Bolivia and the IMF
Enhanced Structural Adjustment Facility
Policy Framework Paper, 1998–2001
Prepared by the Bolivian Authorities in Collaboration with the
International Monetary Fund and the World Bank Staffs
August 25, 1998
1. Since 1985 Bolivia has been pursuing a medium-term strategy to accelerate economic growth and reduce poverty. This strategy has produced significant progress in a number of policy areas, particularly in the inflation and external fronts. However, economic growth in this decade and poverty reduction have remained below expectations.
2. Against this background, a key objective of the new ESAF arrangement is to achieve a significant reduction in poverty by 2002 through faster economic growth and stronger social programs. Specifically, the program aims to raise economic growth from 4½ percent in 1998 to 5½– 6 percent by 2001, reduce inflation gradually to 5 percent in 2001, achieve moderate gains in reserves, and keep the external current account deficit on a sustainable path.
3. In support of these macroeconomic objectives, this policy framework paper sets out Bolivia's agenda for structural reform over the period 1998– 2001 (see Table 1) as well as its external financing requirements and technical assistance needs over this period.
Social policies monitored under the HIPC Initiative
4. In 1997, the government, together with the IDB and the World Bank, developed a program of social policies and indicators of the outcomes of the policy actions for the period 1998– 2000. The government has implemented almost all the policies and has observed most of the indicators expected for mid-1998, and will continue to comply with this program through 2000.
Intensified social programs
5. The government has established the goal of poverty reduction as one of its highest priorities. Under the new national action plan, the government will seek to improve social equity by strengthening its social expenditure policies with continued assistance from the World Bank and the IDB. To this end, the government intends to allocate more resources for public investment in social sectors and rural development and will protect spending on a core group of nonsalary items in education and health as agreed with the World Bank and the IDB. Investment on social and rural development programs will increase from 3.4 percent of GDP in 1998 to 3.7 percent of GDP in 2000.
6. Specifically, the government plans to undertake the following measures over the next three years:
7. The specific targets in the area of education reform will be to: (a) achieve a 45 percent primary education completion rate by 2001 and 50 percent by 2005; (b) improve the coverage of female attendance in rural areas to 64 percent by 1999 and to 68 percent by 2000; (c) increase the number of participants in the childhood education development program to 100,000 in 1999 and 120,000 in 2000; (d) modify teachers' compensation to link remuneration to performance by 1999; (e) establish a reform group to present a proposal on reforming higher education to the ministry of education by June 1999; (f) decentralize the wage payment and management of teachers to the municipal level by 2000; and (g) seek to achieve other education targets set under the HIPC Initiative.
8. The specific targets for health reform are to (a) increase spending on basic health as a share of the health budget, with emphasis on preventive medicine and universal access to primary care; (b) expand the coverage of maternal and child health care services through the introduction of the PMN in 3 pilot departamentos in 1999 and extend this program to the rest of the country by 2000; (c) reduce endemic diseases among children through immunization programs and implement the AIEPI program in 3 pilot departamentos in 1999 and the rest of the country by 2000; (d) increase financial assistance in the 1999 budget for lowering the economic and cultural barriers that prevent indigenous and other poor people from usingpublic health services; and (e) seek to achieve other health targets established under the HIPC Initiative.
9 The government also intends to strengthen the delivery of public health care by monitoring vaccination programs and introducing epidemiologic surveillance by 1999. In addition, in 1999 the government will begin to study the feasibility of introducing a limited cost-recovery, fee-based health care delivery system, supported by a basic health insurance system, for certain nonbasic services to help defray the rising cost of publicly provided health services. This study is targeted for completion in 2000.
