## _cr16387 - 2025. To advance their plans, the authorities are using their policy buffers, with the sizable fiscal ## Source details **Canonical URL:** [_cr16387 - 2025. To advance their plans, the authorities are using their policy buffers, with the sizable fiscal](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16387.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16387.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16387.pdf.json) --- ### Macroeconomic outlook and recent developments - Real GDP growth projected at 3.7 percent in 2016; expected to converge towards 3.5 percent in the medium term ("consistent with the new commodity price normal"). - Real GDP excluding hydrocarbons: 2016 = 5.2. - GDP deflator: 2016 = -2.0. - CPI inflation (period average): 2016 = 3.7 percent; CPI inflation (end-of-period) 2016 = 4.6. - Total investment: 2016 = 20.9 percent of GDP; Public sector investment: 2016 = 13.5 percent of GDP. - Gross domestic savings: 2016 = 11.9 percent of GDP. - Revenues and grants (combined public sector): 2016 = 35.0 percent of GDP; Hydrocarbon related revenue: 2016 = 6.4 percent of GDP. - Expenditure (combined public sector): 2016 = 43.0 percent of GDP; Current expenditure: 2016 = 27.8 percent of GDP; Capital expenditure: 2016 = 15.2 percent of GDP. - Overall balance after nationalization costs: 2016 = -8.1 percent of GDP; Non-hydrocarbon balance, before nationalization costs: 2016 = -12.2 percent of GDP. - Total gross NFPS debt: 2016 = 46.7 percent of GDP; projected 2017 = 47.6; 2018 = 48.8; 2019 = 49.4; 2020 = 51.2; 2021 = 52.0. - NFPS deposits: 2016 = 15.1 percent of GDP; projected decline to 2017 = 12.4; 2018 = 10.3; 2019 = 8.5; 2020 = 7.9; 2021 = 7.3. - Current account: 2016 = -7.6 percent of GDP; projected 2017 = -4.7; 2018 = -3.8; 2019 = -2.9; 2020 = -2.6; 2021 = -2.3. - Net Central Bank foreign reserves (in millions of U.S. dollars): 2011 = 12,019; 2012 = 13,927; 2013 = 14,430; 2014 = 15,123; 2015 = 13,056; 2016 = 10,344; 2017 = 8,330; 2018 = 6,721; 2019 = 5,570; 2020 = 4,442; 2021 = 3,945. - Reserves in percent of broad money: 2016 = 36.5 percent; 2017 = 26.4; 2018 = 19.5; 2019 = 14.8; 2020 = 10.9; 2021 = 8.8. - Credit to the private sector (growth): 2016 = 17.5 percent; projected 2017 = 15.2; 2018 = 11.0; 2019 = 10.5; 2020 = 9.5; 2021 = 10.0. - Credit to the private sector (percent of GDP): 2016 = 59.5; 2017 = 61.6; 2018 = 62.8; 2019 = 63.9; 2020 = 64.9; 2021 = 65.7. - U.S. dollar and dollar-indexed deposits (percent of total deposits): 2016 = 15.6 percent (projected to remain 15.6 percent through 2021). - U.S. dollar and dollar-indexed credit (percent of total credit): 2016 = 3.0 percent (projected to remain 3.0 percent through 2021). - Nominal GDP (in billions of U.S. dollars): 2016 = 33.8; 2017 = 37.6; 2018 = 40.9; 2019 = 44.4; 2020 = 47.9; 2021 = 52.0. - Oil prices (U.S. dollars per barrel): 2016 = 43.0; 2017 = 50.6; 2018 = 53.1; 2019 = 54.4; 2020 = 56.3; 2021 = 58.0. ### Executive Board assessment — main findings - Commended past sound macroeconomic management and poverty reduction during the commodity boom. - Agreed outlook is increasingly challenging; risks tilted to the downside due to low commodity prices and growing fiscal and external imbalances. - Encouraged a "carefully measured approach to adjusting to the less favorable external environment" given still sizable buffers. - Urged improving the non-hydrocarbons primary balance by streamlining and increasing expenditure efficiency; recommended early transition to a credible medium-term fiscal framework to assure debt sustainability and build cushions against hydrocarbon price volatility. - Advised ensuring financial health of SOEs, exercising greater oversight, and strengthening evaluation and transparency of SOE investments. - Stressed enhancing central bank independence and phasing out central bank exposures to SOEs to avoid conflicts with the commitment to price stability. - Most Directors encouraged "gradually permitting greater exchange rate flexibility" to improve competitiveness and facilitate adjustment. - Welcomed overall soundness of the financial sector but cautioned about vulnerabilities linked to the Financial Services Law; suggested modifying key provisions and using market-oriented mechanisms to promote financial inclusion. - Emphasized accelerating structural reforms: improving incentives for hydrocarbons exploration, aligning wages with productivity, and addressing severe water shortages. - Recommended better targeting and improved efficiency of social spending to mitigate lower commodity prices’ impact on inequality and poverty. ### Fiscal position, public debt, and recommended consolidation - Fiscal deficit: 2015 overall balance = -6.9 percent of GDP; projected 2016 overall balance = -8.1 percent of GDP. - Staff baseline: non-hydrocarbons primary deficit declines gradually from around 13 percent of GDP in 2015 to 7 percent of GDP in 2021; gross public debt projected to increase from 41 percent of GDP in 2015 to about 52 percent of GDP by 2021. - Staff recommended (active) consolidation: reduce the non-hydrocarbons primary deficit by about 1.3 percent per year on average over the next 5 years; achieve consolidation mainly through streamlining expenditures while safeguarding development spending. - Specific spending measures suggested: - Gradually reduce wage-to-GDP ratio by moderating future wage adjustments. - Rationalize public investment and strengthen its management. - Gradually reduce energy subsidies while strengthening social safety nets (potentially yielding up to 1 percent of GDP). - Increase efficiency of social spending via higher but progressive fees, greater competition in provision, better targeting of benefits, and reform of health finance toward performance-based systems. - Revenue measures suggested: - Introduction of a progressive income tax or reform of the complementary VAT regime (RC-IVA) could yield around 1 percent of GDP. - Simplify tax regime for small companies. - Reform hydrocarbon and mineral tax systems to be transparent and incentive-compatible to encourage exploration and generate longer-term revenues. - Subnational recommendations: - Strengthen own-source revenues of subnational governments (possible measures: higher property taxes on real estate and vehicles). - Make transfers rely more on criteria such as population size, development needs, and means-testing rather than hydrocarbons revenues. ### External sector, reserves, and exchange rate assessment - Current account: surplus for 2003–14 turned into deficits of 5.8 percent of GDP in 2015 and about 7 percent of GDP in 2016Q1; staff BPM6 transition first half 2016 = -6.5 percent of GDP. - Reserves declined by US$2.1 billion in 2015 and an additional US$2.3 billion through mid-October 2016; reserves at about 32 percent of GDP mid-2016; forecast to decline to close to 7½ percent of GDP or 4 months of imports by 2021 under staff baseline. - EBA-lite results: - Current account approach: desirable current account norm about -5 percent of GDP; to close gap between norm (-5 percent) and expected 2016 outturn (-7.6 percent) would require real exchange rate depreciation of about 17½ percent. - REER approach finds REER overvaluation of 24 percent. - Staff recommendation: gradually permit greater exchange rate flexibility to address competitiveness and diversification challenges; transition should be carefully crafted and clearly communicated to keep inflation expectations anchored, build market infrastructure, and strengthen policy and analytical capacity. ### Financial sector soundness, vulnerabilities, and recommended reforms - Banks’ overall capital adequacy ratio: 12 percent in mid-2016; all banks above regulatory minimum of 10 percent. - Return on bank equity: 12 percent in June 2016. - Private sector credit increased by about 8 percentage points of GDP in 2015; credit to private sector (percent of GDP): 2016 = 59.5; 2017 = 61.6; 2018 = 62.8; 2019 = 63.9; 2020 = 64.9; 2021 = 65.7. - Dollarization: deposits dollarization stabilized around 17 percent as of mid-October 2016; credit dollarization around 3 percent of total loans. - Financial Services Law: achievements (Basel II–III principles, deposit insurance, credit registry, Financial Stability Council) and concerns (quotas and interest caps inducing rapid credit expansion and potential quality deterioration). - Stress test findings: - If NPL ratio doubles, capital would need to be raised to meet regulatory requirements in just over half of banks. - A quadrupling in NPLs would leave nearly all banks with some capital shortfall; estimated losses under these scenarios broadly manageable at 0.2 and 1.2 percent of GDP, respectively. - System-level aggregate liquidity coverage ratio around 110 percent; some small banks could struggle under severe deposit-run stress without systemic implications. - Policy recommendations: - Modify key provisions of the Financial Services Law (quotas and interest caps) to reduce distortions and risk buildup. - Relax credit quotas and phase out interest rate caps. - Use more market-oriented mechanisms to promote financial inclusion (e.g., partial credit guarantees). - Finalize and publish a housing price index to inform credit risk analysis. ### Hydrocarbons, SOEs, industrialization projects, and central bank exposures - Hydrocarbons: proven reserves estimated at about 10 Tcf; production scenarios show current production about 60 (million cubic meters per day) with a projected near-term increase to close to 70 by 2019 under baseline; baseline projects Bolivia would struggle to meet internal demand and minimum contractual export volumes after 2021. - YPFB investments: roughly US$4.3 billion in gas separation and petrochemical plants; half already executed; largest project (polyethylene plant) outstanding. - ENDE investments: heavy investments in thermoelectric and hydroelectric generation. - Central Bank (BCB) financing of projects: loans issued in bolivianos at highly concessional terms (subsidized interest rates averaging less than 1 percent; grace periods 3 to 7 years; maturities 18 to 30 years). - Outstanding BCB lending (in millions of Bolivianos): YPFB = 12,563; ENDE = 4,612; COMIBOL = 2,149. - Equivalent in percent of BCB's capital: YPFB 1,000; ENDE 367; COMIBOL 171. - Staff recommendation: phase out BCB exposures to SOEs; transfer developmental spending financed by BCB credit to a separate agency funded by other means and guided by transparent investment rules, strong governance, and a clear development mandate. - Scenario analysis for public enterprises: - Baseline (WEO-based): overall sector’s balance deteriorates sharply to -6½ percent of GDP this year; cumulative financing need Bs 47 billion (about 11 percent of GDP) over next five years. - Severe scenario (oil at US$30 per barrel): cumulative deficit around Bs 117 billion. - Benign scenario (oil recovers to US$78 per barrel by 2020): overall balance turns positive after four years. - Staff advised monitoring SOE operations, publishing SOEs’ financials, and moving toward including all SOEs in NFPS fiscal accounts. ### Debt sustainability and stress tests (Annex III highlights) - Staff DSA: risks to Bolivia’s public debt moderate in medium term (2016–21). - Public debt: 43 percent of GDP in August 2016; projected about 52 percent of GDP in 2021. - 2016 financing need: 10.2 percent of GDP; gross financing needs projected to fall to about 8 percent of GDP in 2019–21 under baseline. - Stress test outcomes (debt-to-GDP deviations from baseline): - Primary balance shock: debt-to-GDP ~55.7 percent in 2021 (about 3.7 percentage points higher than baseline). - Growth shock: debt-to-GDP ~54.4 percent in 2021 (2.4 percentage points higher). - Interest rate shock: debt-to-GDP ~54.3 percent in 2021 (2.3 percentage points higher). - Exchange rate shock: debt-to-GDP ~54.2 percent in 2021 (2.2 percentage points higher). - Combined shock: debt-to-GDP ~63.1 percent in 2021 (11.1 percentage points higher). - Contingent liability shock: debt-to-GDP ~58.9 percent in 2021 (6.9 percentage points higher). - Policy implications: maintain pragmatic approach to public investment plans; monitor public gross financing needs, especially given 2016 spike to 10.2 percent of GDP and projected exceedance under shocks. ### DSGE model findings (Box 2) - Model calibrated to pre-boom (2000–05) and simulates pre-boom, boom (2006–14), bust (2015–21). - Commodity Boom (2006–14) findings: - Observed 2 percent increase in potential growth mainly from commodity price boom raising profitability and government revenues. - Infrastructure investment improved private sector productivity; urban labor supply increase aided industrial expansion. - Distributional effects: decline in inequality driven ~one-third by reduced skills premium, ~one-third by higher agricultural productivity, remainder by expanded social programs. - Commodity Bust findings: - Bust could reduce medium-term potential growth by about 1½ percentage points. - Slightly more than half of decline from direct lower commodity prices; remainder from general equilibrium effects. - Policies increasing fiscal space for infrastructure investment and enhancing its efficiency can halve the bust’s impact on growth. - Distributional effects: rural Gini may fall while urban Gini increases; national Gini rises and poverty reduction pace slows. - Better targeting of cash transfers can mitigate inequality impacts. ### Risk assessment, outlook, and scenarios - Near-term growth: 2016 = 3.7 percent; 2017 = 3.9 percent; agricultural output expected to decline by about 4 percent in 2016; gas production expected to marginally decline despite recovery in 2016H2. - Medium-term potential growth: staff estimate = 3.5 percent. - Downside risks (selected): slower agricultural rebound; faster decline in gas production; excessive credit growth volatility linked to quotas and interest caps; further U.S. dollar strength; lower commodity prices; weakness in key emerging markets (Brazil and China). - Upside risks (selected): better-than-expected infrastructure spending quality; success in discovering/exploiting new gas reserves; stronger oil price recovery; potential windfall from lithium if commercial viability realized. ### Social, structural, and data recommendations - Improve targeting and efficiency of social spending (means testing, competition in provision, performance focus) to preserve gains in poverty reduction and inequality. - Bring wages back in line with productivity; moderate wage-to-GDP ratio over time. - Improve incentives for hydrocarbons exploration (e.g., allow expensing of exploration investments, accelerated depreciation for development). - Address severe water shortages; build irrigation and water infrastructure. - Data and transparency: timely publication of macroeconomic data; improve data on quasi-fiscal activities and publish a real estate price index; progress toward full SDDS subscription. ### Political, authorities’ views, and recent developments - Political context: President Morales lost February 2016 referendum to run for reelection in 2019; social unrest included miners' protests (death of Deputy Interior Minister), truck drivers' strikes, requests for subnational bailouts. - Authorities’ growth outlook: expect output growth around 4.8 percent; plan 2017 budget on $45 per barrel oil price; argue staff projections are pessimistic. - Authorities’ stance on policies: - Do not favor phasing out BCB’s development role; view BCB loans to SOEs as key for strategic investment. - Do not see exchange rate misalignment; prioritize exchange rate stability to shield from volatility. - Defend Financial Services Law and quota framework as supportive of financial intermediation and inclusion. - Consider public investment and PDES-driven short-term deficits as temporary and aimed at raising potential output. - Updated information since staff report: - Severe drought (worst in 25 years) prompted a state of emergency and water rationing; drought may have more severe effects than staff baseline projected. - Fiscal balance through September running well below prior year; non-financial public sector posted a deficit of 2 percent of GDP YTD, worse than small surplus in same period a year ago. *Source: _cr16387 - IMF staff report and annex excerpts.* ### 2025. To advance their plans, the authorities are using their policy buffers, with the sizable fiscal ### _cr16387 - 2025. To advance their plans, the authorities are using their policy buffers, with the sizable fiscal ### Macroeconomic outlook and recent developments - Real GDP growth is projected at 3.7 percent in 2016. - Growth is expected to converge towards 3.5 percent in the medium term, "consistent with the new commodity price normal." - A continued supportive fiscal policy and rapid credit growth linked to the Financial Services Law are buttressing activity and offsetting a major drought and temporary supply shocks in gas production. - Sizable fiscal and external surpluses from the previous decade "have now turned into large twin deficits." - Near-term risks are tilted to the downside, including "additional weakness in key emerging markets, further dollar strength, and a larger-than-expected impact of the drought." - Longer-term uncertainties include "future oil prices, the extent of natural gas discoveries and export contract renewals, and the possibility of an excessive credit growth volatility." ### Executive Board assessment — main findings - Directors commended past sound macroeconomic management and poverty reduction during the commodity boom. - Directors agreed the outlook is increasingly challenging, with risks tilted to the downside owing to continued low commodity prices and growing fiscal and external imbalances. - Given still sizable buffers, Directors encouraged a "carefully measured approach to adjusting to the less favorable external environment." - Directors underscored risks from "large and widening fiscal deficits" and urged improving the non-hydrocarbons primary balance by streamlining and increasing expenditure efficiency. - Directors recommended an early transition to a credible medium-term fiscal framework to assure debt sustainability, account for the business cycle, and build cushions to absorb volatility in hydrocarbon prices. - Directors advised ensuring the financial health of state-owned enterprises (SOEs), exercising greater oversight, and strengthening evaluation and transparency of SOE investments. - Directors stressed enhancing central bank independence and phasing out central bank exposures to SOEs to avoid conflicts with the commitment to price stability. - Most Directors encouraged "gradually permitting greater exchange rate flexibility" to improve competitiveness and facilitate adjustment to lower commodity prices. - Directors welcomed the overall soundness of the financial sector but cautioned about growing vulnerabilities linked to the Financial Services Law; they suggested modifying key provisions to reduce distortions and risk buildup and using more market-oriented mechanisms to promote financial inclusion. - Directors emphasized accelerating structural reforms: improving incentives for hydrocarbons exploration, aligning wages with productivity, and addressing severe water shortages. - Directors praised significant declines in inequality and poverty over the last decade and recommended better targeting and improved efficiency of social spending to mitigate the impact of lower commodity prices on inequality and poverty. ### Key quantitative indicators and projections (selected, as reported) - Real GDP: 2015 = 4.8; 2016 = 3.7; 2017 = 3.9; 2018–2021 = 3.5 each year (2018–2021) and 3.5 in 2020 and 2021 as shown in table. - Real GDP excluding hydrocarbons: 2016 = 5.2. - GDP deflator: 2016 = -2.0. - CPI inflation (period average): 2016 = 3.7 percent; CPI inflation (end-of-period) 2016 = 4.6. - Total investment: 2016 = 20.9 percent of GDP. - Public sector investment: 2016 = 13.5 percent of GDP. - Gross domestic savings: 2016 = 11.9 percent of GDP. - Revenues and grants (combined public sector): 2016 = 35.0 percent of GDP. - Of which: Hydrocarbon related revenue: 2016 = 6.4 percent of GDP. - Expenditure (combined public sector): 2016 = 43.0 percent of GDP. - Current expenditure: 2016 = 27.8 percent of GDP. - Capital expenditure: 2016 = 15.2 percent of GDP. - Overall balance after nationalization costs: 2016 = -8.1 percent of GDP. - Non-hydrocarbon balance, before nationalization costs: 2016 = -12.2 percent of GDP. - Total gross NFPS debt: 2016 = 46.7 percent of GDP; 2017 = 47.6; 2018 = 48.8; 2019 = 49.4; 2020 = 51.2; 2021 = 52.0. - NFPS deposits: 2016 = 15.1 percent of GDP; 2017 = 12.4; 2018 = 10.3; 2019 = 8.5; 2020 = 7.9; 2021 = 7.3. - Current account: 2016 = -7.6 percent of GDP; 2017 = -4.7; 2018 = -3.8; 2019 = -2.9; 2020 = -2.6; 2021 = -2.3. - Merchandise exports: 2016 = 21.0 percent of GDP. - Of which: natural gas = 2016 = 7.0 percent of GDP. - Merchandise imports: 2016 = 27.5 percent of GDP. - Overall balance of payments: 2016 = -8.0 percent of GDP. - Terms of trade index (percent change): 2016 = -10.1. - Net Central Bank foreign reserves (in millions of U.S. dollars): 2011 = 12,019; 2012 = 13,927; 2013 = 14,430; 2014 = 15,123; 2015 = 13,056; 2016 = 10,344; 2017 = 8,330; 2018 = 6,721; 2019 = 5,570; 2020 = 4,442; 2021 = 3,945. - Reserves in percent of broad money: 2016 = 36.5 percent; 2017 = 26.4; 2018 = 19.5; 2019 = 14.8; 2020 = 10.9; 2021 = 8.8. - Credit to the private sector (growth): 2016 = 17.5 percent; 2017 = 15.2; 2018 = 11.0; 2019 = 10.5; 2020 = 9.5; 2021 = 10.0. - Credit to the private sector (percent of GDP): 2016 = 59.5; 2017 = 61.6; 2018 = 62.8; 2019 = 63.9; 2020 = 64.9; 2021 = 65.7. - U.S. dollar and dollar-indexed deposits (percent of total deposits): 2016 = 15.6 percent; projected to remain 15.6 percent through 2021. - U.S. dollar and dollar-indexed credit (percent of total credit): 2016 = 3.0 percent; projected to remain 3.0 percent through 2021. - Nominal GDP (in billions of U.S. dollars): 2016 = 33.8; 2017 = 37.6; 2018 = 40.9; 2019 = 44.4; 2020 = 47.9; 2021 = 52.0. - Oil prices (U.S. dollars per barrel): 2016 = 43.0; 2017 = 50.6; 2018 = 53.1; 2019 = 54.4; 2020 = 56.3; 2021 = 58.0. ### Policy recommendations and priorities - Pursue a measured yet credible approach to adjustment, sequencing policies given still sizable fiscal and external buffers. - Steadily reduce the non-hydrocarbons primary deficit. - Ensure the financial health of SOEs; exercise greater oversight and strengthen evaluation and transparency of SOE investments. - Consider gradually permitting greater exchange rate flexibility to improve competitiveness and facilitate adjustment to lower commodity prices. - Enhance the independence of the central bank and phase out central bank exposures to SOEs to avoid conflicts with price stability. - Modify key provisions of the Financial Services Law (quotas and interest caps) to reduce distortions, avoid unnecessary risk buildup, and promote market-oriented mechanisms to achieve financial inclusion. - Improve incentives for hydrocarbons exploration. - Bring wages back in line with productivity. - Address severe water shortages. - Improve targeting and efficiency of social spending to preserve gains in poverty reduction and inequality. ### Political and social context - Political challenges: President Morales lost a February 2016 referendum to run for reelection in 2019; social unrest has included miners' protests (resulting in the death of the Deputy Interior Minister), truck drivers' strikes, and requests for subnational bailouts. - Fiscal measures: In light of slowing growth, the government announced that the second monthly Christmas bonus would not be paid in 2016. *Source: _cr16387 - 2025. To advance their plans, the authorities are using their policy buffers, with the sizable fiscal* ### 3. The economic expansion continues, but fiscal and external imbalances are growing: ### 3. The economic expansion continues, but fiscal and external imbalances are growing: ### Economic performance - Real GDP growth over the last 12 months to June 2016 was 4.4 percent. - 2016Q2 growth was 3¼ percent (y-o-y). - Temporary supply shocks affected hydrocarbons and agriculture; agriculture impacted by a drought linked to the La Niña climate phenomenon. - Consumption growth has been strong given solid real wage increases. - Unemployment increased slightly to 4.4 percent. - Inflation was 3.5 percent y-o-y in October 2016, despite rapid monetary growth. ### Fiscal position and public debt - Fiscal deficit reached 6.9 percent of GDP in 2015 due to sharply lower hydrocarbon revenues and large increases in spending. - Financing of the 2015 deficit was mainly via Central Bank of Bolivia (BCB) net credit (use of government deposits or direct credit to SOEs). - Gross public debt was 43 percent of GDP in August 2016; net debt was 28 percent of GDP. - At the subnational level, financial positions of several administrations highly reliant on hydrocarbons-related revenues have significantly worsened. - Projection table (selected figures): - Actual 2015 overall balance: -6.9 (percent of GDP) - Projected 2016 overall balance: -8.1 (percent of GDP) - Baseline scenario: public debt projected from 40.6 (2015) to 52.0 (2021) (percent of GDP) - Active scenario: public debt projected from 40.6 (2015) to 45.0 (2021) (percent of GDP) - Staff recommends reducing the non-hydrocarbons primary deficit by about 1.3 percent per year on average over the next 5 years (active scenario). ### External sector and reserves - Current account: surplus for 2003–14 turned into deficits of 5.8 percent of GDP in 2015 and about 7 percent of GDP in 2016Q1. - Note: Under BPM6 transition, current account in first half of 2016 was -6.5 percent of GDP. - Reserves declined by US$2.1 billion in 2015 (about 6 percent of GDP) and an additional US$2.3 billion through mid-October 2016. - Reserves remained at 32 percent of GDP and described as more than adequate by any metric. - Staff forecast: international reserves are forecast to further decline to close to 7½ percent of GDP or 4 months of imports by 2021. - Footnote: Reserves could be up to 3 percent of GDP higher if the US$1 billion of sovereign bond issuance in international capital markets goes ahead. ### Public enterprises and hydrocarbons sector - Public enterprises increased spending, particularly investments, sustained by prior high hydrocarbon prices. - The sharp fall in hydrocarbon prices tipped public enterprises’ financial balance into negative territory over the past couple of years; this has largely been financed by the central bank. - The fall in hydrocarbon prices is putting pressure on the financial health of public enterprises. ### Financial sector and vulnerabilities - Banks’ overall capital adequacy ratio stood at 12 percent in mid-2016; all banks were above the regulatory minimum of 10 percent. - Return on bank equity was 12 percent in June 2016; profitability declining due to higher tax burden and reduced interest