primary balance supported by a stabilization/savings fund with strong governance.
  - Authorities view MTFF preparation as gradual and are not persuaded about the benefits of a fiscal rule; note sizable subnational government resources held at the central bank.
- Monetary policy and inflation:
  - Staff: further tightening may be necessary if second round effects persist; strengthen monetary policy framework and safeguard central bank anti-inflation credentials; discontinue direct lending by the central bank to public corporations.
  - Since 2009 central bank authorized to lend to central government at concessional terms; in 2013 lending limit increased to US$5.3 billion, of which US$2.2 billion had been disbursed by November.
  - Staff suggested financing public investment via the ministry of finance through a savings fund; FINPRO (established in 2012 using part of international reserves) could be a stepping stone if it yields positive returns and strong governance.
  - Create conditions for gradual exit from de-facto stabilized exchange rate: improve liquidity management, enhance policy rate role, develop inflation forecasting, collect high frequency indicators, increase central bank operational autonomy.
  - Authorities argue price stability is a constitutional mandate and lending to strategic areas constitutes income for the central bank.
- Financial stability and Financial Services Law (FSL):
  - Progress: adoption of Basel II/III elements, deposit insurance scheme, expanded access to financial services.
  - Staff concerns: regulated interest rates and credit quotas may distort allocation, reduce profitability, encourage circumvention, crowd-in ill-equipped sectors, compress margins and hurt banks’ capitalization; contract provisions could increase credit risk; increased intervention and regulatory uncertainty may discourage investment.
  - Staff alternatives: transparent fiscal transfers to financial institutions, partial credit guarantees, productive development services.
  - Authorities stress that regulations in Supreme Decrees will consider stability and growth and emphasize inter-institutional coordination via Financial Stability Council.
- Structural and social policies:
  - Need to improve business climate, finalize key legislation, delineate public corporations’ role, and enhance governance to minimize fiscal risks.
  - Social outcomes: Bolivia ranks "108 out of 187 in 2012" in the UN Human development index; extreme poverty fell from 38.2 percent in 2005 to 21.6 percent in 2012.
  - Staff recommends impact evaluations of social transfers before scaling up and strengthening local capacity for social infrastructure delivery.

### Staff appraisal: priorities
- Immediate challenges:
  - Ensure mid-2013 food price spike does not produce permanently higher inflation; continue to mop up liquidity if pressures persist.
  - Enhance monetary policy effectiveness: allow market-based signals under FSL, gradually exit stabilized exchange rate, and discontinue central bank lending to public corporations (transfer to a sovereign fund with strong governance).
- Fiscal guidance:
  - Avoid over-stimulating domestic demand; a neutral fiscal stance for 2014 would be consistent with a moderate overall fiscal surplus rather than the draft budget deficit.
  - Adopt an MTFF, prioritize exploration of new natural gas reserves to offset depletion projected for mid-2020s, and establish a clear, stable legal framework to attract private investment.
- Financial sector:
  - FSL contains elements to foster inclusion, but instruments like interest rate caps and minimum credit quotas could reduce profitability, lending funds, over-leverage beneficiaries, and complicate monetary policy; staff reiterates alternative instruments.

### Risk Assessment Matrix (selected entries)
- Argentina and Brazil: Up/Downside:  ; Risk Impact: M/H ; Policy Response: Exchange rate flexibility. Use existing buffers from large international reserves. Mobilize countercyclical fiscal policy given fiscal space.
- Sustained decline in commodity prices: Up/Downside:  ; Risk Impact: L ; Policy Response: M/H Exchange rate flexibility. Large international reserves and government deposits provide buffer. Finalize economic laws to improve business climate.
- Increased uncertainty about the policy framework: Up/Downside:  ; Risk Impact: H ; Policy Response: M Promptly finalize pending reforms of Investment, Hydrocarbon, and Mining Laws. Adopt fair and swift process for nationalized companies. Allow market-based signals to operate.
- Decline in natural gas production: Up/Downside:  ; Risk Impact: L/M ; Policy Response: M/H Finalize hydrocarbon legal reforms to attract private investment.
- Persistent second round effects from food supply shocks: Up/Downside:  ; Risk Impact: H ; Policy Response: M Accelerate withdrawal of excess liquidity through open market operations; macroprudential measures.
- Stronger fiscal stimulus due to election cycle: Up/Downside:  ; Risk Impact: L ; Policy Response: M Avoid stimulus given closed output gap.

### Annex I — Medium-Term Fiscal Framework (MTFF) and sustainable non-hydrocarbon balances
- Four approaches to set sustainable non-resource primary balance (NRPB): Bird-in-hand rule; Permanent Income Hypothesis (PIH); Modified PIH (MPIH); Fiscal Sustainability Framework (FSF).
- Illustrative numeric scenarios (based on current proven reserves ≈ 17 years of average annual production):
  - PIH suggests sustainable non-resource primary fiscal deficit of 3¼ percent of GDP (implying a fiscal adjustment of about 5¾ percent of GDP from projected 2013 levels).
  - More optimistic scenario indicates a sustainable deficit of 4½ percent of GDP.
- Structural balance measures:
  - Two SB measures relevant: (i) cyclically-adjusted non-hydrocarbon primary balance; (ii) structural primary balance (adds structural hydrocarbon balances based on structural commodity prices).
  - Staff estimate: Bolivia’s potential growth is around 5 percent.
  - Elasticity estimates used: income taxes 2½–3½ percent (bottom-up); indirect taxes 1½ percent (bottom-up); historical 20-year averages lower.
- Institutional recommendations:
  - Improve quality and timeliness of fiscal data; publish structural balance monitoring; consider formal fiscal rules that are measurable and evaluable with clear reporting.

### Annex II — Potential output
- Methods used: univariate filters, multivariate Kalman filter variants, production function.
- Main results:
  - Trend growth accelerated after 2001, especially after mid-2000 due to TFP increases.
  - Potential output growth has been in the range of 4.5 to 5 percent in the last five years; trend growth recently peaked and expected to average 5.2 percent in near future.
  - Output gap closed in 2013, averaging 0.4 percent, expected to converge to nil.

### Annex III — External spillovers
- Empirical SVAR results:
  - A one percentage point reduction in Brazil’s output growth lowers Bolivia’s output growth by 1/3 percentage point on impact and by 0.8 percent cumulatively over twelve months.
  - A one percentage point negative shock to Argentina lowers Bolivia’s output growth by close to 1/3 percentage point on impact and by 1 percent cumulatively over twelve months.
  - A one percentage point cutback in global demand brings down Bolivian output growth by 1.8 percent (at trough).
  - A ten percent drop in oil prices (relative to the U.S. CPI) would reduce Bolivia’s output by 1.6 percent after one year.
- Policy implications: continue prudent fiscal policies to build buffers; diversify exports; increase competitiveness; manage natural resource wealth effectively.

### Annex IV — Exchange rate and competitiveness assessment
- REER has risen about 21 percent over the last decade; Boliviano kept virtually fixed vis-à-vis the U.S. dollar since late 2011 (stabilized arrangement effective November 2, 2011).
- CGER/MB/ERER diagnostics:
  - Modified MB approach suggests REER strengthening would be needed for CAB to be close to medium term norm (-1.4 percent of GDP); benchmark CAB norm is -1.8 percent of GDP. Estimated deviations not statistically significant.
  - ERER assessment points to an overvaluation of about 12 percent as of September 2013; deviation not statistically significant.
  - ES method suggests boliviano in line with fundamentals; NFA stabilize around 19 percent of GDP over medium term.
- Competitiveness indicators:
  - Exports-to-GDP rose from 20 percent to ~40 percent over the last decade; hydrocarbon exports increased to 46 percent of total exports.
  - World Economic Forum Global Competitiveness Index: Bolivia improved to 98th out of 148 in 2013–14 (from 104th in 2012–13).
  - World Bank Doing Business Index: Bolivia ranks 162nd out of 185 in Doing Business 2014.
  - Structural bottlenecks: infrastructure, labor market efficiency and informality, poor quality of higher education.

### Debt sustainability and alternative resource-exhaustion scenario
- Baseline findings:
  - Gross public debt declined from 95.7 percent of GDP in 2003 to 33.4 percent in 2012; gross public debt 33 percent of GDP in 2012 projected to decline to 22 percent by 2018 and to 11 percent by 2033.
  - Under baseline, debt and external debt indicators remain well below thresholds for medium performers; risk of debt distress remains low.
- Baseline assumptions (2013–2033):
  - Average annual real GDP growth: 6.7 (2013), 5.4 (2014), 5 (until 2018), 4 thereafter.
  - Inflation (CPI, period average): 5.9 (2013), 6.8 (2014), 5 (2015–2033).
  - Net FDI assumed stable at 3 percent of GDP through 2020, then decline gradually.
  - For 2019–33, primary surplus of 0.3 percent of GDP assumed for non-financial public sector.
- Alternative (shorter resource horizon) scenario:
  - Resource horizon assumed to last through 2025 based only on current proven gas reserves.
  - Primary balance of non-financial public sector projected to worsen to a deficit of around 8 percent of GDP on average in 2026–33.
  - Public debt-to-GDP: bottoms out at 21 percent in 2020; increases to 32 percent by 2025; could rise to around 61 percent by 2033 under larger primary deficit.
- Stress tests:
  - One-time 30 percent nominal depreciation in 2014: PV of debt-to-GDP deteriorates by around 8½ percentage points on impact but converges to baseline in medium term; indicators remain below thresholds.

### Boxes and special topics (selected quantitative and policy notes)
- Inflation pass-through:
  - A 1 percent shock to global food prices increases domestic food prices by 0.81 percent over 12 months.
  - A 1 percent increase in domestic food prices has a cumulative twelve month pass-through of 0.85 percent to headline inflation.
- Exchange rate pass-through (selected values, In percent):
  - 2-months: Bolivia 2.5
  - 6-months: Bolivia 11.8
  - 12-months: Bolivia 23.2
- Central Bank credit to public corporations (approved / disbursed; USD $ Billion; Percent of GDP, as of November 2013):
  - YPFB: 2.0 / 6.8 ; 0.9 / 3.1
  - ENDE: 1.0 / 3.4 ; 0.4 / 1.4
  - COMIBOL: 0.9 / 3.0 ; 0.1 / 0.4
  - EASBA: 0.3 / 0.9 ; 0.2 / 0.5
  - FINPRO: 0.6 / 2.0 ; 0.6 / 2.0
  - MEFP: 0.5 / 1.7 ; 0.0 / 0.0
  - Total: 5.3 / 17.8 ; 2.2 / 7.5
- International reserves: Net international reserves reached US$14.4 billion at end-2013 (48.4 percent of projected 2013 GDP); gross international reserves $14,534 million (2013); $16,089 million (2014 projection).

### Recent policy actions and legal changes (late 2013)
- Measures on lending rates and credit quotas (Supreme Decree, December 23):
  - Ceiling on lending rates for social housing: 5.5 to 6.5 percent depending on property value.
  - Minimum credit quotas: housing financial institutions 50 percent for social housing; commercial banks 60 percent for social housing and productive sector combined; microfinance institutions 50 percent.
  - Compliance timelines: commercial banks and microfinance institutions five years; housing financial institutions four years. National development bank exempt.
- New law on public enterprises (approved December 26):
  - Creates Strategic Public Enterprises Council; requires external audits; enterprises’ budgets to ministry of finance and Congress.
- Financial Services Law:
  - Regulates lending rates and minimum lending quotas; discretion to set floors on deposit rates; includes Financial Stability Council (President of BCB, Executive Director of ASFI, Minister of Economy and Finance).

