## _cr15334

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### Monetary policy, inflation, and macro-financial context
- Recent growth and inflation:
  - Average annual real GDP growth of about 5 percent since 2006.
  - Real GDP growth: 5.5 percent in 2014; 4.8 percent through Q2 2015.
  - Economic activity indicators: grew 2.4 percent and 3.9 percent in July and August 2015, respectively.
  - Inflation: 4.1 percent y/y by September 2015.
  - Export prices: gas export prices down 34.2 percent y/y in the 1st half of 2015.
- External and fiscal context:
  - Fiscal deficit of 3.4 percent of GDP in 2014; fiscal balance surplus of 1.8 percent of GDP through August 2015.
  - Non-hydrocarbons primary balance deteriorated by 9.1 percentage points of GDP since 2006 (to -12.3 percent of GDP in 2014).
  - Current account: surplus declined to 0.2 percent of GDP in 2014 and slipped into a deficit of 1.4 percent of GDP in 2015Q1.
  - International reserves: US$14.2 billion (42 percent of GDP) as of September 2015; reserves fallen by nearly US$0.9 billion since end-2014.
  - Real effective appreciation: more than 40 percent since 2010.
- Financial sector indicators:
  - Banks’ overall capital adequacy ratio: 12.7 percent in June 2015; regulatory minimum: 10 percent.
  - Aggregate leverage ratio: around 8 percent.
  - Return-on-equity: 13.8 percent as of June 2015.
  - Non-performing loans (NPLs): around two percent.
  - Dollarization of deposits: about 20 percent as of August 2015.
  - Private sector credit growth: around 15 percent (y/y); elsewhere noted as 13 percent y/y.
  - Credit-to-GDP ratio: above 45 percent of GDP in June 2015, 3½ percentage points more than a year ago.
- Monetary policy framework and effectiveness:
  - OMOs are the main operational instrument; central bank monitors net domestic credit and excess reserves.
  - Central bank intervenes through daily FX auctions at a set U.S. dollar exchange rate within a narrow buy-sell spread; exchange rate virtually unchanged since 2008; de-facto stabilized regime since 2011.
  - Staff estimate: central bank able to control about 30 percent of consumer inflation variability via timely monetary policy reactions.

### Financial Services Law (FSL): provisions, observed effects, and risks
- Key provisions:
  - Aim: promote financial inclusion, preserve financial stability, enhance credit to housing and productive sectors.
  - Productive sectors broadly defined (including agriculture, mining, manufacturing); July 2015 modification added tourism and intellectual property.
  - Supreme Decrees (2013, 2014) set floors on deposit rates and ceilings on lending rates:
    - Social housing lending rates: 5.5–6.5 percent.
    - Corporate and SME loans to productive sectors: 6–7 percent.
    - Microfinance loans: 11.5 percent.
  - Full service banks required to direct at least 60 percent (50 percent for SME banks) of loan portfolios to social housing and productive sectors within five years, guided by intermediate annual targets.
  - Guarantee funds financed from a 6 percent tax on banks’ 2014 profits.
- Observed effects:
  - Minimum credit quotas being met in 2015 by most financial institutions; productive sector and social housing loans grew 26 percent since December 2014.
  - Interest rate caps materially affecting MFIs: average loan sizes rose above trend while number of borrowers declined.
- Scenarios and risks:
  - Non-productive Credit-to-GDP Scenario: if share of non-productive sector credit to GDP remains constant, total credit growth needs to be around 18 percent with productive sector credit growth (including social housing) of 33 percent.
  - Credit Growth Trend Scenario: if non-productive sector credit growth continues at 2014 rates, 60/40 target by 2018 implies annual overall credit growth of about 25 percent and productive sector credit growth of 42 percent.
  - In either scenario, the credit-to-GDP gap is high, indicating a buildup of financial stability risks (concentration, asset quality deterioration, over-indebtedness).
  - Alternative: meet quotas by balance sheet reduction, implying a credit crunch in the non-productive sector.
- Policy guidance related to FSL:
  - Modify key provisions via decrees if material risks build up.
  - Prefer limited state interventions (e.g., partial credit guarantees) over broad interest rate caps or quotas to promote inclusion.
  - Create a real estate price index and develop macroprudential toolkit to monitor systemic risks.

### Outlook, projections, and key risks
- Near-term projections:
  - Growth projected at 4.1 percent in 2015.
  - Fiscal deficit expected to deteriorate to 5.3 percent of GDP in 2015.
  - Current account deficit projected to reach 4.5 percent of GDP in 2015.
- Medium-term staff baseline:
  - Assumes significant public investment and credit growth (average annual growth of around 10 percent y/y).
  - GDP growth forecast about 3.5 percent in 2016 and beyond.
  - Potential growth revised down from 5 percent to 3½ percent (one-third of downgrade attributed to lower private and public investment; remainder reflects reassessment of TFP).
  - International reserves projected to decline but remain adequate: 14 percent of GDP and 6 months of imports in 2020.
  - Financing deficits likely to involve recourse to existing public sector deposits and direct lending from the central bank.
- Selected baseline projections (percent of GDP):
  - Overall balance (2014–2020): -3.4, -5.3, -5.8, -5.5, -5.1, -4.6, -4.3.
  - Non-hydrocarbon primary balance (2014–2020): -12.3, -10.1, -8.7, -8.5, -8.3, -8.0, -7.8.
  - Public debt (2014–2020): 33.0, 38.0, 42.0, 44.1, 45.8, 46.8, 47.6.
- Active scenario selected projections (percent of GDP):
  - Overall balance (2014–2020): -3.4, -5.2, -5.3, -3.1, -1.4, -0.1, 1.3.
  - Non-hydrocarbon primary balance (2014–2020): -12.3, -10.1, -8.2, -6.2, -4.6, -3.5, -2.2.
  - Public debt (2014–2020): 33.0, 38.0, 41.5, 41.3, 39.5, 36.6, 32.5.
- Key downside risks (tilted to the downside):
  - (i) a sharper slowdown in Brazil (Likelihood: High; Expected Impact: M/H (↓)).
  - (ii) further dollar appreciation exacerbating Boliviano overvaluation (Likelihood: High; Expected Impact: L/M (↓)).
  - (iii) U.S. interest rate normalization increasing NPL risk via TRE-indexed loans (Likelihood: High; Expected Impact: L/M (↓)).
  - (iv) FSL-induced credit crunch in nonproductive sectors and/or excessive credit growth in productive sector/social housing (Likelihood: Medium; Expected Impact: L/M (↓)).
  - (v) additional softness in energy prices (Likelihood: Medium; Expected Impact: H (↓)).
  - Compound “perfect storm”: disappearance of buffers if hydrocarbons reserves not renewed and Brazil gas contract not renewed in 2019, combined with fiscal weakening and undermined central bank credibility.
- Upside risks:
  - Quicker recovery in oil prices; commodity projects outperforming staff baseline; efficient infrastructure ramp-up raising potential growth.

### Policy recommendations — fiscal, monetary, financial, and structural
- Overarching imperatives:
  - Improve the non-hydrocarbons primary balance.
  - Allow more exchange rate flexibility.
- Anchoring fiscal sustainability:
  - Staff recommends adjusting the non-hydrocarbons primary balance by an additional 5½ percent of GDP via:
    - Revenue-side measures: introduce a progressive personal income tax (PIT) or reform RC-IVA; strengthen transfer pricing rules; transparent hydrocarbons and mining fiscal regimes. Note: A fully fledged PIT could bring additional revenue of around 1 percent of GDP.
    - Expenditure-side measures: prioritize and improve public investment quality; reduce energy subsidies (could yield over 1 percent of GDP); rationalize wage bill and goods/services expenditures toward pre-2014 levels.
  - Institutional reforms: adopt a fully fledged medium-term fiscal framework with a fiscal target for the non-hydrocarbons primary balance; monitor and publish SOEs’ financial operations and include quasi-fiscal activities in NFPS.
- Exchange rate and monetary policy:
  - Create conditions for greater exchange rate flexibility; de-dollarization progress is a pre-condition.
  - Ensure credible inflation anchoring and appropriate monetary instruments and money market infrastructure for any transition.
  - New central bank law should maintain operational independence and preserve capital base.
  - Discontinue direct lending by the central bank to public corporations (direct lending expanded to US$2.9 billion, equivalent to 8.4 percent of GDP as of mid-2015; FINPRO lending and grants from the central bank total US$1.2 billion).
  - Strip lending activities from central bank balance sheet and consolidate in a separate fund for development with transparent rules and governance.
  - Price stability should be central bank’s first priority.
  - Revise FSL targets that distort interest rates and credit allocation to improve monetary transmission.
- Financial sector stability and inclusion:
  - Modify FSL provisions if material risks build up; rely on market-based signals and targeted instruments (partial credit guarantees).
  - Create a real estate price index to monitor risks due to social housing inclusion in quotas and lack of down payments.
  - Develop a framework to monitor systemic risks and implement a macroprudential toolkit.
  - Strengthen supervision; publish and monitor SOE and quasi-fiscal activity exposures.

### External stability, competitiveness, and de-dollarization
- External assessment highlights:
  - REER appreciated by over 40 percent since 2010; staff EBA-lite CA indicates a real currency overvaluation of 15.6 percent in 2015 and a needed current account adjustment of about 2.6 percent of GDP.
  - CGER-like methodologies provide varied REER overvaluation estimates (examples: EBA-lite IREER model ~25.0 percent overvaluation; other methods show different magnitudes).
  - Current account projected deficit: -4.5 percent of GDP in 2015; expected to fall to near -3 percent of GDP by 2020 under baseline.
  - Reserves: coverage was equivalent to 14 months of imports in 2014; staff projects reserves to decline to around US$6¾ billion by 2020 (reserves falling to 20 percent of broad money at that level).
- De-dollarization:
  - Deposits denominated in U.S. dollars declined from nearly 85 percent at end-2005 to about 20 percent by mid-2015; credit dollarization declined to 6.3 percent.
  - Prudential measures: additional provisions for FX loans, tax on FX transactions for accounts > US$2,000, reserve requirements on FX deposits increased to nearly 52 percent in 2015 (vs 12 percent for Bolivianos).
  - Recommendation: focus on entrenching durable de-dollarization while preparing for greater exchange rate flexibility; preconditions include diversification, institutional credibility, deeper capital markets, and two-way exchange rate flexibility.
- Competitiveness and diversification issues:
  - Export concentration: gas, mining, and soy account for 85 percent of total exports; known hydrocarbon reserves expected to deplete before 2030 at current extraction rates.
  - Structural constraints: Goods Market Efficiency rank 132/140; Labor Market Efficiency rank 129/140; Logistics Performance Index rank 121/160.
  - Real minimum wage: US$57 in 2000 and US$127 in 2015; minimum wage grew nearly 80 percent during 2000–2013.
  - Wage growth outpaced productivity over the last decade, affecting competitiveness.

### Debt sustainability, baseline and alternative scenarios
- Baseline (2015–2035) main assumptions:
  - Annual real GDP growth: 4.1 percent in 2015 and 3.5 percent thereafter through 2020; deceleration to a little above 3 percent by 2035.
  - Inflation (CPI, period average): 4.3 percent in 2015, 4.9 percent in 2016, and 5 percent in 2017–2035.
  - Net FDI: around 3 percent of GDP.
  - Fiscal assumptions aligned with staff medium-term projections through 2020; primary deficit ~2 percent of GDP on average for 2021–35.
  - External financing: about 25 percent of financing needs; CAF expected to remain largest external lender; average concessionality of public external debt ~20 percent.
- Baseline projected debt dynamics:
  - Gross non-financial public debt (PV terms): increase to 46.2 percent of GDP by 2020, peak at 48.4 percent in 2028, decline to 45.5 percent in 2035 (below 56 percent threshold).
  - Total external debt (PV terms): peak at 18.9 percent of GDP in 2021, decline to 13.8 percent by 2035.
  - Staff classification: Bolivia as a medium performer based on World Bank CPIA.
- Stress tests and alternative (shorter resource horizon) scenario:
  - One-time 30 percent nominal depreciation in 2016 worsens PV debt-to-GDP by around 6¾ percentage points on impact.
  - Under alternative scenario assuming current proven gas reserves last only through 2025 and Brazil contract not renewed after 2019, primary deficit averages around 5¾ percent of GDP in 2020–35; PV public debt-to-GDP breaches threshold by 2025 in this scenario.
  - Under a passive scenario of no policy change and public investment-to-GDP at 2014 levels, overall fiscal deficit could widen to about 10 percent of GDP and public debt could reach 70 percent of GDP by 2020.
  - Staff view: low risk of debt distress under baseline but downside hinge on hydrocarbons uncertainty; policy priorities include fiscal consolidation, exploration investment, and concessional external financing management.