margins. - Private sector credit increased by about 8 percentage points of GDP in 2015—well above its trend. - To finance rapid credit growth while maintaining capital ratios, banks increased issuance of subordinated debt. - Dollarization: - Deposits dollarization stabilized at around 17 percent as of mid-October 2016. - Credit dollarization around 3 percent of total loans. - Real appreciation tightened financial conditions for exporters and import-substituting sectors. - Previous staff VAR finding: a 1 p.p. decrease in real credit growth lowers GDP growth by 0.2 p.p. the following year. ### Implementation of prior Fund advice - Authorities have taken measures toward a medium-term fiscal framework: - Creation of a Macro-Fiscal Unit at the Ministry of Finance to produce fiscal projections. - Requirement for subnational governments and public enterprises to prepare multi-year budgets. - Limited traction on recommendations to: - Improve the non-hydrocarbon fiscal balance. - Discontinue central bank lending to enterprises. - Gradually allow greater exchange rate flexibility. ### Outlook and risks (near-term and medium-term) - Near-term growth: - Growth expected to reach 3.7 percent in 2016 and 3.9 percent in 2017. - Agricultural output expected to decline by about 4 percent in 2016. - Gas production expected to marginally decline despite a recovery in 2016H2. - Fiscal and current account deficits projected to widen in 2016 to 8.1 percent and 7.6 percent of GDP, respectively. - Significant recourse expected to public sector deposits and central bank credit. - Drought may cause a near-term uptick in food prices, with moderation thereafter. - Medium-term: - Potential growth forecast of 3.5 percent (staff’s estimate based on a DSGE model). - Commodity bust expected to reduce medium-term potential growth by about 1½ percentage points (model simulation). - In absence of corrective measures, fiscal and current account deficits expected to persist and erode buffers. - Downside risks: - Domestic: slower rebound in agriculture in 2017; faster decline in gas production; excessive credit growth volatility linked to lending quotas, interest rate caps, and increased taxation in the financial sector. - External: further U.S. dollar strength; even lower commodity prices; additional weakness in key emerging markets (including Brazil and China). - Absent policy adjustment, these risks could rapidly deplete buffers and lead to severe macroeconomic stresses. - Upside risks: - Better-than-expected quality of infrastructure spending. - Greater success discovering/exploiting new gas reserves, or bringing downstream and electricity projects on stream. - Stronger recovery in oil prices. - Potential major windfall from lithium deposits if lithium battery production becomes commercially viable. ### Box 2 summary: DSGE model for Bolivia — impact of the commodity boom/bust - Model structure: - Continuum of heterogeneous households (farmers; informal, private and public sector workers; entrepreneurs). - Three periods: pre-commodity boom (2000–05), boom (2006–14), bust (2015–21). - Calibrated to pre-boom period using Bolivia’s macroeconomic and household survey data. - Findings — Commodity Boom (2006–14): - Observed 2 percent increase in potential growth explained mostly by commodity price boom increasing profitability in energy and agriculture and government revenues. - Increased infrastructure investment improved private sector productivity. - Urban labor supply increased via rural-to-urban migration and higher skill share, aiding industrial expansion. - Distributional effects: decline in inequality driven about one-third by reduced skills premium, one-third by higher agricultural productivity narrowing inter-sectoral inequality, and remainder by expanded social programs. - Findings — Commodity Bust: - Bust could reduce medium-term potential growth by about 1½ percentage points. - Slightly more than half of expected decline from direct impact of lower commodity prices; remainder from general equilibrium effects. - Policies that increase fiscal space for infrastructure investment and enhance its efficiency can halve the impact of the bust on growth. - Distributional effects: lower agricultural export prices reduce large farmers’ incomes more than small ones (reducing rural Gini); urban Gini increases as private sector wages fall more than public sector ones; national Gini rises and pace of poverty reduction slows. - Better targeting of cash transfers can mitigate inequality impacts. ### Policy discussions and recommendations - Overarching priority: adapt policies to anchor strong, balanced, and durable growth; continue poverty reduction; and guard against downside risks. - Sequenced priorities: - (i) Steadily reduce the non-hydrocarbons primary deficit and ensure financial health of SOEs. - (ii) Allow greater exchange rate flexibility. - (iii) Improve incentives for hydrocarbons exploration. - (iv) Bring wage growth in line with productivity changes. - A. Preserving buffers and strengthening the fiscal framework - Risks of implementing full original PDES investment levels: - Could widen the overall deficit to 15–20 percent of GDP and increase public debt to about 100 percent of GDP by 2021. - Staff baseline: flexible PDES implementation with lower spending; non-hydrocarbons primary deficit declines gradually from around 13 percent of GDP in 2015 to 7 percent of GDP in 2021; gross public debt projected to increase from 41 percent of GDP in 2015 to about 52 percent of GDP by 2021. - Staff’s recommended (active) consolidation: - Reduce the non-hydrocarbons primary deficit by about 1.3 percent per year on average over next 5 years. - Achieve consolidation mainly through streamlining expenditures while safeguarding development spending. - Specific spending measures: - Gradually reduce wage-to-GDP ratio by moderating future wage adjustments to converge closer to regional average. - Rationalize public investment and strengthen its management. - Gradually reduce energy subsidies while strengthening social safety nets (potentially yielding up to 1 percent of GDP). - Increase efficiency of social spending via: higher but progressive fees for users of social services; greater competition in provision of social services; better targeting of social benefits; and reform of finance mechanisms for health spending (move away from capacity-based remuneration toward performance-based systems). - Revenue measures: - Introduction of a progressive income tax or reform of the complementary VAT regime (RC-IVA) could yield around 1 percent of GDP in additional revenue. - Simplify tax regime for small companies. - Reform tax system for hydrocarbon and mineral extraction sectors to be transparent and incentive-compatible to encourage discovery of new reserves/deposits and generate longer-term revenues. - Subnational governments: - Additional policies needed to reduce local governments’ reliance on gas revenues and increase their revenues. - Staff welcomes subnational efforts to streamline spending but cautions against across-the-board cuts. *Source: IMF staff report excerpt, "3. The economic expansion continues, but fiscal and external imbalances are growing:"* ### introduction of the “Ley del Sistema de Planificación Integral del Estado” in January 2016 will also ### _cr16387 - introduction of the “Ley del Sistema de Planificación Integral del Estado” in January 2016 will also ### Subnational fiscal coordination and recommendations - Introduction of the “Ley del Sistema de Planificación Integral del Estado” in January 2016 is expected to improve coordination between various levels of government and the central government’s ability to monitor subnational fiscal developments. - Near-term staff recommendation: strengthen own-source revenues of subnational governments. - Possible measures: higher property taxes on real estate and vehicles. - Medium-term staff recommendation: make transfers to subnational governments rely more on criteria such as population size, development needs, and means-testing, rather than primarily on hydrocarbons revenues. - Under current regulations, subnational governments must almost automatically match expenditures with revenues and past savings, with limited borrowing possibilities. - Municipalities have been affected less than prefectures because municipalities have more own-source revenues through tax sharing with the central government. ### Efficiency of social spending (Box 3) - Health spending inefficiencies: - Inefficiencies largely in transforming intermediate resources (e.g., number of physicians, nurses, midwives, and hospital beds) into health outcomes. - Contributing factors: fixed salaries for general practitioners (independent of results), hospital financing based on capacity reducing incentives to cut costs, and absence of co-payments leading to potential excessive demand. - Education: - Bolivia’s spending on education is more than 8 percent of GDP, exceeding the average of 5 percent for LAC. - Results are relatively poor: low teacher-student ratios and enrollment rates compared with LA countries. - Staff analysis: Bolivia’s net enrollment rates are low for the given level of education spending in purchasing power terms. - Bolivia lags in final education outcomes (e.g., number of medals and awards in the International Mathematical Olympiads relative to secondary education spending per student). - Research and development expenditure about 0.2 percent of GDP, close to the average for LAC, yet patents per capita granted by the U.S. Patents and Trademarks Office are low. - Contributing factors: - Large shares of wages and investment in total primary education spending, leaving smaller share for non-wage recurrent expenditures. - Coordination issues: decisions about establishing schools made by local governments while teachers are financed by the central government. - Public spending on education mostly benefits households with higher income. - Subsidies and social protection: - Government spends 1–2 percent of GDP on fuel subsidies, which mainly benefit producers and the rich. - Government spends 2–3 percent of GDP on social programs, but only a small share reaches the poor due to no or limited means’ testing for most programs. ### Structural fiscal reforms and SOE oversight - Medium-term budgeting and SOE oversight recommended to contain risks: - Develop and communicate effectively a medium-term framework to anchor consolidation. - Faster transition to multi-year budgeting. - Introduce a fiscal target for the non-hydrocarbons primary balance designed to assure debt sustainability, account for business cycle, and build cushions for hydrocarbon price volatility. - Clear communication of policy intentions to avoid surprises. - SOE investments and transparency: - Investments by YPFB and ENDE increasing considerably under the PDES. - In 2016, about half of YPFB’s investments are to be executed by subsidiaries; for ENDE the number is close to 80 percent. - Staff recommends monitoring and publishing SOEs’ financial operations and balance sheets and moving toward including all SOEs in fiscal accounts of the NFPS. - Suggest assessing SOE efficiency and new investments on nonsubsidized gas and electricity input prices (Annex II). ### Exchange rate flexibility and monetary policy framework - Assessment and concerns: - The boliviano is assessed to be overvalued. - Despite moderate depreciation in recent months, the boliviano—de-facto stabilized against the U.S. dollar—has appreciated by 49 percent in real effective terms since January 2010. - Exports highly concentrated in commodities whose prices remain low. - Significant mandatory minimum and average wage increases have largely exceeded productivity growth, eroding competitiveness. - Bolivia slipped in the 2015–16 Global Competitiveness Index to 117th place from 105th place in 2014–15. - Two EBA-lite approaches (current account and real effective exchange rate models) and the external sustainability assessment suggest a significant overvaluation of the boliviano (Annex IV). - Staff recommendations: - Gradually permit greater exchange rate flexibility to address competitiveness and diversification challenges, facilitate adjustment to lower commodity prices, and limit potential impact of future shocks. - Transition should be carefully crafted and clearly communicated to keep inflation expectations anchored, build market infrastructure, and strengthen policy and analytical capacity. - Central bank independence and balance sheet: - BCB exposures to SOEs (state owned natural gas and electricity companies) have grown substantially (Annex II). - Staff recommends phasing out BCB exposures to SOEs; transfer developmental spending financed by BCB credit to a separate agency funded by other means and guided by transparent investment rules, strong governance, and a clearly-stated development mandate. - Enacting a new central bank law has been delayed; a first draft is now expected in 2017 H1. ### Financial sector stability and inclusion - Financial Services Law achievements and concerns: - Positive: implementation of some Basel II–III principles, setting up of a deposit insurance scheme and credit registry, and creation of a Financial Stability Council (meets every quarter). - Concerns: quotas and interest caps on “productive sectors” and social housing inducing rapid credit expansion, potentially lowering credit quality. - July 2015 decree broadened definition of these sectors; large institutions appear set to meet 2016 credit targets