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Bolivia—Letter of Intent, Memorandum of Economic Policies, and Technical Memorandum of Understanding

La Paz, Bolivia
March 21, 2003


The following item is a Letter of Intent of the government of Bolivia, which describes the policies that Bolivia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Bolivia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.


Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. The attached Memorandum of Economic Policies (MEP) describes the economic program and objectives of the Government of Bolivia for 2003. In support of this program, the Government requests a Stand-By Arrangement in the credit tranches from the Fund for a period of 12 months in an amount equivalent to SDR 85.75 million. We expect to request a new arrangement under the Poverty Reduction and Growth Facility from the Fund as soon as possible.

2. The Government believes that the policies set forth in the attached Memorandum of Economic Policies are adequate to achieve the objectives of its program, but it will take any additional measures that may become appropriate for this purpose. The Government will provide the Fund with such information as the Fund may request in connection with progress in implementing this program. Bolivia will consult with the Fund on the adoption of these measures, in accordance with the Fund's policies on such consultations, and it will consult with the Managing Director in advance of any revision to the policies covered by the MEP.

3. Reviews under the arrangement that assess overall performance under the program will be completed by May 15, 2003; August 15, 2003; November 14, 2003; and February 15, 2004. Quantitative performance criteria are being proposed for end-March 2003 and end-June 2003, with indicative targets for end-September and end-December 2003.

Sincerely yours,

/s/
Javier Comboni
Minister of Finance
   /s/
Juan Antonio Morales
President, Central Bank of Bolivia

 

Memorandum of Economic Policies of the Government of Bolivia

I. Introduction

1. The government that took office in August 2002 inherited a situation of prolonged economic stagnation. Economic growth averaged only 1½ percent a year in 1999-2002. The resulting fall in per capita income and employment, and the contraction of the informal economy owing in part to the coca eradication campaign, have contributed to rising social tensions that erupted recently. Moreover, the weak economy has undermined government revenues, raised the fiscal deficit, and placed a heavy financing burden on the public sector. The prolonged economic stagnation has also weakened the financial and corporate sectors.

2. Against this background, the government has formulated an economic program for 2003 aimed at stabilizing the economy, calming social tensions, and laying the foundation for comprehensive medium-term reforms that could be supported by a PRGF arrangement. The main components of the program are: (i) the 2003 budget aimed at containing the borrowing requirement of the public sector while increasing social expenditure; (ii) a monetary program to maintain low inflation and increase international reserves; and (iii) policies aimed at banking system stability and strengthening the financial and corporate sectors.

II. Macroeconomic Policies for 2003

A. Macroeconomic Framework

3. The macroeconomic framework for 2003 is presented below. Provided macroeconomic and social stability can be quickly restored and maintained, and the external environment remains supportive, GDP growth in 2003 could rise close to 3 percent. The medium-term economic strategy that is being developed will aim at raising growth subsequently to 4½-5 percent, while improving per capita income and social inequalities. The macroeconomic framework for 2003 also aims at maintaining low inflation, reducing the external current account deficit, and gradually rebuilding international reserves.

Macroeconomic Framework, 2002-03
  2002 2003

Real GDP growth (in percent) 2.5   2.9  
Excluding hydrocarbons 1.8   2.0  
Inflation (end-period; in percent) 2.4   2.8  
External current account (in percent of GDP) -4.0   -3.2  
Gross official reserves (US$ million) 854   992  

B. Fiscal Policy and the Social Safety Net

4. The government's program for 2003 aims to put Bolivia's fiscal accounts on a sustainable path. The public sector deficit (excluding pensions) would be reduced from 3.7 percent of GDP in 2002 to 1.6 percent of GDP in 2003. This implies a target for the public sector borrowing requirement (PSBR) of 6.5 percent of GDP in 2003 for the combined public sector (including pension costs). The medium-term strategy will aim at reducing further the fiscal imbalance and strengthening debt sustainability.

5. The fiscal targets for 2003 will be met through a balanced fiscal program that has emerged from an ongoing process of deliberations within the Congress. The budget, including revenue measures, was submitted to Congress, and has already received the support of the House Finance Committee. We expect explicit support shortly for the budget and the revenue package from the President of the Lower House and this will be a prior action under the program. We anticipate passage by Congress of the 2003 budget and supporting revenue measures by end-March, 2003, but in any case by April 15 as a performance criterion.

