Public Information Notice: IMF Concludes Article IV Consultation with Bolivia

February 25, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 7th, the Executive Board concluded the Article IV consultation with Bolivia.1


Since 1985, Bolivia has achieved a considerable degree of macroeconomic stability, and the steadfast implementation of structural reforms has helped remove most of the distortions that adversely affected the economy in the early 1980s. This strategy has been anchored by a strong fiscal policy, designed to avoid central bank financing of the combined public sector, and a comprehensive program of structural reforms aimed at dismantling the extensive state intervention in economic activity that had been built up prior to 1985. As a result, during the 1990s, foreign direct investment has surged, economic growth averaged 4.1 percent a year, and the 12-month rate of inflation fell from 18 percent during 1990 to 3.1 percent during 1999. Gross official foreign reserves rose from the equivalent of 3.7 months of imports of goods and services at end-1990 to 6.9 months at end-1999, while Bolivia's public sector external debt declined substantially over the same period, from the equivalent of 82 percent of GDP to 54 percent.

With Latin America suffering the impact of the financial crisis, the growth in economic activity in Bolivia slowed significantly in 1999. Preliminary data indicate that real GDP grew by just under 1 percent in the first three quarters of 1999, compared with the same period in 1998. Inflation continued to decline, to its lowest rate in 30 years. The external current account deficit is estimated to have narrowed to 6.3 percent of GDP in 1999, despite a fall in export earnings, mainly due to a decrease in the value of imports reflecting lower domestic demand and a decline in the price of imports. In the capital account, foreign direct investment was strong, contributing to a modest surplus in the overall balance of payments (including the exceptional financing from the debt relief under the original HIPC Initiative).

In the public sector, the authorities maintained fiscal discipline in 1999, even though tax revenue fell short of program projections. At the same time, strict control of current expenditure ensured that over 90 percent of the investment program was executed, despite a shortfall in external disbursements. For the year as a whole, the overall deficit of the combined public sector is estimated to have remained within the limit set in the program. Key structural reforms have continued to be adopted in 1999. A new customs law, aimed at enhancing transparency and efficiency, was issued in July, and in the last quarter of 1999 the authorities sold the state smelting company Vinto and the refineries of the petroleum company YPFB. The authorities have continued to strengthen financial sector regulations, and in September the first stage of regulations aimed at tripling provisioning requirements over a five-year period became effective.

The authorities' program for 2000 assumes a rate of economic growth of 4-4½ percent, on the basis of improvements in world commodity prices and the expected pickup in economic activity in Latin America. The program aims at containing inflation to 4½ percent and at maintaining gross official international reserves at a comfortable level. The external current account deficit would widen modestly, to 6.8 percent of GDP, as the economy recovers and imports increase while the overall deficit of the combined public sector (after grants) narrows to 3.7 percent of GDP (which would be equal to a small surplus, excluding costs related to the pension reform). The continued implementation of the current exchange rate policy, together with an anticipated increased flexibility in labor regulations, are expected to help improve Bolivia's external competitiveness.

The Bolivian authorities are committed to fighting poverty. Despite tight budget constraints, social spending has risen in recent years and progress has been made under the social indicators agreed upon in the context of the original HIPC Initiative. In their interim Poverty Reduction Strategy Paper (PRSP), the authorities have laid out their proposal for developing a comprehensive poverty reduction strategy in the context of a national dialogue with civil society, to be held during the first half of this year. As a follow-up to this dialogue, they plan to prepare a comprehensive PRSP by mid-2000.

Executive Board Assessment

Executive Directors commended Bolivia for its solid poverty track record since 1985, which has made it possible to lower inflation to industrial country levels and place the external sector on a much stronger footing. Directors also noted that economic growth had been solid, averaging just over 4 percent a year during the 1990s despite some adverse shocks, but that improvements in poverty and social indicators had been modest. While social spending had risen in recent years, a significant part of the country's resources had been used to finance important structural reforms, including pension reform. In Directors' view, further efforts were needed to strengthen the macroeconomic framework, deepen structural reforms, and develop a comprehensive strategy to reduce poverty and improve the conditions of the poor.

Directors noted that the slowdown in economic activity in 1999, which had been caused by the regional financial crisis and the weakness in international commodity prices, had posed a difficult challenge to Bolivia. They praised the authorities for resisting pressure to increase external protection and grant relief on tax and interest obligations, and commended their steadfast efforts to maintain sound macroeconomic policies despite these pressures, including in the fiscal area. Directors also welcomed the authorities' commitment to maintaining the public sector finances on a sound basis, but underscored that the fiscal framework should embed the costs of the needed social outlays.

