For more information, see Bolivia and the IMF
La Paz, Bolivia
International Monetary Fund
Washington, DC 20431
Dear Mr. Camdessus:
1. The attached Memorandum of Economic Policies reviews progress so far under the three-year PRGF arrangement approved by the Executive Board of the Fund on September 18, 1998, and describes the objectives and policies that the government intends to pursue during the remainder of 1999 and in 2000.
2. We believe that the policies and measures set forth in this memorandum are adequate to achieve the objectives of our program, but will take any other measures necessary for this purpose. During the period of the arrangement, the government will consult with the Managing Director, on its own initiative or at the request of the Managing Director, concerning the adoption of appropriate measures. Bolivia will conduct with the Fund two reviews of the second year of the program supported by the arrangement, to be completed no later than April 30, 2000 and October 30, 2000, respectively. The macroeconomic framework will be reviewed in the context of the reviews of the program, to take into account the impact of additional debt relief that may be granted under the enhanced HIPC Initiative. Moreover, while Bolivia has outstanding financial obligations to the Fund arising from loans under the arrangement, Bolivia will consult with the Fund from time to time, at the initiative of the government or whenever the Managing Director requests consultations on Bolivia's economic and financial policies.
3. On this basis, we are requesting the second annual arrangement under the PRGF in an amount equivalent to SDR 33.6 million, with three equal disbursements of SDR 11.2 million each, of which the first one is to be made available after approval of this arrangement and the subsequent ones upon observance of performance criteria at end-March 2000 and end-September 2000.
4. To facilitate a wider distribution of the Interim Poverty Reduction Strategy Paper within the donor community, the Government of Bolivia authorizes its transmittal by the Fund staff to any international organization that requests it for the exclusive use of the organization.
Bolivia: Memorandum of Economic and Financial Policies
1. This memorandum provides an update of our economic policy memorandum of August 27, 1998 which set out Bolivia's economic program for 1998-2001. This memorandum reviews economic developments so far in 1999 and explains the government's economic program for the remainder of 1999 and in 2000.
2. 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 prior to 1985. As a result, foreign direct investment has surged, economic growth averaged 4.2 percent a year over the past decade, and the 12-month rate of inflation fell from 18 percent during 1990 to 4.4 percent during 1998. Gross official foreign reserves rose from the equivalent of 3.7 months of imports of goods and services at end-1990 to 7½ months at end-1998, while Bolivia's public sector external debt declined substantially over the same period, from the equivalent of 82 percent of GDP to 54 percent.
3. Bolivia's economic program for 1999-2001, supported by the current three-year Poverty Reduction and Growth Facility, aims at promoting high and sustainable growth and reducing poverty. Fiscal policy has been designed to stay on a medium-term path designed to gradually offset the sharp rise in the cost of structural reforms since 1996 and to reduce the fiscal deficit to a level that can be financed entirely with external credit by 2002, thus freeing up domestic resources to finance private sector activity and stimulate economic growth. The Government of Bolivia attaches very high priority to strengthening education and health reform and rural development programs, particularly with the support of the Inter-American Development Bank (IDB) and the World Bank. Other key structural reforms include making fiscal decentralization more effective, privatizing remaining public enterprises, improving road construction and maintenance, strengthening the financial sector, and reforming labor market legislation. The program also includes weeding out corruption through ongoing judicial reform, a complete restructuring of customs, and greater transparency of government operations.
4. Despite a more difficult external environment than envisaged initially, significant progress has been achieved under the 1999 program. The program for 1999 initially aimed at achieving economic growth of 4½-5 percent, limiting inflation to 5.5 percent, and narrowing the external current account deficit to 7.2 percent of GDP while allowing for a modest loss of reserves (US$50 million). However, the regional slowdown arising from the international financial crisis and the sharp drop in world mineral and agricultural prices have dampened economic activity in Bolivia. For 1999 as a whole, the economy is estimated to grow by 2-2.5 percent, a rate higher than in most neighboring countries, but significantly lower than envisaged in the program. So far this year, inflationary pressures have been lower than anticipated, as the 12-month rate of increase in the consumer price index declined from 4.4 percent in December 1998 to 2.3 percent in October. During the first three quarters of 1999, the net international reserves of the central bank declined somewhat, but gross reserves remained at a comfortable level, at the equivalent of 6½ months of imports of goods and services at end-September. All the end-September financial benchmarks of the program have been met.