### Private investment, structural constraints, and inclusion
- Private investment and diversification:
  - Private investment share of GDP around 8 percent.
  - Raising complexity score to regional average would increase growth by about 0.4 p.p.
- Key impediments to private investment:
  - Regulatory uncertainty: pending decrees, incomplete hydrocarbons and labor laws, arbitration exemptions, some laws leave key elements to decrees.
  - Infrastructure/logistics: less than 10 percent of roads paved vs regional average 22 percent; Logistics Performance Index rank 121/160.
  - Labor costs and regulations: minimum wage nearly 4-fold increase; private sector wages +8 percent average over last 10 years; informality and dated labor legislation hinder formal job creation.
  - Government market interventions and price controls: cover up to ¼ of CPI basket.
- Poverty and inclusiveness:
  - Poverty headcount: 45.0 percent of population (2011).
  - Social transfers (Renta Dignidad, Bono Juancito Pinto, Bono Juana Azurduy) reached just under 30 percent of total population and totaled 1.5 percent of GDP in 2014.
  - During 2007–2013, nearly 70 percent of decline in extreme poverty explained by GDP growth; 30 percent due to distributional changes.
- Policy measures to boost private investment and maintain inclusiveness:
  - Resolve legal and regulatory uncertainty; finalize hydrocarbons and mining fiscal regimes; reduce government incursions into product markets; reduce labor costs and increase flexibility.
  - Maintain targeting and quality of social transfers given tighter fiscal envelope; focus on education and healthcare quality.

### Data, statistics, and institutional transparency
- Data adequacy and gaps:
  - Data provision broadly adequate but shortcomings: delayed INE releases, declining quality of household and employment surveys, need to revise PPI and trade unit values, incomplete coverage of decentralized agencies and special funds in fiscal statistics, need for improved reporting on SOE operations.
  - Progress toward SDDS subscription; SDDS requirements regarding ESS currently met.
  - Recommended improvements: better data on quasi-fiscal activities of SOE subsidiaries, creation of a real estate price index, enhancements in classification for ESS and IIP.
- Public sector balance-sheet findings:
  - Roughly ¼ of total state investment excluded from fiscal accounts (25 subsidiaries of YPFB, ENDE, ENTEL).
  - Inclusion of capital expenditure by relevant subsidiaries worsens balance by 2.1 percent of GDP on average for 2006–14.
  - Adjusted overall balance (2006–2014, percent of GDP): 6.0, 4.0, 7.7, 2.4, 3.2, 2.0, 3.5, 2.8, -1.6.
  - Public sector net worth (in percent of GDP, selected years): 25.6 (2006), 42.4 (2014 end series noted).
- Central bank lending to public enterprises:
  - Direct lending expanded to US$2.9 billion (8.4 percent of GDP) as of mid-2015; FINPRO lending and grants total US$1.2 billion.
  - Staff recommends stripping lending from central bank balance sheet and consolidating in a separate development fund.

*Source: _cr15334 (excerpt from IMF staff report).*

### 1. Monetary Policy and Inflation in Bolivia ________________________________________________________ 6

### 1. Monetary Policy and Inflation in Bolivia

### Context and recent developments
- After a decade of strong macroeconomic performance and poverty reduction, Bolivia faces challenges from the end of the commodity boom.
- Average annual real GDP growth of about 5 percent since 2006.  
- Poverty ratio declined by 16 percentage points since 2006.  
- Bolivia has among the highest commodity dependence in the region; the recent drop in commodity terms of trade is estimated to have resulted in about 7 percentage points of GDP loss for Bolivia.  
- Political context: President Morales sworn in for a third term in January 2015 with a two-thirds majority in both houses of Congress; a national referendum on a constitutional change allowing him to run again is slated for February 2016.

- Recent activity and inflation:
  - Real GDP growth: 5.5 percent in 2014; 4.8 percent through Q2 2015.
  - Economic activity indicators grew 2.4 percent and 3.9 percent in July and August 2015, respectively.
  - Inflation: 4.1 percent y/y by September 2015.
  - Export prices: gas export prices down 34.2 percent y/y in the 1st half of 2015.

- Fiscal and external:
  - Fiscal deficit of 3.4 percent of GDP in 2014.
  - Non-hydrocarbons primary balance deteriorated by 9.1 percentage points of GDP since 2006 (to -12.3 percent of GDP in 2014).
  - Fiscal balance surplus of 1.8 percent of GDP through August 2015.
  - Current account: surplus declined to 0.2 percent of GDP in 2014 and slipped into a deficit of 1.4 percent of GDP in 2015Q1.
  - International reserves: US$14.2 billion (42 percent of GDP) as of September 2015; reserves fallen by nearly US$0.9 billion since end-2014.
  - Real effective appreciation: more than 40 percent since 2010.

- Financial sector indicators and vulnerabilities:
  - Banks’ overall capital adequacy ratio: 12.7 percent in June 2015.
  - Regulatory minimum capital adequacy: 10 percent.
  - Aggregate leverage ratio: around 8 percent.
  - Return-on-equity: 13.8 percent as of June 2015.
  - Non-performing loans (NPLs): around two percent.
  - Dollarization of deposits: about 20 percent as of August 2015.
  - Private sector credit growth: around 15 percent (y/y); elsewhere noted as 13 percent y/y.
  - Credit-to-GDP ratio: above 45 percent of GDP in June 2015, 3½ percentage points more than a year ago.

### Monetary policy framework and inflation dynamics (Box 1)
- Operational instruments and regime:
  - Open market operations (OMOs) are the main operational instrument.
  - Central bank monitors monetary aggregates: net domestic credit of the central bank and excess reserves of the banking sector.
  - Central bank intervenes in foreign exchange market through daily auctions at a set U.S. dollar exchange rate within a narrow buy-sell spread band.
  - Exchange rate at the central bank window virtually unchanged since 2008; de-facto stabilized regime since 2011.

- Effectiveness:
  - Central bank policies have been effective in managing inflation amid ample liquidity from increased public investment.
  - Staff estimates: central bank has been able to control about 30 percent of consumer inflation variability with timely monetary policy reactions affecting money markets and bank lending activities.
  - Empirical model inputs: central bank monetary policy instruments; exchange rate and base money; interbank interest rate and banks lending rate and credit; consumer and core prices; economic activity index; real effective exchange rate.

### The Financial Services Law and its impact (Box 2)
- Objectives and key provisions:
  - Law aims to promote financial inclusion, preserve financial stability, and enhance credit to housing and productive sectors.
  - Productive sectors defined broadly to include non-service sectors such as agriculture, mining, and manufacturing.
  - Supreme Decrees (2013 and 2014) set floors on deposit rates and ceilings on lending rates:
    - Social housing lending rates: 5.5–6.5 percent.
    - Corporate and SME loans to productive sectors: 6–7 percent.
    - Microfinance loans: 11.5 percent.
  - Full service banks required to direct at least 60 percent (50 percent for SME banks) of loan portfolios to social housing and productive sectors within five years, guided by intermediate annual targets.
  - Guarantee funds financed from a 6 percent tax on banks’ 2014 profits to finance down payments for productive sector and social housing loans.

- Observed effects and risks:
  - Minimum credit quotas to productive and social housing sectors being met in 2015 by most financial institutions.
  - Meeting quotas required: sharp acceleration of loans to productive sector and social housing—growth of 26 percent since December 2014—and reduction in credit growth to service and commerce sectors.
  - Interest rate caps materially affecting microfinance institutions: MFIs have increased loan sizes above trend to reduce operational costs while the number of borrowers has declined.
  - Risks identified if 60/40 target achieved by 2018:
    - Rapid credit growth raising concerns about concentration risks, compromised asset quality, and over-indebtedness in the productive sector.
  - Scenario specifics:
    - “Non-productive Credit-to-GDP Scenario”: If share of non-productive sector credit to GDP remains constant, total credit growth needs to be around 18 percent with productive sector credit growth (including social housing) of 33 percent.
    - “Credit Growth Trend Scenario”: If non-productive sector credit growth continues at 2014 rates, the 60/40 target by 2018 implies annual overall credit growth of about 25 percent and productive sector credit growth of 42 percent.
    - In each scenario, the credit to GDP gap is high, indicating a buildup of financial stability risks.
    - Alternative: meet quotas by balance sheet reduction, implying a credit crunch in the non-productive sector.
  - July 2015 modification expanded scope of “productive sector” to include tourism and intellectual property, which reduces credit growth pressure but may shift risks to loan quality and increase supervisory complexity.

### Development planning and fiscal policy stance
- Authorities finalizing a 5-year development plan (Plan Quinquenal) centered on sizable public investments across infrastructure, productive activities, health, education, and technology.
- Commodity-related projects include exploration of gas and oil reserves, petro-chemical plants, thermo- and hydro-electricity plants, and large iron ore and lithium mines.
- Fiscal and external deficits likely to persist under the plan, with a sizable share of external financing expected.

- Policy alignment with Fund advice:
  - Partial alignment: pro-cyclical fiscal stimulus avoided; steps toward a medium-term fiscal framework; inflation contained; significant increases in public infrastructure spending.
  - Less traction: improving non-hydrocarbons fiscal balance, discontinuing central bank lending to public enterprises, and gradually allowing greater exchange rate flexibility.

### Outlook and risks
- 2015 projections and near-term outlook:
  - Growth projected at 4.1 percent in 2015.
  - Fiscal deficit expected to deteriorate to 5.3 percent of GDP in 2015.
  - Current account deficit projected to reach 4.5 percent of GDP in 2015.
  - Full impact of oil price decline on gas exports and hydrocarbon revenues expected to be felt in the second half of 2015 due to lags in export contract price adjustments.

- Medium-term baseline (staff):
  - Assumes significant public investment and credit growth (average annual growth of around 10 percent y/y).
  - GDP growth forecast to remain robust at about 3.5 percent in 2016 and beyond.
  - Potential growth revised down from 5 percent to 3½ percent.
    - One-third of the downgrade attributed to lower private and public investment; remainder reflects a reassessment of TFP growth.
  - International reserves projected to decline but remain adequate: 14 percent of GDP and 6 months of imports in 2020.
  - Financing deficits likely to involve recourse to existing public sector deposits and direct lending from the central bank.

- Key risks:
  - Continued twin deficits (fiscal and current account) and reserve drawdowns as commodity prices normalize.
  - Financial stability risks from rapid credit growth driven by the Financial Services Law targets (concentration, asset quality deterioration, over-indebtedness).
  - Competitiveness deterioration from a stronger-than-warranted Boliviano in 2015 (real effective appreciation >40 percent since 2010) and sizable wage increases outpacing productivity.
  - Potential increase in vulnerabilities as growth slows and lower oil prices persist.

*Source: IMF staff report excerpt: 1. Monetary Policy and Inflation in Bolivia.*

### 11.      In line with the global context, risks for Bolivia are tilted to the downside. These

### _cr15334 - 11.      In line with the global context, risks for Bolivia are tilted to the downside. These

### Key downside and upside risks
- Downside risks identified:
  - (i) a sharper slowdown in Brazil.
  - (ii) further dollar appreciation, which would exacerbate the overvaluation of the Boliviano given the de-facto stabilized exchange rate against the dollar.
  - (iii) U.S. interest rate normalization, which may lead to rising NPLs given many bank loans are indexed to a variable reference interest rate (TRE).
  - (iv) the combination of credit quotas and interest rate caps under the Financial Services Law leading to a credit crunch in the nonproductive sectors and/or excessive credit growth in the productive sector and for social housing.
  - (v) additional softness in energy prices over the medium-term.
  - A compounded “perfect storm” risk: Bolivia’s large buffers could disappear steadily if a failure to discover and explore significant new hydrocarbons reserves and/or renew the Brazil gas contract in 2019 is combined with a weakening of the fiscal position and an undermining of central bank credibility.
- Upside risks:
  - Quicker and larger than expected recovery in international oil prices improving fiscal and external accounts and attracting greater foreign investment to discover new hydrocarbons reserves if combined with a more attractive investment regime.
  - Commodity-related projects outperforming the staff baseline.
  - Efficient ramp-up in infrastructure spending could significantly raise potential growth.