10. With 40 percent of the population in rural areas and almost 90 percent of those living in poverty, a successful rural development strategy is key for poverty reduction in Bolivia. In the past, rural development programs and social investment projects had a minor impact on rural incomes. Agricultural policies tended to favor large commercial farmers in the lowlands rather than poor, largely indigenous, small farmers in the highlands. The government is committed to alleviate rural poverty through a decentralized approach by improving its understanding of rural poverty. In this regard, the survey of living conditions (MECOVI), the system of social indicators (SISAP), and the implementation evaluation report of the Rural Development Project sponsored by the World Bank will provide useful information on the characteristics of the rural poor. The government also plans to promote private investment in rural areas, particularly in agriculture, through an acceleration of its land titling program with assistance from the World Bank and to strengthen the quality of basic services and infrastructure to rural areas through a variety of participatory projects involving a wide range of donors.
Poverty reduction and safety net programs
11. The government will continue to create favorable economic conditions to foster economic growth and reduce poverty while implementing a targeted safety net for the very poor. Through the passage of a broad financial law (Ley de Propiedad y Crédito Popular) the government has established a framework for helping all enterprising Bolivians to gain access to credit via the Acciones Populares program. The same law also replaces the BONOSOL with another supplementary pension benefit (BOLIVIDA) to Bolivian citizens of 50 years of age and above on December 31, 1995. At the same time, the government will continue to provide strong support to help poor children, women, the elderly, and indigenous people, respectively, through the Program of Attention for Children (PAN), the mother-child support program, the old-age support program, and the program for the development of the indigenous people. To ameliorate the adverse impact on the poor of the hydrocarbon price increases in December 1997, the government has continued its limited subsidy on cooking fuel used by the poor.
12. The government has recently completed a review on the overall strategy on the use of the social and rural development funds (fondos sociales). At the same time, with assistance from the IDB, a set of indicators of social conditions and expenditure has been developed. The government will use the lessons of the review to design an improved system of social assistance delivery by June 1999. Appropriately, the effectiveness and performance of the new program will be tracked by the recently developed social indicators.
Housing and basic services
13. The government's policy on housing and basic services is oriented towards improving the living conditions of the poor. Legal and bureaucratic impediments that increase the cost of construction, the purchase and resale of, and the financing of low cost homes will be removed. With the recent passage of a financial law, access to housing financing for low income groups will be facilitated. Steps will be taken to update the registry of urban real property. By June 1999, the government will also take measures to ensure that the program which provides a limited housing subsidy to the very poor in urban and rural areas (Programa de Subsidio de Vivienda) is made fairer, more transparent, and efficient. The government will also develop a secondary housing mortgage market by mid-2000.
14. The government is also introducing a program to provide increased access to drinking water and achieve higher sanitation standards in rural and poor urban areas. An increase in the private sector participation in the provision of safe drinking water will be sought to complement existing water and sanitation projects through a national program (PROSABAR) and a regional one in Beni (PRAS-BENI).
15. In 1998, the government took several steps to improve the coordination of spending decisions among all levels of government, including cofinancing of investments that meet national priorities and the provision of advice to local governments on budget preparation and execution. In addition, the 1998 budget lowered the limit on indebtedness of local governments from 250 percent to 200 percent of revenues. The government recognizes that additional efforts are needed to improve the coordination and execution of public sector activities envisaged under the process of popular participation and administrative decentralization. In order to keep the debt of local governments at a sustainable level, the proposed 1999 budget will reduce further the limit on indebtedness of local governments, include a ceiling on the annual growth of debt for each municipality and will strengthen monitoring of these debt levels. A plan for further reform, aided by a technical assistance mission of the Fund's Fiscal Affairs Department, will be formulated by October 1998, and the mission's recommendations will be incorporated into the 1999 budget.
16. The government intends to privatize all remaining public enterprises, including the enterprises of the armed forces (which will be joint ventures with majority private ownership). The government has already started to privatize the residual of YPFB, as the conversion of the drilling services unit to a joint venture was completed in June 1998. The workforce of YPFB was reduced by 1,350 persons between September 1997 and June 1998. The government will publish a request for bids to privatize the refineries by February 1999 and intend to privatize the refineries by June 1999. The publication of the request for bids by February 1999 will be a structural performance criterion under the program. Privatization of YPFB's natural gas network, jet fuel stations, and natural gas bottling plants will be completed by March 1999, and gasoline stations will be sold as existing long-term leases expire. A plan of action to reduce excess employment in other residual elements of YPFB (including headquarters) will be formulated by June 1999. In addition, the state smelting company (Vinto) will be offered for sale by October 1998 and the workforce of Vinto will be reduced by 890 persons in 1998. The government plans to sell the development finance company of Santa Cruz (FINDESA) by October 1998; a sugar mill (Bermejo) and a water company (SEMAPA) by December 1998; and two electricity distribution companies (Servicios Eléctricos de Potosí and Servicios Eléctricos Tarija) by June 1999.