5. The slowdown in economic activity has placed strong pressures on the consolidated accounts of the combined public sector. Tax collections during the first three quarters of 1999 have been lower than anticipated, reflecting a slowdown in domestic demand. Under these circumstances, the government has been compensating part of the tax shortfall with specific revenue actions, including the regularization of cars previously imported as contraband, and strictly limiting expenditure growth. In the area of petroleum products, the government has continued to adhere to the policy defined in 1997, and increases in world oil prices have been reflected in matching increases at the consumer level. During the last quarter of this year, the government will continue to keep a tight lid on expenditure, in order to ensure compliance with the program limit on the 1999 overall deficit of the combined public sector. However, net foreign disbursements to the combined public sector are expected to be lower than initially envisaged, which will require a larger use of domestic financing. We are thus requesting an increase of Bs. 274 million (0.6 percent of GDP) in the end-December 1999 program ceiling on the net domestic financing of the combined public sector.
6. In the financial sector, the economic slowdown contributed to a deceleration in both money demand and credit to the private sector. Private sector deposits declined during the first half of 1999, before recovering significantly during the third quarter. The central bank has been providing additional liquidity to the banking system, including as part of the resolution process of a medium-sized bank that was intervened by the Superintendency of Banks in May. During the first three quarters of 1999, the demand for domestic currency declined and, to avoid a sharp tightening in monetary policy which may threaten the incipient recovery in economic activity, the Government of Bolivia is requesting a modest relaxation (US$50 million) in the end-December 1999 net international reserves target of the program. This will leave gross reserves at the equivalent of 6½ months of imports of goods and services.
7. Key structural reforms are being implemented under the 1999 program. A new Customs Law, which replaces the old law dating back to 1929, was approved by Congress in July. This new law emphasizes accountability and enforcement through the establishment of a Customs Board, the appointment of an independent president of customs for a five-year period, and the replacement of politically-related personnel with highly qualified staff. Following the appointment of the new president in August, the customs department has been reorganized around five regional directions, the units for the repression of contraband have become operational since late October, and politically-related staff are being replaced. In the area of privatization, the public shareholdings in the cement company FANCESA were sold in September, the sale of the refineries of the state petroleum company YPFB was completed in November, and that of the state smelting company Vinto is expected to be completed in early January 2000. Financial sector regulations have continued to be strengthened, with improved risk assessment requirements in effect since the beginning of 1999 for classification of new loans and the implementation in September 1999 of the first stage of the December 1998 regulation aimed at tripling provisioning requirements over a five-year period.
8. The key aim of our economic program is to create the conditions for a higher rate of economic growth and a significant reduction in poverty. Important efforts have been made in recent years, including through a substantial increase in public sector social spending in relation to GDP and improvements in the quality of social programs. A series of restructurings of external debt, including the debt relief received by Bolivia in September 1998 under the Highly Indebted Poor Countries (HIPC) Initiative, have helped lower the stock of external debt and free resources for social programs. The government believes that the enhanced HIPC Initiative will help bring further improvements in the living standards of the poorest segments of the population. Policies directly aimed at reducing poverty will be enhanced, and the Government of Bolivia intends to organize, during the first half of 2000, a national dialogue aimed at defining a national strategy in that area. Improvements will be measured by several indicators, including extreme poverty indices, the poverty gap, child and maternal mortality, and child malnutrition.
9. To ensure achievement of these goals, the government intends first to preserve macroeconomic stability and implement a well-targeted structural reform program. Consistent with economic growth of 4-4.5 percent, the program for 2000 aims at limiting inflation to 4-4.5 percent and containing the external current account deficit to the equivalent of 6.8 percent of GDP (entirely financed by foreign direct investment), with a modest gain in net official international reserves. Fiscal policy will contribute to an increase in national savings to help finance the expected growth in private investment and keep the external current account deficit on a sustainable path. The central bank will continue to control the expansion of its net domestic credit and maintain an exchange rate policy stance consistent with a steady improvement in external competitiveness.