while some small institutions face difficulties. - Potential negative effects on financial inclusion: average loan sizes increasing while growth in number of borrowers declined substantially; microcredit sector shows signs of disintermediation and shift toward unregulated lenders. - Policy recommendations: - Modify key provisions of the Financial Services Law to reduce distortions and avoid unnecessary buildup of risk. - Relax credit quotas to avoid excessive and potentially poor-quality credit growth. - Phase out interest rate caps (set by decree) to better reflect costs and risks. - Consider market-oriented mechanisms to improve financial access (e.g., partial credit guarantees). - Finalize and publish a housing price index to inform credit risk analysis. - Stress test findings and risks (Annex V): - Credit risk: Rapid credit expansion plus adverse economic climate could sharply increase NPLs. - If NPL ratio doubles, capital would need to be raised to meet regulatory requirements in just over half of banks. - A quadrupling in NPLs (a “one-in-twenty year” shock, calibrated using historical patterns; still well below the peak observed in 2002) would leave nearly all banks with some capital shortfall. - Estimated losses under these scenarios remain broadly manageable at 0.2 and 1.2 percent of GDP, respectively. - Concentration risk: Single largest credit exposure exceeds 10 percent of regulatory capital in 10 banks; the five largest exposures together exceed half of regulatory capital in 8 banks. - Liquidity risk: System-level aggregate liquidity coverage ratio around 110 percent. - A stress scenario corresponding to the largest deposit withdrawal rates observed in recent years suggests several small banks would struggle to cover required liquidity needs, but with no systemic implications. - Note on regulatory requirements: - The quotas are set at 60 percent for general license banks and 50 percent for SME banks. - The Financial Services Law requires banks to retain 50 percent of their annual net profits to increase their capital base. - Although Bolivia has not adopted Basel III (including LCR), liquidity stress tests were based on LCR proxies using data for end-June 2016. ### Enhancing potential growth and inclusiveness - Labor and competitiveness: - Real wages among the lowest in the region; wage policies should aim to align labor costs with productivity as the growing wedge is a major constraint to the private sector. - Government decision not to pay the second Christmas bonus in 2016 should help competitiveness. - Other measures: improve business climate, reduce export and domestic price restrictions. - Hydrocarbons sector: - New hydrocarbon incentives law (December 2015) provides incentives for crude oil and condensates production and likely to stimulate more production from existing fields. - Law could have done more to incentivize exploration investment; effective tax burden remains high. - To attract further FDI into exploration, government could allow expensing investments in exploration for hydrocarbon tax purposes and introduce accelerated depreciation for development expenditures. - Social programs and distributional risks: - Commodity boom helped reduce inequality by increasing agricultural incomes and reducing rural-urban inequality; government policies and hydrocarbons revenues facilitated infrastructure and expanded social programs. - Lower growth will likely reduce pace of poverty reduction; Gini coefficient could start to rise as rural-urban inequalities increase with stresses in agriculture and constrained development spending. - Recommendations: better targeting and improved efficiency of social spending via means testing, introducing more competition in provision of social services, and more focus on performance. ### Authorities’ views - Growth outlook and disagreement with staff: - Authorities expect stronger outcomes from current and previous 5-year development plans and view staff’s projections as overly pessimistic, noting IMF forecasts had underestimated growth in the past decade. - Authorities expect output growth of around 4.8 percent and plan the 2017 budget on $45 per barrel oil price (as in the 2016 budget). - They argue significant public spending plans in the 2017 budget and beyond are oriented towards economic diversification and finding new revenue sources; consider current spending levels well controlled. - Disagreement on policy recommendations: - Authorities did not favor staff’s key policy recommendations and questioned whether the IMF should make policy recommendations for Bolivia. - They did not concur with staff’s recommendation to gradually reduce the non-hydrocarbon deficit over the medium term, noting the concept is difficult to explain to the public. *Source: IMF staff report excerpt from _cr16387.* ### 26. The authorities pointed to the existing mechanisms of subnational fiscal adjustments, ### _cr16387 - 26. The authorities pointed to the existing mechanisms of subnational fiscal adjustments, ### Subnational fiscal adjustments and revenues - Departmental governments are highly dependent on mining and hydrocarbon revenues but are required by the existing legal framework (Ley de Autonomías) to finance their operations through their own resources and savings from previous years, which induces an automatic fiscal adjustment towards a balanced budget. - Under the law, the central government is under no obligation to transfer additional resources to departmental governments. - The authorities reported that the fiscal position of local governments (municipalities) had not weakened because losses in local revenue from lower hydrocarbon revenues were counterbalanced through tax sharing and existing transfer mechanisms, which have benefitted from a set of tax and customs administration measures executed by the central government. ### Coordination between Ministry of Finance and BCB; role of BCB in development finance - The authorities view coordination of policies between the Ministry of Finance and the BCB as a key tool to promote economic growth and stability and consider coordination adequate. - The authorities do not see the need to phase out the BCB’s economic development role. - The authorities view BCB loans to SOEs as a key source of financial resources directed towards strategic investment projects in their industrialization plans. - The authorities argued that returns obtained by the BCB on these operations are higher than those derived from alternative financial investments. ### Exchange rate stance - Despite depreciation of neighboring currencies, the authorities do not see an exchange rate misalignment. - The authorities argued that exchange rate stability shielded the domestic economy from inflationary pressures and other adverse effects of exchange rate volatility observed in other countries in the region. - The authorities do not believe that more exchange rate flexibility would lead to higher economic diversification and consider it would only have a limited impact in addressing external imbalances. ### Financial sector law and credit risks - The authorities disagreed with staff’s analysis that the financial sector law may have led to increased credit and other risks. - Their arguments: - Credit growth was not excessive because credit was flowing to productive sectors. - NPLs were the lowest in the region. - Banks remained profitable. - Decreasing numbers of borrowers and rising loan sizes were a result of reclassification and did not indicate a reversal of gains in financial access. - The authorities noted a housing price index was built but more time would be needed before it could be published. ### Social policies, poverty, and rural development - The authorities highlighted efforts to reduce poverty and inequality, arguing social policies played a fundamental role in those reductions. - They are implementing and designing projects to support the agriculture sector and rural areas, some involving financial support from IFIs. - Efforts include improving irrigation, supporting farmers, and building roads to boost rural incomes and reduce inequality further. ### Staff appraisal — macroeconomic situation and outlook - After a decade of substantial economic and social progress underpinned by sound macroeconomic management, Bolivia is being challenged by low commodity prices. - Bolivia recorded strong growth accompanied by a substantial buildup of fiscal and external buffers, and achieved significant reductions in poverty and inequality. - Given still sizable policy buffers and developmental needs, the authorities can take a measured approach to adjustment, but it needs to start soon. Key statistics and projections cited by staff: - Growth is projected at 3.7 percent in 2016. - Potential growth is estimated at 3.5 percent. ### Staff-identified imbalances and adjustment needs - Growth will remain robust, but imbalances are growing due to: - Lower commodity prices combined with robust public spending leading to sustained large fiscal and external deficits absent significant adjustment. - Rapid wage growth and sizeable exchange rate appreciation in real effective terms eroding Bolivia’s competitiveness. - Key policy priorities recommended by staff: - Consolidation of the non-hydrocarbon primary balance, especially through streamlining spending. - Adoption of a credible medium-term fiscal framework which includes activities of SOEs more systematically. - Gradual transition towards a more flexible exchange rate regime to facilitate adjustment to lower commodity prices and provide defense against future external shocks. ### Structural and social policy recommendations - Increase private investment to support medium-term prospects. - Strengthen the existing hydrocarbon sector framework to increase incentives for exploration. - Rein in wage growth to align labor costs with productivity. - Eliminate distortionary policies in product markets to improve private sector participation and efficiency. - Improve targeting and efficiency of social spending to mitigate the impact of lower commodity prices on inequality and poverty by: - Building capacity to means test benefits. - Introducing more competition in provision of social services. - Focusing more on performance. ### Data and transparency recommendations - Data provision is broadly adequate for surveillance, with some shortcomings. - Progress made toward full subscription of the Special Data Dissemination Standard (SDDS). - Further steps to improve transparency and statistics: - Timely publication of macroeconomic data according to a pre-announced schedule. - Improve data on quasi-fiscal activities of subsidiaries of SOEs outside of the fiscal accounts. - Publish a real estate price index. *Source: IMF staff report content (chapter excerpts).* ### 36. Staff proposes holding the next Article IV Consultation with Bolivia on the standard ### _cr16387 - 36. Staff proposes holding the next Article IV Consultation with Bolivia on the standard ### Consultation proposal - Staff proposes holding the next Article IV Consultation with Bolivia on the standard 12-month cycle. ### Key economic and social indicators - GDP per capita (U.S. dollars, 2015): 2,900 - Poverty headcount ratio (percent of population, 2015): 38.6 - Population (millions, 2015): 11.5 - Gini index (2015): 47.0 - Life expectancy at birth (years, 2014): 68 - Adult literacy rate (percent, 2015): 95.1 - Infant mortality rate (per thousand, 2015): 30.6 - Net primary education enrollment rate (2011): 82.2 ### Macroeconomic overview and baseline projections - Real GDP (annual percent changes): 2010: 4.1; 2011: 5.2; 2012: 5.1; 2013: 6.8; 2014: 5.5; 2015: 4.8; 2016: 3.7; 2017: 3.9; 2018: 3.5; 2019: 3.5; 2020: 3.5; 2021: 3.5 - Real GDP excluding hydrocarbons (annual percent changes): 2010: 3.5; 2011: 5.0; 2012: 4.4; 2013: 6.2; 2014: 5.4; 2015: 5.4; 2016: 5.2; 2017: 3.7; 2018: 3.5; 2019: 3.4; 2020: 3.8; 2021: 3.6 - GDP deflator (annual percent changes): 2010: 8.8; 2011: 14.6; 2012: 7.1; 2013: 6.0; 2014: 2.0; 2015: -4.6; 2016: -2.0; 2017: 7.1; 2018: 5.2; 2019: 4.8; 2020: 4.2; 2021: 4.7 - CPI inflation (period average): 2010: 2.5; 2011: 9.9; 2012: 4.5; 2013: 5.7; 2014: 5.8; 2015: 4.1; 2016: 3.7; 2017: 4.8; 2018: 5.0; 2019: 5.0; 2020: 5.0; 2021: 5.0 - CPI inflation (end-of-period): 2010: 7.2; 2011: 6.9; 2012: 4.5; 2013: 6.5; 2014: 5.2; 2015: 3.0; 2016: 4.6; 2017: 5.0; 2018: 5.0; 2019: 5.0; 2020: 5.0; 2021: 5.0 ### Investment and savings - Total investment (percent of GDP): 2010: 17.0; 2011: 19.8; 2012: 17.7; 2013: 19.0; 2014: 21.0; 2015: 19.2; 2016: 20.9; 2017: 19.1; 2018: 18.0; 2019: 17.3; 2020: 16.5; 2021: 15.8 - Gross domestic savings (percent of GDP): 2010: 23.9; 2011: 25.5; 2012: 27.1; 2013: 26.0; 2014: 22.4; 2015: 13.2; 2016: 11.9; 2017: 14.0; 2018: 14.4; 2019: 14.8; 2020: 14.4; 2021: 14.3 - Saving/investment balances (percent of GDP): 2010: 8.0; 2011: 5.8; 2012: 8.1; 2013: 4.9; 2014: -0.6; 2015: -6.1; 2016: -8.1; 2017: -5.0; 2018: -4.0; 2019: -2.9; 2020: -2.6; 2021: -2.0 ### Public finances and fiscal outlook - Combined public sector revenues and grants (percent of GDP): 2010: 33.2; 2011: 36.2; 2012: 37.8; 2013: 39.1; 2014: 39.9; 2015: 37.7; 2016: 35.0; 2017: 35.2; 2018: 34.5; 2019: 34.6; 2020: 33.9; 2021: 33.6 - Of which: Hydrocarbon related revenue (percent of GDP): 2010: 10.2; 2011: 11.4; 2012: 13.0; 2013: 13.5; 2014: 12.7; 2015: 9.1; 2016: 6.4; 2017: 6.8; 2018: 6.0; 2019: 6.3; 2020: 5.6; 2021: 5.5 - Expenditure (percent of GDP): 2010: 31.5; 2011: 35.4; 2012: 36.0; 2013: 38.4; 2014: 43.3; 