### Statistical and institutional capacity
- Data adequacy: broadly adequate for surveillance; authorities plan to update national accounts base, implement agricultural and economic census, and reinstate employment survey.
- INE updating base year from 1990 to 2007; preliminary results (2007–2012) planned by June 2014 and definitive series by end-2014.
- Bolivia in position to graduate to SDDS in mid-term per October 2013 assessment.

*Source: IMF staff report excerpt "_cr1436".*

### 1. Past Fund Policy Recommendations and Implementation _____________________________________ 17

### 1. Past Fund Policy Recommendations and Implementation

### Background
- Since the mid-2000s, macroeconomic performance and social policies helped nearly triple income per capita and reduce extreme poverty in Bolivia.
- Prudent fiscal policies saved a sizable portion of the hydrocarbon revenue windfall from the commodity price boom.
- Bolivia sustained positive growth during the global crisis of 2008–09 and weathered the recent regional slowdown.
- The 2009 Constitution requires substantial revisions to legal and policy frameworks; the authorities’ strategy aims to expand and industrialize natural resource production and improve public services in remote areas.

### Recent Developments
- Real GDP growth accelerated to 6.6 percent by September 2013, from 5.2 percent in 2012; staff expects output growth of 6.7 percent for 2013 (the highest in thirty years).
- External current account surplus projected to narrow to 4 percent of GDP in 2013, from 7.8 percent of GDP in 2012, due to softer terms of trade and a pickup in imports.
- Gross international reserves projected at 49 percent of GDP at end-2013.
- Inflation:
  - Headline inflation hovered around 5 percent (y/y) in the first seven months of 2013; food supply shocks pushed inflation up in August–September.
  - Core inflation (excluding food, fuel, and administered prices) edged up to 4.9 percent (y/y), from 4 percent in January.
  - Staff projects headline inflation to rise to 7.5 percent by end-2013, from 4.5 percent in 2012.
- Monetary policy:
  - Anchored on a stable nominal exchange rate vis-à-vis the U.S. dollar, supplemented by liquidity management through open market operations.
  - Central bank immobilized banks’ excess reserves in domestic currency at a remunerated rate of 1.8 percent.
  - Excess liquidity fell; the auction rate of the 91 day t-bill rose to 1.9 percent in November from 0.35 percent at end-2012.
  - Yield of the 1-year t-bill increased to 4.08 percent in November 2013 from 0.75 percent at end-2012.
  - Authorities applied stricter prudential limits on consumption credit and offered a savings bond to the public.
- Fiscal developments:
  - Fiscal outturns through October showed strong overall performance supported by hydrocarbon and tax revenues.
  - Staff projects an overall fiscal surplus of 0.6 percent of GDP for 2013 (1.8 percent of GDP in 2012).
  - This implies a pro-cyclical impulse of about 0.8 percent of GDP.
  - Gross public debt projected to decline to 32.5 percent of GDP by end-2013.
- Banking sector:
  - Credit to the private sector moderated to 19 percent nominal growth in November.
  - Banks’ capital adequacy ratio stood at 12.9 percent in November (regulatory minimum 10 percent).
  - NPL ratio declined to 1.7 percent (from 8.7 percent at end-2006).
  - Return-on-equity at 12.9 percent in November, compared to 21.2 percent in 2007.
  - Dollarization ratio fell to 23 percent of total deposits in September from 53 percent in 2008.
  - Reserve requirements on foreign currency deposits scheduled to rise to 66.5 percent by 2016, from 21.5 percent in 2008.
- Financial Services Law:
  - Establishes comprehensive legal framework; general thrust subordinating financial sector activities to social objectives.
  - Gives broad powers to the Executive; may create regulatory uncertainty.
  - Main features include regulating lending rates and lending targets, discretion to set floors on deposit rates, and mechanisms to enhance consumer protection and financial access in rural areas.
  - Law came into effect in November; specific regulations to be defined by Supreme Decrees.
- Market access:
  - October 2012: 10 year bond for US$0.5 billion at yield 4.875 percent.
  - August 2013: second issuance US$0.5 billion at yield 6.25 percent.
  - Issuances aimed to establish a benchmark and pre-finance public investment projects; included collective action clauses.

### Outlook and Risks
- Staff projections (Prel. / Projections):
  - Real GDP growth: 2013: 6.7; 2014: 5.4; 2015–2018: 5.0 each year.
  - Inflation (end of period): 2013: 7.5; 2014: 5.5; 2015: 5.2; 2016–2018: 5.0.
  - Fiscal balance (overall): 2013: 0.6; 2014: -0.4; 2015: -0.1; 2016: -0.1; 2017: -0.4; 2018: -0.7.
  - Nonhydrocarbon balance: 2013: -10.2; 2014: -10.4; 2015: -10.1; 2016: -9.5; 2017: -9.3; 2018: -9.3.
  - Public debt: 2013: 32.5; 2014: 29.7; 2015: 27.8; 2016: 25.9; 2017: 24.1; 2018: 22.3.
  - Net public debt: 2013: 9.5; 2014: 8.9; 2015: 8.3; 2016: 7.7; 2017: 7.4; 2018: 7.4.
  - Current account: 2013: 4.0; 2014: 3.1; 2015: 1.9; 2016: 1.4; 2017: 1.1; 2018: 0.9.
  - Reserves: 2013: 48.8; 2014: 48.3; 2015: 48.1; 2016: 47.3; 2017: 46.5; 2018: 45.5.
  - Reserves (in months of imports): 2013: 16.3; 2014: 16.1; 2015: 16.3; 2016: 16.6; 2017: 17.1; 2018: 17.9.
  - External debt: 2013: 20.2; 2014: 19.1; 2015: 18.4; 2016: 17.7; 2017: 17.0; 2018: 16.3.
- Staff projects real GDP growth of 5.4 percent in 2014, above potential (staff estimates potential growth in range 4.5 to 5 percent).
- External current account surplus expected to narrow to 3.1 percent of GDP in 2014 and 1 percent of GDP by 2018.
- Overall fiscal balance projected to turn to a deficit in 2014 and remain so over the medium term as hydrocarbon revenues decline.
- Staff expects inflation expectations to be anchored and inflation to stabilize around 5 percent over the medium term.
- External downside risks:
  - Weaker growth in Argentina and Brazil: share of Argentina and Brazil in Bolivian exports rose to around 50 percent in 2013, from 25 percent in early 2000s.
  - Empirical staff estimate: a one percentage point reduction in Brazil’s output growth would lower Bolivia’s output growth by 1/3 percentage point on impact and by close to 0.8 percent over a twelve month period.
  - Lower world commodity prices, particularly hydrocarbons: close to 90 percent of Bolivia’s exports are commodity based, with natural gas roughly 50 percent of total exports; hydrocarbon revenues account for nearly 35 percent of total revenue and grants.
  - Export price formulas for gas exports use a basket of petroleum products with a three month lag, providing temporary cushion.
- Buffers:
  - International reserves and government deposits at the central bank projected at 49 and 26 percent of GDP by end-2013, respectively.
- Domestic risks:
  - If key laws and business climate improvements are delayed, private investment may remain subdued.
  - New Financial Services Law may weaken credit conditions and banks’ balance sheets and may not provide level playing field for public and private banks.
  - Upside: fiscal stimulus could be stronger than staff baseline (general election in late 2014); National Public Investment System implementation may accelerate investment planning and execution.

### Policy Discussions — A. Strengthening the Fiscal Framework
- Authorities’ stance:
  - Reiterated commitment to prudent fiscal policy.
  - 2014 draft budget included overall fiscal deficit target of 3.2 percent of GDP (smaller than 4.6 percent in 2013 budget); replacing oil price forecasts with WEO baseline yields projected fiscal deficit of 0.4 percent of GDP for 2014 (moderately expansionary).
  - Authorities indicated any fiscal stimulus would be driven by public investment, not current spending; investment prioritized to deepen diversification and industrialization of the economy.
  - Authorities did not see major concern from the election cycle for fiscal sustainability and believed fiscal surpluses could be within reach in 2014.
- Staff recommendations and concerns:
  - Recommended aiming for a neutral fiscal stance in 2014 given strong growth and a closed output gap; save stimulus for downside external shocks and consider fiscal tightening if inflation persists.
  - Emphasized improving the non-hydrocarbon fiscal balance is critical for medium term sustainability.
  - Non-hydrocarbon primary deficit widened from 3.2 percent of GDP in 2006 to projected 9.1 percent of GDP in 2013.
  - Staff estimates sustainable non-hydrocarbon primary deficit around 3¼ percent of GDP on current proven gas reserves and resource horizon — requiring improvement of 5¾ percent of GDP from 2013 projected level (Annex I).
  - Short resource horizon impacts debt trajectory after mid-2020s; urgency to invest in exploration with private sector support.
- Authorities’ response to staff concern on non-hydrocarbon deficit:
  - Prioritizing investment in gas exploration with 18 new contracts expected by 2025.
  - Disagreed with staff that non-hydrocarbon fiscal deficit level was problematic, citing history of fiscal surpluses and good prospects for the sector.

*Source: IMF staff report excerpt "1. Past Fund Policy Recommendations and Implementation" (Bolivia).*

### 15.      Strengthening the non-hydrocarbon fiscal balance will require both expenditure and

### _cr1436 - 15.      Strengthening the non-hydrocarbon fiscal balance will require both expenditure and

### Fiscal consolidation: expenditure and revenue measures
- Expenditure-side recommendations:
  - Gradual reform of fuel subsidies to target the most vulnerable groups.
  - Enhancements in the quality of capital expenditure.
- Revenue-side recommendations:
  - (i) Introducing personal income taxes or reforming the existing VAT complementary system.
  - (ii) Strengthening compliance of the corporate income tax.
  - (iii) Reforming revenue agencies.
  - (iv) Quantifying and reporting tax expenditures in the budget with potential to curtail those with high cost-benefit ratios.
- Fiscal transparency and risk management:
  - Prepare a comprehensive risk statement in the budget to identify quasi-fiscal risks from public corporations and financial institutions and inform reform needs.
- Authorities’ position:
  - Noted that recent revenue measures pursued similar goals but saw little scope for structural fiscal reforms during the election year.
- Footnote observation:
  - "In addition to the new taxes on the financial sector, the authorities have strengthened tax administration and significantly broadened the base of contributors."