17. The government intends to develop a plan to strengthen domestic tax collection in light of widespread underdeclaration of taxable income. This program will promote a sense of fairness especially among those who have routinely paid their full share of taxes, thereby broadening the support for the government's economic program. To this end, the government will develop a plan for domestic tax administration reform by March 1999. It will also submit to congress an amendment to the tax code to strengthen the legal position of the tax authority (DGII) by June 1999.
18. A complete overhaul of the judicial system in Bolivia is central to our efforts to reduce corruption and strengthen the private sector's ability to enforce its property rights. Three laws were passed since August 1997 that establish three new independent legal institutions: (i) the Judicial Council, which will appoint judges based solely on their professional qualifications; (ii) the Ombudsman, which will settle minor disputes and help alleviate the workload of the courts; and (iii) the Constitutional Court, which will decide claims regarding the constitutionality of laws. The Judicial Council and the Ombudsman will be fully staffed and operational by end-1998; the Constitutional Court will be fully organized by end-1999. To modernize the legal framework for individual rights, by June 1999, the government will submit to congress proposed revisions to the law on administrative procedures, and by end-1999 to the civil and penal codes. These changes will clarify arbitration procedures, resolve legaldisputes faster, and provide greater certainty for contracts. A draft commercial code will be submitted to congress by end-2000.
19. The government is taking a number of concrete steps to improve customs administration. A short-term action plan (Plan de Contingencias) will be initiated by December 1998. The plan will include the formation of a technical team that will implement the plan; conduct random checks against those suspected of customs fraud; restructure the customs police (URVA), along with an increase in its budget; remove unauthorized persons from customs posts; establish a plan for rotation of personnel; and initiate construction of customs warehouses in Puerto Suárez and Oruro. A new organic customs law, along with the required regulatory decrees, was presented to congress in June 1998. The government will seek the passage of this law by June 1999. Relevant regulations for the free trade zones will be completed by December 1998. In order to ensure a more level playing field between firms in the free zones and other enterprises, there will be no changes in the tax regime for firms in the free zone and these firms will be closely monitored to ensure they fully comply with the relevant regulations.
20. A long-term customs advisor will be hired by September 1998 to assist in the implementation of the medium-term plan for customs reform. By December 1998, an action plan for medium-term reform, including a description of its financing, will be completed. Actions to be taken by June 1999 include: implementing a new strategy of control, creating a unit to perform ex-post verification; and preparing an infrastructure plan for all customs posts. The full implementation of the new information system and completion of required infrastructure projects are targeted for December 2000.
Civil service and public institution reforms
21. The civil service and other nonjudicial public institutions will need to be strengthened to foster the efficiency of public administration in line with the evolving role of the state. To increase the level of professionalism of government employees and make the public administration more efficient, a civil service reform will be initiated by end-1999 following the review of public expenditure with World Bank's assistance. The government will also implement an integrated action plan to strengthen the supervision of budgetary operations, identify result-oriented budgetary programs, and enhance its ability to undertake performance evaluation of those programs. The plan will be introduced in five selected ministries by mid-1999 and extended to another 10 ministries by mid-2000.