2015: 44.6; 2016: 43.0; 2017: 41.9; 2018: 40.7; 2019: 40.1; 2020: 39.2; 2021: 38.6 - Current expenditure (percent of GDP): 2010: 22.8; 2011: 24.2; 2012: 25.1; 2013: 24.9; 2014: 28.2; 2015: 29.1; 2016: 27.8; 2017: 27.8; 2018: 27.5; 2019: 27.4; 2020: 27.3; 2021: 27.3 - Capital expenditure (percent of GDP) 2/: 2010: 8.7; 2011: 11.2; 2012: 11.0; 2013: 13.5; 2014: 15.0; 2015: 15.5; 2016: 15.2; 2017: 14.1; 2018: 13.2; 2019: 12.6; 2020: 11.9; 2021: 11.3 - Overall balance after nationalization costs (percent of GDP): 2010: 1.7; 2011: 0.8; 2012: 1.8; 2013: 0.7; 2014: -3.4; 2015: -6.9; 2016: -8.1; 2017: -6.7; 2018: -6.2; 2019: -5.4; 2020: -5.3; 2021: -5.0 - Non-hydrocarbon balance, before nationalization costs (percent of GDP): 2010: -8.1; 2011: -9.6; 2012: -9.7; 2013: -11.1; 2014: -13.2; 2015: -14.1; 2016: -12.2; 2017: -11.4; 2018: -10.2; 2019: -9.7; 2020: -9.0; 2021: -8.6 - Total gross NFPS debt (percent of GDP) 3/: 2010: 38.5; 2011: 35.7; 2012: 35.7; 2013: 36.1; 2014: 37.0; 2015: 40.6; 2016: 46.7; 2017: 47.6; 2018: 48.8; 2019: 49.4; 2020: 51.2; 2021: 52.0 - NFPS deposits (percent of GDP): 2010: 20.8; 2011: 21.4; 2012: 24.2; 2013: 24.0; 2014: 20.3; 2015: 16.6; 2016: 15.1; 2017: 12.4; 2018: 10.3; 2019: 8.5; 2020: 7.9; 2021: 7.3 ### External sector and reserves - Current account (percent of GDP): 2010: 3.9; 2011: 0.3; 2012: 7.2; 2013: 2.4; 2014: 0.2; 2015: -5.8; 2016: -7.6; 2017: -4.7; 2018: -3.8; 2019: -2.9; 2020: -2.6; 2021: -2.3 - Merchandise exports (percent of GDP): 2010: 32.4; 2011: 34.6; 2012: 41.3; 2013: 37.9; 2014: 37.0; 2015: 25.0; 2016: 21.0; 2017: 21.8; 2018: 20.5; 2019: 20.3; 2020: 19.3; 2021: 18.5 - Of which: natural gas (percent of GDP): 2010: 14.1; 2011: 16.1; 2012: 20.1; 2013: 19.8; 2014: 18.1; 2015: 11.3; 2016: 7.0; 2017: 7.9; 2018: 7.6; 2019: 7.7; 2020: 6.6; 2021: 6.3 - Merchandise imports (percent of GDP): 2010: 28.3; 2011: 32.8; 2012: 31.4; 2013: 31.4; 2014: 31.6; 2015: 29.1; 2016: 27.5; 2017: 25.4; 2018: 23.4; 2019: 22.6; 2020: 21.1; 2021: 20.0 - Net Central Bank foreign reserves (in millions of U.S. dollars): 2010: 9,730; 2011: 12,019; 2012: 13,927; 2013: 14,430; 2014: 15,123; 2015: 13,056; 2016: 10,344; 2017: 8,330; 2018: 6,721; 2019: 5,570; 2020: 4,442; 2021: 3,945 - Net official reserves (end-of-period, in millions of U.S. dollars): 2010: 9,730; 2011: 12,019; 2012: 13,927; 2013: 14,430; 2014: 15,123; 2015: 13,480; 2016: 10,768; 2017: 8,753; 2018: 7,143; 2019: 5,992; 2020: 4,863; 2021: 4,366 - Net official reserves (in months of imports of goods and services): 2010: 17.6; 2011: 15.7; 2012: 16.8; 2013: 15.2; 2014: 14.1; 2015: 14.2; 2016: 11.6; 2017: 9.3; 2018: 7.4; 2019: 6.0; 2020: 4.8; 2021: 4.1 ### Financial sector and monetary developments - Credit to the private sector (percent of GDP): 2010: 36.0; 2011: 36.8; 2012: 39.0; 2013: 40.9; 2014: 43.7; 2015: 51.5; 2016: 59.5; 2017: 61.6; 2018: 62.8; 2019: 63.9; 2020: 64.9; 2021: 65.7 - Broad money (annual percent changes): 2010: 12.5; 2011: 17.7; 2012: 20.2; 2013: 16.2; 2014: 15.6; 2015: 16.2; 2016: 4.5; 2017: 11.1; 2018: 9.3; 2019: 9.1; 2020: 8.6; 2021: 9.2 - U.S. dollar and dollar-indexed deposits (in percent of total deposits): 2010: 43.8; 2011: 34.5; 2012: 26.3; 2013: 21.0; 2014: 17.6; 2015: 15.6; 2016: 15.6; 2017: 15.6; 2018: 15.6; 2019: 15.6; 2020: 15.6; 2021: 15.6 - U.S. dollar and dollar indexed credit (in percent of total credit): 2010: 38.6; 2011: 30.7; 2012: 21.3; 2013: 15.8; 2014: 10.2; 2015: 8.0; 2016: 3.0; 2017: 3.0; 2018: 3.0; 2019: 3.0; 2020: 3.0; 2021: 3.0 - Central Bank foreign exchange interventions remain low; central bank lending to state-owned enterprises continues to expand (Figure notes). ### Balance of payments (selected levels, in millions of U.S. dollars) - Current account: 2010: 766; 2011: 77; 2012: 1,970; 2013: 749; 2014: 61; 2015: -1,923; 2016: -2,563; 2017: -1,786; 2018: -1,571; 2019: -1,298; 2020: -1,232; 2021: -1,211 - Trade balance: 2010: 812; 2011: 431; 2012: 2,676; 2013: 2,014; 2014: 1,783; 2015: -1,384; 2016: -2,209; 2017: -1,354; 2018: -1,233; 2019: -998; 2020: -868; 2021: -765 - Exports, f.o.b. (millions of U.S. dollars): 2010: 6,402; 2011: 8,358; 2012: 11,254; 2013: 11,698; 2014: 12,301; 2015: 8,302; 2016: 7,100; 2017: 8,188; 2018: 8,560; 2019: 9,034; 2020: 9,253; 2021: 9,641 - Imports, c.i.f. (millions of U.S. dollars): 2010: -5,590; 2011: -7,927; 2012: -8,578; 2013: -9,684; 2014: -10,518; 2015: -9,686; 2016: -9,309; 2017: -9,542; 2018: -9,793; 2019: -10,032; 2020: -10,121; 2021: -10,406 - Direct investment (net, millions of U.S. dollars): 2010: 672; 2011: 859; 2012: 1,060; 2013: 1,750; 2014: 648; 2015: 503; 2016: 169; 2017: 376; 2018: 628; 2019: 888; 2020: 1,197; 2021: 1,665 ### Financial system survey (selected) - Net short-term foreign assets (stocks, millions of U.S. dollars): 2010: 77,635; 2011: 90,634; 2012: 105,197; 2013: 110,565; 2014: 119,040; 2015: 108,154; 2016: 91,300; 2017: 80,734; 2018: 72,820; 2019: 68,238; 2020: 63,931; 2021: 63,996 - Broad money (stocks, millions of U.S. dollars): 2010: 84,382; 2011: 99,315; 2012: 119,367; 2013: 138,661; 2014: 160,279; 2015: 186,305; 2016: 194,677; 2017: 216,295; 2018: 236,474; 2019: 258,026; 2020: 280,313; 2021: 306,207 - Credit to the private sector (stocks, millions of U.S. dollars): 2010: 49,668; 2011: 61,090; 2012: 72,922; 2013: 86,706; 2014: 99,744; 2015: 117,315; 2016: 137,901; 2017: 158,835; 2018: 176,308; 2019: 194,740; 2020: 213,262; 2021: 234,569 ### Fiscal structure and operations of the consolidated public sector - Revenue composition (percent of GDP, selected items): Taxes (2010: 26.3; 2015: 31.3; 2016: 28.7), IDH and royalties (2010: 7.7; 2015: 7.6; 2016: 5.1), Indirect taxes (2010: 14.0; 2015: 17.6; 2016: 17.5) - Expenditure composition highlights: Compensation of employees (2010: 9.5; 2015: 12.6; 2016: 12.2), Social benefits (2010: 7.8; 2015: 8.4; 2016: 8.1) - Net lending/borrowing (overall balance, percent of GDP): 2010: 1.7; 2011: 0.8; 2012: 1.8; 2013: 0.7; 2014: -3.4; 2015: -6.9; 2016: -8.1; 2017: -6.7; 2018: -6.2; 2019: -5.4; 2020: -5.3; 2021: -5.0 - Memorandum: Nominal GDP in billions of Bolivianos: 2010: 137.9; 2011: 166.2; 2012: 187.2; 2013: 211.9; 2014: 228.0; 2015: 228.0; 2016: 231.9; 2017: 258.0; 2018: 280.8; 2019: 304.7; 2020: 328.4; 2021: 356.9 ### Risk Assessment Matrix — key risks and recommended responses - Persistently lower energy prices (Direction: ↓; Likelihood: Low) — Expected impact: High. Recommended response: Gradually introduce fiscal adjustment, allow greater exchange rate flexibility, and improve the business climate to facilitate investment and diversification. - Slowdown in China and other large EMs/frontier economies including Brazil (Direction: ↓; Likelihood: Low to Medium/Medium) — Expected impact: Medium to High. Recommended response: Temporarily maintain accommodative monetary and fiscal policies as allowed by existing buffers; permit some exchange rate flexibility. - Sharp rise in risk premia with flight to safety and U.S. dollar appreciation (Direction: ↓; Likelihood: Medium) — Expected impact: Low to Medium. Recommended response: Gradual exchange rate flexibility; ensure policy credibility; close financial supervision. - Distortions in the financial system (Direction: ↓; Likelihood: Medium) — Expected impact: Low to Medium. Recommended response: Modify key provisions of the Financial Services Law (interest rate caps, credit quotas, timelines) via decrees if material risks emerge. - Larger impact of drought on agriculture (Direction: ↓; Likelihood: High) — Expected impact: Low to Medium. Recommended response: Revise trade policies as needed; temporary and targeted support. - Natural gas production and reserves (Direction: ↓; Likelihood: Medium) — Expected impact: Medium to High. Recommended response: Improve environment for private sector participation in hydrocarbons; proactively negotiate Brazilian contract extension. - Delay in policy adjustment (Direction: ↓; Likelihood: High) — Expected impact: Medium to High. Recommended response: Narrow the non-hydrocarbon fiscal deficit to contain debt accumulation and help narrow overall BOP deficits. ### Past Fund policy recommendations and implementation status (selected) - Improve the non-hydrocarbons balance: Not implemented. "The non-hydrocarbons deficit continued to widen." - Adopt a medium-term fiscal framework: In progress. Authorities adopted a five-year development plan, required public enterprises to prepare multi-year budgets, and created a Macro-Fiscal Unit at the Ministry of Finance to produce fiscal projections. - 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. "There has been a stable exchange rate vis-à-vis U.S. dollar since November 2011." - Continue strengthening supervision: Partially implemented. Credit registry coverage expanded; depositor protection fund created; regulatory requirements strengthened; Financial Stability Council met in August 2015. - Modify interest rate caps and credit quotas: Limited progress. Compliance timelines and scope adjustments noted; small lenders facing difficulties. - Resolve legal and regulatory uncertainty for hydrocarbons and mining fiscal regimes: Some progress. Hydrocarbon incentives law approved in December 2015 provides production incentives but falls short on exploration attractiveness. *Sources: Ministry of Economy and Public Finances, Central Bank of Bolivia, National Institute of Statistics, UDAPE, and Fund staff calculations.* ### Annex I. Financial Stability Assessment ### Annex I. Financial Stability Assessment ### Financial Soundness Indicators and banking sector condition - Vulnerability assessment: - Financial Soundness Indicators suggest vulnerabilities have increased to “medium” since the first half of 2015, driven by rapid credit growth. - Bank balance sheets and structural indicators: - Deposit-to-loan ratio: 122.7; 148.2; 133.4; 128.5; 129.1; 129.5; 135.6; 127.9; 127.9 (quarterly sequence shown in source). - FX liabilities % (of total liabilities): 23.1; 19.9; 18.6; 19.4; 19.1; 18.9; 17.1; 17.7; 17.7. - FX loans % (of total loans): 9.4; 6.3; 5.5; 5.0; 4.2; 3.5; 2.9; 2.5; 2.5. - Leverage ratio (%): 8.2; 7.9; 7.7; 7.7; 7.7; 7.4; 7.4; 7.5; 7.5. - Profitability and asset quality: - ROA: 1.2; 1.2; 1.1; 1.0; 1.0; 1.0; 0.8; 0.8; 0.8. - ROE: 16.0; 16.9; 14.8; 13.8; 13.8; 15.1; 11.3; 11.9; 11.9. - NPL ratio: 1.6; 1.5; 1.7; 1.0; 1.6; 1.5; 1.7; 1.6; 1.6. - NPL ratio change (%, annual): -1.2; -2.6; 4.3; -33.8; 1.9; -0.7; -1.2; n.a.; -1.2. - Credit dynamics: - Change in credit / GDP ratio (pp, annual): 2.4; 2.8; 3.5; 4.4; 6.2; 7.7; 8.0; 8.0; 8.0. - Growth of credit / GDP (%, annual): 6.0; 6.9; 8.5; 10.4; 14.6; 17.5; 18.2; 17.0; 17.0. - Credit-to-GDP gap (std. dev): -0.5; 0.1; 0.0; 2.1; 2.9; 2.9; 1.8; 1.8; 1.8. - Staff commentary: - Banks’ balance sheets remain healthy with low structural risks; deposit-to-loan ratio remains high; foreign exchange exposure is limited given low deposit and credit dollarization. - Bank profitability has been declining but still remains robust. - Looking ahead, the financial services law may lead to new risks; vigilance regarding asset quality and the speed of credit growth is needed. ### Financial stability map and risk assessment - Overall trends: - Bolivia’s financial stability map shows an increase in risks since Q1 2014. - Macroeconomic and inward spillover risks have increased, reflecting emerging large fiscal and external deficits. - Credit risks are on the rise (strong credit growth, slight increase in non-performing loans, declining profitability). - Comparative positioning: - The level of overall macro-economic risks for Bolivia is now higher than the level of global risks reported in the April 2016 Global Financial Stability Report. - Market and liquidity risks are lower than global risks because Bolivian banks’ deposit-to-loan ratios are higher than in those in other countries. ### Hydrocarbons sector prospects and exploration activity - Historical context: - Gas production increased eightfold over 1998–2014 following late 1990s discoveries. - At the peak in 2013–14, hydrocarbons accounted for roughly 31 percent of fiscal revenues, 8 percent of GDP and over 50 percent of export revenues. - Recent production and reserves: - Gas production fell by over 1 percent in 2015. - Expected production change: fall by another 1–2 percent in 2016; recovery in 2017 as Incahuasi came on stream in August 2016. - Proven reserves are now estimated at about 10 Tcf, equal to a maximum of 10 years of production at current volumes. - Exploration and investment: - Total planned investment for 2016 was US$2,411 million; exploration investment accounted for roughly 28 percent of total investment. - For 2016, the scheduled total investment by YPFB headquarters, YPFB subsidiaries and private operators was 905.6, 942.7 and 562.6 (millions of US$), respectively. - YPFB estimates total potential of fields currently being explored at around 29–35 TCF, with expected discoveries of 5–10 TCF (applying subjective discovery probabilities). - Authorities aim to attract FDI; the hydrocarbon investment law passed in late 2015 is a positive step. - Promising projects and timelines: - Most potential in non-traditional zones: Huacareta (BG-Shell), Azero (Total), San Telmo (Petrobras). - Timeline: discovery results not expected before 2018–19; production in the mid-2020s if successful. Boyuy or Boycobo could produce by 2019 if successful. ### Natural gas production scenarios and domestic/export demand - Production scenarios (millions of cubic meters per day): - Current production about 60. - Projected near-term increase