### Managing resource wealth: Medium-Term Fiscal Framework (MTFF) and fiscal rule
- Staff recommendations:
  - Develop a fully-fledged MTFF as part of budget documentation, in line with best practices in fiscal transparency.
  - MTFF should include mechanisms to insulate the fiscal sector from commodity price volatility, improve budget predictability, and promote countercyclical fiscal policies.
  - Consider eventual adoption of a fiscal rule targeting the structural primary balance, supported by a stabilization/savings fund with clear investment objectives and strong governance.
  - As first steps, calculate, report, and discuss structural fiscal indicators in the budget.
  - Revisit hydrocarbon revenue sharing agreements in the context of the fiscal rule; the Fiscal Pact called for by the decentralization law of 2010 provides an opportune time for revision.
- Authorities’ position:
  - View MTFF preparation as an ongoing, gradual process toward multi-year budgeting; some essential elements already underway.
  - Stabilization fund foreseen in decentralization law but consensus for implementation difficult during an election year.
  - Not persuaded about the benefits of a fiscal rule.
  - Note: sizable resources of subnational governments held at the central bank already provide an important source of fiscal savings.

### Monetary policy and inflation: preserving price stability
- Recent events and risks:
  - Rapid response to the food price shock of 2013 was appropriate.
  - Second round effects from food price shocks take "5–8 months" to reach their peak and are more persistent amid lax monetary conditions.
  - Income policy decisions and end-year seasonal hike in demand entail upside risks.
- Staff recommendations:
  - Further tightening may be necessary if second round effects prove persistent.
  - Strengthen the monetary policy framework to safeguard central bank anti-inflation credentials, noting gradual weakening of central bank independence and increased central bank lending to public corporations.
  - Discontinue direct lending by the central bank to public corporations.
    - Since 2009, the central bank is authorized to lend to the central government at concessional terms.
    - In 2013, this lending limit was increased to US$5.3 billion, of which US$2.2 billion had been disbursed by November.
    - Staff recommended that financing of public investment be implemented by the ministry of finance through a savings fund, which could absorb the credit portfolio of the central bank.
    - Suggested "Fondo para la Revolución Industrial Productiva" (FINPRO), established in 2012 using part of international reserves, could be a stepping stone for a savings fund if it yields positive returns, uses sound financial considerations, and has strong institutional setup.
  - Continue to rely primarily on market-based signals to allocate financial savings; establish a clear and transparent process for setting interest rates to minimize distortions.
  - Create conditions for gradual exit from the de-facto stabilized exchange rate arrangement in place since end-2011; steps include improving liquidity management, enhancing the role of the policy rate, developing inflation forecasting, collecting high frequency indicators, and increasing central bank operational autonomy.
- Authorities’ position:
  - Argued price stability is a constitutional mandate not imperiled by lending to strategic areas; lending constituted an income source for the central bank.
  - Emphasized coordination among public institutions and interest in staff input on accounting treatment of current lending on the central bank balance sheet.
- Constitutional/contextual note:
  - The 13-month wage was doubled and the solidarity pension increased in 2013.
  - The Financial Services Law explicitly states the supremacy of its provisions over contradictory laws, but recognizes that the Central Bank of Bolivia is regulated by its own legal framework (Art. 5).

### Financial stability: supervision, legislation, and risks from the Financial Services Law
- Progress and outstanding weaknesses:
  - Expanded access to financial services and improving financial soundness indicators.
  - Implemented several FSAP recommendations: adopting Basel II and III principles (adding market risk to capital requirements; guidance on operational and interest rate risk), and introducing a deposit insurance scheme.
  - Shortcomings remain: independence of the supervisory authority (ASFI), criteria for provisioning requirements, limits on total foreign investments as a share of capital, and regulations for pensions and insurance sectors.
  - Plans to strengthen ASFI’s resources to handle new tasks under the Financial Services Law.
- AML/CFT:
  - Bolivia’s exit from the FATF monitoring process indicates strengthening of the AML/CFT legal framework.
  - Next steps: effectively implement AML/CFT regime as Financial Services Law comes into effect, ensure smooth transfer of the Financial Investigations Unit (FIU) and resources from ASFI to the ministry of finance, clarify FIU organization/functions/sanctioning procedures, and guarantee FIU autonomy.
- Staff concerns about the Financial Services Law:
  - Regulated interest rates and credit quotas may distort resource allocation, hurt profitability of financial institutions, encourage circumvention and disintermediation, crowd-in sectors ill-equipped to absorb funds, and create concentration risks; compressed margins likely to hurt banks’ profitability and capitalization.
  - Legal framework regarding contracts could expose institutions to additional risks: clients could terminate contracts without penalty; mortgage loans considered fully paid with amount recovered from collateral, creating incentives for strategic defaults.
  - Increased intervention and regulatory uncertainty (e.g., "temporary preventive measures" (Art. 6)) and lack of elaboration on functions/scope/accountability of the Financial Stability Council may discourage investment in the financial sector.
- Alternative instruments advised by staff:
  - Transparent fiscal transfers to financial institutions to subsidize lending to target beneficiaries.
  - Innovative interventions such as partial credit guarantees and productive development services to leverage public funds for development and housing finance.
- Authorities’ stance:
  - Did not see merit in staff’s concerns; stressed that regulations in Supreme Decrees would be set with consideration for stability and growth, and highlighted the importance of coordination among ministry of finance, ASFI, and the central bank via the Financial Stability Council.

### Sustaining inclusive growth and business climate
- Key constraints:
  - Uncertainties in the legal framework hamper the business climate and private investment (private investment as a share of GDP remains among the lowest in the region).
  - Long delays in finalizing key legislation (investment, hydrocarbon, mining, labor) weaken business confidence; uncertainty regarding expropriation and nationalization processes.
  - Need to improve governance framework for public corporations to minimize fiscal risks and delineate their role vis-à-vis private companies.
- Authorities’ view:
  - Continue working towards consensus on laws; argue no legal uncertainty for investment because the Investment Law of 1990 remains in effect and the 2009 constitution guarantees private property and fair rules.
- Social outcomes and policy recommendations:
  - Economic strategy increased standards of living, but Bolivia ranks "108 out of 187 in 2012" in the UN Human development index; child and maternal mortality remain high; water and sanitation coverage low in rural and poor marginal urban areas.
  - Cash transfer programs in education, maternal health, energy, and pensions have been central.
  - Staff recommended conducting impact evaluations of existing social transfers before scaling up to ensure good design and focalization.
  - Improve capacity at the local level to enhance the impact of social infrastructure.

### Staff appraisal: outlook, priorities, and key recommendations
- Macroeconomic performance and outlook:
  - 2013 real GDP growth expected to reach its highest rate in over thirty years, supported by buoyant natural gas exports, strong private consumption, and accommodative macro-policies.
  - Prudent macroeconomic management saved part of the hydrocarbon revenue windfall; continued twin surpluses in fiscal and external accounts.
  - Economy expected to continue to grow above potential in 2014, albeit at a slower pace; risks manageable given sizable international reserves and government deposits at the central bank.
  - Domestic risks balanced: upside from fiscal stimulus offset by downside from weak private investment climate.
- Immediate policy challenges:
  - Ensure mid-2013 food price spike does not result in permanently higher inflation; continue to mop up liquidity if pressures persist.
  - Enhance effectiveness of monetary policy: allow market-based signals under the Financial Services Law and gradually exit the de-facto stabilized exchange rate in place since late 2011.
  - Discontinue central bank lending to public corporations; transfer lending activities to a sovereign fund administered by the ministry of finance with strong governance and clear investment criteria to benefit current and future generations.
- Fiscal policy guidance:
  - Avoid over-stimulating domestic demand; a neutral fiscal stance for 2014 would be consistent with a moderate overall fiscal surplus rather than the deficit envisaged in the draft budget.
  - Give priority to adopting a MTFF to manage resource wealth and guide fiscal policy, balancing intergenerational equity and immediate needs.
  - Prioritize exploring new natural gas reserves to offset depletion projected for mid-2020.
  - Success depends on establishing a clear, stable legal framework and favorable business climate to attract private investment and support diversification and productivity.
- Financial sector recommendation reiterated:
  - The Financial Services Law contains elements that can foster inclusion and integrity, but the chosen instruments (interest rate caps and minimum credit quotas) could reduce profitability and lending funds, over-leverage beneficiaries, and complicate monetary policy.
  - Staff recommended alternative instruments such as transparent fiscal transfers to financial institutions to subsidize lending to target beneficiaries.

*Source: _cr1436 - 15. Strengthening the non-hydrocarbon fiscal balance will require both expenditure and revenue measures (IMF staff report excerpt).*

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

### _cr1436 - 32.      It is proposed that the next Article IV consultation with Bolivia be held on the standard

### Risk Assessment Matrix
- Sources of risk and associated Up/Downside, Impact, and Policy Response:
  - Argentina and Brazil: Sharply weaker growth and/or policy spillovers
    - Up/Downside: 
    - Risk Impact: M/H
    - Policy Response: Exchange rate flexibility. Use existing buffers from large international reserves. Given ample fiscal space, mobilize countercyclical fiscal policy.
  - Sustained decline in commodity prices
    - Up/Downside: 
    - Risk Impact: L
    - Policy Response: M/H Exchange rate flexibility. Large international reserves and government deposits at the central bank provide some buffer. Finalizing key economic laws, provided they improve Bolivia’s business climate, will increase the productivity of key sectors, i.e. mining and hydrocarbon.
  - Increased uncertainty about the policy framework
    - Up/Downside: 
    - Risk Impact: H
    - Policy Response: M Promptly finalize pending reforms of the Investment, Hydrocarbon, and Mining Laws. Adopt a fair and swift process for nationalized companies. Allow market-based signals to operate.
  - Decline in natural gas production
    - Up/Downside: 
    - Risk Impact: L/M
    - Policy Response: M/H Finalize legal reforms to the hydrocarbon sector, setting stable pricing and tax policies that are attractive for private investment.
  - Persistent second round effects from food supply shocks
    - Up/Downside: 
    - Risk Impact: H
    - Policy Response: M Accelerate the withdrawal of excess liquidity through open market operations. Macroprudential measures.
  - Stronger fiscal stimulus due to upcoming election cycle
    - Up/Downside: 
    - Risk Impact: L
    - Policy Response: M With the output gap already closed, fiscal stimulus would be detrimental to inflation and the external current account balance.

### Past Fund Policy Recommendations and Implementation (Box 1)
- 2012 Article IV Consultation focus: appropriate policy mix to mitigate risks of overheating and medium term challenges to achieving strong, sustained, and inclusive growth.
- Monetary and exchange rate policy:
  - Recommendation: central bank absorb part of the large excess liquidity in the banking sector to slow credit growth and seek a gradual increase in interest rates. Gradual move toward greater exchange rate flexibility as lower dollarization becomes entrenched and financial markets develop.
  - Implementation: central bank started a gradual tightening of monetary conditions at the end of 2012 and reacted promptly with further measures in response to the food inflation shock in mid-2013. The Boliviano has remained virtually unchanged vis-à-vis the US dollar since late 2011.
- Fiscal policy:
  - Recommendation: aim for a higher fiscal balance to offset strong private demand growth; strengthen the non-hydrocarbon balance over the medium term; set up a MTFF to manage resource wealth; limit the role of the central bank in financing public investment; enhance governance and accountability for public enterprises.
  - Implementation: overall fiscal surplus in 2012 was about 1 percent of GDP higher than envisaged at the time of the Article IV Consultation, but the surplus narrowed in 2013. Authorities advanced medium term fiscal projections and medium term forecasts for key public enterprises. Authorized limits for central bank lending to public corporations were raised in 2013. The Public Enterprises Law is under discussion.
- Financial sector:
  - Recommendation: avoid direct controls on the price and allocation of credit; enhance the financial system safety net.
  - Implementation: Staff welcomed progress in adopting FSAP recommendations. The new Financial Services Law contemplates setting floors on deposit rates, ceilings on lending rates and quantitative lending targets for the productive sector and social housing; includes establishment of a macroprudential oversight body, a credit registry, and a deposit guarantee scheme.
- Structural policies:
  - Recommendation: improve the business environment via legal framework for natural resources and private investment ensuring clear and stable rules and delineating the scope of public sector operations.
  - Implementation/Status: Legal reforms of key legislation, including on investment, hydrocarbon, mining and labor, are still pending. Uncertainty regarding expropriation and nationalization process continues to affect business confidence.