Combined Public Sector Accounts, 2002-03
(In millions of bolivianos)
(Percent change) (In percent of GDP)
2002 2003 2003 2002 2003

Overall balance, excluding pensions -2,026 -952 -53.0 -3.7 -1.6
Total revenue 12,329 14,142 14.7 22.4 24.2
Grants 1,268 1,652 30.3 2.3 2.8
Current expenditure 10,770 11,758 9.2 19.6 20.1
  Of which:          
    Wages 5,058 5,503 8.8 9.2 9.4
    Interest payments 1,468 1,683 14.6 2.7 2.9
Capital expenditure 4,853 4,989 2.8 8.8 8.6
Pension-related balance -2,779 -2,840 2.2 -5.0 -4.9
Overall balance, including pensions -4,804 -3,793 -21.0 -8.7 -6.5
Memorandum item:          
Poverty-reducing expenditure 6,821 7,547 10.6 12.4 12.9

6. Total revenue is targeted to increase by almost 2 percent of GDP to 24.2 percent of GDP through measures designed to share more fairly the burden of adjustment across the economy. The emphasis will be on restructuring petroleum sector taxation, eliminating many tax exemptions, strengthening administration, and minimizing the reliance on new taxes at this stage. The main measures are as follows:

  • A decree was issued on January 25, 2003 that restructures the basis for petroleum sector taxation. This decree increases revenues from the hydrocarbons sector by better aligning ex-refinery prices and international prices of oil refined products (with a yield of 0.9 percentage point of GDP in 2003).

  • A new tax procedures code will be submitted to Congress by the end of April (performance criterion) and is expected to be in place by the end of the third quarter (benchmark). It will have several features that should strengthen the tax agencies' enforcement power, providing for more rapid resolution of disputes over tax liabilities and more effective prosecution of tax fraud. Also under preparation is a special facility for the restructuring of arrears to the public sector (Ley de Acreencias); it will be approved at the same time as the new tax code. Our assessment is that these measures should improve revenues by a total of 0.4 percent of GDP in 2003.

  • With the budget, we expect Congress to approve a tax law that eliminates tax exemptions benefiting a few sectors, related to business services, hydrocarbon products, and income taxation of nonbank financial institutions (yield of 0.1 percent of GDP in 2003).

  • The same law will also adjust excise taxes on alcohols and the travel tax (yield of 0.2 percent of GDP in 2003).

  • Tax administration will be strengthened through improved coordination between the two tax agencies to combat tax fraud schemes, especially in the VAT.

7. The government is preparing a more comprehensive tax reform that will improve the revenue base over the medium term. For the design of this program, which will aim at broadening the base of taxation, we will request technical assistance from the IMF. We expect to prepare this reform by midyear and seek its implementation in time for the 2004 fiscal year. Vulnerable groups will be protected.

8. Total noninterest spending would decline somewhat to 30.7 percent of GDP in 2003, while leaving room for enhanced and better targeted social spending.

  • Following the sharp increases in real wages during the last few years, public sector real wages will be generally maintained in 2003 (including the minimum wage). Taking into account the full-year impact of last year's wage increases, the total wage bill would increase by 0.2 percent of GDP to Bs 5.5 billion. This limit will still allow selective increases to address distortions in some sectors.

  • We are addressing the problem of the large increase in pension costs that followed the 1997 pension reform. The first steps in 2003 include control of fraudulent claims, and streamlining and enforcing strictly eligibility requirements. Strengthened procedures for eligibility have already been implemented and any additional regulations that may be needed will be issued before end-April. These steps should allow a saving of about 0.5 percent of GDP in 2003.

  • The budget includes steps to reduce low priority current expenditure. Effective February 20, the government has reduced the number of ministries by five, with commensurate budgetary savings, and has decided on a reduction of at least 10 percent in all current spending of the central administration excluding the wage bill for health, education, security, and tax and customs agencies. Our assessment is that savings from current expenditures should total about 0.1 percent of GDP in 2003.

