Reinvigorating Growth in Bolivia, Remarks by Anoop Singh, Director, Western Hemisphere Department, IMF
IMF News, July 17, 2003
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- Published: July 17, 2003
Introduction and context
- Delivered at the CAINCO Economic Forum 2003, Santa Cruz de la Sierra, July 17, 2003.
- IMF engagement:
- IMF Board completed the first review of Bolivia's stand-by arrangement ten days prior to the speech.
- IMF working with international community on a longer-term program possibly supported by the Poverty Reduction and Growth Facility.
- Central objective: reinvigorate growth with improved equity, reduce vulnerabilities, and build domestic consensus for reform.
Bolivia's early macroeconomic stabilization (historical achievements)
- Inflation and macro stability:
- Rate of inflation reduced from its peak of over 23,000 in September 1985 to 18 percent in 1990.
- Inflation maintained in single digits since 1995.
- Growth and external sector:
- Growth averaged well over 4 percent a year from 1990 to 1997.
- Economy had contracted by a cumulative 10 percent in the first half of the 1980s.
- External debt lowered from about 100 percent of GDP to under 50 percent.
- Current account deficits financed largely by foreign direct investment in export-earning projects and infrastructure; gross reserves rebuilt from very low 1985 levels.
- Fiscal correction and structural reforms:
- Public sector deficit reduced from almost 30 percent of GDP in 1984 to around 4 percent in 1986.
- Key reforms: unification of exchange rates; passage of mining, hydrocarbons and investment laws; privatization of six large public enterprises; lifting price controls; trade liberalization; establishment of an independent central bank; privatization of state-owned banks.
- Social progress and political stability:
- Major social advances including halving child mortality and improved primary education and pension reform.
- Return to democracy since 1985 with greater policy continuity; successful coca control campaign reduced corruption risks.
Recent economic performance (weaknesses and vulnerabilities)
- Overall deterioration (past five years prior to 2003):
- Per capita real income falls; Bolivia's real GDP per capita now stands at about US$900.
- Open unemployment risen to 8½ percent by end-2002.
- About half of the labor force is underemployed.
- Savings, investment, and external performance:
- Domestic investment and savings have fallen by as much as a third since 1998.
- Public savings turned negative in the year prior to the speech.
- Weakened capital account; Bolivia's export share not rising commensurately with trade openness; growing dependence on regional markets, especially Brazil.
- Poverty and social indicators:
- Two-thirds of Bolivia's population estimated to be below the poverty line.
- More than a third in extreme poverty, with disproportionate effects on indigenous people and rural women.
- Macro vulnerabilities that reemerged:
- Fiscal deterioration: fiscal deficit allowed to rise, reaching 9 percent of GDP in 2002.
- Nonfinancial public sector debt increased to over 60 percent of GDP, despite enhanced HIPC debt relief.
- Overreliance on crawling peg exchange rate regime reduced room for maneuver against external shocks.
- Financial sector stresses: nonperforming loans risen to at least 20 percent; banks' loan portfolios declining; deposit base instability; concentration of banks' balance sheets on a small client base.
- Structural and institutional gaps:
- One of the most inflexible labor market regimes in Latin America.
- Insufficient alternative income sources for farmers affected by coca eradication.
- Fiscal decentralization advanced without uniformly strengthening local institutional capacity.
- Declining efficiency of health care and education spending; reversals in key primary school enrollment indicators.
- Poor governance and competitiveness: low rankings in the 2002 Global Competitiveness Report and Transparency International; high costs and complexities of new business start-ups.
Key tasks and policy recommendations to reinvigorate growth
- Growth target and rationale:
- Minimum objective: raise growth back to 4 percent per year.
- Given high population increase, an even more ambitious objective is desirable to rapidly reduce poverty.
- Core components of the growth strategy:
- Restore macroeconomic stability through fiscal consolidation.
- Reduce macroeconomic vulnerabilities by strengthening the banking and corporate sectors.
- Press ahead with market reforms within an improved institutional environment.
- Increase and make social spending more efficient, protecting education and healthcare.
- Effectively use Bolivia's natural resources, notably gas and oil.
- Fiscal consolidation specifics:
- 2003 budget begins a phased reduction in the fiscal deficit.
- Program elements: balanced package of measures, introduction of a new tax procedures code, collection of tax arrears, control of low-priority public spending.
- Longer-term needs: equitable and efficient tax reform to increase revenue buoyancy; improved prioritization and tracking of public spending including at local government level; protect and increase social spending; better control of pension costs.
- Financial and corporate sector strategy:
- Tackle corporate and financial balance sheet problems while minimizing moral hazard and avoiding unaffordable public bailouts.
- Recommended instruments: modernized legal framework for bankruptcy and out-of-court workouts; limit government involvement; maintain high standards of accountability and transparency.
- Government actions already taken: appointment of a high level management committee; developing legislation for voluntary, out-of-court corporate restructurings; strengthening regulatory framework for the banking sector.
- Addressing dollarization:
- Develop a gradual and voluntary process to promote use of the domestic currency to allow more flexible exchange rate management and reduce balance sheet vulnerabilities.
- Success depends on sustained prudent macroeconomic management and a regulatory framework that recognizes higher risks of dollar-based intermediation.
- Structural reforms to enhance inclusive growth:
- Enhanced rural development schemes to absorb social costs of coca eradication.
- Secure land access and property rights to attract investment in rural areas.
- Ensure poorer regions benefit from international trade.
- Implement labor market reforms to encourage job creation.
- Strengthen institutional capacity at local government level to improve efficiency of social spending.
- Natural resource strategy:
- Leverage abundant natural gas resources: existing pipeline to Brazil has been important.
- Pursue potential exports of liquefied natural gas to the US market as a major transformative project.
- Political economy and consensus-building:
- National Dialogue to develop medium-term structural reforms as the basis for a new poverty reduction strategy.
- Participatory approach to include women and indigenous people and build broad popular support.
- Urgent need to address social equity and governance to underpin popular support for reform.
Outlook and concluding guidance
- Optimism tempered by caution:
- Structural reforms typically take several years before sustained growth sets in.
- Stabilization under the stand-by arrangement is a good start but must be sustained and strengthened.
- Priority: place public finances on a solid footing and address social equity and governance to sustain reform momentum.
Reinvigorating Growth in Bolivia — Remarks by Anoop Singh, Director, Western Hemisphere Department, International Monetary Fund, July 17, 2003.