10. The Government of Bolivia places high priority on fiscal consolidation. The combined public sector overall deficit (after grants) will be contained at 4.2 percent of GDP in 1999, and reduced to 3.7 percent in 2000. General government current revenue is projected to increase from 22.4 percent of GDP in 1999 to 22.8 percent in 2000, as revenue efforts are being stepped up. Tax revenue is projected to improve by 1 percentage point of GDP, reflecting in part a rise in hydrocarbon royalties based on higher exports of gas to Brazil and improvements in tax administration, particularly in the customs area. These revenue gains are expected to offset moderate declines in nontax revenue and central bank operating profits in relation to GDP. Net external financing is projected to cover two-thirds of the combined public sector financing requirement in 2000, mostly in the form of concessional external resources from multilateral and bilateral creditors. Net domestic financing will not exceed Bs 723 million (1.3 percent of GDP), a level somewhat lower than the resources that the private pension funds are expected to accumulate in 2000. The fiscal targets of the program will be monitored on the basis of quarterly ceilings on the overall deficit and the net domestic financing of the combined public sector, as presented in the attached Tables 1 and 2.
11. The implementation of the reform of customs will help boost revenue. In 2000, customs revenue and VAT receipts on imports are projected to grow by close to 23 percent, taking into account both the projected recovery in imports and improvements in tax collections. Building on the progress made so far, further steps are being implemented in that area. An automated international transit control system with magnetic cards will be progressively implemented beginning in November 1999, to become fully operational on the entire territory by July 2000. Implementation of the computerized control system, which will be selected by mid-December 1999, will begin in early 2000. The regulations for implementation of the Customs Law, including those dealing with administrative procedures and tax violations, will be issued by end-February 2000. The establishment of a professional career stream and selection based on merit and open recruitment is being undertaken, and a system of customs control a posteriori for imports will be established during 2000.
12. Tax administration is being strengthened. The regulations for implementation of the law on the civil servant status approved in October 1999, aiming at promoting professionalism and continuity in the civil service, will be issued by end-March 2000. The draft tax procedures code, which aims at strengthening the enforcement power of the tax and customs administration, will be introduced to congress no later than end-March 2000; this measure will be a structural performance criterion under the program. In the internal revenue service, during the first half of 2000 all employees will have to pass a competency examination as a precondition to becoming permanent staff. A new tax administration law, aimed at restructuring the internal revenue service into an autonomous agency with its own resources, will be submitted to congress during the first half of 2000. The draft law will also aim at removing political influence in the selection of staff and establishing a career system for professionalized staff recruited on the basis of merit.
13. To ensure attainment of the overall deficit targets for 1999 and 2000, the government will continue to strictly control the growth of nonpension current spending while making room for social outlays. In 2000, nonpension current outlays are projected to rise only slightly faster than nominal GDP, reflecting in part a prudent wage policy. Specific provisions have been made for annual wage increases and, overall, the general government wage bill will be reduced in relation to GDP. In 2000, net pension costs are estimated to amount to 4 percent of GDP, broadly unchanged from 1999. To contain expenditure growth, the limits on the indebtedness of local governments have been tightened since early 1999.
14. In 2000, capital expenditure by the general government is projected to rise to the equivalent of 6.8 percent of GDP. Emphasis will be placed on roads and social sectors, while investment by public enterprises will decline, reflecting the sale to the private sector of the main assets of the state petroleum company YPFB. The government will continue to enhance the implementation of public investment by ensuring that adequate domestic counterpart funds are available for projects approved in the budget. Both in 1999 and in 2000, the program allows for privatization proceeds from the sale of public enterprises to be spent on public investment, up to a maximum of US$45 million; privatization proceeds in excess of that amount will be used to lower the deficit of the overall combined public sector.
15. Expenditure on social sectors and infrastructure will increase in 2000. In line with the recommendations of the Public Expenditure Review of the World Bank, expenditure on health will be increased; spending on the distribution of water and sanitation will be raised while refraining from extending new public subsidies; and steps will be taken to reorient education expenditure toward primary and secondary education. Outlays on social reforms, including pensions, are projected to amount to about 3.1 percent of GDP in 1999-2000 (Table 3). The program also provides for additional outlays designed to alleviate poverty, including in social sectors and infrastructure, in amounts equivalent to the additional relief that may be provided under the enhanced HIPC Initiative during 2000.