### Risk Assessment Matrix — selected entries (likelihood, expected impact, policy response)
- External risks:
  - A sharper slowdown in Brazil
    - Likelihood: High
    - Expected Impact: M/H (↓)
    - Rationale: Brazil accounts for about ⅓ of Bolivia's exports. While a growth slowdown may not reduce short-term demand for natural gas, it could still impact activity via other trade and non-trade channels.
    - Policy responses: Accommodative macro policies, including fiscal stimulus within the available policy space, accommodative monetary policy, and exchange rate flexibility.
  - Persistent dollar strength
    - Likelihood: High
    - Expected Impact: L/M (↓)
    - Rationale: Further dollar appreciation would exacerbate the overvaluation of the boliviano, impeding diversification away from commodity sectors.
    - Policy responses: Exchange rate flexibility and improving business climate.
  - U.S. interest rate normalization
    - Likelihood: High
    - Expected Impact: L/M (↓)
    - Rationale: Many bank loans are indexed to a variable reference interest rate (TRE); a sharp increase could lead to a rise in NPLs and negatively impact future international placements of sovereign bonds.
    - Policy responses: Vigilant financial sector supervision and regulation; enhancing policy credibility and improving the business climate.
  - Persistently low energy prices
    - Likelihood: Medium
    - Expected Impact: H (↓)
    - Rationale: Prices lower than current baseline would weaken fiscal and external accounts and reduce incentives for foreign energy investment.
    - Policy responses: Exchange rate flexibility, gradual fiscal adjustments, use of large international reserves as buffer, industrialization of natural gas, and broader diversification beyond natural resources.
- Country-specific risks:
  - Financial Services Law
    - Likelihood: Medium
    - Expected Impact: L/M (↓)
    - Rationale: Credit quotas and interest rate caps could cause credit crunches or excessive credit growth leading to NPLs and bank capital impairment.
    - Policy responses: Modify key provisions via decrees if material risks build up; rely primarily on market-based signals (e.g., partial credit guarantees) to improve financial inclusion.
  - Failure to discover significant new hydrocarbons reserves and/or to renew the Brazil gas contract
    - Likelihood: Low/Medium
    - Expected Impact: M/H (↓)
    - Rationale: Doubts on success of exploration; renewal negotiations depend on Brazil’s energy supply situation and Bolivia’s guarantees of production capacity beyond the mid-2020s.
    - Policy responses: Finalize legal reforms to the hydrocarbon sector, clarify investment incentives, and press ahead with negotiations with Brazil before current long-term contract expires in 2019.
  - Delay in policy adjustments
    - Likelihood: Medium
    - Expected Impact: M/H (↓)
    - Rationale: Delays could exhaust external and debt buffers.
    - Policy responses: Improve non-hydrocarbon fiscal balances to maintain fiscal and debt sustainability.

### Fiscal baseline, active scenario projections, and risks to sustainability
- Baseline fiscal projection (selected figures, in percent of GDP):
  - Overall balance (2014–2020): -3.4, -5.3, -5.8, -5.5, -5.1, -4.6, -4.3
  - Non-hydrocarbon primary balance (2014–2020): -12.3, -10.1, -8.7, -8.5, -8.3, -8.0, -7.8
  - Public debt (2014–2020): 33.0, 38.0, 42.0, 44.1, 45.8, 46.8, 47.6
- Active scenario (selected figures, in percent of GDP):
  - Overall balance (2014–2020): -3.4, -5.2, -5.3, -3.1, -1.4, -0.1, 1.3
  - Non-hydrocarbon primary balance (2014–2020): -12.3, -10.1, -8.2, -6.2, -4.6, -3.5, -2.2
  - Public debt (2014–2020): 33.0, 38.0, 41.5, 41.3, 39.5, 36.6, 32.5
- Staff warnings and scenarios:
  - Under a passive scenario of no policy change and assuming public investment to GDP remains at 2014 levels, the overall fiscal deficit could widen to about 10 percent of GDP and public debt could reach 70 percent of GDP by 2020.
  - Under the baseline, Bolivia shows low risk of debt distress for total and external public debt; however the baseline projects a relatively high level of debt in the medium term for a low income country.
  - Staff’s active scenario targets a reduction of the non-hydrocarbons primary deficit to 2.2 percent of GDP by 2020 and public debt to 32½ percent of GDP.

### Policy recommendations — overview
- Two overarching imperatives:
  - Improve the non-hydrocarbons primary balance.
  - Allow more exchange rate flexibility.
- Given large buffers, the authorities can take a measured approach. Many prior Article IV recommendations remain valid.

### A. Anchoring fiscal sustainability and strengthening the fiscal framework
- Risks if adjustment incomplete:
  - An incomplete adjustment to the new commodity price normal would raise concerns about debt sustainability.
- Key facts and targets:
  - The non-hydrocarbons primary deficit widened from 3.2 percent of GDP in 2006 to 12.3 percent of GDP in 2014.
  - Baseline projects non-hydrocarbons primary deficit shrinks by 4½ percent of GDP to 7.8 percent of GDP in 2020, with public debt stabilizing at around 50 percent of GDP under certain behavioral assumptions (capital budget execution rate ~80 percent in 2015; public investment stabilizing at around 9¼ percent of GDP by 2020).
- Staff recommended measures to adjust non-hydrocarbons primary balance by an additional 5½ percent of GDP:
  - Revenue-side:
    - Introduce a progressive personal income tax (PIT) or reform RC-IVA (the complementary VAT regime).
    - Establish rules to deal with transfer pricing practices and prepare tax administration to control them.
    - Note: A fully fledged PIT could bring additional revenue of around 1 percent of GDP.
    - Ensure transparent and incentive-compatible hydrocarbons and mining fiscal regimes to encourage exploration and long-term commodity revenues.
  - Expenditure-side:
    - Public investment has scope to decline further while remaining above 2006–12 average; prioritize based on economy-wide returns with focus on quality.
    - Reducing energy subsidies could yield over 1 percent of GDP.
    - Scope to reduce the wage bill and rationalize goods and services expenditures to pre-2014 levels.
- Institutional reforms:
  - Introduce a fully fledged medium-term fiscal framework: multi-year budget, fiscal target for the non-hydrocarbons primary balance consistent with long-term debt sustainability, and strengthen Macro-Fiscal unit coordination with Central Bank.
  - Monitor and publish SOEs’ financial operations and balance sheets; include quasi-fiscal activities currently outside the NFPS; ensure SOEs “generate surpluses” that more than offset capital depreciation.

### B. Improving exchange rate and monetary policies
- Exchange rate flexibility:
  - Creating conditions for greater exchange rate flexibility is critical to facilitate adjustment to terms of trade shocks and to address assessed overvaluation of the Boliviano.
  - De-dollarization progress is an important pre-condition; migration to a regime that allows two-way flexibility helps reduce incentives for dollarization.
  - Any transition needs credible inflation anchoring and appropriate monetary instruments and money market infrastructure.
- Central bank and monetary framework:
  - New central bank law under preparation should maintain operational independence and preserve capital base.
  - Discontinue direct lending by the central bank to public corporations or trust funds for development objectives.
    - Direct lending expanded to US$2.9 billion (equivalent to 8.4 percent of GDP) as of mid-2015, about 60 percent directed to YPFB.
    - FINPRO lending and grants from the central bank total US$1.2 billion.
  - Staff recommends stripping lending activities from central bank balance sheet and consolidating them in a separate fund for development with transparent investment rules, strong governance, and a clear development mandate.
  - Price stability should be clearly stated as the central bank’s first priority.
  - Revise targets in the Financial Services Law that distort interest rates and credit allocation to improve monetary policy transmission.

### C. Ensuring financial sector stability and enhancing financial inclusion
- Progress and remaining risks:
  - Financial Services Law advances: deposit insurance scheme, credit registry, implementation of some Basel II and III principles, creation of a Financial Stability Council (met first in August 2015), and expected national AML/CFT strategy in late 2015.
  - Risks: interest rate caps and credit quotas could produce excessive credit growth in productive sectors (including social housing) or a credit crunch in nonproductive sectors; may harm financial inclusion.
- Empirical findings and stress test results:
  - Staff VAR analysis: a 1 p.p. increase in real credit growth raises GDP growth by 0.2 p.p. the following year.
  - Scenario analysis: credit growth rates potentially in excess of 30 percent for the productive sectors to meet 5-year credit quotas.
  - Stress tests: a doubling of NPLs is manageable for most banks, but a spike to peak levels reached over the last decade would cause many banks to be significantly below regulatory capital thresholds.
  - The average loan size of microfinance institutions has risen above trend while the number of borrowers has declined, indicating adverse effects of interest rate caps on financial inclusion and possible migration to unregulated lenders.
- Policy recommendations:
  - Modify key provisions of the regulations if material risks build up; decrees set interest rate caps and credit quotas and can be modified, but changes must be clear and transparent to avoid regulatory uncertainty.
  - Create a real estate price index to monitor risks in the real estate sector, important due to inclusion of social housing in credit quotas and lack of down payments.
  - Promote financial inclusion via limited, carefully-designed state interventions such as partial credit guarantees rather than broad interest rate caps or quotas.
  - Develop a framework to monitor systemic risks and a macroprudential toolkit.

### D. Increasing potential growth and inclusiveness
- Policy emphasis:
  - Efficient use of infrastructure spending to raise potential growth.
  - Finalize hydrocarbon sector legal reforms and clarify investment incentives to encourage exploration and renew contracts (notably the Brazil gas contract negotiations ahead of 2019 expiry).
  - Maintain measured fiscal consolidation consistent with development needs and buffers.

*Source: _cr15334 (excerpt from IMF staff report).*

### 24.      Increasing private investment is central to medium-

### 24. Increasing private investment is central to medium-term prospects

### Private investment and diversification
- The share of private investment to GDP is currently around 8 percent.
- Bolivia ranks among the lowest in Latin America and the Caribbean in economic diversification and complexity.
- Raising Bolivia’s complexity score to the average in Latin America and the Caribbean would increase growth by about 0.4 p.p.

### Impediments to private investment
- Regulatory uncertainty:
  - Important progress made adapting the legal framework to the new Constitution (Investment Promotion Law in April 2014, Mining Law in May 2014, Arbitration Law in June 2015).
  - Some laws do not fully resolve regulatory uncertainty: Arbitration Law exempts many key sectors; the Bolivian state’s right to accept or reject external tribunal verdicts could weaken the law’s purpose.
  - Important aspects of the legal framework are left to decrees, many pending or modifiable.
  - A few key laws are still pending, such as the hydrocarbons and labor laws, a new tax code, and sectoral incentive laws.
- Other impediments:
  - High real wage growth and other mandated bonuses have led to real income growth exceeding productivity growth.
  - Labor market inflexibility and pervasive informality undermine productivity and SME financial access.
  - Government incursion into product markets through price controls and public enterprises crowds out private investment, as public enterprises face less competitive pressure and lower efficiency requirements.

### Inequality and poverty reduction
- Bolivia registered some of the largest declines in inequality and poverty in the region over the last decade, but further progress will be challenged by the end of the commodity boom.
- Social transfers to the elderly, pregnant women and school kids benefit about 30 percent of the population and have helped improve primary schooling, maternal health, and reduce extreme poverty especially in rural areas.
- Together, Renta Dignidad, Bono Juancito Pinto, and Bono Juana Azurduy benefited just under 30 percent of the total population and totaled 1.5 percent of GDP in 2014.
- During 2007–2013, nearly 70 percent of the decline in extreme poverty is explained by GDP growth, while the remaining 30 percent is associated with changes in the distribution of income.
- The decline in inequality was mainly driven by a declining skills premium: real labor income increased rapidly for low skilled workers while it declined for high skilled workers.

### Authorities’ views
- Growth and fiscal stance:
  - Authorities expect growth to be around 5 percent in 2015 and to average about 5¾ percent during 2015–20.
  - They forecast a fiscal deficit of about 4 percent of GDP in 2015, and indicated the deficit target would be lower for 2016.
  - Authorities did not see a need to cut public investment, expecting revenues—both non-hydrocarbons and hydrocarbons related—to pick up.
- Exchange rate and central bank:
  - Authorities disagreed with the need for greater exchange rate flexibility or operational independence of the central bank.
  - They argued that greater exchange rate flexibility would not help competitiveness given supply-determined export volumes in hydrocarbons and mining and limited response of nontraditional exports to exchange rate dynamics.
  - They view central bank independence as unnecessary given coordination with the Ministry of Finance and political consensus on low inflation; the central bank should play a development role, including direct lending to public corporations.
- Financial regulations:
  - Authorities agreed regulations can be adapted but disagreed about adverse impacts of credit quotas and interest rate caps.
  - They argued banks will achieve the 60 percent share of productive loans to total loans without excessive credit growth; credit quotas have been effective in redirecting flows toward productive loans and NPLs remained the lowest in the region.
  - Authorities noted declining microfinance borrowers reflected reclassification, not reduced financial inclusion.
  - They concurred on constructing a house price index and modifying quotas and caps if systemic risks build up.
- Labor market and investment:
  - Authorities agreed on the need to increase private investment but disputed staff’s analysis of impediments, emphasizing legal alignment progress and investment projects in the pipeline.
  - They rejected the need for labor market reforms, arguing labor policies are tools for redistribution and have reduced poverty and inequality.
  - Authorities are convinced of the public sector’s catalytic role in increasing productive capacity and facilitating market functioning through direct intervention.