### Inflation Dynamics (Box 2)
- Bolivia is highly open and commodity dependent and is very sensitive to inflationary pressures from external and domestic supply shocks.
- Historical episodes: 2008 and early 2011 had double-digit headline inflation driven by global food and fuel price surges.
- Pass-through estimates:
  - A 1 percent shock to global food prices increases domestic food prices by 0.81 percent over a 12 month period.
  - A 1 percent increase in domestic food prices has a cumulative twelve month pass-through of 0.85 percent to headline inflation.
  - Context: October 2011 World Economic Outlook median pass-through for a group of 50 emerging markets is 0.35 (international food price inflation to domestic food price inflation) and 0.40 (domestic food price inflation to headline inflation).
  - Drivers: larger share of food products in Bolivia’s consumer price index and a lower effectiveness to contain second round effects.
- Exchange rate pass-through:
  - Based on a VAR for Bolivia, Chile, Paraguay, Peru and Uruguay; Bolivia’s short-run pass-through is large by regional standards, although well below one; pass-through is more important at longer horizons, reflecting openness and dollarization.
- Footnotes:
  - 1/ Average food expenditure share in national consumption baskets of emerging markets is 34 percent. In Bolivia, it is 39 percent.
  - 2/ VAR with 2 lags, estimated in log-levels with monthly frequency during 2003–2013, including a total production index, CPI, policy rate, and NEER. Commodity prices, the US federal funds rate, and US industrial production are also included as controls.
- Exchange Rate Pass-Through (In percent) — selected values from table:
  - 2-months: Bolivia 2.5, Chile 1.3, Paraguay 1.9, Peru 3.5
  - 6-months: Bolivia 11.8, Chile 5.2, Paraguay 13.8, Peru 13.8, Uruguay 12.3
  - 12-months: Bolivia 23.2, Chile 10.6, Paraguay 21.9, Peru 18.4, Uruguay 17.2

### International Reserves Management (Box 3)
- Post-2006 nationalization of hydrocarbon sector: public sector became sole recipient of large natural gas export receipts, resulting in substantial fiscal savings deposited at the central bank.
- Factors behind reserve accumulation: managed exchange rate regime and financial de-dollarization.
- Central bank lending to public enterprises and development projects includes FINPRO financing for USD $1.2 billion.
- Concerns and recommendations:
  - Central bank and FINPRO assets and returns could have important economic implications; government should carefully specify the setup and operations of FINPRO and explain these fully to the public.
  - International best practices for SWFs call for clear articles of agreement detailing board role and responsibilities, management, monitoring, and audit requirements; some countries require independent and internationally reputable auditors.
  - If spending from these resources takes place outside the budget, fiscal accounting and transparency issues could emerge, undermining budgetary control and possibly leading to mismanagement.
- Recommendation: develop a mechanism to transform reserves from the non-renewable sector into sustainable and more stable future income. An investment fund with clear operational rules within an appropriate government-wide framework could help manage wealth and serve as insurance against volatile commodity prices.
- Central Bank Credit to Public Corporations, as of November 2013 — Approved / Disbursed (USD $ Billion; Percent of GDP):
  - YPFB: 2.0 / 6.8 ; 0.9 / 3.1
  - ENDE: 1.0 / 3.4 ; 0.4 / 1.4
  - COMIBOL: 0.9 / 3.0 ; 0.1 / 0.4
  - EASBA: 0.3 / 0.9 ; 0.2 / 0.5
  - FINPRO: 0.6 / 2.0 ; 0.6 / 2.0
  - MEFP: 0.5 / 1.7 ; 0.0 / 0.0
  - Total: 5.3 / 17.8 ; 2.2 / 7.5
- NIR Coverage in 2013 (In percent of GDP) — metrics shown: 20% of M2, 100% of short-term debt, 3 months imports, IMF's reserve adequacy metric (chart indicates Bolivia well above metrics but exact numeric values not provided beyond chart legend).

### Real Sector Developments (Figure 2)
- Growth accelerated in 2013 and was well above median growth in the region (includes Argentina, Brazil, Chile, Paraguay, and Uruguay).
- Hydrocarbon sector was a key source of growth while domestic demand picked up in mid-2013.
- A positive output gap emerged in 2013.
- Food supply shocks have pushed up inflation.
- Charts and series noted:
  - Output Gap (In percent) series from 2008–2013.
  - Sector Contribution to GDP Growth (Hydrocarbon and Non-hydrocarbon).
  - Demand Side Contribution to GDP Growth (Net exports, Domestic demand).
  - Headline, Core 2/, Food inflation series (Nov-09 to Nov-13).
  - Real GDP Growth (In percent, y/y) 2008–2013 with southern cone percentiles for comparison.
  - Index of Economic Activity y/y growth and 12-month moving average (2008–2013).

### External Sector Developments (Figure 3)
- The current account surplus is narrowing.
- Mining exports continue to decline, while gas exports have reached record high levels.
- Imports increased in 2013, especially capital goods.
- Capital account deficit narrowed as portfolio outflows receded and FDI increased.
- International reserves continue to vastly exceed every adequacy metric.
- Selected series and observations:
  - Current account (in percent of GDP) and Terms of trade (2000=100) trends through 2013H1.
  - Gas exports, Mining exports, Remittances (In percent of GDP).
  - Export Volumes and Price of Gas (In millions of cubic meters; Dollars per thousand cubic feet, annual average).
  - Import Growth by Categories (Other, Consumer goods, Capital goods & transport equipment, Primary material and intermediary products).
  - Private Capital Flows and FDI (Net portfolio flows, FDI net, In percent of GDP).
  - NIR coverage and reserve adequacy metrics charted.

### Monetary Developments (Figure 4)
- Rates on central bank paper edged up in 2013, while the exchange rate remained stable.
- Real interest rates on deposits continue to be negative.
- Open Market Operations accelerated in mid-2013 — including new instruments to withdraw liquidity.
- Credit growth has slowed but remains elevated.
- Series and values:
  - 90-day Central Bank paper rate series (Nov-08 to Nov-13) with nominal exchange rate (rhs). Example labels: 6.8, 6.9, 7.0, 7.1, 7.2 (chart axis shown).
  - Inflation (y/y), Lending rate, Deposits rate (Nov-08 to Nov-13).
  - Bank Reserves and Open Market Operations (Required reserves, Excess reserves, Open market operations in millions of US dollars).
  - Deposits of the financial system and Credit to private sector (In percent, nominal).

### Fiscal Developments (Figure 5)
- Overall fiscal balance projected to remain in surplus in 2013, but the non-hydrocarbon fiscal deficit is large.
- Hydrocarbon revenues increased further on the back of strong export volumes and prices.
- Capital expenditure remains high.
- Public debt ratios continue to decline.
- The maturity structure of public debt has improved and the share of foreign currency debt has declined.
- Series and composition details:
  - Domestic Debt Breakdown by Maturities (Less than 1 year; Between 1 and 5 years; More than 5 years) 2006–2012.
  - Domestic Debt Breakdown by Currency (Bs, Bs inflation indexed, Bs USD indexed, USD) 2006–2012.
  - Expenditure Composition (Transfers, Capital expenditure, Current expenditure (excluding transfers)) as percent of GDP (2006–2013 proj.).
  - Public Sector Debt (Gross, Net) as percent of GDP (2006–2013 proj.).
  - Fiscal Balance (Nonhydrocarbon balance; Overall balance before nationalization) (In percent of GDP) 2006–2013 proj.
  - Total Revenue Composition components: Other revenues, Public corporations' operating surplus, IDH and royalties, Tax revenues (In percent of GDP) 2006–2013 proj.

### Financial Sector Developments (Figure 6)
- Capital adequacy remains above the regulatory requirement, and NPL ratios are low.
- Bank profitability declined (figure continues beyond supplied excerpt).

_International Monetary Fund staff summary based on the provided PDF content._

### introduction of new taxes.

### _cr1436 - introduction of new taxes.

### Financial sector structure and composition
- Commercial banks account for 80 percent of assets.
- Financial sector composition (in percent of total, September 2013) includes:
  - Commercial banks
  - Microfinance banks
  - Mutuales
  - Cooperativas
  - Private financial funds
- Number of institutions, assets, and credit composition illustrated by categories (September 2013): composition by sector (Services, Commerce, Construction and property, Productive) and by type (Consumer, Mortgage, Micro, Commercial).

### Banking sector performance and vulnerabilities
- Capital adequacy ratio and nonperforming loans (time series through Nov-13):
  - Capital adequacy ratio (rhs) and NPL shown; historical NPL and capital adequacy movements are reported (figures presented).
- Rates of return (Nov-06 through Nov-13):
  - ROA (rhs) and ROE time series presented.
- Bank lending effective rates by type of credit (effective rate, Nov-13 series):
  - Commercial, Mortgage, Microcredit, SME, Consumer (rates shown in chart).
- Selected vulnerability indicators:
  - Nonperforming loans (in percent of total loans): 4.3, 3.5, 2.2, 1.7, 1.5 (annual series).
  - Restructured loans (in percent of total loans): 8.8, 6.4, 3.6, 2.2, 1.5.
  - Nonperforming and restructured loans (in percent of total loans): 13.1, 9.9, 5.8, 3.9, 3.0.
  - Capital adequacy ratio (in percent): 13.7, 13.3, 11.9, 12.3, 12.6.
  - Profits after tax (in percent of equity): 20.3, 20.6, 17.3, 19.5, 17.6.
  - Cash and short-term investments (in percent of total assets): 43.4, 48.0, 39.0, 37.6, 37.4.
  - Composition of bank deposits: Dollar deposits (in percent of total deposit) 53.0, 52.6, 43.8, 34.5, 26.3; Local currency deposits (in percent of total deposit) 47.0, 47.4, 56.2, 65.5, 73.7.

### Monetary and credit aggregates
- Net Central Bank foreign reserves (stocks, millions of U.S. dollars): 7,722; 8,580; 9,730; 12,019; 13,927; 14,534; 16,089; 17,502; 18,896; 20,432; 22,074 (series through projection years).
- Net international reserves (flows and stocks) presented in Central Bank Monetary Survey.
- Credit to private sector (percent of GDP): 31.5, 34.0, 36.0, 36.8, 39.0, 42.1, 42.5, 43.4, 44.2, 45.1, 45.8.
- Broad money (percent change): 19.9, 19.7, 12.5, 17.7, 20.2, 17.2, 15.9, 12.8, 12.0, 12.1, 12.0.
- Deposits (in percent of GDP) and memorandum items reported: Deposits (in percent of GDP) 38.8, 47.1, 44.7, 44.7, 48.0, 51.7, 54.5.
- U.S. dollar and dollar-indexed deposits (in percent of total deposits): 53.0, 52.6, 43.8, 34.5, 26.3, 23.8, 21.3.
- U.S. dollar and dollar indexed credit (in percent of total credit): 59.3, 49.5, 38.6, 30.7, 21.3, 20.1, 18.9.