  • Fixed investment is being reduced modestly (by about 0.2 percentage point of GDP) from its high level of last year, with careful attention to maintaining investment financed by grants or concessional loans.

Social safety net

9. The social safety net will be strengthened further. We have decided to reinstate Bonosol payments (providing payments from the Collective Capitalization Fund to all citizens over the age of 65); continue with the emergency employment program (PLANE)—with assistance from the World Bank—and orient the public investment program toward employment creation; launch an income transfer program to encourage secondary school attendance; and provide universal health coverage for pregnant women and children under five (SUMI). Also, debt relief from the enhanced HIPC initiative is helping to finance social spending in the areas of schools and lunch programs, and basic sanitation. As a result, poverty-reducing expenditure is expected to rise by 0.5 percentage point of GDP to 12.9 percent of GDP.

Contingency plans

10. We have contingency plans for the fiscal program that will be applied if revenues and grants, or external financing are lower than projected. If cumulative quarterly revenues plus grants fall below programmed levels, then public investment would be streamlined, with priority given to protecting projects financed by external concessional loans or grants, and poverty-reducing expenditure. Also, as a contingency, retail fuel prices would be adjusted in the event that international oil prices are significantly higher than projected unless there is an offsetting overperformance of non-oil revenues or reductions in other expenditures.

C. Financing and External Policies

We expect that virtually all of the PSBR of the combined public sector of about 6.5 percent of GDP will be met from external sources (shown below), mainly on a concessional basis. In addition, bilateral grants projected at US$146 million will help to limit the fiscal deficit.
11. We have finalized these financing assurances as a prior action under the program. Net domestic financing will be reduced to only 0.1 percent of GDP, compared with 2.5 percent of GDP in 2002. Looking ahead, we will schedule a meeting of the consultative group of donors in the second half of 2003.

Budgetary External Financing
(In millions of U.S. dollars)

Loans 480   
World Bank (net) 178   
Inter-American Development Bank (net) 58   
Andean Development Corporation (CAF) (net) 112   
Other 131   
Grants 146   
  Of which:
    United States    57   
    Netherlands 15   
    European Union 14   
    Germany 15   
    Japan 17   

12. The increase in nonconcessional external debt of the public sector will be limited (on a net basis) to US$150 million (2 percent of GDP) in 2003, with a downward adjuster for delayed disbursements in public borrowing earmarked to fund the public sector's possible contribution to bank restructuring or corporate workouts, as described below. This limit takes account of Bolivia's phased graduation from IDA and the budget financing plans summarized in the above table; and it is consistent with external debt sustainability criteria. At the time of the second review, in parallel with the government's efforts to define the role and nature of any public support to the bank and corporate restructuring process, we will reassess the likely financing need and the timing of any additional nonconcessional external borrowing by the public sector to cover the costs of public financial support for the restructuring process, taking account of the plans of multilateral development banks for additional lending to Bolivia. Consistent with prudent external debt management, external short-term borrowing would be limited to zero, on a net basis, for the year as a whole.

Nonconcessional External Financing
(In millions of U.S. dollars)
Gross Net

IDB 4 -60
IBRD 60 60
CAF 266 147
Other 76 3
Total 406 150

13. The government is actively pursuing several large projects that could come on stream over the next several years. The liquefied natural gas (LNG) project for exports to North America is expected to move forward this year on the most efficient basis.

14. We intend to maintain a liberal trade policy. In addition, we are negotiating with our trading partners to improve market access for our exports, including the removal of barriers to soybean exports to Colombia, and the design of a possible free trade agreement with Chile. Regarding trade with the United States, exporters are already taking advantage of the benefits of the recent regional trade package, and we expect this trade to expand rapidly.

15. We have signed agreements with almost all creditors that deliver relief under the enhanced HIPC Initiative, while still pursuing agreements with Brazil, China, Japan, and Taiwan Province of China.

D. Monetary and Exchange Rate Policies

16. We remain committed to a strong and independent central bank, which will continue to keep inflation low. The monetary program for 2003 will be conducted through control of the central bank's net domestic assets (NDA). This program will reduce NDA in 2003 by 7 percent (December-over-December). It incorporates a decline in central bank credit to the central government.