### Staff appraisal and policy recommendations
- Outlook and challenges:
  - The global outlook has changed; Bolivia must adjust to the new commodity price normal while preserving economic and social gains.
  - Growth for 2015 is projected by staff at 4.1 percent, supported by public investment and strong credit growth; the outlook for 2016 and beyond is increasingly challenging as lower oil prices are expected to widen fiscal and external deficits absent adjustment.
  - The short horizon of current proven natural gas reserves increases urgency to improve competitiveness and develop non-commodity sectors.
- Key policy imperatives:
  - Improve the non-hydrocarbons primary balance.
  - Allow greater exchange rate flexibility to facilitate adjustment to the terms of trade shock and future external shocks.
  - Adopt a credible medium-term fiscal framework that includes SOE activities more systematically.
  - Strengthen the monetary policy framework to uphold the central bank’s operational independence and credibility; transitions to greater exchange rate flexibility should ensure inflation expectations remain anchored and preserve de-dollarization.
  - Modify key financial regulations—the credit quotas and interest rate caps—via decrees if material risks build up.
- Measures to increase private investment:
  - Resolve remaining legal and regulatory uncertainty.
  - Ensure transparent and incentive-compatible hydrocarbons and mining fiscal regimes.
  - Reduce government incursions into product markets.
  - Reduce labor costs and increase labor market flexibility.
- Maintaining inclusiveness:
  - Given a tighter fiscal envelope, ensure social transfers are well designed and targeted and focus on the quality of education and healthcare.

### Data and statistics
- Data provision is broadly adequate for surveillance but has shortcomings.
- Progress made toward full subscription of the Special Data Dissemination Standard (SDDS).
- Further steps recommended: improve data on quasi-fiscal activities of subsidiaries of SOEs outside the fiscal accounts, and create a real estate price index.

*Source: _cr15334 - 24. Increasing private investment is central to medium- (IMF staff report excerpt).*

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

### _cr15334 - 36.      It is proposed that the next Article IV consultation with Bolivia be held on the standard

### Real and external sector developments
- Growth remained robust, albeit with some deceleration in early 2015.
- The contribution of exports has turned negative.
- The output gap has started to shrink.
- The current account surplus narrowed in 2014 as natural gas export prices started to drop.
- Imports continued to grow, driven mainly by capital goods.
- Key statistics and indicators (as presented):
  - Index of Economic Activity: y/y growth and 12 month moving average shown through Jan-15; Aug-15 Index level context provided.
  - Output Gap: ranges shown between -2 and 2 percent in selected quarters (e.g., 2015Q2).
  - Contributions to GDP Growth (2015Q2): imports, exports, investment, private consumption, gov. consumption displayed graphically.

### Monetary developments
- Monetary policy eased in 2015, including through the reduction of the stock of the central bank bills.
- Inflationary pressures have subsided.
- Central bank credit to state-owned enterprises continued to expand.
- The foreign exchange market remains stable with low central bank intervention and de-dollarization has continued.
- Key rates and aggregates (end- and sample-periods shown):
  - Policy/market rates: 90-day Central Bank paper rate, interbank rate; charted through Jun-15.
  - Inflation rate (y/y) and deposit/lending rates through Sep-15.
  - Bank reserves and open market operations (In millions of US dollars) through Sep-15.
  - Central Bank lending to the public sector (In millions of Bolivianos) through Jun-15.
  - Central Bank intervention in FX market (In millions of US dollars) through Jun-15.
  - Monetary aggregates dollarization (M1, M2, M3 dollarization) through Jun-15.

### Fiscal developments
- The overall fiscal deficit is projected to widen in 2015, after recording the first deficit in 2014 since 2005.
- The fiscal impulse is projected to be negative, reflecting improvements in the non-hydrocarbon primary balance.
- Hydrocarbons revenues are projected to shrink as oil prices decline, with adjustments in capital expenditures partially offsetting the impact.
- Public debt edged up in 2014, reflecting the first overall deficit since 2005.
- The share of foreign currency debt continued to decline.
- Selected fiscal figures and projections:
  - Fiscal impulse definition: change in the cyclically-adjusted non-hydrocarbons primary balance (footnote 1/).
  - Public Sector Debt (gross/net) shown as percent of GDP across 2006–2015 (proj.).
  - Revenue composition and expenditure composition charts shown for 2006–2015 (proj.).
  - Fiscal balances: Nonhydrocarbon primary balance and overall balance trends, with 2015 projections.

### Financial sector developments
- Capital adequacy remains above regulatory requirements, and NPLs are low.
  - Capital adequacy ratio chart: values shown around 11.0–14.0 percent across 2007–Aug-15.
  - Nonperforming loans around 1.5–3.5 percent in sample years.
- Bank profitability is on a declining trend (ROA, ROE charts through Aug-15).
- The introduction of the new Financial Services Law has led to reorganization of the financial sector; growth in private sector credit has decelerated.
- The microcredit lending rate is the most affected by the new law; a cap for microcredit is illustrated in the bank lending rate chart (Aug-15).
- The share of credit to the productive sector is mandated to expand to 60 percent of total credit in five years.
- Credit and deposit dynamics:
  - Deposits of the financial system and credit to the private sector: y/y growth series through Aug-15.
  - Credit by destination sector (Jun-15): Household, Non-productive, Productive shares shown with target shift toward productive.

### Past Fund policy recommendations and implementation (Table 2)
- Fiscal policy framework
  - Avoid pro-cyclical fiscal stimulus and save budgetary resources — Partially implemented. The overall fiscal balance swung into deficit for the first time in nine years in 2014.
  - Improve the non-hydrocarbons balance — Not implemented.
  - Adopt a medium-term fiscal framework — In progress. Authorities drafting a five-year development plan and preparing medium-term fiscal projections and outlooks for key public enterprises.
- Maintaining low and stable inflation
  - Tighten monetary policy further if second-round inflationary effects prove persistent — Implemented. Inflationary pressures were contained in mid-2014 through monetary tightening and agreements with food producers.
  - Discontinue central bank lending to public enterprises — Not implemented. Central bank lending to public corporations has continued.
  - Gradually allow greater exchange rate flexibility — Not implemented. Stable exchange rate vis-à-vis U.S. dollar since November 2011.
- Safeguard financial stability
  - Continue strengthening supervision — Partially implemented. Expanded credit registry coverage; depositor protection fund created; strengthened regulatory requirements (market risks to capital, primary capital requirement increase from 5 percent to 7 percent of risk-weighted assets and contingencies); guidance on operational and interest risks issued. Financial Stability Council met for the first time in August 2015.
  - Employ less distortionary instruments to promote financial inclusion — Not implemented. Supreme decrees regulated interest rates and set credit quotas for lending to the productive sector and social housing; five-year compliance horizon with intermediate annual targets.
- Sustaining inclusive growth
  - Improve the business climate — Some progress. Law on Investment Promotion enacted April 2014; Arbitration law in June 2015. Some laws do not fully resolve regulatory uncertainty.
  - Enhance investment in infrastructure and human capital — Partially implemented. Significant increases in public infrastructure spending.

### Key social and demographic indicators (Table 3 header)
- GDP per capita (U.S. dollars, 2014): 2,955
- Poverty headcount ratio (percent of population, 2011): 45.0
- Population (millions, 2014): 11.2
- Gini index (2012): 46.6
- Life expectancy at birth (years, 2011): 67
- Adult literacy rate (percent, 2010): 91.2
- Infant mortality rate (per thousand, 2010): 54.2
- Net primary education enrollment rate (2010): 88.0

### Selected economic and financial indicators (Table 3 highlights)
- Real GDP (annual percent change): 3.4 (2009), 4.1 (2010), 5.2 (2011), 5.1 (2012), 6.8 (2013), 5.5 (2014), 4.1 (2015 proj.), 3.5 (2016 proj.), 3.5 (2017 proj.), 3.5 (2018 proj.), 3.5 (2019 proj.), 3.5 (2020 proj.)
- CPI inflation (end-of-period): 0.3 (2009), 7.2 (2010), 6.9 (2011), 4.5 (2012), 6.5 (2013), 5.2 (2014), 4.2 (2015 proj.), 5.0 (2016–2020 proj. each year)
- Total investment (percent of GDP): 17.0 (2009), 17.0 (2010), 19.8 (2011), 17.7 (2012), 19.0 (2013), 21.0 (2014), 20.3 (2015 proj.), 18.3 (2016 proj.), 17.3 (2017 proj.), 16.7 (2018 proj.), 16.2 (2019 proj.), 15.6 (2020 proj.)
- Gross domestic savings: 19.8 (2009), 23.9 (2010), 25.5 (2011), 27.1 (2012), 26.0 (2013), 22.4 (2014), 15.0 (2015 proj.), 12.8 (2016 proj.), 12.9 (2017 proj.), 13.0 (2018 proj.), 13.0 (2019 proj.), 12.9 (2020 proj.)
- Hydrocarbon related revenue (percent of total revenues): 11.3 (2009), 10.2 (2010), 11.4 (2011), 13.0 (2012), 13.5 (2013), 12.7 (2014), 7.7 (2015 proj.), 5.5 (2016 proj.), 5.8 (2017 proj.), 5.9 (2018 proj.), 6.0 (2019 proj.), 6.1 (2020 proj.)
- Total gross NFPS debt (percent of GDP): 40.0 (2009), 38.5 (2010), 34.7 (2011), 33.3 (2012), 32.5 (2013), 33.0 (2014), 38.0 (2015 proj.), 42.0 (2016 proj.), 44.1 (2017 proj.), 45.8 (2018 proj.), 46.8 (2019 proj.), 47.6 (2020 proj.)
- Current account (percent of GDP): 4.3 (2009), 3.9 (2010), 0.3 (2011), 7.2 (2012), 3.5 (2013), 0.2 (2014), -4.5 (2015 proj.), -5.0 (2016 proj.), -4.2 (2017 proj.), -3.6 (2018 proj.), -3.3 (2019 proj.), -2.9 (2020 proj.)
- Net Central Bank foreign reserves (millions of U.S. dollars): 8,580 (2009), 9,730 (2010), 12,019 (2011), 13,927 (2012), 14,430 (2013), 15,123 (2014), 14,143 (2015 proj.), 12,878 (2016 proj.), 11,601 (2017 proj.), 10,455 (2018 proj.), 9,302 (2019 proj.), 7,946 (2020 proj.)
- Exchange rate, Bolivianos/U.S. dollar (end-of-period): 7.0 (2009), 6.9 (2010–2014 as listed)

### Combined public sector operations (Table 4 highlights)
- Revenue (percent of GDP): 35.8 (2009), 33.2 (2010), 36.2 (2011), 37.8 (2012), 39.1 (2013), 39.9 (2014), 35.1 (2015 proj.), 32.6 (2016 proj.), 32.7 (2017 proj.), 32.9 (2018 proj.), 33.2 (2019 proj.), 33.1 (2020 proj.)
- Expenditure (percent of GDP): 35.8 (2009), 31.5 (2010), 35.4 (2011), 36.0 (2012), 38.4 (2013), 43.3 (2014), 40.4 (2015 proj.), 38.4 (2016 proj.), 38.1 (2017 proj.), 37.9 (2018 proj.), 37.8 (2019 proj.), 37.4 (2020 proj.)
- Net lending/borrowing (overall balance, percent of GDP): 0.0 (2009), 1.7 (2010), 0.8 (2011), 1.8 (2012), 0.7 (2013), -3.4 (2014), -5.3 (2015 proj.), -5.8 (2016 proj.), -5.5 (2017 proj.), -5.1 (2018 proj.), -4.6 (2019 proj.), -4.3 (2020 proj.)
- Primary balance (percent of GDP): 1.7 (2009), 3.1 (2010), 2.1 (2011), 2.8 (2012), 1.6 (2013), -2.4 (2014), -6 (2015 proj. displayed as -6 in chart area), and memorandum non-hydrocarbon primary balance values reported.