### Public finances and fiscal projections
- Combined public sector revenues and expenditures (in percent of GDP):
  - Revenues: 38.9, 35.8, 33.2, 36.2, 37.9, 38.6, 37.3, 36.4 (series 2008–2015).
  - Expenditure: 35.3, 35.8, 31.5, 35.4, 36.1, 38.0, 37.7, 36.5.
  - Overall balance after nationalization costs (in percent of GDP): 3.6, 0.0, 1.7, 0.8, 1.8, 0.6, -0.4, -0.1 (2008–2015).
- Tax composition (in percent of GDP):
  - Taxes: 28.5, 26.9, 26.3, 28.9, 31.8, 33.0, 31.5, 30.8.
  - IDH and royalties: 8.5, 8.3, 7.7, 8.3, 10.4, 10.4, 9.7, 9.2.
  - Direct taxes: 4.5, 4.7, 4.6, 5.5, 5.7, 6.2, 6.2, 6.1.
  - Indirect taxes: 15.5, 13.9, 14.0, 15.2, 15.8, 16.1, 15.7, 15.6.
  - VAT (o/w): 7.4, 7.0, 7.2, 8.1, 8.7, 9.1, 8.8, 8.7.
- Non-hydrocarbon balance (before nationalization costs) (in percent of GDP): -7.5, -10.3, -8.1, -9.6, -9.7, -10.2, -10.4, -10.1.

### External sector and balance of payments
- Current account (in millions of U.S. dollars): 746, 766, 772, 2,127, 1,205, 1,026, 690, 549, 467, 436 (2009–2018 series).
- Merchandise exports (in percent of GDP): 38.9, 28.4, 32.4, 34.7, 41.3, 39.1, 38.2, 36.6, 35.0, 33.2, 31.2.
- Natural gas exports and components (in millions of U.S. dollars and volumes/prices) reported: natural gas exports values, volumes (mmm3 p/day) and prices ($/mmbtu) series for Brazil and Argentina.
- Net official reserves (end-of-period) series: 8,580; 9,730; 12,019; 13,927; 14,534; 16,089; 17,502; 18,896; 20,432; 22,074.
- Trade balance and imports/exports time series shown in Table 3.

### Policy-relevant statements from source text
- "Introduction of new taxes."
- "Commercial banks account for 80 percent of assets, but there are many non-bank institutions."
- "Lending rates in the productive sector and housing will be regulated under the new Financial Services Law."

### Key macroeconomic indicators and projections (selected)
- Real GDP (annual percent changes, 2008–2018 projections): 6.1, 3.4, 4.1, 5.2, 5.2, 6.7, 5.4, 5.0, 5.0, 5.0, 5.0.
- CPI inflation (end-of-period, 2008–2018): 11.8, 0.3, 7.2, 6.9, 4.5, 7.5, 5.5, 5.2, 5.0, 5.0, 5.0.
- GDP per capita (U.S. dollars, 2012): 2,51450.6 (as presented).
- Population (millions, 2012): 10.856.3 (as presented).
- Net Central Bank foreign reserves (in millions of U.S. dollars) for projection years included in tables.

*Source: _cr1436 - introduction of new taxes. (PDF tables and figures provided in the content unit).*

### Annex I. A Medium Term Fiscal Framework for Managing Resource

### Annex I. A Medium Term Fiscal Framework for Managing Resource Wealth

### Frameworks for setting sustainable non-hydrocarbon balances
- Four approaches to inform sustainable non-resource primary balance (NRPB):
  - Bird-in-hand rule: set aside resource revenue in a separate fund and target the NRPB equal to the return on the fund (limits non-resource spending earlier by accumulating savings).
  - Permanent Income Hypothesis (PIH): combines physical (natural resources in the ground, in net present value) and financial assets and targets the NRPB based on the return on combined resource wealth.
  - Modified PIH (MPIH): accounts for scaled up near-term infrastructure investment; resource wealth is subsequently replenished to sustain the same NRPB as PIH.
  - Fiscal Sustainability Framework (FSF): assumes front-loaded MPIH investment enhances non-resource sector growth, generating higher non-resource revenue that narrows the non-resource primary deficit and reduces required resource wealth.
- Illustrative numeric scenarios based on current proven reserves (equivalent to about 17 years of average annual production):
  - PIH suggests a sustainable non-resource primary fiscal deficit of 3¼ percent of GDP (which would imply a fiscal adjustment of about 5¾ percent of GDP from projected 2013 levels).
  - A more optimistic scenario with a longer resource horizon and a moderate decline in the resource balance indicates a sustainable deficit of 4½ percent of GDP.
- Illustrative transition: gradual decline of current spending levels, followed by an MPIH adjustment period to accumulate resource wealth needed for long-run sustainability (figures provided in source).

### Insulating the budget and structural balance (SB) measures
- Rationale:
  - Insulate expenditure from commodity price fluctuations via conservative price forecasting and prudent use of hydrocarbon revenues.
  - Use structural fiscal balance (SB) as a policy tool to adjust fiscal indicators for the output cycle, commodity price shocks, asset price cycles, and one-off factors.
- Two SB measures relevant for Bolivia:
  - (i) Cyclically-adjusted non-hydrocarbon primary balance (adjusts by output cycle, ideally against non-hydrocarbon GDP).
  - (ii) Structural primary balance (adds structural hydrocarbon balances based on structural commodity prices to the cyclically-adjusted non-hydrocarbon primary balance).
- Cyclically-adjusted balance mechanics:
  - Requires potential output, output gap, budget elasticities, and identification of one-off items.
  - Staff estimate: Bolivia’s potential growth is around 5 percent.
  - Elasticity estimates used:
    - Income taxes: 2½–3½ percent (bottom-up estimates).
    - Indirect taxes: 1½ percent (bottom-up estimates).
    - Historical 20-year averages: income taxes 1–2½ percent; indirect taxes around 1 percent.
    - Expenditures typically treated as structural with zero elasticity to output.
  - One-off item example: nationalization costs incurred in 2007–09 adjusted as one-off.
- Structural hydrocarbon balance / price rules (illustrations used in source):
  - Price rules illustrated: five year historical average (5/0/0); average of past five years, current, and forecast next five years (5/1/5); average of past twelve years, current, and forecast next three years (12/1/3).
  - Structural primary balance targets can be set to determine expenditure irrespective of realized commodity prices; complemented by expenditure rules (e.g., ceilings on real expenditure growth).
  - Figures show actual primary balance and counterfactual primary balance under a structural primary balance target of 0 percent of GDP and cumulative additional savings under the price rules (figures provided in source).

### Institutional and data recommendations for SB-based policy
- Improve quality and timeliness of fiscal data to measure fiscal stance more accurately and strengthen transparency through publication.
- Once structural balance monitoring is established, consider formal fiscal rules to cope with price volatility and exhaustibility of natural resource revenues.
- Requirements for effective fiscal rules:
  - Measurable and evaluable.
  - Clarity on objectives, institutions, and reporting arrangements to preserve credibility.

### Policy-level recommendations related to resource management (from Annex I)
- Use structural fiscal balance as core policy tool to manage volatility and guide expenditure.
- Strengthen data quality, institutional arrangements, and consider formal fiscal rules with clear measurement and reporting.

---

### Annex II. Potential Output

### Key findings from multiple methodologies
- Methods used: univariate filters (HP, Baxter-King, Christiano-Fitzgerald), multivariate Kalman filter variants with Phillips curve and Okun’s law, and production function (Cobb-Douglas with labor, physical and human capital, and technology).
- Main results:
  - After a trough in 2001, trend growth (Y) accelerated, especially after mid-2000 driven by a sizable increase in TFP and some improvement in capital stock contribution (K).
  - Potential output growth has been in the range of 4.5 to 5 percent in the last five years.
  - Trend growth peaked recently and is expected to average 5.2 percent in the near future (with high uncertainty).
  - Following a decade-long negative output gap, the output gap closed in 2013, averaging 0.4 percent, and is expected to converge to nil in the near future.
- Summary numeric ranges and averages (from staff calculations and methods):
  - Univariate filters: trend growth averages and ranges reported in source.
  - Kalman filter (PC+OL): trend growth and output gap estimates reported in source.
  - Production function: trend growth averages and ranges reported in source.
  - (Exact method-specific tables and ranges are presented in the source document.)

### Policy implications suggested
- Maintain a neutral monetary and fiscal policy stance given consistent estimates across methodologies pointing to a closed output gap.
- Speed up reforms tailored to enhance total factor productivity (TFP) to sustain higher long-term growth.
- Improve physical and human capital accumulation through increased investment in infrastructure, education, and healthcare.
- Address high labor informality, which constitutes a drag on productivity.

---

### Annex III. Assessing External Spillovers

### Context and methodology
- Bolivia’s exports to Brazil and Argentina increased more than fivefold since early 2000, increasing vulnerability to shocks in those neighbors.
- A structural VAR (SVAR) model with three block exogeneity restrictions (global, regional, domestic) was used to construct counterfactual scenarios and quantify transmission channels (following Sims and Zha (2006) methodology).

### Quantified spillover effects and channels (empirical findings)
- Spillovers from Brazil:
  - A one percentage point reduction in Brazil’s output growth rate lowers Bolivia’s output growth by 1/3 percentage point on impact.
  - The cumulative effect is a contraction of 0.8 percent over a twelve month period.
  - Main transmission channel: trade.
- Spillovers from Argentina:
  - A one percentage point negative shock to Argentina’s output growth rate lowers Bolivia’s output growth by close to 1/3 percentage point on impact.
  - Over a twelve month period the cumulative effect on Bolivia is a decrease of 1 percent.
  - Main transmission channels: third-country effects (Argentina’s shock reduces exports to Brazil, which then affects Bolivia).
- Global demand and oil prices:
  - A one percentage point cutback in global demand brings down Bolivian output growth by 1.8 percent (at its trough, principally via lower trade flows to Brazil).
  - A ten percent drop in oil prices (relative to the U.S. consumer price index) would reduce Bolivia’s output by 1.6 percent after one year. The impact on trade flows with Brazil is the main factor behind this contraction.
- Overall transmission: trade flows with Brazil are the main channel by which regional and global shocks (including oil price shocks) are transmitted and amplified to Bolivia; domestic non-trade effects explain much of the initial impact, but exports to Brazil drive GDP several months after the shock.

### Policy implications related to external spillovers
- Continue prudent fiscal policies and build buffers (current account surpluses have helped accumulate buffers).
- Priorities to reduce vulnerability and support medium-term sustainability:
  - Diversify the export base.
  - Increase competitiveness.
  - Effectively manage natural resource wealth.

