Public Information Notice: IMF Concludes Article IV Consultation with Bolivia

IMF News, February 25, 2000

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Public Information Notice: IMF Concludes Article IV Consultation with Bolivia

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• Published: February 25, 2000

Background and structural reforms

• Since 1985, Bolivia achieved a considerable degree of macroeconomic stability through steadfast implementation of structural reforms that removed most distortions from the early 1980s.
• Strategy anchored by a strong fiscal policy designed to avoid central bank financing of the combined public sector and a comprehensive program to dismantle extensive state intervention.
• Outcomes during the 1990s attributed to reforms:
  • Foreign direct investment surged.
  • Economic growth averaged 4.1 percent a year.
  • 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 at end-1990 to 6.9 months at end-1999.
  • Public sector external debt declined from the equivalent of 82 percent of GDP to 54 percent.

Economic developments in 1999

• Growth and inflation:
  • Real GDP growth slowed; preliminary data indicate 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.
• External sector:
  • External current account deficit estimated to have narrowed to 6.3 percent of GDP in 1999 despite a fall in export earnings.
  • Narrowing driven mainly by a decrease in the value of imports reflecting lower domestic demand and a decline in the price of imports.
  • Foreign direct investment was strong in the capital account, contributing to a modest surplus in the overall balance of payments (including exceptional financing from debt relief under the original HIPC Initiative).
• Public finances and structural actions:
  • Authorities maintained fiscal discipline in 1999 despite tax revenue shortfalls.
  • Strict control of current expenditure allowed over 90 percent of the investment program to be executed despite shortfall in external disbursements.
  • Overall deficit of the combined public sector estimated to have remained within the program limit for 1999.
  • Structural reforms in 1999 included a new customs law issued in July, sale in the last quarter of 1999 of the state smelting company Vinto and the refineries of the petroleum company YPFB, and strengthened financial sector regulations with the first stage of regulations tripling provisioning requirements over a five-year period becoming effective in September.

Authorities' program and projections for 2000

• Growth and inflation objectives:
  • Program assumes a rate of economic growth of 4-4½ percent.
  • Program aims at containing inflation to 4½ percent and at maintaining gross official international reserves at a comfortable level.
• External and fiscal outlook:
  • External current account deficit projected to widen modestly to 6.8 percent of GDP as the economy recovers and imports increase.
  • Overall deficit of the combined public sector (after grants) projected to narrow to 3.7 percent of GDP (equal to a small surplus excluding costs related to the pension reform).
• Policy measures to improve competitiveness:
  • Continued implementation of current exchange rate policy.
  • Anticipated increased flexibility in labor regulations expected to help improve external competitiveness.

Executive Board assessment and recommendations

• Commendations and overall view:
  • Executive Directors commended Bolivia for its solid poverty track record since 1985, low inflation, stronger external sector, and solid average growth of just over 4 percent a year during the 1990s.
  • Noted that improvements in poverty and social indicators have been modest despite increased social spending.
• Policy guidance and priorities:
  • Further efforts needed to strengthen the macroeconomic framework, deepen structural reforms, and develop a comprehensive strategy to reduce poverty and improve conditions of the poor.
  • Urged authorities to embed the costs of needed social outlays within the fiscal framework.
  • Supported decisive reform of labor regulations in 2000 to enhance external competitiveness, make regulations compliant with International Labor Organization norms, and broaden coverage of the formal economy.
  • Encouraged modernization of the tax system and tax administration to promote a more efficient and progressive tax system.
  • Supported continued strengthening of the financial system, including creation of a fully funded deposit insurance scheme, vigilance in bank supervision, and implementation of tightening provisioning requirements on schedule.
  • Highlighted risks from insufficiently hedged borrowing in foreign currency in a highly dollarized economy.
  • Welcomed measures to combat corruption, including judicial and customs reforms, and urged vigorous pursuit of customs administration strengthening to increase transparency and tax revenue.
• Data and international support:
  • Noted that Bolivia's economic statistics are generally adequate for surveillance but recommended completion of quarterly national accounts data and addressing weaknesses in balance of payments statistics.
  • Welcomed progress on a comprehensive strategy to reduce poverty and noted that assistance at the completion point under the enhanced HIPC Initiative would help meet social needs.
  • Emphasized the need for the international community to secure all financing under the enhanced HIPC Initiative for Bolivia and warned that delays in providing assistance could undermine poverty reduction progress.

Key statistics (selected indicators)

• Real GDP (annual percentage change): 1996: 4.4; 1997: 4.4; 1998: 4.7; 1999: 1.0
• Real domestic demand (annual percentage change): 1996: 5.4; 1997: 9.0; 1998: 6.6; 1999: 0.2
• CPI inflation (end-of-period): 1996: 8.0; 1997: 6.7; 1998: 4.4; 1999: 3.1
• Gross domestic investment (percent of GDP): 1996: 16.2; 1997: 19.8; 1998: 20.0; 1999: 18.4
• Gross national savings (percent of GDP): 1996: 11.0; 1997: 12.9; 1998: 12.1; 1999: 12.1
• Combined public sector overall balance (percent of GDP): 1996: -1.9; 1997: -3.3; 1998: -4.0; 1999: -4.2
• Foreign financing (percent of GDP): 1996: 2.5; 1997: 2.7; 1998: 2.8; 1999: 2.5
• Domestic financing (percent of GDP): 1996: -0.6; 1997: 0.5; 1998: 1.2; 1999: 1.7
• M3 (annual percentage change): 1996: 25.0; 1997: 17.3; 1998: 13.7; 1999: 5.0
• Credit to private sector (annual percentage change): 1996: 13.6; 1997: 19.4; 1998: 23.8; 1999: 4.6
• Current account balance (US$ million) 1/: 1996: -389; 1997: -554; 1998: -675; 1999: -537
• Current account balance (percent of GDP): 1996: -5.3; 1997: -7.0; 1998: -7.9; 1999: -6.3
• Trade balance (US$ million): 1996: -450; 1997: -685; 1998: -878; 1999: -639
• Capital account balance (US$ million): 1996: 731; 1997: 657; 1998: 777; 1999: 517
• Foreign direct investment (US$ million): 1996: 426; 1997: 599; 1998: 870; 1999: 915
• Overall balance (US$ million): 1996: 342; 1997: 103; 1998: 102; 1999: -20
• Exceptional financing (US$ million): 1996: 0; 1997: 0; 1998: 26; 1999: 77
• Gross official reserves (months of imports) 2/: 1996: 6.5; 1997: 5.7; 1998: 7.5; 1999: 6.9
• Public sector external debt (US$ billion) 3/4/: 1996: 4.6; 1997: 4.5; 1998: 4.6; 1999: 4.6
• Public sector external debt (percent of GDP) 3/4/: 1996: 62.6; 1997: 56.4; 1998: 53.4; 1999: 54.0
• Debt-service ratio 3/5/ (percent): 1996: 25.4; 1997: 26.5; 1998: 29.9; 1999: 24.2