### Balance of payments summary (Table 5 highlights)
- Current account (in millions of U.S. dollars): 746 (2009), 766 (2010), 771 (2011), 1,970 (2012), 1,095 (2013), 62 (2014), -1,517 (2015 proj.), -1,772 (2016 proj.), -1,587 (2017 proj.), -1,474 (2018 proj.), -1,477 (2019 proj.), -1,419 (2020 proj.)
- Trade balance (in millions of U.S. dollars): 415 (2009), 812 (2010), 431 (2011), 2,676 (2012), 2,360 (2013), 1,783 (2014), -762 (2015 proj.), -1,259 (2016 proj.), -812 (2017 proj.), -581 (2018 proj.), -453 (2019 proj.), -251 (2020 proj.)
- Exports, f.o.b. (millions of U.S. dollars): 4,960 (2009), 6,402 (2010), 8,358 (2011), 11,254 (2012), 11,698 (2013), 12,301 (2014), 9,135 (2015 proj.), 8,453 (2016 proj.), 9,035 (2017 proj.), 9,627 (2018 proj.), 10,197 (2019 proj.), 10,689 (2020 proj.)
- Imports, c.i.f. (millions of U.S. dollars): -4,545 (2009), -5,590 (2010), -7,927 (2011), -8,578 (2012), -9,338 (2013), -10,518 (2014), -9,897 (2015 proj.), -9,712 (2016 proj.), -9,847 (2017 proj.), -10,209 (2018 proj.), -10,650 (2019 proj.), -10,941 (2020 proj.)
- Net official reserves (end-of-period, millions of U.S. dollars): see Net Central Bank foreign reserves under Selected indicators.

### Central Bank monetary survey (Table 6 highlights)
- Net international reserves (flows, millions of U.S. dollars): 858 (2009), 1,150 (2010), 2,289 (2011), 1,908 (2012), 503 (2013), 693 (2014), -980 (2015 proj.), -1,265 (2016 proj.)
- Net international reserves (stocks, millions of U.S. dollars): 8,580 (2009), 9,730 (2010), 12,019 (2011), 13,927 (2012), 14,430 (2013), 15,123 (2014), 14,143 (2015 proj.), 12,878 (2016 proj.)
- Base money (stocks in millions of Bolivianos): 29,546 (2009), 32,577 (2010), 41,767 (2011), 48,669 (2012), 53,487 (2013), 61,256 (2014), 61,930 (2015 proj.), 63,377 (2016 proj.)

### Commercial banks and non-bank depository institutions (Table 7 highlights)
- Credit to the private sector (stock, millions of Bolivianos): 41,409 (2009), 49,668 (2010), 61,090 (2011), 72,922 (2012), 86,706 (2013), 99,744 (2014), 112,717 (2015 proj.), 126,105 (2016 proj.)
- Deposits (stock, millions of Bolivianos): 57,371 (2009), 61,642 (2010), 74,206 (2011), 89,697 (2012), 105,073 (2013), 123,317 (2014), 141,689 (2015 proj.), 158,762 (2016 proj.)
- U.S. dollar and dollar-indexed deposits (percent of total deposits): 52.6 (2009), 43.8 (2010), 34.5 (2011), 26.3 (2012), 21.0 (2013), 17.6 (2014), 16.4 (2015 proj.), 15.2 (2016 proj.)

### Financial system survey and vulnerability indicators (Tables 8–9 highlights)
- Broad money (stocks, millions of Bolivianos): 74,985 (2009), 84,382 (2010), 99,315 (2011), 119,367 (2012), 138,661 (2013), 160,279 (2014), 178,961 (2015 proj.), 195,925 (2016 proj.)
- Reserve adequacy (Table 9):
  - Net international reserves: 8,580 (2009), 9,730 (2010), 12,019 (2011), 13,927 (2012), 14,430 (2013), 15,123 (2014)
  - NIR coverage, in percent of dollar deposits: 198.2 (2009), 250.0 (2010), 322.2 (2011), 404.8 (2012), 448.4 (2013), 478.7 (2014)
  - NIR coverage, in percent of broad money: 79.8 (2009), 80.0 (2010), 83.0 (2011), 80.0 (2012), 71.4 (2013), 64.7 (2014)
- Debt ratios:
  - Total gross NFPS debt (percent of GDP): 40.0 (2009), 38.5 (2010), 34.7 (2011), 33.3 (2012), 32.5 (2013), 33.0 (2014)
  - Domestic vs external composition reported.
- Commodity dependency:
  - Hydrocarbon revenue (percent of total revenues): 31.6 (2009), 30.7 (2010), 31.6 (2011), 35.4 (2012), 34.2 (2013), 33.8 (2014)
  - Gas exports (percent of total exports): 39.7 (2009), 43.7 (2010), 46.5 (2011), 48.7 (2012), 52.3 (2013), 48.9 (2014)
- Banking sector indicators (latest available): NPLs 3.5 (2009) down to 1.5 (2014); Capital adequacy ratio 13.3 (2009), 12.3 (2014); Profits after tax (percent of equity) 20.6 (2009), 16.9 (2014).

### Millennium Development Goals (Table 10 highlights)
- Population below US$1 a day (percent): 41.2 (1990), 37.7 (2006), 37.7 (2007), 29.9 (2009), 26.1 (2010), 17.8 (2013), 24.1 (2014) as tabulated in the MDG table.
- Net primary enrollment ratio and other MDG indicators presented across multiple years (2006–2015 series where available).

*Source: IMF staff presentation and tables as provided in the content unit.*

### Annex I. External Stability Assessment

### Annex I. External Stability Assessment

### Overview
- Bolivia’s real exchange rate has appreciated by over 40 percent since 2010 and is assessed to be stronger than warranted by medium-term fundamentals and desirable policies as of 2015.
- The sharp decline in oil prices since late 2014, the dollar’s appreciation, and neighboring currencies’ depreciation have weakened Bolivia’s external position.
- Reserves remain more than adequate by any metric but are expected to start declining.

### Current Account
- The current account is projected to post a 4.5 percent deficit in 2015 after dropping to balance in 2014 following a decade of surpluses.
- Drivers of the 2015 deficit:
  - Drop in the value of natural gas exports to Brazil and Argentina.
  - Imports remain significantly above levels seen earlier in the 2000s as the economic expansion continues.
  - Increased income outflows from foreign investment in Bolivia and weakened income from foreign reserves due to low interest rates.
  - Increased service imports, including those related to investment projects, over the last five years.
- Assessment vs. fundamentals:
  - EBA-lite methodology indicates a need for current account adjustment of about 2.6 percent of GDP (when accounting for large infrastructure investment needs for a low-income country).
  - This translates into a real currency overvaluation of 15.6 percent.
- Outlook and risks:
  - Current account deficit expected to fall to near 3 percent of GDP by 2020, based on a modest recovery in oil prices, a small increase in gas export volumes to Brazil and Argentina, and modest adjustment of domestic demand and government spending.
  - Downside risks: further declines in export commodity prices and hydrocarbons prospects (gas, mining, and soybeans account for 85 percent of total exports).
  - Known hydrocarbon reserves are expected to deplete before 2030 at current extraction rates; investment in exploration is critical.

### Exchange Rate, Relative Prices, and Competitiveness
- Real effective exchange rate (CPI-based REER):
  - Appreciated by more than 40 percent since 2010, strengthened further since the 2nd half of 2014 due to depreciation of the Brazilian real and Argentine peso (21 percent overall; 43 percent against the real; 13 percent against the peso during July 2014–September 2015).
  - EBA-lite IREER model points to about 25.0 percent overvaluation in 2015 (the model is judged less robust than the CA approach due to large residuals).
  - EBA-lite CA results: Current account norm -1.9 percent of GDP; Current account balance -4.5 percent of GDP; Gap -2.6 percent of GDP; Elasticity REER -16.8; REER overvaluation 15.6 (positive indicates overvaluation).
  - CGER-like methodologies show varied REER overvaluation estimates: Macroeconomic balance REER -16.8 (5.0 percent), External sustainability REER -16.8 (19.9 percent), Equilibrium real exchange rate 36.3 (based on REER as of April 2015).
- Competitiveness and diversification:
  - Export diversification: some progress in value but modest; non-traditional exports increased in value but shrank as share of total exports; non-traditional and re-export sectors did not increase their share in the economy during the last 12 years.
  - Bolivia’s share of global exports rose from about 0.02 percent in 2000 to about 0.05 percent in 2014, largely driven by favorable prices in gas, minerals, and soy; at constant 2005 U.S. dollar prices the share remained roughly maintained.
  - Real minimum wages: US$57 in 2000 and US$127 in 2015; minimum wage grew nearly 80 percent during 2000–2013.
  - Labor and productivity:
    - Annualized real wage growth for high-skill workers was negative during 2000–2012 (-2 percent).
    - Wage growth outpaced productivity growth over the last decade, adversely affecting competitiveness.
  - Structural competitiveness indicators (Global Competitiveness Index positions among 140 countries):
    - Macroeconomic Environment: one area where Bolivia is in the top half.
    - Goods Market Efficiency: rank 132.
    - Labor Market Efficiency: rank 129.
  - Logistics Performance Index (World Bank, 2014): Bolivia ranked 121 out of 160 countries; transport infrastructure, ease of arranging shipments, logistics services quality, tracking and tracing, and timeliness scored below regional peers.
  - Product concentration (Herfindahl-Hirschman Product Concentration Index): Bolivia ranks low relative to regional neighbors (higher concentration closer to 1).

### Capital Flows, Reserves, and International Investment Position
- Capital account:
  - Registered a small surplus in 2014 and expected to remain in surplus in the medium term.
  - Bolivia attracted sizable foreign direct investment and official financing in 2014.
  - Portfolio outflows driven by commercial banks’ required liquid asset (RAL) abroad; other private capital outflows increased in 2013 and 2014.
- International reserves:
  - Reserve coverage equivalent to 14 months of imports in 2014; substantially above adequacy thresholds suggested by short-term debt or broad money.
  - Staff projects reserves to decline to around US$6¾ billion by 2020 given current account deficits and decreased net capital flows.
  - At that level, reserves would fall to 20 percent of broad money.
- International investment position:
  - Net international investment position positive since 2008.
  - Net IIP stood at 13.7 of GDP at end-2014, with external assets dominated by international reserves.

### Financial Stability (Annex II highlights)
- Financial Soundness Indicators show vulnerabilities increased to “medium” in H1 2015, driven by increasing credit-to-GDP ratio; however, banks’ balance sheets remain healthy with low structural risks and strong buffers.
- Key indicators (selected values from 2012–2015 series):
  - Change in credit / GDP ratio (pp, annual): most recent values 3.6, 3.7.
  - Growth of credit / GDP (%, annual): most recent values 8.8, 8.9.
  - Credit-to-GDP gap (st. dev): most recent value 1.4.
  - Deposit-to-loan ratio: recent value 119.2.
  - FX liabilities % (of total liabilities): 19.6, 19.1.
  - FX loans % (of total loans): 6.3, 5.8, 4.9 (downtrend).
  - Leverage ratio (%): recent values 7.7, 7.7.
  - ROA: around 1.0–1.2; recent 1.0.
  - ROE: recent 14.8, 13.8.
  - NPL ratio: recent 1.7, 1.6.
- Assessment:
  - Deposit-to-loan ratio remains high.
  - Foreign exchange exposure limited given low deposit and credit dollarization.
  - Leverage and profitability at acceptable levels; non-performing loans low.
  - Risks ahead: potential new risks from the financial services law, and need for vigilance regarding asset quality and credit growth speed.
- Financial stability mapping:
  - No significant increase in risks compared with the period before the 2013 financial services law.
  - Marginal increase in inward spillover risks (commodity price decline; export concentration).
  - Credit risks increased slightly due to a small rise in NPLs and decreased banks’ profitability.
  - Overall macroeconomic risk level for Bolivia is lower than the level of global risks reported in the April 2015 Global Financial Stability Report.

### Debt Sustainability (Annex III highlights)
- Baseline assessment:
  - Bolivia shows low risk of debt distress for total and external public debt under the current baseline scenario.
  - Under the baseline, debt ratios remain below respective risk thresholds even under extreme shocks.
  - Debt sustainability depends on authorities’ fiscal consolidation efforts in response to lower hydrocarbon revenues.
- Alternative scenario risk:
  - An alternative scenario assuming no augmentation of current proven natural gas reserves and a shorter resource horizon up to the mid-2020s indicates higher risk of debt distress, with total public sector debt breaching the debt distress threshold by 2025.
- Background and historical trajectory:
  - Gross public debt fell from 95.7 percent in 2003 to 32.5 percent in 2013 (supported by MDRI debt relief, fiscal surpluses, and strong growth).
  - Trend reversed in 2014: first fiscal deficit in nine years; debt increased to 33.0 percent of GDP in 2014.
  - Debt projected to continue rising during gradual fiscal adjustments and to stabilize at around 48 percent of GDP by 2020.
  - External debt declined to 17.3 percent in 2014 from 65.0 percent in 2003; the share of foreign currency debt in domestic debt declined (text truncated in source).