22. Develop national road network. An area of acute concern for the government is the poor quality and insufficient amount of roads, which stands in the way of further economic growth. The National Road Service (SNC) was reestablished in November 1997 to ensure that construction and maintenance of national roads received sufficient priority. The role of the private sector in the provision of roads was strengthened by passage of the transport concessions law in June 1998. To provide the SNC with adequate financing to execute national road projects, 70 percent of tolls charged on existing national roads will be channeled to the SNC starting in 1999. The government will design by December 1998 a master plan for the national road system, which will delineate the responsibilities of national, departmental, and municipal governments. In addition, by March 1999, an evaluation of the costs of maintaining the road system will be undertaken, and adequate funding for this purpose will be provided in the 2000 budget. The master road plan will be finalized by June 1999. By mid-2002, more than 50 percent of asphalt roads will be under satisfactory maintenance. The government expects that by end-2002 the construction and maintenance of more than 500 km of roads will be under private concession. The World Bank, the IDB, and other donor countries will continue to support the government's efforts in these areas. In addition, the government will submit a law to congress to promote competition in trucking, railway, civil aviation, ports, and water transport by September 1999.
23. Other sectors. In telecommunication, existing cooperatives which cannot find sufficient funds to upgrade their operations to meet the new standards will be encouraged to change their legal status in order to gain access to local or foreign capital. By March 1999 regulations to allow new entries in the personal communication systems (PCS) market will be issued to promote competition. These regulations will be extended to cover long distance and local services by 2001. In the area of hydrocarbons, the government will issue regulations on the urban distribution network for natural gas and on lubricant oil standards by March 1999, and on liquid storage, the royalty mechanism for stored gas, and jet fuel supply by September 1999. As regards water, the government will present to congress by September 1999 a draft water law to establish user rights and water quality standards.
24. In recent years, financial system supervision has been improved substantially, and by end-1998, all banks will have capital-asset ratios of 10 percent, measured in accordance with Basle guidelines. Despite this progress, the government will introduce further reforms to create a financial system that has the full confidence of the public. These reforms are supported by the World Bank and are in line with recommendations of the Fund's Monetary and Exchange Affairs Department. In June 1998 congress established the Committee onFinancial Prudential Norms (CONFIP) to ensure that norms and regulations are consistent across all financial sectors.1 Congress also eliminated a regulation that limited the voting power of any bank shareholder to no more than 20 percent, which acted as the only impediment to the entrance of foreign banks into Bolivia. With the removal of this regulation, we expect several major foreign banks to become majority shareholders of several major Bolivian banks, and we believe the entrance of foreign banks will fortify the domestic banking system.
25. With regard to more fundamental reforms, the government will submit to congress in June 1999 a law to establish a deposit insurance system and a resolution trust corporation, which will work out the problems of banks in difficulty. This law will also sharply curtail the central bank's role in bank rescue operations, allowing it to concentrate on monetary policy. By June 1999, the superintendent of banks will gain added authority to reevaluate the quality of bank managers and owners and to revoke their banking license if necessary. By end-1999 the superintendent of banks will issue new prudential norms to require banks to more carefully assess credit, interest rate, liquidity, and other types of risk and to establish stronger systems for internal and external audits as well as create an appropriate framework for supervising risks and improving the transparency of financial institutions. In addition, enterprises will be required to meet higher disclosure standards when applying for credit.
26. Measures to deepen the capital market in Bolivia will continue to receive top priority. A new securities law was ratified by congress in March 1998. In June the insurance law was passed by Congress which included a regulation to mandate the transfer of the management of common and professional risk insurance from the pension funds to insurance companies. To further improve the regulatory framework, the government consolidated the supervisory role of existing financial regulators through the establishment of the Superintendencia de Recursos Jerárquicos (SRJ) which replaces the Superintendencia de Regulación Financiera (SIREFI), and consolidated the superintendencies of pension, securities, and insurance into one superintendency. Supervision of nonbank financial intermediaries will also be strengthened considerably. To strengthen microcredit, operations of nonbank financial intermediaries (cooperatives, mutual funds, and private investment funds (FFP)) will be carried out under the same legal framework as the banking sector, and supervision on nonbank financial intermediaries will be strengthened considerably. By September 1999, CONFIP will issue a set of regulatory norms to be applied uniformly to all financial intermediaries. Also the government will provide institutional support (including technical assistance) to financial institutions that provide microcredit.