*Source: IMF staff analysis as presented in "Annex I. A Medium Term Fiscal Framework for Managing Resource Wealth", and accompanying Annexes II and III in the provided document.*

### Annex IV. Exchange Rate and Competitiveness Assessment

### Annex IV. Exchange Rate and Competitiveness Assessment

### Real and nominal exchange rate developments
- Against a backdrop of substantial reserves accumulation, Bolivia’s real effective exchange rate (REER) has risen by about 21 percent over the last decade.
- The Boliviano has been kept virtually fixed vis-à-vis the U.S. dollar since late 2011; the sliding rate was set to zero and the de facto exchange rate arrangement was reclassified to a stabilized arrangement, effective November 2, 2011.
- Drivers of REER appreciation identified: strong terms of trade, large public investment, and relatively high inflation.
- There has been a nominal strengthening against regional currencies, despite the fixed vis-à-vis the U.S. dollar policy.

### CGER methodology results and diagnostics
- General finding: CGER methodologies tailored for resource-rich countries suggest no significant misalignment; estimated deviations from equilibrium are not statistically significant.
- Modified Macroeconomic Balance (MB) approach:
  - The benchmark MB approach was modified to separate the effects of hydrocarbon revenues and fiscal policy in the current account and to capture the elasticity of non-hydrocarbon exports and imports relative to the REER.
  - The modified MB approach uses the non-hydrocarbon fiscal balance instead of the standard fiscal balance and a hydrocarbon export balance instead of the oil export balance.
  - Following the large increase in the current account surplus in 2012, the MB approach suggests a strengthening of Bolivia’s REER would be needed for the underlying current account balance (CAB) to be close to its estimated medium term norm (-1.4 percent of GDP).
  - Footnote: The CAB norm under the benchmark MB approach is -1.8 percent of GDP.
  - The estimated deviation from equilibrium is not statistically significant.
- Equilibrium Real Exchange Rate (ERER) assessment:
  - The ERER assessment points to an overvaluation of the exchange rate of about 12 percent as of September 2013.
  - The ERER is estimated as a function of medium term fundamentals: terms of trade, net foreign assets, public expenditure, FDI, and productivity.
  - Estimates are less robust than other approaches given significant structural changes in the Bolivian economy that are not well captured in the model.
  - The estimated deviation from equilibrium is not statistically significant.
- External sustainability (ES) method:
  - The ES method suggests the boliviano is in line with fundamentals.
  - Under ES, Bolivia’s net foreign assets positions would stabilize at around 19 percent of GDP over the medium term.

### External sector and export structure
- Exports-to-GDP ratio increased from 20 percent to around 40 percent over the last decade.
- Hydrocarbon exports (primarily natural gas) have increased to 46 percent of total exports (from 24 percent a decade earlier), concentrated in two main markets: Argentina and Brazil.
- The share of mining-related products has increased markedly, despite a sharp reduction in 2012.
- Policies aimed at strengthening food security have restricted non-traditional exports (mainly sugar, soybeans, corn, and meats); non-traditional exports have a current share of 15 percent of total exports compared to 55 percent in 2002.

### Competitiveness, business environment, and structural constraints
- World Economic Forum Global Competitiveness Index:
  - Bolivia ranking improved to the 98th position (out of 148 countries) in the 2013–14 survey, from 104th in 2012–13.
  - Most improvement driven by a better ranking in the macroeconomic environment (from 49th to 28th).
- World Bank Doing Business Index:
  - Bolivia ranks 162nd out of 185 countries in Doing Business 2014.
  - Main weaknesses reflected in Doing Business: tax evasion, extensive procedures and days to start a business, and burdensome building permits.
  - Note: These indicators should be interpreted with caution due to a limited number of respondents, limited geographical coverage, and standardized assumptions on business constraints and information availability.
- Key structural bottlenecks weighing on competitiveness:
  - Infrastructure bottlenecks
  - Low labor market efficiency, including widespread labor informality
  - Poor quality of higher education
- Policy implication: Structural reforms, including addressing widespread labor informality and improving infrastructure and higher education quality, are needed to enhance competitiveness and productivity.

*Source: Annex IV. Exchange Rate and Competitiveness Assessment (IMF staff report).*

### 7.      Trust Funds (TF) continue to be used to support policy dialogue and to pilot

### 7. Trust Funds (TF) continue to be used to support policy dialogue and to pilot innovative ideas.

### World Bank Trust Fund Portfolio in Bolivia (as of December 2013)
- Project — Amount (US$ million)
  - Strengthening of the Ministry of Development Planning in the Process of Decentralization (IDF) — 0.28
  - Climate Change Resilience Management System in the Pilot Sub-basins (CSCFIA) — 0.5
  - Pilot Program for Climate Resilience - Phase I (CSCFIA) — 1.5
  - Ensuring Quality in the National Statistical System (TFSCB) — 0.24
  - Early Childhood Care And Development in the Most Vulnerable Districts Of La Paz And El Alto (JSDF) — 2.78
  - Integrated Community-Driven Territorial Development for Remote Communities in the Amazon (JSDF) — 2.21
- TFs are an important financing source for the Bank’s program in Bolivia.

### IMF Relations with the World Bank under JMAP — Coordinated priorities for Bolivia
- Strengthening of the fiscal framework:
  - Reform of intergovernmental relations, transparent management of hydrocarbon-related revenue, reinforcement of the multi-annual budget and planning process.
  - Strengthen capacity on public sector management, procurement, and public investment, including at the subnational level.
- Maintaining adequate financial sector supervision:
  - Financial sector described as liquid and solvent.
  - Challenges: implement the new Financial Services Law, strengthen supervision to maintain loan portfolio health, manage transition of the AML/CT regime under the new law.
- Improving the business climate to bolster investment:
  - Private investment rate remains below early 2000s levels and well below the regional average.
  - Challenge to reconcile role of private sector with government intention to increase the role of the state.
- Reducing poverty:
  - Challenges in human development: access to quality basic education, health, social protection network, and employability of low income youth.
  - Technical strengthening on poverty measurement included.

### Agreed division of labor between Fund and Bank
- Tax policy and administration:
  - Fund leads collaboration with authorities; Bank may support through its diagnostic tools if requested.
- Fiscal federalism and budget framework:
  - Bank supports Ministry of Development Planning in decentralization, public investment management, and coordination across government levels; supports planning and implementation of public investment and the multi-annual budget process.
  - Fund continues analytical work on macro-fiscal institutions and advising on medium-term fiscal framework components.
- Debt management:
  - Bank, with Fund, assisting Ministry of Finance on debt management reform plans based on the Debt Management Performance Assessment (DeMPA).
  - Bank to provide technical assistance on management of non-concessional loans.
- Poverty and social protection:
  - Bank providing technical assistance on poverty measurement (monetary poverty and multidimensional well-being indicators) and STATCAP support for high quality statistical information.
  - Bank to assist on social protection, health, and early child development.
- Private sector development:
  - World Bank Group financing in agricultural productivity, food security, rural development, community-driven development.
  - Bank conducting sectoral evaluation on growth, bottlenecks, and measures to improve growth prospects focusing on agriculture, hydrocarbon and mining.
  - IFC supporting improvement of business procedures at subnational levels.
- Financial sector surveillance:
  - Fund to continue surveillance and monitoring implementation/operation of the Financial Services Law.
- Statistics:
  - Fund providing TA for subscription to the Special Data Dissemination Standard (SDDS).
  - Fund supporting enhanced accounting of mixed-ownership companies (telecommunications, electricity, hydrocarbon) and their inclusion in fiscal accounts of the non-financial public sector given government majority ownership and control.

### Relations with the Inter-American Development Bank (IDB)

### IDB exposure and lending to Bolivia (as of September 30, 2013)
- Approved loans to Bolivia — US$5.23 billion
- Disbursements totaling — US$3.89 billion
- Bolivia’s outstanding debt to the IDB — approximately US$828.1 million
- Undisbursed approved funds — US$972.5 million
- Net cash flows to the country were positive for a fourth year in a row, a trend expected to continue in the base scenario to 2016.
- IDB unilateral MDRI write-off at end-2007:
  - Principal payments written off — US$741.1 million
  - Future interest payments written off — US$307.3 millions
  - Estimated annual fiscal space generated — more than US$18.0 millions on average

### IDB lending policy and country strategy
- IDB implemented new concessional lending allocation consistent with Debt Sustainability Framework; operational guidelines for concessional funds under Fund of Special Operations (FSO) performance-based allocation system.
- Parallel lending operations (blend of ordinary and concessional funding) preferred up to 2020.
- Country strategy period — 2011–2015; increase in financial flows to Bolivia.
  - Beginning 2012 (base scenario), Bolivia allocated 20 percent of concessional element under IDB’s blended financial conditions.
  - In 2013, Bolivia’s annual allocation — US$356.50 millions; base scenario for 2013–2014 — approval of new loans US$356.5 million per year.
- Country strategy objectives: sustainable growth and poverty-inequality reduction; alignment 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.
- Overarching focus: climate change and indigenous population/diversity issues.

### IDB portfolio composition (as of September 30, 2013)
- Executing sovereign guaranteed operations: 35 loans totaling US$1.30 billion; 26.9 percent disbursed.
  - Portfolio supports primarily transport, water and sanitation, and energy infrastructure.
  - Undisbursed sovereign portfolio concentrated 56 percent in those sectors.
- Non-sovereign guaranteed executing portfolio: 5 loans ascending to US$29.0 million and two TFFP’s ascending to US$3.7 million.
- 2013 operative program: six sovereign guaranteed loans total US$378.5 million; two non-sovereign guaranteed loans total US$22 million.
- Pipeline 2014: six additional loans identified for US$334.5 million.

### Implementation risks identified for IDB strategy
- Institutional, social, and political definitions yet to be clarified, representing direct and indirect risks.
- Relevant macroeconomic, institutional, and regulatory risks:
  - Financial implications of excessive dependence on oil revenues.
  - Weak policy implementation and institutional capacity affecting public investment.
  - Problematic regulatory environment downgrading the investment climate.

### Statistical Issues (As of November 26, 2013)

### Assessment of data adequacy for surveillance
- General: Data provision has some shortcomings but is broadly adequate for surveillance.
- Authorities plan to strengthen quality and timeliness of statistics: update national accounts base, implement agricultural and economic census, reinstate employment survey, work towards SDDS subscription.
- National Accounts:
  - INE updating base year from 1990 to 2007, implementing SNA 1993 and some SNA 2008 recommendations.
  - INE plans to release preliminary results (year 2007–2012) by June 2014 and definitive series by end of the year.
- Labor market:
  - Quality of household and employment surveys declined due mainly to financial constraints.
  - Quarterly employment survey discontinued in 2003; lack of quarterly unemployment, employment and wages data.
  - Yearly wage information still compiled by INE.
- Prices statistics:
  - Industrial producer price indices and external trade unit values compiled by INE but need revision for concepts and definitions consistent with SNA 1993 and treatment of seasonal products, missing items, quality changes, and new products.
- Government finance statistics:
  - Ongoing implementation of a comprehensive financial management system (funded by 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; mixed-ownership companies (telecommunications, electricity, hydrocarbon) should be included in fiscal accounts of the non-financial public sector given government majority ownership and control.
- Balance of payments:
  - Coverage of certain services and financial transactions expanded following January 2007 Data ROSC mission recommendations.