*Source: Annex I. External Stability Assessment (IMF staff).*

### 10.8 percent from 82.5 percent over the same period. The commodity price boom and a limited

### _cr15334 - 10.8 percent from 82.5 percent over the same period. The commodity price boom and a limited

### Baseline scenario: main assumptions (2015–2035)
- Annual real GDP growth: 4.1 percent in 2015 and 3.5 percent thereafter through 2020. Output growth is assumed to continue to decelerate to a little above 3 percent by 2035.
- Inflation (CPI, period average): 4.3 percent in 2015, 4.9 percent in 2016, and 5 percent in 2017–2035.
- External sector: in line with staff’s medium-term projections through 2020, and based on stable import and export ratios to GDP over the long term.
- Net FDI: assumed to remain stable at around 3 percent of GDP.
- Fiscal assumptions and financing strategy: in line with staff’s medium-term projection through 2020. For 2021–35, a primary deficit of around 2 percent of GDP is assumed on average.
- External financing: assumed to account for about 25 percent of financing needs, with CAF expected to remain the largest external lender.
- Average concessionality of public external debt: around 20 percent in the long term.

### Baseline scenario: projected debt dynamics and classification
- Bolivia classified as medium performer based on the three year average of the World Bank’s CPIA scores.
- Gross non-financial sector public debt (PV terms): projected to increase to 46.2 percent of GDP by 2020, peak at 48.4 percent in 2028, then decline to 45.5 percent in 2035. Remains below the threshold of 56 percent.
- Total external debt (including private, PV terms): projected to peak at 18.9 percent of GDP in 2021, then decline to 13.8 percent by 2035.
- All debt burden indicators for Bolivia are below the specific indicative thresholds for medium performers.

### Stress tests and resilience
- Under a onetime 30 percent nominal depreciation relative to the baseline in 2016, the ratio of the PV of debt to GDP deteriorates by around 6¾ percentage points on impact; the gap remains in large part in the medium to long term.
- All external debt indicators remain well below the threshold in the extreme stress scenarios.
- For public debt, the PV of debt to GDP breaches the threshold if the primary balance is assumed to remain in a deficit of 4.2 percent from 2015 onwards.
- Debt ratios remain below indicative thresholds even under an extreme shock of an increase in other debt-creating flows in 2016 equivalent to 10 percent of GDP.

### Alternative scenario: shorter natural gas resource horizon
- Rationale: uncertainty surrounding hydrocarbons production could shorten the resource horizon; scenario assesses implications based only on current proven reserves.
- Natural gas resource horizon assumption: current reserves expected to last only through 2025 (based on staff’s medium-term production assumptions under the baseline).
  - Assumes the long-term export contract with Brazil will not be renewed after 2019 and production volume will drop in 2020.
  - Assumes continued production for Argentina until the end of current contract in 2027 and domestic use until 2033.
  - Scenario could be viewed as the upper bound for debt sustainability risks.
- Fiscal assumptions under alternative scenario: with the assumed loss of hydrocarbons related revenues, the primary deficit of the non-financial public sector is assumed to average around 5¾ percent of GDP in 2020–35.

### Risk assessment and policy implications
- Staff view: Bolivia’s risk of debt distress is low under the baseline scenario; debt expected to be sustainable over the medium and long term.
- Downside risks: hinge on uncertainty in hydrocarbons production and the need for successful exploration and discovery of natural gas reserves.
- Policy priorities implied by the analysis:
  - Fiscal consolidation efforts in response to lower hydrocarbon revenues.
  - Investment for exploration and successful discovery of natural gas reserves.
  - Continued management of external financing with concessional financing and reliance on CAF as a major lender.

*Source: IMF staff analysis as presented in the provided content unit.*

### 7.      Under the shorter resource horizon scenario, the debt trajectory starts to worsen from

### _cr15334 - 7.      Under the shorter resource horizon scenario, the debt trajectory starts to worsen from

### Shorter resource horizon scenario: overview
- Under the shorter resource horizon scenario, the debt trajectory starts to worsen from mid-2020s, reflecting the assumed exhaustion of current proven gas reserves.
- The PV of the public debt-to-GDP ratio is projected to breach the threshold in 2025 and continue to rise, reflecting primary deficits.
- The public debt-to-GDP ratio, in nominal terms, could reach around 85 percent of GDP by 2035.

### Drivers of the projected deterioration
- Assumed exhaustion of current proven gas reserves by the mid-2020s.
- Continued primary deficits that push up the present-value debt ratios.
- Stress-test results indicate that particular shocks (e.g., one-time depreciation and non-debt flows) produce the most adverse outcomes in various subpanels of Figure 2.

### Stress tests and scenario design
- The most extreme stress test is defined as the test that yields the highest ratio on or before 2025.
- Figure annotations indicate which shocks produce the most extreme outcomes by panel:
  - In Figure 2b (PV of debt-to-GDP ratio), the most extreme shock corresponds to a One-time depreciation shock.
  - In Figure 2c (PV of debt-to-exports ratio), the most extreme shock corresponds to a Non-debt flows shock.
  - In Figure 2d (PV of debt-to-revenue ratio), the most extreme shock corresponds to a One-time depreciation shock.
  - In Figure 2e (Debt service-to-exports ratio), the most extreme shock corresponds to a Non-debt flows shock.
  - In Figure 2f (Debt service-to-revenue ratio), the most extreme shock corresponds to a One-time depreciation shock.

### Sensitivity analysis and alternative scenarios (selected)
- Table 1b presents sensitivity analyses for key indicators of public debt under alternative scenarios and bound tests.
- Alternative scenario A4 (Shorter resource horizon) is explicitly presented among alternatives.
- Bound tests include shocks such as:
  - One-time 30 percent real depreciation in 2016.
  - A 10 percent of GDP increase in other debt-creating flows in 2016.
  - Real GDP growth and primary balance shocks at historical averages or at historical averages minus one standard deviation.

### Fiscal and debt dynamics context (selected indicators from the baseline tables)
- Identified mechanics highlighted in Table 1a:
  - Primary deficits are a key identified debt-creating flow.
  - Automatic debt dynamics and the contribution from interest rate/growth differential are quantified as contributors to debt changes.
- The tables and figures show multiple metrics used to assess sustainability:
  - PV of public sector debt (percent of GDP and percent of revenues).
  - Debt service-to-revenue and debt service-to-exports ratios.
  - Gross financing need and rate of debt accumulation.
  - Grant-equivalent financing and grant element of new borrowing.

*Source: _cr15334 - 7.      Under the shorter resource horizon scenario, the debt trajectory starts to worsen from (IMF staff estimates and projections as contained in the supplied content).*

### Annex IV. Background Analytical Work

### Annex IV. Background Analytical Work

### I. Fiscal Balances and the Public Sector Balance Sheet

- Adjusted Fiscal Balances
  - Investment by public enterprises is expected to increase further in the coming years, as natural gas-related exploration starts to pick up.
  - Roughly ¼ of total state investment is excluded from the fiscal accounts; this investment is made by 25 subsidiaries of the SOEs YPFB (hydrocarbons), ENDE (electricity) and by ENTEL (nationalized telecom company).
  - These companies could pose increasing contingent fiscal risks and warrant closer scrutiny of their financial states.
  - Adjusted overall balances are slightly higher than the unadjusted fiscal balances reported by the authorities.
    - The balance worsens by 2.1 percent of GDP on average for 2006–14 with the inclusion of capital expenditure by the relevant subsidiaries.
    - Estimated current balances based on the available information improve the overall balance by 4.2 percent of GDP.
    - The adjusted balance is projected to be similar to the unadjusted one during 2015–2016.
  - Fiscal overall balance and components (in percent of GDP) for 2006–2014:
    - Fiscal overall balance: 4.5, 1.7, 3.6, 0.0, 1.7, 0.8, 1.8, 0.7, -3.4
    - Capital expenditure by companies with state participation (net of YPFB HQ): 1.2, 0.6, 0.0, 2.7, 2.4, 3.2, 2.9, 2.6, 3.4
      - o/w: YPFB subsidiaries: 0.9, 0.9, 1.2, 1.9, 1.8, 2.1, 2.0, 1.8, 1.9
    - Estimated current balances of companies with state participation: 2.7, 2.8, 4.1, 5.1, 4.0, 4.4, 4.7, 4.7, 5.2
      - o/w: YPFB subsidiaries: 2.6, 2.7, 3.6, 3.8, 2.6, 3.0, 3.3, 3.1, 3.3
    - Adjusted overall balance: 6.0, 4.0, 7.7, 2.4, 3.2, 2.0, 3.5, 2.8, -1.6
  - Sources: Ministry of Economy and Public Finance, Ministry of Planning, YPFB, ENTEL and staff estimates and calculations.

- Public Sector Balance Sheet
  - Aggregate public sector net worth masks complex intra-governmental transactions.
  - Overall, public sector financial and physical net worth has increased dramatically since 2007.
  - Drivers and trade-offs:
    - Increasing public investment funded by strong hydrocarbon fiscal revenues contributed to the accumulation of physical assets and accumulation of international reserves at the central bank and deposits for sub national governments.
    - This has come at the cost of depletion of the physical asset (hydrocarbons reserves).
  - SOEs’ net worth is close to zero; accumulation of assets from natural resource revenues is matched by increased direct lending from the central bank (around 8.4 percent of GDP as of mid-2015, with the current lending limit up to 18 percent of GDP).
  - Central government net worth has remained consistently in deficit over the years.
  - Sub national governments net worth increased steadily, benefitting from natural gas revenue sharing, but declined in 2014 as capacity to execute capital expenditure projects improved.
  - Risks and possible developments:
    - Public sector net worth could start to gradually decline given the more challenging external environment.
    - SOEs net worth could turn negative should the current pace of central bank lending for investment projects continue.
    - Given the Treasury guarantee for central bank lending to SOEs, this could create a fiscal contingent risk should SOEs’ operations deteriorate further.
    - Sub national governments, especially those with limited alternative sources to hydrocarbons revenues, could start accumulating debt.
    - Central bank net worth should remain positive, but asset composition could shift as loans to SOEs increasingly replace international reserves.
  - Public sector balances and assets (in billions of Bolivianos, unless otherwise stated)
    - Physical assets: 28.4, 35.3, 43.6, 50.8, 58.7, 70.4, 83.1, 98.7, 117.1
    - Financial net worth: -4.9, -16.9, -16.8, -17.4, -13.6, -12.2, -5.2, -12.4, -20.5
    - Financial assets: 49.1, 66.7, 88.5, 96.3, 112.7, 139.9, 170.6, 193.2, 201.7
      - Cash and equivalent: 21.3, 25.0, 30.3, 33.1, 49.0, 69.9, 92.3, 93.8, 93.1
      - Securities and shares: 25.5, 39.2, 54.3, 59.2, 59.1, 62.4, 66.0, 78.5, 83.9
      - Loans: 2.3, 2.5, 3.9, 3.9, 4.5, 7.5, 12.2, 20.7, 24.6
      - Others: 0.1, 0.0, 0.1, 0.1, 0.1, 0.1, 0.1, 0.2, 0.2
    - Financial liabilities: 54.0, 83.6, 105.4, 113.7, 126.3, 152.2, 175.8, 205.7, 222.3
      - Cash and equivalent: 14.8, 17.5, 24.7, 31.5, 36.4, 48.5, 61.5, 70.3, 70.1
      - Currency in circulation: 8.8, 14.1, 17.0, 18.9, 24.6, 28.6, 32.7, 37.0, 41.4
      - Securities and shares: 26.7, 33.7, 43.2, 40.2, 39.7, 42.3, 39.5, 43.8, 49.3
      - Loans: 3.1, 17.7, 19.9, 21.1, 23.4, 30.6, 39.8, 52.1, 59.2
      - Others: 0.8, 0.6, 0.5, 2.0, 2.2, 2.3, 2.3, 2.4, 2.3
    - Public sector net worth (in billions): 23.5, 18.4, 26.7, 33.4, 45.1, 58.1, 77.8, 86.3, 96.6
    - Public sector net worth (in percent of GDP): 25.6, 17.8, 22.2, 27.4, 32.7, 35.0, 41.6, 40.7, 42.4
  - Sources: IMF Monetary and Financial Statistics, and staff calculations.