to close to 70 by 2019 under baseline. - Under baseline, Bolivia would struggle to meet internal demand and minimum contractual export volumes after 2021. - Source-provided scenario graph includes: Baseline Production Scenario; Upside Production Scenario; Downside Production Scenario; Domestic Gas Demand Projection; Minimum guaranteed exports to ARG and BRA; Maximum contractual exports to ARG and BRA. - Staff conclusion: - There are risks to meeting internal and external gas demand over 2016–25 using current pipeline of exploratory projects and likely production curves. ### Industrialization projects: scope, costs, and concerns - Government strategy: - Ambitious downstream hydrocarbon industrialization and electricity generation program to move into petrochemicals and electricity; core element of five-year development plan to transform Bolivia into a South American energy hub. - YPFB investments: - YPFB is investing roughly US$4.3 billion in gas separation plants and petrochemical plants to turn natural gas into fertilizers and plastic. - Half of US$4.3 billion already executed; the largest project (polyethylene plant) still outstanding. - ENDE investments: - ENDE investing heavily in thermoelectric and hydroelectric generation to generate excess capacity for export. - Expected export impact: - Staff baseline projections envisage exports from industrialization projects to increase total goods exports by 2 percent in 2021; in a best case scenario, exports could be higher by another 6 percent in 2021. - Project risks: - Downside risks include potential shortage in gas as input, elevated costs, logistical issues, and lack of guaranteed markets. - Financial viability of projects is not clear from available information. ### Risks to public enterprises and the Central Bank balance sheet - Central Bank (BCB) financing of projects: - Most financing for industrialization projects comes directly from the central bank. - Loans to SOEs issued in bolivianos at highly concessional terms: subsidized interest rates (averaging less than 1 percent), grace periods (3 to 7 years) for principal and interest, maturities (18 to 30 years). - Loans to ENDE and COMIBOL are ultimately guaranteed by the Treasury with TGN securities; loans to YPFB are guaranteed by YPFB through account receivables. - Magnitude of BCB lending (outstanding amounts in millions of Bolivianos reported in source): - YPFB: 12,563 (in millions of Bolivianos). - ENDE: 4,612. - COMIBOL: 2,149. - Equivalent in percent of BCB's capital: YPFB 1,000; ENDE 367; COMIBOL 171 (source table presentation). - Fiscal and enterprise balance trends: - Public enterprises increased spending; the fall in hydrocarbon prices has tipped enterprises’ balances into negative territory. - YPFB accounts for bulk of overall deficit in consolidated public enterprise sector; almost entire deficit financed by the central bank. - Central Bank net income implications: - For every dollar lent, BCB receives subsidized interest; BCB likely faces either higher interest payments on its own securities or foregone interest income due to reduced NIR. - Historically, about half of BCB’s revenues came from earnings on foreign assets; half of expenses (excluding transfers to the Treasury) were due to cost of open market operations (interest on BCB securities). ### Scenario analysis and stress-test results for public enterprises - Scenario assumptions and outcomes: - Baseline scenario uses current WEO projections with global oil prices rising smoothly from current levels to US$56.29 per barrel by the end of 2020. - Baseline outcome: overall sector’s balance deteriorates sharply this year to -6½ percent of GDP, and only turns positive by 2019. - This entails a cumulative financing need of Bs 47 billion (about 11 percent of GDP) over the next five years. - Severe scenario: oil prices remain at US$30 per barrel over the next five years; cumulative deficit around Bs 117 billion. - Benign scenario: oil prices recover to US$78 per barrel by 2020; overall balance turns positive after four years. - Repayment schedules and contingent pressures: - Public enterprises face substantial repayment schedules over coming years, with pressures as early as 2016–17 for YPFB. - Large number of loans approved but not disbursed by the BCB, which if fully implemented would add further pressures in outer years, particularly ENDE. - Consolidated public enterprise fiscal metrics (selected historical figures, in millions of Bolivianos, from table): - Total Revenue 2015: 54,516. - Total Expenditure 2015: 60,020. - Overall Balance 2015: -5,503. - Net Financing from the Central Bank 2015: 6,523 (memorandum item in the table). - Crude oil price (US$ per bbl) 2015: 48.7 (historical series also provided in table). - Subsidiaries’ profit and investment dynamics (selected figures, in millions of Bolivianos): - YPFB Group net profits before tax: 2012 6,347; 2013 6,799; 2014 7,055; 2015 1,311. - YPFB Group acquisition of fixed assets: 2012 3,301; 2013 3,682; 2014 4,198; 2015 4,379. - ENDE Group net profits before tax: 2012 168; 2013 198; 2014 807; 2015 1,435. - ENDE Group acquisition of fixed assets: 2012 401; 2013 685; 2014 905; 2015 1,595. ### Key risks and policy implications (derived from assessment) - Financial sector vigilance: - Monitor asset quality and the speed of credit growth given rapid credit expansion and medium vulnerabilities. - Hydrocarbon and industrialization strategy: - Attract FDI and foreign financing/know-how to complement YPFB exploration efforts; consider policy measures to make exploration activity more attractive (example cited: allow exploration spending to be offset against hydrocarbon taxes). - Public enterprise and central bank risk management: - Reassess concessional lending terms and fiscal guarantees to limit contingent liabilities for Treasury and the BCB. - Prepare contingency measures for large repayment schedules and potential further disbursements of approved loans. - Address risks to BCB net interest income from concessional lending and potential normalization of U.S. interest rates. *Source: Annex I. Financial Stability Assessment (selected content) from the provided IMF document.* ### Annex III. Debt Sustainability Analysis—Baseline Scenario ### Annex III. Debt Sustainability Analysis—Baseline Scenario ### Summary and overall risk assessment - Staff’s analysis using the Public DSA framework for Market-Access Countries: risks to Bolivia’s public debt are moderate in the medium term (2016–21). - At 43 percent of GDP in August 2016, Bolivia’s public debt is moderate by international standards, but it has grown significantly and is projected to reach about 52 percent of GDP in 2021. - Medium-term risks remain manageable if the authorities continue their pragmatic approach to implementing public investment plans (as under the baseline projections). - Financing need remains below the respective benchmark under most standard macroeconomic shocks through 2021, except: - 2016 financing need: 10.2 percent of GDP. - Under the primary balance shock, gross financing need is projected to exceed 10 percent of GDP in 2017–18. ### Debt profile and recent developments - Public sector debt definition in this DSA: all financial obligations of the central government and subnational governments plus liabilities of non-financial state-owned enterprises (SOEs) to the central bank (BCB). - Key facts: - Public sector debt: 35.7 percent of GDP in 2012; increased to 40.6 percent of GDP in 2015. - BCB’s lending to SOEs: 1.9 percent of GDP in 2011; 9.2 percent of GDP in 2015. - Increase in gross public debt in 2015 relative to 2014: 3.6 percentage points of GDP, driven mainly by increased external debt and BCB lending to SOEs. - External debt share: about 47 percent of total debt at end-2015. - Net public debt (gross debt excluding deposits of the general government and SOEs at the BCB): 28 percent of GDP at end-August 2016. ### Macroeconomic and fiscal assumptions (staff projections) - Real GDP growth: - 2016: 3.7 - 2017: 3.9 - 2018–21: 3.5 (each year) - Inflation (GDP deflator): - 2016: -2.0 - 2017: 7.1 - 2018: 5.2 - 2019: 4.8 - 2020: 4.2 - 2021: 4.7 - GDP deflator change: decline about 2 percent in 2016, increase about 7 percent in 2017, and increase 4.2–5.2 percent in 2018–21. - Primary balance (percent of GDP): - 2016: -7.0 - 2017: -5.7 - 2018: -5.1 - 2019: -4.2 - 2020: -3.9 - 2021: -3.4 - Effective interest rate (defined as interest payments divided by debt stock at end of previous year): - 2016: 2.5 - 2017: 2.5 - 2018: 2.5–2.7 (table shows 2.7 in 2019, 3.0 in 2020, 3.3 in 2021) - Under these assumptions: - Gross financing needs of the public sector projected to fall to about 8 percent of GDP in 2019–21 from about 10 percent of GDP in 2016. - Public debt-to-GDP ratio projected to increase to about 52 percent in 2021. ### Stress tests — scenarios and outcomes (debt-to-GDP results) - Baseline (for reference): projected debt-to-GDP about 52 percent in 2021. - Primary balance shock: - Shock: primary balance in 2017–18 hit by 1.9 percent of GDP (50 percent of the 10-year historical standard deviation). - Debt-to-GDP: increases to 52.6 percent in 2018 and to 55.7 percent in 2021 (about 3.7 percentage points higher than baseline in 2021). - Growth shock: - Shock: real GDP growth rates 1 percentage point lower in 2017–18 (100 percent of the 10-year historical standard deviation). - Debt-to-GDP: increases to 51.3 percent in 2018 and to 54.4 percent in 2021 (2.4 percentage points higher than baseline). - Interest rate shock: - Shock: real interest rates increase by about 330 basis points during 2017–21 (difference between average real interest rate in 2006–15 and the highest historical real rate). - Debt-to-GDP: gradually increases to 54.3 percent in 2021 (2.3 percentage points higher than baseline). - Exchange rate shock: - Shock: real effective exchange rate depreciates by 20 percent in 2017. - Debt-to-GDP: increases to 50.1 percent in 2017 and then to 54.2 percent in 2021 (2.2 percentage points higher than baseline). - Combined shock (simultaneous combination of the four shocks above): - Debt-to-GDP: rises to 55.3 percent in 2017, 58.9 percent in 2018, and 63.1 percent in 2021 (11.1 percentage points higher than baseline). - Contingent liability shock: - Shock: one-time increase in non-interest expenditures equivalent in 2017 to 10 percent of banking sector assets, combined with lower growth and lower inflation in 2017–18 (growth reduced by 1 standard deviation). - Debt-to-GDP: peaks at 55.9 percent in 2018, followed by a gradual increase to 58.9 percent in 2021 (6.9 percentage points higher than baseline). ### Key indicators and historical table highlights - Public gross financing needs (table 2014–2021, in percent of GDP): - 2014: 1.0 - 2015: 4.2 - 2016: 8.0 - 2017: 10.2 - 2018: 9.0 - 2019: 8.5 - 2020: 7.8 - 2021: 7.8 - Nominal gross public debt (table 2014–2021, in percent of GDP): - 2014: 44.4 - 2015: 37.0 - 2016: 40.6 - 2017: 46.7 - 2018: 47.6 - 2019: 48.8 - 2020: 49.4 - 2021: 51.2 - Identified debt-creating flows cumulative (2014–21): 16.0 (table line "Identified debt-creating flows ... cumulative 16.0"). - Primary (noninterest) revenue and grants cumulative 2005–2013 projection: 206.8 (table shows "206.8" under cumulative). - Automatic debt dynamics (cumulative over projection period): -13.3 (table shows cumulative -13.3). ### Policy implications and recommendations (as stated) - Maintain the pragmatic approach to implementing public investment plans to keep medium-term risks manageable. - Monitor public gross financing needs, especially given the 2016 spike to 10.2 percent of GDP and the projected exceedance of 10 percent under a primary balance shock in 2017–18. - Given expected global monetary tightening and higher interest rates, monitor the evolving effective interest rate impact, which is described as gradual and limited given the maturity structure of the debt stock. *Source: IMF staff (Annex III. Debt Sustainability Analysis—Baseline Scenario).