### Data Standards and Quality
- Bolivia has participated in GDDS since November 2002.
- Data ROSC published on August 13, 2007.
- October 2013 SDDS assessment mission found Bolivia’s statistical system is, in general, in a good position to graduate to the SDDS in the mid-term.

### Selected data reporting frequencies and recent observation dates (As of November 26, 2013)
- Exchange Rates — Latest Observ. Date: Daily; Frequency Received: Daily; Frequency of Reporting: D; Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Daily/D/D
- Reserve/Base Money — Latest Observ. Date: Oct. 2013; Date Received: Nov. 2013; Frequency: M/M/M; Data Quality–Methodological Soundness: O, LO, LO, O; Data Quality–Accuracy and Reliability: O, O, O, O, O
- Broad Money — Latest Observ. Date: Oct. 2013; Date Received: Nov. 2013; Frequency: M/M/M
- Central Bank Balance Sheet — Latest Observ. Date: Oct. 2013; Date Received: Nov. 2013; Frequency: M/M/M
- Consolidated Balance Sheet of the Banking System — Latest Observ. Date: Oct. 2013; Date Received: Nov. 2013; Frequency: M/M/M
- Interest Rates — Latest Observ. Date: Oct. 2013; Date Received: Nov. 2013; Frequency: W/W/W
- Consumer Price Index — Latest Observ. Date: Oct. 2013; Date Received: Nov. 2013; Frequency: M/M/M; Data Quality–Methodological Soundness: LO, O, LO, O; Data Quality–Accuracy and Reliability: O, LO, LNO, O, LO
- Revenue, Expenditure, Balance and Composition of Financing – General Government — Latest Observ. Date: Sep. 2013; Date Received: Nov. 2013; Frequency: M/M/M; Data Quality–Methodological Soundness: LO, LO, LNO, LO; Data Quality–Accuracy and Reliability: LO, O, O, O, LO
- External Current Account Balance — Latest Observ. Date: Q2 2013; Date Received: Sep. 2013; Frequency: Q/Q/Q; Data Quality–Methodological Soundness: O, LO, LO, LO; Data Quality–Accuracy and Reliability: LO, O, LO, O, LO
- GDP/GNP — Latest Observ. Date: Q2 2013; Date Received: Nov. 2013; Frequency: Q/Q/Q; Data Quality–Methodological Soundness: LO, LO, LO, O; Data Quality–Accuracy and Reliability: LNO, LO, LNO, O, LO
- Gross External Debt — Latest Observ. Date: Oct. 2013; Date Received: Nov. 2013; Frequency: M/M/M
- International Investment Position — Latest Observ. Date: Q4 2012; Date Received: May 2013; Frequency: Q/Q/Q

### Debt Sustainability Analysis — Key findings and baseline assumptions

### Key findings (summary)
- Public debt declined sharply following MDRI debt relief in 2006–07 and continued to improve supported by overall fiscal surpluses.
- Under the baseline scenario, debt ratios display ample margins relative to risk thresholds and are expected to decline further in the medium to long term.
- Debt service projected to remain low due to predominantly long maturities of both domestic and foreign debt.
- Path of debt ratios deteriorates under standard stress tests, especially for total public debt, but remains well below indicative thresholds.
- Risk of debt distress remains low.
- Alternative scenario assuming no augmentation of current natural gas reserves (shorter resource horizon) shows debt ratios starting to climb after the mid-2020s when current proven gas reserves are expected to be exhausted.

### Background public debt developments
- Gross public debt declined from 95.7 percent of GDP in 2003 to 40.5 percent in 2007 and to 33.4 percent in 2012.
- External public debt declined to 14.8 percent of GDP in 2011 from 65.0 percent in 2003, but rose to 15.7 percent of GDP in 2012 after issuance of an international bond of US$ 0.5 billion.
- External public debt projected to increase in 2013 following a second international bond issuance of US$0.5 billion in August 2013.
- Nearly all domestic debt had maturities exceeding five years at end-2012 (compared to about ⅔ in 2005).
- 87.7 percent of external public debt had maturities exceeding eleven years.
- Net public debt (gross debt minus net central bank credit) declined to 11.1 percent of GDP in 2012 from 87.8 percent in 2003.
- Effective interest rate of total public debt was 3.4 percent in 2012.

### Baseline scenario assumptions for 2013–2033
- Average annual real GDP growth:
  - 6.7 percent in 2013
  - 5.4 percent in 2014
  - 5 percent until 2018
  - 4 percent thereafter
- Inflation (CPI, period average):
  - 5.9 percent in 2013
  - 6.8 percent in 2014
  - 5 percent in 2015–2033
  - Note: inflation assumptions for 2013–14 are higher than last year’s DSA reflecting mid-2013 food supply shocks.
- External sector:
  - In line with medium term staff projections through 2018 and based on stable import and export ratios to GDP over the long term.
  - Net FDI assumed to remain stable at 3 percent of GDP through 2020, then decline gradually over the long term.
- Fiscal assumptions and financing strategy:
  - In line with medium term staff projections until 2018.
  - For 2019–33, a primary surplus of 0.3 percent of GDP is assumed for the non-financial public sector (previous DSA assumed a surplus of 0.4 percent of GDP on average over 2018–32).
  - Assumption based on stable international oil prices and public expenditure as a share of GDP.
  - CAF expected to remain the largest external lender.
- Average concessionality of public external debt:
  - Around 27 percent in the medium term based on projected disbursements of official loans and concessional financing conditions.

*Source: _cr1436 - 7. Trust Funds (TF) continue to be used to support policy dialogue and to pilot*

### 4.      To assess the impact of the exhaustion of natural gas reserves, the following assumptions

### _cr1436 - 4.      To assess the impact of the exhaustion of natural gas reserves, the following assumptions

### Alternative scenario assumptions (shorter resource horizon)
- Natural resource horizon: resource horizon is assumed to last through 2025 based only on current proven gas reserves.
- Fiscal assumptions: primary balance of non-financial public sector is projected to worsen to a deficit of around 8 percent of GDP on average in 2026–33.

### Baseline projections and assessment of sustainability
- Bolivia is classified as medium performer in terms of policy and institutional capacity (three year average of World Bank’s CPIA scores).
- Gross non-financial sector public debt:
  - 33 percent of GDP in 2012
  - projected to decline to 22 percent of GDP by 2018
  - projected to decline to 11 percent of GDP by 2033
- Total external debt (including private):
  - 20 percent of GDP in 2012
  - projected to decline to 16 percent by 2018
  - projected to decline to 10 percent by 2033
- Conclusion: Under the baseline scenario, Bolivia’s public and external debt are expected to remain sustainable throughout the projection period; all debt burden indicators are well below the specific indicative thresholds for medium performers.

### Shorter resource horizon scenario: projected impacts
- Debt trajectory deteriorates from mid-2020, reflecting assumed exhaustion of current proven gas reserves.
- Public debt-to-GDP ratio:
  - bottoms out at 21 percent in 2020
  - increases to 32 percent by 2025
  - could rise to around 61 percent of GDP by 2033 with the larger primary deficit

### Stress test results and resilience
- Standard stress tests indicate Bolivia’s low public and external indebtedness is resilient to a series of shocks.
- Most extreme stress test to external debt:
  - one-time 30 percent nominal depreciation relative to the baseline in 2014
  - the ratio of the PV of debt to GDP deteriorates by around 8½ percentage points on impact, but converges to the baseline trajectory in the medium to long term
  - all external debt indicators remain well below thresholds in extreme stress scenarios
- For public debt, the most extreme risk arises from a temporary shock to real GDP growth, but debt ratios remain well below indicative thresholds under stress tests.

### Risk rating and authorities’ assessment
- Bolivia’s risk of debt distress is low based on baseline and most extreme stress test analysis.
- Staff and the authorities concurred that Bolivia’s risk of debt distress is low and debt is expected to be sustainable over the medium and long term.
- Authorities highlighted:
  - public debt-to-GDP ratio reduced to one of the lowest in the region
  - improvement in maturity structure and systemic decline in external debt service indicators point to limited liquidity risks

### Selected quantitative indicators and mechanics (verbatim figures from analysis)
- Primary balance projected deficit in alternative scenario: around 8 percent of GDP on average in 2026–33.
- Public debt trajectory under alternative scenario:
  - 21 percent in 2020 (bottom)
  - 32 percent by 2025
  - around 61 percent by 2033
- Most extreme external shock: one-time 30 percent nominal depreciation relative to the baseline in 2014; PV of debt-to-GDP ratio deteriorates by around 8½ percentage points on impact.
- Remittances context: remittances represent about 4 percent of GDP and 9 percent of goods and services exports; inclusion does not change risk rating.

*Source: National authorities and Fund staff calculations.*

### 1.      This statement provides information that has become available since the

### _cr1436 - 1.      This statement provides information that has become available since the

### Recent macroeconomic developments
- Inflation:
  - Inflation moderated to 6.5 percent y/y in December, closing the year below the 7.5 percent projected in the staff report.
  - An unanticipated decline in the prices of key food items in the last two months of the year accounts for the difference between the staff projection and the outturn.
  - Core inflation (excluding food, fuels, and administered prices) edged up to 5.1 percent y/y in December.
- Fiscal outcomes:
  - Fiscal outturns through November showed an overall surplus of 3.7 percent of GDP (5.5 percent of GDP in the same period of 2012).
  - The 2014 Budget Law approved by Congress in December was in line with the fiscal projections and targets presented in the staff report.
- External sector and reserves:
  - Net international reserves reached US$14.4 billion at end-2013 (48.4 percent of projected 2013 GDP).
  - The external current account recorded a surplus of 3.8 percent of GDP through September (5.5 percent of GDP in the same period of 2012).

### Measures on lending rates and credit quotas (supreme decree, December 23)
- Social housing lending rates:
  - The ceiling on lending rates for social housing ranges from 5.5 to 6.5 percent depending on the value of the property.
  - Existing mortgages can be renegotiated at the regulated rates.
- Credit quotas:
  - For housing financial institutions, the minimum credit quota for social housing was set at 50 percent.
  - For commercial banks, the minimum quota for social housing and the productive sector combined was set at 60 percent.
  - For microfinance institutions, the minimum quota was set at 50 percent.
- Compliance timelines:
  - Commercial banks and microfinance institutions will have five years to comply with the quotas.
  - Housing financial institutions will have four years to comply.
- Exemptions:
  - The national development bank, now a first-tier public bank, is exempt from the decree.

### New law on public enterprises (approved December 26)
- Objectives:
  - Strategic enterprises in mining, energy, telecommunications, transport and other areas will be generating profits to finance social policies.
  - Social enterprises will be generating employment, providing services, and intervening in the market to avoid distortions.
- Institutional and governance changes:
  - The law creates the Strategic Public Enterprises Council to establish policies, approve strategic plans, and appoint and dismiss enterprises’ directors.
  - The law requires external audits and the submission of the enterprises’ budget to the ministry of finance and Congress.