16. During 1999-2000, the central bank of Bolivia will continue to promote the objective of keeping inflation at a low level. To that effect, the central bank will keep developments in the money market under close review. For 2000, the growth in net domestic assets will be somewhat less than the expansion in currency issue (projected to grow broadly in line with nominal GDP) to secure a modest gain in net international reserves. Broad money is projected to grow by about 6 percent in 1999 and close to 11 percent in 2000. Bank credit to the private sector, which has slowed significantly this year, is expected to recover in 2000. To monitor the monetary program, quarterly targets on the net international reserves and ceilings on the net domestic assets of the central bank have been established, as presented in attached Tables 4 and 5.
17. The prudential ratios of financial intermediaries will continue to be strengthened. Under the timetable that became effective in September 1999, provisioning requirement will be raised twice in 2000, in March and September. A draft financial sector law, aimed at establishing a comprehensive bank resolution framework, including a deposit insurance scheme based on fair premia, has been introduced in congress for approval by March 2000. The draft law aims at reinforcing the role of the Superintendency in early bank intervention, strengthening accountability for bank managers and directors, and bringing capital adequacy risks weights for mortgage loans in line with Basle requirements. Also, norms will be issued to strengthen internal controls, auditing, and rating agencies for the financial sector, and bring consolidated supervision in line with Basle core principles.
18. The government will continue implementing an exchange rate policy aimed at improving Bolivia's external competitiveness. The Government of Bolivia believes that the current exchange rate system, by which the central bank manages the boliviano in the daily foreign exchange auctions, has served the country well. The central bank will continue to monitor developments in the foreign exchange market closely.
19. The program of social policies will be carried out in accordance with the strategy described in the Interim Poverty Reduction Strategy Paper (PRSP). The government believes that the strategy of the fight against poverty should be broad encompassing, and include improving the road network, as the poor quality of the network keeps transportation costs high and limits the potential for economic growth. The government will take steps to improve existing mechanisms for managing, rehabilitating, and expanding the network. The key policy actions to carry out social and structural reforms are presented in Table 6 of this Memorandum, including two structural performance criteria, on the submission to congress of the tax procedure code by end-March 2000 and the introduction of the comprehensive tax reform in congress in October 2000.
20. The government intends to take major steps to modernize the domestic tax system. During 2000 the special tax regimes in the commercial and transportation sectors will be modified, so that the relatively few large taxpayers in these sectors, who have often been avoiding taxation, can be incorporated in the general tax regime. A comprehensive reform of the tax system will be elaborated and implemented in several steps during 2000, with the objective of making the tax system more progressive and efficient, based on the recommendations of the Fund's Fiscal Affairs Department. The reform is scheduled to be adopted before year-end, for full implementation by January 1, 2001. It will aim at replacing distortive taxes, such as the cascading transactions tax, with alternative revenue sources, either by increasing existing tax rates or by introducing new, more equitable, taxes. Submission of the draft tax reform law to congress by October 2000 is a structural performance criterion under the program.
21. The government will initiate the necessary technical and legal actions for the development and implementation during 2002 of a unified system of accounts for the private enterprises, which will allow for standardization of their accounting systems. Regulatory supervision will thus be facilitated, as well as tax administration. Also, this unified system of accounts will allow for better risk assessments, thus contributing to the development of the market for securities.
22. The Government of Bolivia intends to complete its privatization program by the end of 2000. Following the privatization in 1999 of the refineries of the state petroleum company YPFB and the sale of its service stations to the company's employees, the government will privatize its remaining assets, including the oil storage facilities, the natural gas distribution networks, the airport jet fuel stations, and the natural gas bottling plants during the first half of 2000. The government also intends to offer for sale in 2000 the electricity distribution company of Tarija (SETAR), the electricity generation and distribution company of Potosi (SEPSA), and the electricity generation company of Trinidad. During 2000, the government plans to offer in concession to the private sector the operation of the postal service company ECOBOL.
23. During 1999 and 2000 the government will deepen the reform of the pension system initiated in recent years. In the public pension system, steps will be taken in 2000 to prepare for the payment of compensatory pensions to those who contributed to the public pension regime and have now transferred to the private system. A norm will be issued in the first half of next year to specify the computation of such pension rights. With regard to the funds accumulated under the capitalization program, work on the National Identification System (RIN) aimed at identifying beneficiaries, will continue during 2000, for completion by 2001.