Labor market reform
27. The government is sponsoring a dialogue among representatives of the private sector, labor, and government that is intended to lead to a comprehensive revision of Bolivia's labor laws and regulations, which are antiquated, complex and often contradictory. The government has secured the technical assistance of the International Labor Organization (ILO) and the United Nations Development Program (UNDP), and established an office in the ministry of labor to coordinate the process of developing new labor legislation. Two tripartite meetings were held in the first half of 1998. By December 1998, the government will prepare a proposed draft law that will serve as a basis for further discussion among the main groups in society. A new draft law will be submitted to congress by end-1999.
Sustainable development and the environment
28. The management of Bolivia's natural resources will be enhanced by improving the management and implementation of existing environmental programs. As a first step, the ministry of environment and sustainable development was recently strengthened through a successful recruitment program in 1998. In 1999, the government will continue to implement the national system of protected areas and secure sufficient funding for the National Environment Fund (FONAMA), partly through the introduction of user charges in national parks. By end-1999, the management of the remaining seven of the 12 protected areas will be decentralized. A draft law establishing water quality standards and strengthening the regulatory framework through the separation of water resources management concerns from general water quality issues will also be submitted to congress by June 1999. To strengthen the supervision of environmental standards, an enforcement unit inside the natural resource regulatory body (SIRENARE) will be established by December 1999.
29. The effective implementation of the measures described in this paper will require continued substantial inflows of concessional assistance in 1998– 2001 that would supplement the domestic saving effort and the inflows of private capital. This support-a substantial portion of which is to be provided in the context of the HIPC Initiative-is essential for accelerating the implementation of key structural reforms, strengthening economic growth, and pursuing social policies that would achieve a substantial reduction in poverty.
30. The external financing requirement for 1998– 2001 is based on a projection that the current account deficit (excluding official grants) would widen slightly from US$835 million in 1997 to about US$900 million in 1998 (about the same in percentage of GDP) as import volumes would continue to grow because of ongoing investment in capitalized enterprises and the construction of the gas pipeline to Brazil. At the same time, a substantial decline in Bolivia's export prices would offset much of the projected growth in export volumes. The current account deficit (excluding official grants) would decline to about US$845 million in1999 and further to about US$720 million in 2001. Taking into account projected net private inflows, scheduled debt service on public debt, and a modest build-up of gross international reserves of the central bank, the gross financing requirement of Bolivia would rise from about US$605 million in 1998 to US$665 million in 1999, before declining to about US$540 million in 2001 (see Table 2).
31. The external financing requirements are projected to be covered by disbursements of official grants and medium- and long-term loans to the public sector. The IDB is projected to disburse about US$375 million over the 1998– 2001 period while IDA disbursements, which reflect the new country assistance strategy, are projected at about US$310 million. The Fund will disburse about US$45 million per year in 1998– 2001 under the new three-year ESAF arrangement, in addition to the last installment (US$23 million) of the previous ESAF arrangement already disbursed in March 1998. Debt relief under the HIPC Initiative will amount to about US$180 million for this period.
32. Bolivia's public and publicly guaranteed debt stood at US$4.5 billion at end-1997, with an estimated net present value (NPV) equivalent to 252 percent of the three-year average of exports and goods and services. The debt service ratio, before HIPC assistance, would remain above 20 percent of exports of goods and services until the year 2002. The exceptional assistance under the HIPC Initiative scheduled for September 1998 would provide debt relief of US$448 million in NPV terms and reduce the debt service ratio to below 20 percent starting from 1999. This would make Bolivia's debt situation sustainable and permit Bolivia to exit permanently from debt rescheduling mechanisms
33. Technical assistance will continue to provide an important contribution to the implementation of the government's structural reform program. In line with the priority actions identified above, technical assistance in 1998– 2001 will focus on tax and customs administration and the review of public expenditures to identify and improve weak areas of social spending. To encourage strong private sector participation in the economy, a large share of the assistance over the next few years will be devoted to strengthening the sectoral regulatory framework including the financial sector.