17. The monetary program anticipates strengthening the central bank's net international reserves, by US$65 million, to a level of US$875 million—thereby raising coverage of dollar deposits in the banking system from the end-2002 level of 31½ percent of disposable international reserves (excluding gold holdings but including banks' liquid asset requirement held abroad) to 35 percent at end-2003. Broad money in U.S. dollar terms is assumed to recover gradually; at end-2003, it would still remain somewhat lower than at end-2001.

18. In recent years, we have been making exchange rate policy more flexible within the crawling-peg exchange rate regime, and this policy will continue in 2003. Our aim will be to maintain and preserve competitiveness. Looking ahead, the central bank will undertake a study, in consultation with IMF staff, on recent trends in the real effective exchange rate, external debt sustainability, and competitiveness. This study will be completed by September 2003; it should allow us to consider additional options for external policies designed to maintain Bolivia's competitiveness, and to consider a possible move to an inflation targeting framework over the medium term.

III. Financial and Corporate Sector Policies

19. The government is committed to taking all steps needed to maintain and enhance confidence in the domestic banking system. Recently, the central bank responded promptly to deposit outflows by assuring banks of necessary liquidity support and raising dollar interest rates. These measures have helped stabilize the situation and central bank liquidity support is almost fully unwound. Thus, recent episodes of instability have clearly demonstrated the central bank's capacity to respond effectively and quickly restore more normal conditions. If necessary, central bank reserves could be supplemented through access to lines of credit from the Latin American Reserve Fund (FLAR) and other sources.

20. Nevertheless, we recognize the need to strengthen the banking system and have adopted key measures to improve the regulatory framework for bank supervision and advance plans for bank resolution. The main steps to be implemented during 2003, in consultation with Fund staff and in line with the recent FSAP mission's findings, are as follows:

  • Under a decree already issued, banks are required to have met their provisioning requirements against problem loans by end-March 2003. There will be no further forbearance extended to banks, except for temporary forbearance that may be allowed under the government's policy, in the context of a viable corporate restructuring program.

  • A decree will be issued by end-April that clarifies the financial oversight responsibilities of different institutions (performance criterion). General norms in accordance with existing laws will be issued by the Executive Branch, while the banking superintendency—which is responsible for policy implementation—will issue prudential regulations and standards.

  • Consistent with these principles, regulations will be issued for bank resolution and prompt corrective action mechanisms by end-April (performance criterion).

  • Timely bank reporting of their financial condition will be key to assessing the soundness to the banking system. Based on the audited balance sheets for December 2002 and the official balance sheets as of end-March 2003, the situation of each bank will be analyzed in the first half of 2003, and a plan of action will be developed to maintain banks' soundness.

  • The basis for central bank liquidity support of banks, including those undergoing restructuring, will be clarified. The appropriate regulations are expected to be issued by end-April 2003.

21. In addition, the government is developing a comprehensive strategy for the financial and corporate sectors, since the strengthening of both sectors needs to be addressed at the same time. The aim is to restore the profitability of viable private firms while ensuring the financial system's stability and development. The strategy will be formulated by mid-2003, consistent with the findings of the recent FSAP mission. Meanwhile, the initial steps, prepared in consultation with Fund staff and consistent with the recent FSAP mission's findings, are as follows:

  • A high level management team will be appointed to coordinate the relevant public sector agencies regarding the overall strategy for the financial and corporate sectors.

  • Draft laws on bankruptcy procedures and informal workout mechanisms will be submitted to Congress by end-April (performance criteria). These laws are expected to be approved by end-September (benchmarks).

  • The management team will deepen the analysis of the situation in the corporate sector. The impact of potential restructuring of viable enterprises on banks' balance sheets will be identified, and a timetable will be developed for any needed actions to enhance the financial soundness of banks that provide debt relief to the corporate sector. A framework for the use of public funds for bank restructuring or corporate workouts will be developed and fitted into the fiscal framework during the first half of the year, with any funding extended only under strict conditions of an agreed restructuring plan.