24. During 2000, the government intends to continue improving decentralization and financial management in the public sector. To improve public sector cash management, a financial management system has been developed since March 1999, aimed at providing daily information on the financial position of public sector entities, and enhancing public expenditure control. A pilot version of the system will be in place by June 2000 in five ministries, including the ministry of finance, generalized to the other ministries by the end of the year, and subsequently extended to regional and local governments. During the first quarter of 2000, regulations for the implementation of the October 1999 law of local governments, which aims at limiting their current spending to 40 percent of their own recurrent income, will be issued. Also, during 2000 the budgetary and accounting classification, standards, and practices of all levels of government will be harmonized and a generalized accounting plan will be adopted for local governments, consistent with that used by the central government. A plan for further reform on fiscal decentralization will be formulated with the assistance of the Fund's Fiscal Affairs Department.
25. The Government of Bolivia believes that current labor regulations are excessively complex and intricate, and it intends to introduce in congress in 2000 a draft law aimed at modernizing them. Some flexibility was introduced in working hours in all sectors of the economy in May 1999, and a law aimed at protecting the rights of children and preventing child labor exploitation was approved by congress in September 1999. The new labor law, prepared in consultation with all economic and social agents, will be introduced in congress in October 2000, for approval by year-end. It will aim at modernizing the labor market and at bringing Bolivian labor regulations in line with the norms of the International Labor Organization, particularly with respect to equality of treatment among genders and labor safety. The government also intends to introduce in congress a law aimed at promoting employment generation, with special emphasis on microenterprises, which account for two-thirds of employment in Bolivia.
26. During 2000, the government will continue implementing its comprehensive program aimed at reforming and strengthening the judicial system. During the year, the government will submit to congress a new civil code, a law on administrative procedures, and an industrial property law. Work on the preparation of a commercial code, a law on conflict resolution in local communities, and one on public access to justice will proceed during 2000, for adoption in 2001. Training for judges will be strengthened with the creation in 2001 of a Training Institute, while professionalism will be promoted with the development of a career stream in the judiciary.
27. The government is aware that improvements are still required in the quality of monetary statistics, and the recommendations of the Fund's January 1999 technical assistance mission in that area are being implemented. All necessary steps are being taken to ensure that Bolivia joins the General Data Dissemination Standard of the Fund during 2000.
28. The external current account deficit, which is estimated to decline from 7.9 percent of GDP in 1998 to 6.3 percent in 1999, is projected to rise to 6.8 percent in 2000. In 1999, a weakening in export performance associated mainly with lower export prices is being more than offset by a decline in imports reflecting the slowdown in economic activity. Imports of capital goods are estimated to remain high because of large investments undertaken by capitalized enterprises and in the mining and energy sectors. In 2000, exports are projected to recover significantly, reflecting higher prices for mineral and agricultural products, while imports would grow somewhat faster than GDP. Over the medium-term, the current account deficit will fall gradually to about 5½ percent of GDP as new exports come on line. Taking into account envisaged capital disbursements, the central bank will be able to maintain the international reserve cushion at the equivalent of six months of imports of goods and services. During the period of the program, Bolivia will keep the current account of the balance of payments free of restrictions and will refrain from increasing external tariffs or introducing nontariff barriers for balance of payments purposes.
29. The Government of Bolivia views the medium-term outlook for foreign direct investment as a signal that Bolivia's reforms are yielding significant gains. The investment projects in export sectors, such as oil and gas exploration, electric energy, and mining, are expected to contribute to a vigorous growth in exports and economic activity over the medium term. Nonetheless, this outlook depends in part on the environment in the region, and the Bolivian authorities stand ready to adjust, if necessary, their policies to ensure attainment of these medium-term objectives.
30. The programs for 1999 and 2000 are fully financed, and the Government of Bolivia would like to express its gratitude to Bolivia's official creditors for the relief already granted under the HIPC Initiative. The assistance received since September 1998 has helped reduce the external debt burden to a more manageable level and covers the fiscal costs of structural reforms without compromising social expenditure. Poverty remains widespread in Bolivia, and the government intends to ask official creditors in 2000 to consider favorably a further reduction in the net present value of its external debt, from close to 214 percent currently to 150 percent, in line with the recommendations of the enhanced HIPC Initiative. The Government of Bolivia will continue to improve the structure of its external debt in order to maximize the benefits that would accrue to it under the HIPC Initiative. In this respect, Bolivia's nonconcessional external public debt is projected to remain unchanged both in 1999 and in 2000 (Table 7). Bolivia does not have any external payments arrears, and will not incur any new external payments arrears at any time during the arrangement.