* ### Annex IV. External Stability Assessment ### Annex IV. External Stability Assessment ### A. Challenges Affecting the External Sector - Commodity price shock: - Peak-to-trough declines in prices ranged between 30 to 71 percent for hydrocarbons, metals, and soybeans and derivatives. - These goods accounted for more than three-quarters of Bolivia’s exports in 2015. - Since bottoming out, prices have gained between 11 and 51 percent, but remain below peak levels. - Futures contracts indicate only modest strengthening of these commodity prices over the next five years. - Real effective exchange rate (REER): - The real value of the Boliviano has surged, largely reflecting sharp depreciations of major trading partners (including Brazil and Argentina). - As of September 2016, the REER depreciated 1.9 percent from a year ago, but remains 49 percent appreciated relative to the January 2010 level. - Sectoral supply shocks: - Natural gas shipments decreased temporarily mid-year due to challenges at existing fields; a new field launched in August restored output to normal levels, but overall natural gas export quantities are expected to be lower this year. - A major drought in agriculture is expected to reduce crop output by 4 percent this year. - Current account outlook: - A wide current account deficit opened up in 2015 and is set to continue. - The current account deficit will reach 7.6 percent of GDP in 2016. - Exports are expected to decline in 2016 reflecting commodity price effects and sectoral supply shocks. - Imports will remain high, supported by authorities’ investment plans. - Staff forecasts annual current account deficits to decrease but remain significant, declining to 2⅓ percent of GDP in 2021. ### B. Reserves Remain Fully Adequate - Reserve drawdown financing: - Capital and financial account flows have not fully financed recent current account deficits; a drawdown in reserves (NIR) has largely financed them. - In 2015, reserves decreased US$2.1 billion. - So far in 2016, reserves have come down another US$2.3 billion. - Reserves stood at US$10¾ billion through mid-October 2016, or around 32 percent of GDP. - Adequacy metrics and projections: - Under staff’s projection for 2016, reserves would decrease to 30½ percent of GDP and cover 11.6 months of imports. - The Assessing Reserve Adequacy benchmark (applicable to countries with inflexible exchange rates) stands at 16 percent of GDP; projected reserves would be well above 100–150 percent of that benchmark. - Reserves in excess of the benchmark are warranted given Bolivia’s commodity-exporter vulnerability to price shocks. - Staff’s baseline has reserves falling below recommended levels in the medium term in the absence of policy adjustment, underscoring the need for adjustment. ### C. Real Exchange Rate Assessment - EBA-lite approaches and results: - Current account approach: - Desirable policies imply a current account norm of about -5 percent of GDP. - To close the gap between the norm (-5 percent of GDP) and the expected 2016 outturn (-7.6 percent of GDP), the real exchange rate would need to depreciate by about 17½ percent. - REER approach: - The REER model finds an REER overvaluation of 24 percent. - External sustainability and NIIP scenarios: - Bolivia’s net international investment position (NIIP) is currently strong; as of 2015 Bolivia held a slight net asset position. - Scenario 1 (maintain 2015 NFA level): - Maintaining this high NIIP level would require a current account surplus of 0.2 percent of GDP. - That would be consistent with a real depreciation of almost 17¼ percent. - Scenario 2 (stabilize at 2007 NFA level of -11.3 percent of GDP): - Stabilizing at -11.3 percent of GDP would require a current account deficit of around 2⅓ percent of GDP. - That would entail a real depreciation of about 10 percent. ### D. Weakening Performance in Other Measures of Competitiveness - International competitiveness rankings and logistics: - Bolivia’s ranking in the World Economic Forum’s Global Competitiveness Index deteriorated from 105th place in 2014–15 to 117th place in 2015–16. - Out of twelve subcategories, Bolivia performed above the median for Latin American countries in two areas: macroeconomic environment and institutions. - Labor and goods market efficiency, business sophistication, and innovation were particularly weak. - Perceptions of logistics capability are weaker than the median for Latin America and have declined; respondents were critical of the quality and competence of logistics providers and customs, though shipments and timeliness improved slightly. - Labor cost and productivity dynamics: - Real minimum wage growth in Bolivia averaged 14.2 percent over the past 10 years; only Uruguay had slightly faster nominal growth at 14.9 percent. - Overall, real labor incomes have risen about 47 percent over 2000–14. - Labor productivity (real output per employed person) grew 24 percent over the same period, implying real wages have grown ahead of productivity and creating a drag on competitiveness. - Diversification and export structure: - Authorities have objectives and initiatives to diversify and produce higher value-added commodities; some non-traditional exports expanded. - However, the share of nontraditional exports has changed little over the past 12 years; exports remain principally concentrated in natural resource extraction (hydrocarbons and minerals). - Bolivia’s share of world exports has risen due to increases in main commodities, but its share of world real exports has remained broadly stable. *Source: Annex IV. External Stability Assessment, _cr16387 - Annex IV. External Stability Assessment* ### 0.1 percent of GDP). Moreover, levels of dollarization have fallen rapidly in recent years. Roughly ### _cr16387 - 0.1 percent of GDP). Moreover, levels of dollarization have fallen rapidly in recent years. Roughly ### Dollarization and FX exposures - Roughly 15–16 percent of assets and liabilities are currently denominated in U.S. dollars. - On the asset side, most FX-denominated assets are made of cash and high-quality liquid assets. - Credit dollarization represents a mere 2 percent of total loans. - FX loans are generally provided to borrowers that receive hard currency income. - Given the small amounts involved, the presence of any “unhedged borrowers” is unlikely to pose a systemic risk. ### Concentration risk (largest borrower defaults) - Assessment based on hypothetical default of largest borrowers. - In most banks, the largest single exposure represents an important share of total regulatory capital. - The largest exposure in two small banks is close to the regulatory minimum (20 percent of capital). - Although reported collateral against large loans often exceeds loan amounts, collateral may not eliminate risk due to: - valuation deficiencies, - practical limitations (e.g., costly legal process, large execution times), - possible encumbrance (e.g., syndicated loans). - Stress test results: - Default of the single largest borrower would lead to system-wide losses of around 543 million Bolivianos, with resulting capitalization of all banks above the 10 percent minimum. - Hypothetical default of the largest 5 borrowers would lead to losses of about 1.86bn Bolivianos (0.8 percent of GDP) and would result in the undercapitalization of 6 banks. - Table 2: Largest Credit Exposures in the Banking System (In percent of total regulatory capital) — selected values preserved exactly as reported: - All Banks — Largest borrower: 11.4; Largest 5 borrowers: 46.4; Largest 10 borrowers: 76.4 - B1 — Largest borrower: 16.6; Largest 5 borrowers: 64.1; Largest 10 borrowers: 100.3 - B2 — Largest borrower: 19.5; Largest 5 borrowers: 91.9; Largest 10 borrowers: 139.1 - B3 — Largest borrower: 18.7; Largest 5 borrowers: 81.3; Largest 10 borrowers: 129.2 - B4 — Largest borrower: 14.7; Largest 5 borrowers: 41.6; Largest 10 borrowers: 59.8 - B5 — Largest borrower: 16.8; Largest 5 borrowers: 79.9; Largest 10 borrowers: 141.9 - B6 — Largest borrower: 16.1; Largest 5 borrowers: 65.7; Largest 10 borrowers: 117.0 - B7 — Largest borrower: 3.3; Largest 5 borrowers: 10.1; Largest 10 borrowers: 15.3 - B8 — Largest borrower: 13.7; Largest 5 borrowers: 57.3; Largest 10 borrowers: 90.9 - B9 — Largest borrower: 14.5; Largest 5 borrowers: 47.5; Largest 10 borrowers: 79.1 - B10 — Largest borrower: 19.0; Largest 5 borrowers: 76.5; Largest 10 borrowers: 94.3 - B11 — Largest borrower: 9.0; Largest 5 borrowers: 37.4; Largest 10 borrowers: 63.0 - B12 — Largest borrower: 0.8; Largest 5 borrowers: 3.2; Largest 10 borrowers: 5.0 - B13 — Largest borrower: 0.1; Largest 5 borrowers: 0.4; Largest 10 borrowers: 0.7 - B14 — Largest borrower: 12.8; Largest 5 borrowers: 59.3; Largest 10 borrowers: 101.5 ### Liquidity risk and LCR proxies - Liquidity assessment uses liquidity coverage metrics with LCR-type proxies constructed bank-by-bank using balance sheet data and Basel III–style assumptions. - The LCR measures potential net outflows over the next 30 days and the counterbalancing capacity from available liquid assets (“liquidity buffer”). - Banks should maintain an LCR above 100 percent. - An additional LCR-proxy was constructed calibrated on historically observed deposit run-off rates in Bolivia, which are much larger than standard Basel III run-off rates. - Table 3: Assumptions Used in Computation of LCR Proxies (values preserved exactly) - Liquid Assets ("Liquidity Buffer"): - Cash: Basel III 0; Bolivia-specific 0 - Deposits at Central Bank: Basel III 0; Bolivia-specific 0 - Central Bank securities: Basel III 0; Bolivia-specific 0 - Government securities: Basel III 15; Bolivia-specific 15 - Interbank claims: Basel III 100; Bolivia-specific 100 - Loans (performing) maturing within 1 month: Basel III 50; Bolivia-specific 50 - Other assets maturing within 1 month: Basel III 50; Bolivia-specific 50 - Potential Outflows: - Interbank deposits: Basel III 100; Bolivia-specific 100 - Customer Deposits: - Stable deposits: Basel III 5; Bolivia-specific 25 - Less stable deposits: Basel III 10; Bolivia-specific 50 - Term deposits, RM > 1 month: Basel III 0; Bolivia-specific 5 - Other deposits 1/: Basel III 40; Bolivia-specific 40 - Non-deposit liabilities maturing within 1 month: Basel III 100; Bolivia-specific 100 - Footnote 1/: Include desposits from large non-financial corporates, sovereigns, central banks, and SOEs. ### Fund relations and financial position (as presented) - Membership Status: Joined December 27, 1945; accepted obligations under Article VIII, sections 2, 3, and 4 on June 5, 1967. - Exchange regime: Boliviano; de jure regime crawling peg to the U.S. dollar; de facto exchange rate arrangement reclassified to a stabilized arrangement effective November 2, 2011. - Article IV: Last completed by the Executive Board on November 20, 2015 (Country Report No. 15/334). Bolivia follows a standard 12-month consultation cycle. - General Resources Account (values preserved exactly): - Quota 171.50 SDR Million (100.00 percent of Quota) - Fund holdings of currency (Exchange Rate) 162.64 SDR Million (94.83 percent) - Reserve Tranche Position 8.87 SDR Million (5.17 percent) - SDR Department: - Net cumulative allocation 164.13 SDR Million (100.00 percent of Quota) - Holdings 166.70 SDR Million (101.56 percent) - Outstanding Purchases and Loans: None - Latest Financial Arrangements (In SDR Millions) — listed exactly as presented: - Stand-By Arrangement Apr 02, 2003 – Mar 31, 2006; Amount Approved (SDR Million) 145.78; Amount Drawn (SDR Million) 111.50 - ECF Sep 18, 1998 – Jun 07, 2002; Amount Approved 100.96; Amount Drawn 63.86 - ECF Dec 19, 1994 – Sep 09, 1998; Amount Approved 100.96; Amount Drawn 100.96 - Projected Payments to the Fund (SDR Million; Based on existing use of resources and present holdings of SDRs): - Charges/Interest: 2016 0.01; 2017 0.01; 2018 0.01; 2019 0.01 - Total: 2016 0.01; 2017 0.01; 2018 0.01; 2019 0.01 - Safeguards Assessment: CBB was subject to an assessment for the April 2, 2003 SBA; assessment completed June 27, 2003; update assessment completed September 27, 2004; currently CBB is not subject to the safeguards policy. ### World Bank Group and multilateral engagement (selected points) - World Bank Country Partnership Framework (CPF) for 2016–20: two pillars — (1) promote broad-based and inclusive growth; (2) support environmental and fiscal sustainability, and resilience to climate change and economic shocks. - Indicative lending volume under CPF: up to US$2 billion during 2016–20. - IDA/IBRD financing notes: IDA17 front-loaded SDR 146 million (approx. US$208 million) fully committed; IDA Scale-up Facility allocated US$30 million. - World Bank active investment portfolio (as of October 2016): total commitment US$766.24 million; disbursed US$246.06 million; undisbursed US$486.78 million. - IFC portfolio: nine projects worth US$31.8 million in commitments; recent approvals include two long-term financing operations in Bolivia’s banking sector. - IDB (as of September 30, 2016): approved loans US$6.64 billion; disbursements US$4.91 billion; outstanding debt US$2,165 million; undisbursed approved funds US$1,325 million. - IDB country strategy 2016–20: aims to increase financial flows; approval of new loans rose from US$252 million in 2011 to US$475.1 million in 2015 and US$680.73 million in 2016. ### IMF–World Bank coordination priorities under JMAP - Identified priorities: - Reducing poverty and inequality: share of population living in poverty stagnated at around 38 percent between 2013 and 2015; Gini 0.47 in both 2011 and 2015. - Expanding access to basic services (water, sanitation, health, education, social protection), especially in rural areas. - Promoting private investment: private investment below regional levels and decreased after commodity prices plummeted. - Enhancing macroeconomic and fiscal framework to manage low commodity prices. - Division of labor highlights: - Poverty and social protection: Bank technical assistance on poverty measurement, STATCAP support for statistical information. - Basic and social services: Bank support for rural energy, water (drinking and irrigation), sanitation, and transport. - Private sector development: IFC on-lending programs to SMEs, short-term credit lines, advisory services. - Macroeconomic and fiscal management: Bank support available for debt management, multi-year budgeting, public finance management, public investment. ### Statistical issues and data adequacy (as of November 22, 2016) - General: Data provision has shortcomings but is broadly adequate for surveillance. Progress toward full SDDS subscription. - National Accounts: - INE updating base year from 1990 to 2010 (mobile base), implementing SNA 1993 and some SNA 2008 recommendations. - INE plans to release series for years 2010–15 in mid-2017 and then release historical quarterly and regional national accounts from 1990. - Labor market: Quality of household and employment surveys has declined; quarterly employment survey discontinued in 2010; INE working on new household and employment surveys to be published next year with information since 2015. - Prices statistics: PPI and external trade unit values need revision; INE updating CPI base year to be released during the first quarter of 2017; preparing a new producer price index and a wholesale price index planned for 2017. - Government finance statistics: Annual consolidated central government data do not cover all decentralized agencies and special fund operations; implementation of a comprehensive financial management system (funding from IADB/WB) will help. - Balance of payments: BCB began publishing BOP and IIP according to BPM6 in November 2016; SDDS requirements for ESS are almost met except publication of a calendar with data release dates. - Bolivia: Indicators Required for Surveillance (selected entries preserved exactly): - Exchange Rates: Date of Latest Observation Daily; Date Received Daily; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D - Reserve/Base Money: Date of Latest Observation Aug. 2016; Date Received Oct. 2016; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M - Broad Money: Date of Latest Observation Aug. 2016; Date Received Oct. 2016; Frequency M M M - Consolidated Balance Sheet of the Banking System: Date of Latest Observation July. 2016; Date Received Oct. 2016; Frequency M M M - Consumer Price Index: Date of Latest Observation Oct. 2016; Date Received Nov. 2016; Frequency M M M - External Current Account Balance: Date of Latest Observation Q2 2016; Date Received Nov. 2016; Frequency Q Q Q - GDP/GNP: Date of Latest Observation Q2 2016; Date Received Oct. 2016; Frequency Q Q Q - Data quality assessments note areas rated O, LO, LNO across methodological soundness and accuracy and reliability for various series (as presented). *Source: IMF staff report and informational annex content provided in the supplied PDF excerpt.