IV. Medium-Term Objectives and Policies

22. Our medium-term strategy aims at real GDP growth of 4-5 percent in the medium term, with the main sources of growth being the following: (i) gas and oil exploitation; (ii) exports of manufactures that should benefit from expanded U.S. trade preferences for the Andean region; (iii) some large mining projects; (iv) development of the tourism sector; and (v) a gradual recovery of domestic demand based on increased employment and investment opportunities.

23. The medium-term program will aim at a significant further reduction in the fiscal deficit through fiscal reforms. Ongoing reforms of the two tax agencies are designed to, inter alia, improve coordination between the agencies and overhaul support for key tax administration systems, including through an update of the registry of taxpayers in the National Tax Service that will help enhance revenue buoyancy. Public investment will focus on poverty-related and priority areas identified in the government's program, Plan Bolivia. The government's plans for enhancing the efficiency of expenditure include better tracking of pro-poor spending, developing a medium-term expenditure framework, cutting inefficient capital expenditure, and reducing pension costs. These reforms will be developed in close consultation with the IMF, the World Bank, the IDB, and the CAF.

24. Other elements to the government's medium-term strategy are as follows:

  • A strategic plan to promote exports and investment will be developed that will rely on improvements in the economic and business environment.

  • Improvements in the legal framework to give full assurances of the rule of law and to improve the business environment.

  • A second generation of reforms at the municipal level that should result in greater accountability of municipalities while also providing for their fiscal autonomy.

  • Improvements in governance, including institutional reform of public sector entities, a new procurement law, and improved public sector financial information management, and an action plan to combat corruption.

  • A strategy will be developed to increase the share of intermediation in local currency.

25. We aim to complete the formulation as soon as possible of a medium-term economic program, based on our poverty reduction strategy. In this light, we expect to replace the stand-by arrangement by an arrangement under the Poverty Reduction and Growth Facility.

V. Program Monitoring

26. Implementation of the program supported by the Stand-By Arrangement will be monitored through quarterly reviews that should be completed by May 15, August 15 and November 14, 2003 and February 15, 2004. Quantitative performance criteria for end-March and end-June 2003, and indicative targets for end-September and end-December 2003, are shown in Table 1. Prior actions and structural performance criteria and benchmarks are listed in Table 2 and described in detail in the technical memorandum of understanding.

Table 1. Bolivia: Quantitative Performance Criteria and Indicative Targets, 2003
    2003
    Performance Criteria
Indicative Targets
    End-Mar. End-June End-Sep. End-Dec.

(Cumulative amounts from December 31, 2002 in millions of bolivianos)

Deficit of the combined public sector 800    1,450    2,250    3,793   
Net domestic financing of the combined public sector 500    -200    -25    73   
(Cumulative changes from December 31, 2002 in millions of bolivianos)
Net domestic assets of the central bank 725    250    -500    -245   
  Of which: central bank net credit to the nonfinancial public sector 350    175    -325    -82   
(Cumulative changes from December 31, 2002 in millions of U.S. dollars)
External debt of the public sector with maturities up to one year 15    10    10    0   
Nonconcessional external debt of the public sector (net) 15    50    100    150   
Net international reserves of the central bank -170    -90    0    65   
External arrears, stock at end of period (continuous performance criterion) 0    0    0    0   

1The Technical Memorandum of Understanding provides further details on definitions and adjusters to the program.


Table 2. Bolivia: Prior Actions and Structural Conditionality Under the Stand-By
Arrangement, 20031