### IMF Executive Board conclusion and assessment (Press Release No. 14/45, February 10, 2014)
- Consultation conclusion:
  - On January 27, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bolivia.
- Macroeconomic context and performance:
  - Good macroeconomic performance and active social policies since the mid-2000s have helped Bolivia to nearly triple income per capita and reduce poverty.
  - Recent years’ economic gains were supported by high international commodity prices and rising volumes of natural gas exports.
  - Twin surpluses in the fiscal and external accounts have increased net international reserves to almost 50 percent of gross domestic product (GDP), providing ample buffers against external shocks.
  - Social policies have pursued ambitious redistributive and poverty reduction goals, increasing living standards of vulnerable households.
- Growth and outlook:
  - Real GDP growth is projected at 6.7 percent in 2013, the highest growth rate of the last thirty years, supported by soaring hydrocarbon exports, strong private consumption, and accommodative macroeconomic policies.
  - Growth is projected to remain above potential again in 2014, sustained by hydrocarbon exports and a moderate fiscal impulse.
  - Notwithstanding elevated export volumes, the external current account surplus is expected to narrow in 2013 and over the medium term on the back of softer terms of trade.
- Inflation and policy response:
  - Food supply shocks triggered an increase in inflation in mid-2013.
  - Authorities responded with rapid monetary tightening and measures to improve food supply.
  - Staff expects the authorities will succeed in anchoring inflation expectations and inflation is projected to fall to

*Source: _cr1436 - 1.      This statement provides information that has become available since the (IMF).*

### 5.5 percent by the end of 2014, though further tightening may be needed if inflationary pressures

### _cr1436 - 5.5 percent by the end of 2014, though further tightening may be needed if inflationary pressures

### Executive Board assessment — key judgments
- Neutral macroeconomic policy stance appropriate given favorable growth outlook and closed output gap.
- Authorities encouraged to avoid pro-cyclical fiscal stimulus and to save budgetary resources to respond to adverse external shocks.
- Need to improve the non-hydrocarbon fiscal balance to secure medium-term sustainability; suggested measures:
  - Better targeting fuel subsidies.
  - Enhancing efficiency of public investment and social transfers.
  - Implementing tax administration reforms.
- Support for adoption of a medium-term fiscal framework to manage resource wealth and balance intergenerational equity against immediate development needs.
- Commendation for authorities’ response to mid-2013 inflation rise; further monetary tightening could be needed if second-round effects prove persistent.
- Recommendation to discontinue central bank lending to public enterprises; a savings fund aligned with international best practices could help channel such lending.
- Merit seen in gradually allowing greater exchange rate flexibility to help absorb external shocks.
- Sound financial sector noted, but need to continue strengthening supervision.
- Urged implementation of strengthened framework against money laundering and terrorist financing.
- Emphasis on broadening economic base and raising productivity; improve business climate, including creating a predictable legal framework, and greater investment in infrastructure and human capital.

### Macroeconomic outlook and key statistics
- Real GDP: 6.7 (2013); 5.4 (2014 projection).
- GDP deflator: 2.5 (2013); 6.0 (2014 projection).
- CPI inflation (period average): 5.7 (2013); 6.8 (2014 projection).
- CPI inflation (end-of-period): 6.5 (2013); 5.5 (2014 projection).
- Combined public sector:
  - Revenues and grants: 38.6 percent of GDP (2013); 37.3 percent of GDP (2014 projection).
  - Hydrocarbon related revenue: 13.1 percent of GDP (2013); 12.2 percent of GDP (2014 projection).
  - Expenditure: 38.0 percent of GDP (2013); 37.7 percent of GDP (2014 projection).
  - Overall balance: 0.6 percent of GDP (2013); -0.4 percent of GDP (2014 projection).
  - Total gross public debt: 32.5 percent of GDP (end-2013); 29.7 percent of GDP (2014 projection).
- External sector:
  - Current account: 4.0 percent of GDP (2013); 3.1 percent of GDP (2014 projection).
  - Merchandise export: 39.1 percent of GDP (2013); 38.2 percent of GDP (2014 projection).
  - Natural gas export share: 18.4 percent of GDP (2013); 16.7 percent of GDP (2014 projection).
  - Merchandise imports: 31.0 percent of GDP (2013); 31.7 percent of GDP (2014 projection).
- Gross international reserves:
  - $14,534 million (2013); $16,089 million (2014 projection).
  - In percent of broad money: 71.3 (2013); 68.0 (2014 projection).
- Money and credit (changes in percent of broad money at beginning of period):
  - NFA of the banking system: 16.2 (2013); 10.8 (2014 projection).
  - NDA of the banking system: 1.0 (2013); 5.1 (2014 projection).
  - Credit to the private sector (in percent of GDP): 42.1 (2013); 42.5 (2014 projection).
  - Broad money: 17.2 (2013); 15.9 (2014 projection).
- Interest rates (percent, end-of-period):
  - Deposits in local currency: 1.2 (2012); "..." for 2013 and 2014.
  - Loans in local currency: 10.6 (2012); "..." for 2013 and 2014.
- Other indicators cited by authorities:
  - Average growth over past eight years: 5 percent.
  - Unemployment rate: 3.2 percent (2013); 8 percent (2006).
  - International reserves described as "nearly 50 percent of GDP" by the authorities.
  - External public debt: 14 percent of GDP.

### Fiscal stance and public investment
- Fiscal stance expected to remain expansionary with important investment projects to industrialize the resource sector in the pipeline.
- Projection: overall fiscal surplus to narrow to 0.6 percent of GDP in 2013 and turn to an overall deficit of 0.4 percent of GDP in 2014.
- Gross public debt expected to continue downward to 32.5 percent of GDP by end-2013, from 40 percent of GDP in 2009.
- Control over current spending emphasized; fiscal space used to increase capital spending.
- Public investment:
  - 2012 public investment: $2,897 million.
  - 2013 public investment execution as of November: $2,854 million.
- Authorities’ positions:
  - BCB financing to public enterprises seen as important to industrialization and expansion of output; projects described as having financial, economic and social high-yield.
  - Request for a working paper to discuss accounting treatment of BCB-managed resources lent to public corporations.
  - FINPRO regulated by Supreme Decree No. 1367; resources managed through a trust and each project financed must be approved by supreme decree.
  - Fiscal-Financial Program exists as short-term planning instrument between MEFP and BCB; medium-term fiscal framework under preparation.

### Monetary policy and inflation dynamics
- Authorities’ view: BCB gradually reduced liquidity since Q4 2012 via increased supply and placement of monetary regulation instruments, allowing moderated increases in interest rates.
- Inflationary pressures in August 2013 attributed to supply shocks affecting three food-basket products, caused by adverse weather (frost and drought), commercialization disruptions and speculation.
- Authorities report core inflation ended 2013 at 4.1 percent (lower than 2012’s 4.8 percent) and dispute that core inflation reached 4.9 percent yoy in any month of 2013.
- Monetary operations to withdraw liquidity by end-2013:
  - Direct placement of BCB’s deposit certificates to pension funds.
  - Supplementary reserve requirement to financial intermediaries.
  - Expansion of base of foreign-currency denominated deposits subject to reserve requirements.
  - Raising prudential limits on consumer credit.
- Authorities contend monetary response prevented second-round inflation effects.

### Financial Services Law (FSL) — contentions and provisions
- FSL establishes comprehensive legal framework for regulation of financial services, financial institutions, and financial groups.
- Main features include:
  - Provisions to regulate lending rates and set minimum lending quotas for the productive sector and social housing.
  - Discretion to set floors on deposit rates.
  - Mechanisms to enhance consumer protection and financial access in rural areas.
- Authorities’ claims:
  - FSL aims to democratize access to credit, generate better conditions for savings, protect consumers, strengthen supervision, and promote operations of state banks.
  - Several FSL provisions were already applied prior to the law (e.g., termination of contracts without penalty and prepayment).
  - FSL includes measures such as greater capital requirements, particularly in boom periods.
  - Regulation of interest rates in FSL does not cover all rates, but only those negotiated in loans for social housing and manufacturing.
  - Financial Stability Council (composed of President of the BCB, Executive Director of ASFI, and Minister of Economy and Finance) will harmonize monetary policy objectives with FSL provisions.
- Staff concerns noted by authorities:
  - Staff argues FSL could introduce distortions in resource allocation, negative effects on profitability of financial institutions, exposure to additional risks, and regulatory uncertainty.
  - Authorities disagree with the staff’s characterization and suggest a more rigorous analysis once regulations and immediate implementation effects are available.

### Structural reforms, risk assessment, and poverty reduction
- Authorities attribute recent growth to domestic demand and successful social programs; INE cumulative growth as of Q3 2013 cited as 6.7 percent with 96 percent domestic demand driven.
- Authorities dispute staff emphasis on external vulnerabilities tied to Brazil and Argentina, noting regional integration and WEO projections that limit medium-term risk.
- Emphasis on need to broaden economic base, raise productivity, improve business climate, and invest in infrastructure and human capital.
- YPFB (State oil company) investment plans and outcomes:
  - 2013 investments enabled increase in gas reserves by about 3 trillion cubic feet.
  - Aim to sign 18 new exploration contracts over 10 years, potentially increasing gas reserves up to 18 trillion cubic feet.
- Example of BCB-financed project:
  - Urea and ammonia plant to become operational in 2015, projected production of 432,000 and 756,000 metric tons of urea and ammonia respectively.

*Source: IMF staff report and statements contained in the provided PDF content.*

### 1990. In addition, in 2009 the Constitution approved mandates protection for private property

### _cr1436 - 1990. In addition, in 2009 the Constitution approved mandates protection for private property

### Legal framework and private investment
- The 2009 Constitution "approved mandates protection for private property and fair rules for private investment."
- A draft law to reform the relevant legal framework in accordance with the Constitution’s provisions was elaborated in consensus with private sector representatives and sent to the Legislative Assembly.
- To counter arguments about policy uncertainty, foreign direct investment moved:
  - $ 1,060 million in 2012
  - $ 1,366 million as of September 2013

### Nationalizations and compensation
- In the process of nationalization of strategic companies that were privatized in the past, the Government of Bolivia:
  - "has not expropriated any privately-owned capital but compensated fairly to investors, after a process of assessment and negotiation."
  - Some compensation and negotiation processes "have needed more time than others."

### Reform of extractive-sector legal framework
- The process of reforming the legal framework for extractive sectors emphasizes achieving necessary consensus to ensure sustainability.
- The Law of Public Enterprises to reform and modernize the regulatory framework for these types of companies has recently been approved.

### Social policies and poverty reduction
- Authorities commit to improving living conditions by:
  - Building basic infrastructure (water, sanitation, and roads)
  - Increasing public expenditure on education and health services
- Cash-transfer programs:
  - Conditional cash-transfers to keep elementary school students on track and to entice pregnant women to attend regular pre-natal and pediatric checkups
  - Non-conditional cash transfer for the elderly will continue as a universal retirement pension in addition to benefits for affiliates to the pension system
- These programs aim to enhance domestic demand and reduce poverty.
- Poverty outcome reported:
  - Extreme poverty reduced from 38.2 percent in 2005 to 21.6 percent in 2012
- Authorities intend to further reduce poverty by expanding the social safety net and improving access to basic infrastructure nationwide.

*Source: _cr1436 - 1990. In addition, in 2009 the Constitution approved mandates protection for private property*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1436.pdf_