### II. Entrenching a Durable De-Dollarization in Bolivia

- Trends and policy measures
  - Financial dollarization has declined significantly since 2006 in the context of macroeconomic stability and prudential measures.
    - The share of deposits denominated in U.S. dollars declined from nearly 85 percent at end-2005 to about 20 percent by mid-2015.
    - The share of credit denominated in U.S. dollars declined to 6.3 percent.
  - During this period:
    - The exchange rate has remained relatively stable (with a de-facto stabilized exchange rate against dollar since 2011).
    - Inflation declined to well within single digit levels.
  - Prudential and fiscal measures implemented:
    - Since early-2009, Bolivian banks have been required to make an additional provision of up to 1.5 percent for foreign currency denominated loans.
    - A tax of 0.15 percent has been imposed on foreign currency financial transactions for accounts larger than US$2,000 since 2006.
    - Reserve requirements on foreign currency deposits increased from 21.5 percent in 2008 to nearly 52 percent in 2015, compared to 12 percent for deposits in Bolivianos.
- Policy focus and recommendations
  - Given its success so far, Bolivia could refocus policies from further reducing dollarization toward maintaining a durable de-dollarization.
  - In addition to maintaining macroeconomic and political stability, achieving durable de-dollarization at low levels requires:
    - (i) increasing economic diversification,
    - (ii) further strengthening institutional quality and credibility,
    - (iii) deepening capital markets,
    - (iv) allowing greater exchange rate flexibility.
  - An orderly transition to greater exchange rate flexibility should not necessarily reverse the de-dollarization trend significantly.
    - Evidence suggests making de-dollarization durable at low levels requires gradual moves toward two-way exchange rate flexibility, alongside credible macroeconomic policies and prudential frameworks that internalize balance sheet dollarization risks (Kokenyne et al., 2010).
- Assessment of preparedness
  - Bolivia appears well placed to make a transition to greater exchange rate flexibility.
  - Country cases with relatively smooth transitions took time (e.g., Israel 1985–2005, Chile 1984–99, and Poland 1990–2000).
  - Bolivia meets many preconditions needed for a successful transition, only lacking derivatives markets to help manage exchange rate risk and an alternative monetary policy framework.

### III. Strengthening Private Investment

- Growth and investment composition
  - Bolivia’s impressive growth performance partly reflects a public investment boom, while private investment has remained lackluster.
  - In the past five years alone, investment contributed about 2 percent to growth each year, compared to 1 percent in the region.
  - Public investment has increased significantly since 2005, driven by large investments in the transport, hydrocarbons, and construction sectors.
  - Private investment lags behind regional averages.

*Prepared by S. Ogawa, D. Heng, F. Bornhorst and S. Cardenas; see accompanying Selected Issues Paper.*

### 10.      Bolivia needs to address key impediments to realize

### 10.      Bolivia needs to address key impediments to realize

### Major impediments to public-private complementarities
- Transportation infrastructure
  - Bolivia ranks 121 out of 160 countries in the World Bank’s 2014 Logistics Performance Index.
  - Substantial internal distances and difficult terrain (mountains, valleys and plateaus) pose challenges to reaching domestic and foreign markets.
  - Less than 10 percent of its roads are paved compared to a regional average of 22 percent.

- Wage costs
  - The minimum wage increased nearly 4-fold.
  - Private sector wages grew by 8 percent on average over the last 10 years (while inflation averaged 6 percent).
  - Other mandatory wage costs (including but not limited to the double-Christmas bonus if growth exceeds 4.5 percent) have further increased costs.

- Labor regulations and informality
  - Dated labor legislation and lack of judicial efficiency have reduced formal job creation and led to a boom in one-person companies operating at the margin of formality.
  - Surveys link informality to reduced incentives for formal private investment, especially in the face of smuggling and other illegal activities.

- Price controls and regulatory uncertainty
  - Government market interventions and price controls cover up to ¼ of the CPI basket (mainly food, but also inputs such as cement).
  - These interventions increase uncertainty over revenues and weigh negatively on investment decisions.
  - Firms report a significant increase in regulatory burden, including frequent supervisory and tax audits.

- Export uncertainty
  - The new Constitution determines that goods may only be exported once domestic demand has been satisfied.
  - Example: for soy-beans, where international prices are significantly higher than the (regulated) domestic prices, uncertainty over the availability of export permits reduces incentives for farmers to invest in increasing production capacity.

- Legal uncertainty
  - The process of adapting the legal framework to the new 2009 New Constitution remains incomplete, creating legal uncertainties particularly relevant for large, foreign investors.
  - While some important laws have been approved recently, many lack regulating decrees or omit important aspects (e.g., the mining law does not specify the tax regime).

### Key implications for investment and growth
- Infrastructure and logistical constraints (rank of 121/160; low paved-road share: less than 10 percent vs regional average 22 percent) impede access to markets and raise transport costs.
- Rising labor costs (minimum wage nearly 4-fold; private wages +8 percent average over 10 years; inflation averaged 6 percent) and additional mandatory benefits increase operating costs for firms.
- Regulatory, legal, and policy uncertainties (price controls over up to ¼ of CPI, incomplete legal adaptation to the 2009 Constitution, export permit rules) reduce predictability of revenues and deter private investment, including foreign investment.
- High informality and rigid labor framework discourage formal job creation and formal private investment.

*Source: BOLIVIA — STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (excerpt).*

### 2008. INE’s plans to release preliminary results (year 2007–2012) and definitive series in 2014 have

### _cr15334 - 2008. INE’s plans to release preliminary results (year 2007–2012) and definitive series in 2014 have

### Statistical compilation and source issues
- INE’s plans to release preliminary results (year 2007–2012) and definitive series in 2014 have been delayed.
- Labor market
  - Quality of the household and employment surveys has declined in the last few years, due mainly to financial constraints.
  - The quarterly employment survey was discontinued in 2003, leading to a lack of quarterly information on unemployment, employment and wages.
  - Yearly information on wages is still compiled by INE.
- Prices statistics
  - Industrial producer price indices (PPI) and external trade unit values are compiled by INE, but need revision regarding concepts and definitions consistent with SNA 1993, treatment of seasonal products, missing items, quality changes, and introduction of new products.
  - A PPI TA is planned for November 2015.
- Government finance statistics
  - Annual data on operations of the consolidated central government do not cover all operations of decentralized agencies and operations channeled through special funds.
  - Ongoing implementation of a comprehensive financial management system, with funding from the IADB/WB, will help ensure proper monitoring of public sector financial operations including subnational fiscal operations, debt and social spending.
  - Improvement is important in reporting operations and debt of public enterprises.
- Balance of payments and IIP
  - Sources of information for both balance of payments and international investment position (IIP) are considered sound.
  - Need to enhance classification of units by institutional sector and classification of external assets and liabilities by functional categories and instruments.
  - Some institutions that should be considered Other Deposit-Taking Corporations and a fund that should be considered part of the General Government sector with sizable external assets are currently included under the Other Sectors.
  - Assets of several sizable funds are classified under Portfolio Investment or Other Investment regardless of the real nature of the assets.
  - Valuation changes of relevant Bolivian external assets are not identified and are included in transactions.
  - Securities issued internationally by the Bolivian government held by resident investors are identified in data sources but treated as external liabilities in the external sector statistics (ESS).
  - Investigations with reporters are needed to delimitate services (mainly construction or other business services) and direct investment.
  - The method to estimate amounts of goods for processing services related to exports by Bolivia shall be updated.
  - Consistency within ESS needs to be enhanced.
  - During a September 2015 TA mission on ESS, an implementation plan for compilation of ESS on a BMP6 basis was agreed.
  - SDDS requirements regarding ESS are currently met.

### Data standards, dissemination and quality assessments
- Bolivia has participated in the General Data Dissemination System (GDDS) since November 2002.
- Data ROSC published on August 13, 2007.
- Bolivia: Indicators Required for Surveillance (As of October 15, 2015) — selected frequency and data quality assessments from the table:
  - Exchange Rates
    - Frequency of Data: Daily
    - Frequency of Reporting: Daily
    - Frequency of Publication: D
    - Data Quality–Methodological Soundness: D
    - Data Quality–Accuracy and Reliability: D
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities
    - Frequency of Data: Daily
    - Frequency of Reporting: Daily
    - Frequency of Publication: D
  - Reserve/Base Money
    - Date of Latest Observation: Sep. 2015
    - Date Received: Oct. 2015
    - Frequency of Data: M
    - Frequency of Reporting: M
    - Frequency of Publication: M
    - Data Quality–Methodological Soundness: O, LO, LO, O
    - Data Quality–Accuracy and Reliability: O, O, O, O, O
  - Broad Money
    - Date of Latest Observation: Sep. 2015
    - Date Received: Oct. 2015
    - Frequency: M / M / M
  - Central Bank Balance Sheet
    - Date of Latest Observation: Sep. 2015
    - Date Received: Oct. 2015
    - Frequency: M / M / M
  - Consolidated Balance Sheet of the Banking System
    - Date of Latest Observation: Sep. 2015
    - Date Received: Oct. 2015
    - Frequency: M / M / M
  - Interest Rates
    - Date of Latest Observation: Sep. 2015
    - Date Received: Oct. 2015
    - Frequency: W / W / W
  - Consumer Price Index
    - Date of Latest Observation: Sep. 2015
    - Date Received: Oct. 2015
    - 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
    - Date of Latest Observation: Aug. 2015
    - Date Received: Oct. 2015
    - Frequency: M / M / M
    - Data Quality–Methodological Soundness: LO, LO, LNO, LO
    - Data Quality–Accuracy and Reliability: LO, O, O, O, LO
  - Revenue, Expenditure, Balance and Composition of Financing – Central Government
    - Date of Latest Observation: Aug. 2015
    - Date Received: Oct. 2015
    - Frequency: M / M / M
    - Note: Bolivia does not compile central government fiscal data.
  - Stock of Central Government and Central Government-Guaranteed Debt
    - Date of Latest Observation: Aug. 2015
    - Date Received: Oct. 2015
    - Frequency: M / M / M
  - External Current Account Balance
    - Date of Latest Observation: Q1 2015
    - Date Received: Sep. 2015
    - Frequency: Q / Q / Q
    - Data Quality–Methodological Soundness: O, LO, LO, LO
    - Data Quality–Accuracy and Reliability: LO, O, LO, O, LO
  - Exports and Imports of Goods and Services
    - Date of Latest Observation: Q1 2015
    - Date Received: Sep. 2015
    - Frequency: Q / Q / Q
  - GDP/GNP
    - Date of Latest Observation: Q1 2015
    - Date Received: Aug. 2015
    - 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
    - Date of Latest Observation: Sep. 2015
    - Date Received: Oct. 2015
    - Frequency: M / M / M
  - International Investment Position
    - Date of Latest Observation: Q1 2015
    - Date Received: Sep. 2015
    - Frequency: Q / Q / Q
- Footnotes in the table clarify definitions and assessment codes O, LO, LNO, NO, NA and dataset coverage.