Condition Policy Measure Timetable for Implementation1

Public Sector Reform and Financing
Prior Action Finalization of financing assurances Before Board approval of SBA
Prior Action Submission to congress of 2003 budget which, together with the proposed revenue measures described in para. 11 of the TMU, is consistent with a combined public sector deficit equal to or less than 6.5 percent of GDP; support of the budget from the President of the Lower House of Congress Before Board approval of SBA
Performance Criterion Approval of 2003 budget, which together with the proposed revenue measures described in para. 11 of the TMU is consistent with a combined public sector deficit equal to or less than 6.5 percent of GDP April 15, 2003
Performance Criterion Submission to congress of a tax procedures code consistent with para. 12 of the TMU April 30, 2003
Benchmark Approval by congress of a tax procedures code consistent with para. 12 of the TMU September 30, 2003
Financial Sector and Corporate Sector
Performance Criterion Issuance of the final regulations for the bank resolution and prompt corrective action mechanisms introduced by the financial sector law of 2001 consistent with para. 14 of the TMU April 30, 2003
Performance Criterion Issuance of supreme decree(s) (i) clarifying the roles of the different institutions with oversight over the financial sector (includes ensuring a technical basis for issuing prudential norms), and (ii) defining certain areas of banking regulation that should be determined by the superintendency consistent with para. 13 of the TMU April 30, 2003
Performance Criterion Submission to congress of draft bankruptcy law and draft law for corporate debt workout mechanism, prepared in consultation with Fund staff and consistent with paras. 15 and 16 of the TMU April 30, 2003
Benchmark Approval by congress of law on corporate workout mechanism consistent with para. 16 of the TMU September 30, 2003
Benchmark Approval by congress of bankruptcy law consistent with para. 15 of the TMU September 30, 2003

1References in the table are to the relevant paragraphs of the Technical Memorandum of Understanding (TMU).

Bolivia—Technical Memorandum of Understanding

1. This technical memorandum sets forth the definitions of the performance criteria referred to in the Memorandum of Economic Policies under the Stand-By Arrangement. The quantitative targets and limits described below for 2003 will be measured as cumulative flows from December 31, 2002 (Table 1). Monthly updates for fiscal and monetary information will be provided at most 25 calendar days after the end of each month. Further definitions of quantitative performance criteria and adjusters are provided in Table 2.

Quantitative performance criteria

2. The deficit of the combined public sector (CPS) is the sum of the net external financing of the nonfinancial public sector (NFPS) and the net domestic financing of the CPS (see definitions in Table 2). The domestic floating debt of the NFPS comprises the liabilities incurred for goods and services received but not yet paid for, excluding claims on and liabilities to other entities within the NFPS. The floating debt with respect to public sector wages at the end of each month will include (i) unpaid wage increases and (ii) wages for work performed in a previous month but not yet paid. Floating debt will include the floating debt of the departmental capitals, El Alto and those municipalities having subscribed an adjustment program (PRF) with the government as of December 31, 2002; will be reported semiannually, with at most a 90-day lag; and will be included in the floating debt figures as soon as available.

3. The net domestic assets of the central bank (BCB) are defined as the currency issue less the net international reserves (NIR) of the BCB (defined in Table 2). Medium- and long-term external liabilities of the BCB and net credit to the NFPS from the BCB exclude net disbursements of foreign loans administrated by the BCB as trust funds for the NFPS. NIR and external liabilities will be valued at the accounting exchange rate of Bs 7.73 = US$1 in 2003.

4. External debt has the meaning set forth in point No. 9 of the Fund's Guidelines on Performance Criteria with Respect to Foreign Debt, adopted on August 24, 2000, and will include any public debt instruments held by foreign official institutions. The amounts of nonconcessional and short-term external debt will be evaluated at the end-2002 U.S. dollar exchange rates of 0.9536 Euro = US$1,119.90 Japanese yen = US$1, and for other currencies according to the corresponding end-2002 exchange rates published in the IMF's International Financial Statistics.

5. The BCB assets and liabilities denominated in foreign currencies other than U.S. dollars will be converted to U.S. dollars at the market exchange rates for the respective currencies in effect at the date of measurement except for: (i) gold, to be valued at the accounting rate of US$300 per troy ounce; and (ii) SDR holdings and the net Fund position which will be converted into US$1.35952 = SDR1. The change in NIR of the BCB will be measured by differences in stocks. In consolidating the BCB cash operating result (see Table 2) with the NFPS accounts, transfers to the treasury in lieu of operating profits will be excluded from expenditures.

Adjusters to the program

6. HIPC debt relief includes that provided under the original and enhanced initiatives from the reduction in amortization arising from stock of debt reduction operations and rescheduling. As indicated in Table 1, the limit on the deficit of the CPS shall be reduced (increased) by the shortfall (excess) between actual and projected HIPC debt relief. The limits on the net domestic financing of the NFPS will be adjusted upward by the difference between projected and actual cumulative net external financing to the NFPS, excluding HIPC debt relief, up to the designated ceiling. Beyond HIPC refers to debt relief granted by HIPC creditors beyond that agreed within the enhanced HIPC framework.