* ### 1. This statement reports on information that has become available since the staff report ### _cr16387 - 1. This statement reports on information that has become available since the staff report ### Updated information and scope - This statement reports on information that has become available since the staff report was issued. - It does not alter the thrust of the staff appraisal. ### Drought and water emergency - The government declared a state of emergency in response to severe water shortages in some areas across Bolivia, principally La Paz. - The shortages are linked to the current drought—the worst in 25 years—and to underlying vulnerabilities from climate change. - Many Bolivians have been left without reliable access to water. - Government actions taken or announced: - Introduced rationing measures. - Formed a working group of senior officials to oversee the response to the crisis. - Announced an early end to the school year. - Officials are considering other measures to alleviate the situation going forward including constructing additional water infrastructure, although these will take some time to yield results. - Overall assessment: these developments suggest that the drought may be having more severe and wider-reaching effects than envisaged in staff’s baseline projections. ### Fiscal developments through September - The fiscal balance through September is running well below levels a year ago, in line with staff’s forecast of a wide deficit for 2016. - The non-financial public sector has posted a deficit of 2 percent of GDP so far this year, substantially worse than the small surplus recorded in the same period a year ago. - Drivers of the deficit: - Weakening revenues, which mainly reflect the full-year impact of lower petroleum prices on hydrocarbon taxes. - Higher capital spending. - Note: these pressures occur notwithstanding restraint in current expenditures. *Source: IMF staff statement as reported in the provided document.* ### 4. Newly published balance of payments data contain important methodological ### 4. Newly published balance of payments data contain important methodological improvements, but continue pointing to external imbalances. ### Balance of payments methodological changes and outlook - Latest release showed a current account deficit of 6½ percent of GDP in the first half of 2016, with small but positive revisions to 2014–15. - International reserves have fallen $2.6 billion or 7.8 percent of GDP through November 25, 2016. - Staff maintains its outlook for the current account and international reserves; staff’s assessment that the real exchange rate is stronger than warranted by fundamentals and desirable policies remains valid. - For the first time, the authorities issued the data using the methods of the Balance of Payments Manual, 6th Edition (BPM6), significantly impacting key components: - Improved accounting of processing services and free-on-board imports valuation, and other reclassifications substantially impacted goods and services trade balances. - With these changes, the merchandise trade balance is about 3⅓ percentage points of GDP higher on average during 2014–15. - The services balance is about 2¾ percentage points of GDP lower on average during 2014–15. - In the financial account, expanded coverage of sectors and instruments are major steps; authorities are still deciding on treatment of debt issued abroad but held locally. ### Selected balance of payments figures (BPM5 presentation, millions of U.S. dollars and percent of GDP) - Current account (millions): 2014 = 478; 2015 = -1,854; H1 (2015) = -1,019. - Current account (percent of GDP): 2014 = 1.4; 2015 = -5.6; H1 (2015) = -6.5. - Goods (millions): 2014 = 2,922; 2015 = -331; H1 (2015) = -439. - Goods — Exports (millions): 2014 = 12,810; 2015 = 8,673; H1 (2015) = 3,296. - Goods — Exports (percent of GDP): 2014 = 38.5; 2015 = 26.1; H1 (2015) = 21.1. - Goods — Imports (millions): 2014 = 9,888; 2015 = 9,004; H1 (2015) = 3,735. - Goods — Imports (percent of GDP): 2014 = 29.7; 2015 = 27.1; H1 (2015) = 24.0. - Services (millions): 2014 = -1,833; 2015 = -1,568; H1 (2015) = -816. - Services (percent of GDP): 2014 = -5.5; 2015 = -4.7; H1 (2015) = -5.2. - Primary income, net (millions): 2014 = -1,696; 2015 = -1,124; H1 (2015) = -325. - Secondary income, net (millions): 2014 = 1,086; 2015 = 1,169; H1 (2015) = 562. - Financial account (millions): 2014 = 483; 2015 = -2,650; H1 (2015) = -2,071. - Foreign direct investment, net (millions): 2014 = -690; 2015 = -495; H1 (2015) = -170. - Portfolio investment, net (millions): 2014 = 406; 2015 = 804; H1 (2015) = 352. - Other investment, net (millions): 2014 = -166; 2015 = -1,338; H1 (2015) = -397. - Change in reserve assets (millions): 2014 = 932; 2015 = -1,620; H1 (2015) = -1,856. - Net errors and omissions (millions): 2014 = -1; 2015 = -801; H1 (2015) = -1,055. - Source of table: Central Bank of Bolivia, National Institute of Statistics, and Fund staff calculations. ### Authorities’ statement — growth outlook and risks - Bolivia achieved clear positive growth of 4.8 percent in 2015. - The Economic and Social Development Plan (PDES) 2016–2020 envisages fiscal and current account deficits in the short-term to support industrialization and diversification. - Authorities believe staff underestimates growth for 2016; they expect growth around 4.7 percent in 2016 and around 4.7 percent in 2017. - Authorities note near-term sectoral performance: almost all sectors had positive growth in H1 2016 except hydrocarbons; agriculture grew 1.4 percent despite adverse climate events. - Potential growth: staff previously estimated potential output around 5 percent in 2014; the latest staff estimate of 3.5 percent is viewed by authorities as inconsistent and downward biased. - Hydrocarbons: gas fields Incahuasi and Margarita Huacaya II expected to add gas volume in late 2016 and 2017; exploration may bring more production before 2020. - Authorities expect a recovery in oil price in 2017 resulting from OPEC and other producers’ agreement to cut production. ### Authorities’ statement — fiscal policy and public investment - Central Administration’s deficit was 0.9 percent of GDP in 2015. - Public investment is the main component of public expenditure and includes investments in SOEs and public works by the Bolivian Road Agency and sub-national entities. - Authorities view projected fiscal deficits as temporary and aimed at raising potential output. - PDES scenarios include assumed revenues from diversification and industrialization; authorities dispute staff’s pessimistic medium-term fiscal forecasts. - Public investment financing: authorities cite fiscal buffers at national and sub-national levels and available bilateral and multilateral financing (CAF, BID, AIF, IDA, World Bank), and ongoing bilateral negotiations (China, some EU countries). - Authorities argue that considering SOE’s debt to CBB as part of public debt is inappropriate because intra-government debt does not affect public debt sustainability; they stress that fiscal deficits are financed out of government deposits at the CBB. ### Authorities’ statement — exchange rate and competitiveness - Authorities disagree with staff on exchange rate flexibility recommendations and argue that devaluation expectations can damage de-dollarization and international reserves (citing 2008–2009). - CBB’s calculations using staff’s method show a real appreciation since January 2010 of 31.3 percent versus staff’s 49 percent; if period chosen was December 2015–September 2016, there would be a 4 percent real depreciation. - Authorities assert Bolivia’s limited export basket is structural (natural resource-rich) and not caused by exchange rate policy. - Recent months: exchange rate pressures subdued, inflation low, expectations anchored, supporting expansionary monetary policy. ### Authorities’ statement — central bank independence and credit to SOEs - Credit from CBB to SOEs (which does not finance current expenditure) is considered not to compromise price stability; disbursements are fully considered in the financial program. - Authorities emphasize policy coordination benefits and question blanket recommendations on central bank independence that do not consider country idiosyncrasies. - CBB reports positive net income because interest rates on loans to SOEs are higher than yields on international reserves and higher than monetary policy operations. ### Authorities’ statement — external sector and reserves outlook - Industrialization requires capital and intermediate goods imports, which account for 80 percent of imports and drive current account deficits in PDES context. - Exports fell January–September 2016 due to lower commodity prices, but export volumes increased: minerals +10 percent, agro industrial +16 percent, industry +20 percent. - Authorities consider staff projections for net international reserves (NIR) downward biased because staff only include capital project outlays in PDES and keep exports at 20.2 percent of GDP flat for 2016–2021; FDI projections by staff (1.8 percent flat during 2016–2021) are deemed pessimistic. - As of September 2016, authorities state FDI doubles staff’s projection. - Authorities cite committed investments in hydrocarbons: exploration announced $2.3 billion and expansion of production capacity amounting $2.3 billion. ### Authorities’ statement — financial sector, inclusion, and the Financial Services Law (FSL) - FSL aims to boost financial intermediation to support growth; historically intermediation was stagnant due to risk aversion. - Authorities assert credit growth is driven by microfinance institutions. - Authorities do not see need for quota flexibility; banking and other financial entities comply with quotas. - Financial system indicators: credit portfolio as percent of GDP moderate; NPL rate low relative to historic records and regional/global standards; provisions at 100 percent. - Microcredit growth: 9.6 percent so far in 2016; small and micro credit user’s participation rate above 50 percent. - Financial inclusion measures: credit fairs and financial education events aim to reach 75 percent of financial services users. - Authorities argue staff’s stress tests do not fully account for system’s current strong performance, appropriate regulation, or macroeconomic outlook; they question some staff modeling choices (e.g., omission of credit growth as explanatory variable for NPLs). ### Policies for sustainable economic development - Wage policy aims to reduce inequality and strengthen domestic demand; authorities note average wage in Bolivia is the lowest in South America (ECLAC data). - Public investment focuses on physical infrastructure (energy, transportation, communications) to support competitiveness. - Hydrocarbons sector: framework of incentives for exploration and production; several foreign corporations have announced investments (exploration $2.3 billion; expansion $2.3 billion). - Mining and lithium: progress toward industrialization of lithium; Bolivia considered to hold half of the world’s lithium reserves in the Salar de Uyuni. - Electricity: plans for large projects to substantially increase generation capacity. - Social programs will continue and be designed for sustainability to finance improvements in education, health, and sanitation. - Authorities reiterate commitment to fiscal discipline and pro-poor, pro-growth development policies. *Source: Statement by Mr. Torres, Executive Director for Bolivia, and Mr. De la Barra, Advisor to the Executive Director; Bolivia: Balance of Payments Summary (table), December 9, 2016.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16387.pdf_