### Statement by Mr. Chodos and Mr. De la Barra (November 20, 2015)
- Background
  - Bolivia’s economic growth was outstanding in 2014 (5.5 percent) and will be similar in 2015 (estimated 5 percent), registering the highest growth rate in South America, driven mainly by the dynamism of internal demand.
  - The ample public investment of the Bolivian authorities in recent years will allow continuation of such trend from 2016 onwards.
  - During 2015 all economic activities contributed to this performance with the exception of crude oil and natural gas.
  - Major credit risk rating agencies corroborated Bolivia’s exceptional macroeconomic performance in their positive evaluations.
  - Fitch Ratings upgraded Bolivia's long-term foreign and local currency Issuer Default Ratings (IDRs) in 2015 based on Bolivia’s improvement in fiscal revenue, domestic investment and regulatory framework, robust external buffers and ample fiscal policy space.
- Views on the staff report and projections
  - The staff report presents a pessimistic view of the Bolivian economic outlook and does not take into account the country’s medium-term economic objectives and policies, including contingency plans to face shocks.
  - Authorities regret that staff has not given necessary attention to authorities’ concerns about the effect IMF surveillance reports may have on expectations (growth, exchange rate, financial inclusion, financial strength, economic stability).
- Growth outlook and potential growth
  - The staff emphasizes Bolivia’s commodity dependence; authorities argue staff did not provide technical and empirical support for claims on commodity price impact.
  - Authorities reiterate domestic demand is the main engine of growth.
  - Growth momentum for 2015 does not have the "cost" of twin deficits according to the authorities, since all components of domestic demand are staying positive.
  - Authorities project a growth rate of about 5 percent for 2015.
  - Given a cumulative growth of 4.7 percent recorded until June 2015, the staff-projected growth rate of 4.1 percent for 2015 would imply growing 3.5 percent the rest of the year, which authorities consider highly unlikely.
  - Factors expected to support stronger growth in second half of 2015 include acceleration of public investment, starting up of the liquid hydrocarbon separation plant, better performance of the financial sector due to expansionary monetary policy, solid performance of the agricultural sector as of June 2015, and expansion in electricity and construction sectors.
  - The staff previously estimated Bolivia’s potential output to be around 5 percent in 2014; the staff now estimates potential output at 3.5 percent, which the authorities consider unjustified.
  - The Bolivian government has estimated potential output remains at 5 percent (through a wide range of methodologies).
  - Authorities contend the staff underestimates GDP growth by 2.2 percentage points on average for 2015-2020 because new projects (electricity generation, hydrocarbons industrialization, among others) are not considered.
  - A 4.7 percent growth as of June 2015 (reported by the General Index for Economic Activity, IGAE) would already exceed re-estimated potential GDP and, per authorities, would start generating inflationary pressures, which they state is not the case as inflation is under control.
  - Bolivia has experienced several years with twin surplus, providing greater fiscal space; controlled inflation and CBB’s liability level due to monetary regulation operations give room for a more expansionary monetary stance.
  - The World Economic Outlook (WEO) notes countries with less pro-cyclical fiscal policy and high levels of credit, such as Bolivia, are less likely to face large variations in growth; WEO also states countries with heavy investments in sectors favored by the boom are more vulnerable to shocks—authorities argue this is not the case for Bolivia because hydrocarbons and mining investment represented only 13.8 percent of public investment between 2006 and 2014.
  - Authorities criticize IMF staff’s reduction of Bolivia’s potential growth as contradictory.
- Hydrocarbons reserves and exploration
  - Staff forecasts assume Bolivia has a short horizon for proven gas reserves, omitting exploration plans by YPFB.
  - Authorities state gas reserves are increasing and contract with Brazil is expected to be renewed and expanded.
  - Exploration by YPFB produced discovery of a new well (Margarita 7) adding 0.8 trillion cubic feet in gas reserves.
  - An additional reservoir of crude oil in Santa Cruz provides 28 million barrels of oil (MMBbl) and nearly triples crude oil reserves from 16 to 44 MMBbl.
  - Bolivia is already able to sell gas to other countries.
  - Exploration schedules include investments amounting to US$ 4,308 million between 2015 and 2019, of which 22 percent will be made by foreign companies (Repsol and Petrobras).
  - Total and British Gas committed to invest around US$1,500 million in exploration until 2019.
  - Government committed to exploration, including in unconventional areas; Supreme Decree 2366 (May 2015) allows exploration in protected areas.
- Private investment and FDI
  - Authorities contend IMF staff’s analysis of private sector investment is superficial and omits that private investors have scarce capital and low risk appetite.
  - Private investment has shown a growing trend: private investment as a percentage of GDP has continuously increased from 5.4 percent in 2004 to

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

### 8.6 percent in 2014.

### _cr15334 - 8.6 percent in 2014.

### Private investment and business climate
- During the 20 years of neoliberal period, Bolivia never had a strong private sector despite the favorable environment offered to private investors.  
- Staff view: should not insist on asking for a larger share of private investment because this sector lacks capacity and entrepreneurial vision.  
- Identified cause of low private investment: low productivity; neither wage policy nor the exchange rate level are the cause.  
- Regulatory improvements to increase private investment:
  - Investment Protection Law and the Conciliation and Arbitration Law recently approved represent a significant step forward for legal security for national and foreign investment.  
  - These laws are a result of consensus with the private sector and international cooperations, and also provide investment incentives.  
- Government actions to facilitate private investment:
  - Organized the Investing in Bolivia Summit in New York, which attracted the interest of more than 200 investors.  
  - Ministry of Development Planning will create an exclusive office for dealing with Foreign Direct Investment (FDI) flows.  
  - President Morales reinforced business ties with Germany, Italy, Ireland, and France.  
  - Development Promotion of National Industry bill submitted by the Ministry of Productive Development and Plural Economy to the National Assembly.  
- FDI findings:
  - FDI flows have continuously entered the country reflecting investors’ high level of certainty and confidence.  
  - Bolivia was one of three countries in the region with the highest cumulative index of FDI (along with Brazil and Paraguay).  
  - Bolivia shows low levels of volatility in these flows, which eventually translate into attenuated economic cycles.  
- Staff judgment: political, social, and economic stability in Bolivia do not play an important role in assuring an appropriate investment climate (staff does not consider them important).  
- Maintaining a stable exchange rate: allowed more certitude for families and firms, positively supporting investment climate and maintaining the strength and stability of the financial system.

### Fiscal Policy
- Tax burden (excluding hydrocarbon tax - IDH) increased from 21.7 percent in 2013 to 22.3 percent in 2014.  
- ECLAC finding: Bolivia has the largest tax-to-GDP ratio increase over the past 23 years in the whole of Latin America.  
- 2014 public finances:
  - Expenses were greater than revenues due to record public investment mainly executed by sub-national entities and unforeseen expenditures (rehabilitation of Amazon region economy and payments to nationalized companies).  
  - Overall balance recorded a deficit of 3.4 percent of GDP in 2014.  
- 2015 fiscal projection differences:
  - Fiscal deficit in 2015 is set to be around 4.1 percent of GDP, below the level projected by the staff report (5.3 percent).  
  - Reasons cited for lower 2015 deficit: no extraordinary expenses, expected decrease in spending on goods and services (including lower hydrocarbons subsidies, lower tin price for Vinto Metallurgical Company, and lower wheat imports), and declining transfers linked to oil prices.  
  - Tax revenue increase will partly compensate for the fall on oil prices.  
- Staff emphasis on reducing the non-hydrocarbon fiscal deficit is questioned:
  - Not recommended as a policy target because the calculation methodology is not standard and results cannot be contrasted with the authorities’ own estimations.  
  - Pessimistic medium-term fiscal deficit forecasts do not include higher revenues from productive diversification envisaged in the government´s development plan.  
- External debt and fiscal framework:
  - Bolivia’s external debt stock is one of the lowest in the region and the world, and is below thresholds established by international organizations.  
  - Staff assumptions for debt sustainability criticized as distorting (low growth forecasts and zero probability of finding new gas reserves); staff forecasts reach up to 85 percent of GDP, which authorities deem not realistic.  
  - Although not having a medium-term fiscal framework per IMF methodology, the development plan in preparation includes long-term fiscal projections.  
  - Technical assistance report “Progress in the implementation of the Fiscal framework of medium-term” (February 2015) acknowledges MEFP efforts; 2015 Budget directives require public institutions to elaborate annual and multi-annual budgets spanning five years.

### Exchange Rate and Monetary Policy
- Multiple methodologies indicate the Bolivian currency is not overvalued; CBB econometric models show the real exchange rate behavior consistent with economic fundamentals and no persistent misalignments.  
- Any methodology for assessing equilibrium exchange rates involves conceptual simplifications and high sensitivity to assumptions (e.g., period of analysis).  
- Staff conclusion of high overvaluation is criticized as potentially triggering overreaction and attacks on the domestic currency; authorities warn such assertions could exacerbate expectations, causing financial disintermediation, dollarization and loss of net international reserves (NIR).  
- Exchange rate stability outcomes:
  - Allowed management of external price shocks and neighboring exchange rate adjustments; consistent with decline in international prices and has not affected external competitiveness since no persistent real exchange rate misalignments were generated.  
- Risks of depreciation:
  - Depreciation may generate inflationary pressures via pass-through and higher exchange rate volatility (regional examples in 2015 of inflation-targeting regimes experiencing higher inflation).  
  - Sudden devaluation without preparation may be contractive, reducing domestic economic activity via inflation offset, income redistribution lowering aggregate demand, and a rigid productive structure limiting tradable output response.  
  - Marshall Lerner condition (excluding hydrocarbons) has not been met due to low sensitivity of exports and imports to exchange rate variations; competitiveness linked to other variables (e.g., private sector competitiveness).  
- Competitiveness factors:
  - ECLAC data: average real wage in Bolivia is the lowest in South America and has remained stable, improving competitiveness relative to neighbors.  
  - Public investment focused on energy infrastructure, transport and communications reduced private sector costs and contributed to enhancing competitiveness.  
  - World Economic Forum no longer considers the nominal exchange rate a determinant of external competitiveness.  
- Recommendation for a more flexible exchange rate policy is characterized as traditional and not universally applicable given differing country conditions and idiosyncratic vulnerabilities.  
- NIR and current account:
  - NIR decreased mainly due to extraordinary operations and changes in foreign currency and gold valuations; observed loss in early 2015 envisaged within the 2015 financial program projections.  
  - Projecting a NIR fall of more than 65 percent of GDP by 2020 is labelled speculative.  
  - Current account deficit is among the smallest in the region; staff projection of 4.5 percent is argued to be overstated as remittances and a moderate fall in non-traditional exports will reduce the deficit.  
  - CBB studies conclude current account will converge to equilibrium faster than in other regional countries.  
  - Imports by Q3 2015 registered a low decline compared with similar period in 2014.  
- Monetary policy effectiveness:
  - Recent years saw introduction of policy instruments that strengthened monetary transmission channels and improved effectiveness; staff concluded Bolivia’s current monetary policy was effective and useful.  
  - 2015 end-of-period inflation projected to be below the 5.5 percent target, and even less than in the previous year (5.2 percent).  
  - Lower inflation provides room to implement monetary impulses; government ready to adopt short-term policy measures to control inflation.  
- CBB mandate and lending:
  - By Constitution, CBB’s main objective is to maintain internal purchasing power and contribute to economic and social development; loans to strategic national public companies (EPNE) are part of this mandate and follow the annual Financial Program signed by CBB and MEPF.  
  - Loans are monitored by the Superior and Strategic Council for Public Enterprises.  
  - Policy coordination between CBB and Executive Branch judged highly effective in achieving inflation and growth objectives.

### Financial System
- Staff claim that the Financial Services Law (FSL) alters composition of credit flows and poses risks to financial stability is rejected as lacking technical and empirical support.  
- Government financial policy focuses on increasing productive credit and social housing to support development and affordable housing.  
- Financial system indicators:
  - Credit-to-GDP ratio is one of the lowest in the region with space to grow without posing risks.  
  - Non-performing loans (NPL) represent 1.7 percent as of September 2015.  
  - As of September 2015, the financial system’s loan portfolio is US$1,654 million higher than in December 2014, registering a new record.  
  - Banks expected to achieve the 60 percent productive loans quota without causing excessive credit growth.  
  - Microcredit portfolio in terms of GDP amounted to 12 percent.  
- Financial stability framework:
  - Financial Stability Council created to monitor macro-prudential issues.  
  - In 2015 the financial system remains very liquid; new loans continue to flow while their quality has not been affected.  
  - Credit quotas have been effective in redirecting credit towards productive loans; NPLs remained the lowest in the region.  
  - Banks remain profitable; decreasing number of microfinance borrowers attributed to reclassification within the financial sector, economic growth and strategic alliances.  
  - No empirical support that financial disintermediation may occur because of greater loan size.  
- FSL and prudential measures:
  - FSL includes additional provisions and the possibility to increase capital requirements, resulting in a less vulnerable financial system to adverse scenarios.  
  - Staff emphasis on risks to microfinance institutions is contested; all financial institutions (including formal microfinance institutions outside ASFI regulation) continue to grow with positive profitability.  
  - Interest rate caps for loans have not negatively affected microfinance institutions.  
- Microfinance performance and history:
  - Bolivian microfinance institutions are internationally recognized; studies highlight quantity and quality of services, exceptional growth with very low NPL ratio.  
  - CGAP Microfinance Gateway mentions Bolivia as the second country with the best conditions for microfinance worldwide (lowest interest rates for customers and lowest levels of NPLs).  
  - IDB’s Multilateral Investment Fund (2015) mentions Bolivia as the country with the highest level of microcredit penetration.  
- Historical context of financial sector vulnerabilities under neoliberal period (1985–2000):
  - More than 12 large financial entities failed between 1985 and 2000 (examples listed in source).  
  - Financial intermediation during that period was smaller than from 2006 onwards.  
  - Past dollarization reached 97 percent in loans and 93 percent in deposits, resulting in a very vulnerable financial system.

### Policy Recommendations and Position
- The Bolivian government does not agree with the IMF´s policy recommendations.  
- Historical assessment: between 1986 and 2005 six agreements with conditionality signed with the IMF did not solve Bolivia´s economic problems (twin deficits, foreign reserve losses, high foreign debt, large financial dependence).  
- Since 2006, Bolivia has implemented its economic policies with sovereignty and will not follow any IMF policy recipe.

*Source: _cr15334 - 8.6 percent in 2014.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15334.pdf_