As regards the exchange rate, it was generally considered that the current exchange-rate regime has allowed Bolivia to adapt well to external shocks. Directors urged the authorities to proceed decisively with the envisaged reform of labor regulations in 2000 to help enhance external competitiveness, make Bolivia's regulations compliant with the norms of the International Labor Organization, and broaden the coverage of the formal economy.

Directors noted that the structural reforms implemented in recent years had led to a strong increase in foreign direct investment which, in turn, was setting the stage for faster export and real GDP growth. They remarked that in 1999 the authorities' program of structural reforms had suffered some delays, but noted that significant progress had been made by year-end, particularly in the area of privatization. Directors welcomed the authorities' intention to deepen their program in 2000, and to proceed with the modernization of the tax system and of tax administration, in order to help promote a more efficient and progressive tax system. They also supported the authorities' intention to continue strengthening the financial system, including through the creation of a fully funded deposit insurance scheme. In their view, it remains important to maintain vigilance in the area of bank supervision, and to implement on schedule the ongoing tightening of provisioning requirements. In particular, some Directors pointed to problems that could arise from insufficiently hedged borrowing in foreign currency, especially in the context of a highly dollarized economy.

Directors were encouraged by the authorities' decision to enhance confidence in the country's institutions by moving forward with measures to combat corruption, including, in particular, judicial and customs reforms. They noted that efforts to strengthen the customs administration, with a view to achieving greater transparency while also increasing tax revenue, should be vigorously pursued to achieve significant results during 2000.

Bolivia's economic statistics are generally adequate for surveillance, although it would be important to complete the generation of quarterly national accounts data and to address weaknesses in the balance of payments statistics.

Noting that Bolivia's social needs remain very large, Directors welcomed the progress being made to develop and implement a comprehensive strategy to reduce poverty. They noted that the assistance to be provided at the completion point under the enhanced Initiative for the Heavily Indebted Poor Countries (HIPC) would help Bolivia meet its social needs. Directors emphasized that further efforts will need to be made by the international community to secure all the financing needed under the enhanced HIPC Initiative for Bolivia, and that any delays in providing assistance under the enhanced HIPC Initiative could undermine its progress in the reduction of poverty.

Bolivia: Selected Economic Indicators

  1996 1997 1998 1999

(Annual percentage change)
Income and prices        
Real GDP 4.4 4.4 4.7 1.0
Real domestic demand 5.4 9.0 6.6 0.2
CPI inflation (end-of-period) 8.0 6.7 4.4 3.1
(In percent of GDP)
Investment and savings        
Gross domestic investment 16.2 19.8 20.0 18.4
Gross national savings 11.0 12.9 12.1 12.1
Combined public sector        
Overall balance -1.9 -3.3 -4.0 -4.2
Foreign financing 2.5 2.7 2.8 2.5
Domestic financing -0.6 0.5 1.2 1.7
(Annual percentage change, unless otherwise indicated)
Money and credit        
M3 25.0 17.3 13.7 5.0
Credit to private sector 13.6 19.4 23.8 4.6
External sector        
Current account balance (US$ million) 1/ -389 -554 -675 -537
(percent of GDP) -5.3 -7.0 -7.9 -6.3
Of which: trade balance -450 -685 -878 -639
Capital account balance 731 657 777 517
Of which: foreign direct investment 426 599 870 915
Overall balance 342 103 102 -20
Exceptional financing 0 0 26 77
Gross official reserves 2/ 6.5 5.7 7.5 6.9
Public sector external debt (US$ billion) 3/ 4/ 4.6 4.5 4.6 4.6
(percent of GDP) 3/ 4/ 62.6 56.4 53.4 54.0
Debt-service ratio 3/ 5/ 25.4 26.5 29.9 24.2

Sources: Central Bank of Bolivia; Ministry of Finance; and IMF staff estimates.

1/ Excludes grants to finance debt-reduction operations.
2/ In months of imports of goods and services in the following year.
3/ Debt and debt service reflect original HIPC assistance, which became available in 1998.
4/ Includes obligations to the Fund and debt with public guarantee.
5/ Debt service on public sector medium- and long-term external debt, in percent of exports of goods
and services.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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