7. The limits on the net domestic financing of the CPS and on the net domestic assets of the BCB will be adjusted downward, and the target for NIR of the BCB will be adjusted upward, by the amount of any overdue obligations to foreign official creditors. The target for NIR of the BCB will be adjusted downwards for shortfalls relative to the projected currency issue, up to the designated ceiling indicated in Table 1.

8. Loans for financial and corporate restructuring for purposes of the adjuster to the limits on net nonconcessional foreign debt indicated in Table 1 comprise CAF credits of US$35 million and IBRD credits of US$35 million for restructuring that are included in the financing figures in the table in para. 12 of the MEP. The limit on net nonconcessional foreign debt shall be reduced by the amount of the shortfall between actual and projected external financing for financial and corporate restructuring, up to the designated ceiling.

9. External financing for social spending for purposes of the adjuster indicated in Table 1 comprises: a Poverty Reduction and Social Credit from IDA (US$50 million); an IBRD loan to support the social safety net (US$25 million); a social sector credit from the IDB (US$20 million); and a loan to support the employment program (US$25 million) from the CAF. One or more of these loans could be replaced by alternative loans with similar financial conditions and for similar purposes, after consultation with Fund staff. The limit on the deficit of the CPS shall be reduced by the amount of the shortfall between actual and projected external financing for social spending, up to the designated ceiling.

10. An automatic adjustment mechanism for the prices of oil refined products will be implemented on January 1, 2004. Domestic retail prices of refined petroleum products would be increased during 2003 if the three conditions detailed in Tables 2 and 3 hold. In such a case, the price adjustment will be implemented within the following seven days. The amount of the adjustment will be determined in a way that leaves the excise tax rate no lower than the level existing after the first three adjustments of the reference price effected after January 25, 2003.

Other issues

11. The 2003 budget that has been submitted to Congress will be supplemented by a draft tax law that increases the taxation of certain alcoholic beverages, travel, and business services. The consistency of the draft legislation with the limit on the combined public sector deficit indicated in Table 1 will be confirmed with Fund staff. The consistency of the 2003 budget approved by Congress as a performance criterion for the first review will be confirmed with Fund staff in view of any other fiscal legislation that may have been approved by Congress.

12. The new tax procedures code will provide that (i) disputes over tax liabilities will proceed through an administrative procedure prior to the final recourse of judicial review; (ii) tax fraud and similar violations will be subject to criminal penalties; (iii) sworn tax declarations will be a sufficient legal basis for pursuing tax collection; and (iv) the rules for applying the statute of limitations (interrupción del período de prescripción) will be specified.

13. The roles of the different institutions with oversight over the financial sector will be clarified by supreme decree. In particular, (i) the CONAPFI (Consejo Nacional de Política Financiera) shall formulate its recommendations for general norms and regulations for the financial system on the basis of technical and legal reports prepared for this purpose by the relevant superintendency; (ii) the Superintendency of Banks and Financial Institutions (SBEF) shall have the authority to issue regulations including accounting rules for the proper valuation of assets, conduct onsite inspections, take corrective or emergency actions contemplated by Law 2297 of December 2001, and take actions consistent with the resolution mechanisms established by this law and its regulations; and (iii) consistent with the policies established by the executive branch, the areas of banking regulation that will remain under the purview of the SBEF include the fields of liquidity, risk diversification, market risks, securities, interest rate risk, equity investments, loan classification and provisioning, and internal control systems. Limits on open foreign exchange positions will be set by the central bank.

14. Regulations to be issued for bank resolution and prompt corrective action mechanisms should include, in particular, (i) the triggers and procedures for regularization, voluntary liquidation, and intervention of financial institutions (Articles 112-123 of the Banking Law amended by the Law 2297 of December 2001) ; and (ii) the resolution procedures for financial institutions (Articles 124-132 of the Banking Law amended by the Law 2297 of December 2001).

15. The bankruptcy law to be submitted to Congress will provide a legal framework for corporate insolvency, which will include in particular the following principles: (i) a swift liquidation system for nonviable firms designed to maximize recoveries; (ii) the rehabilitation of viable enterprises to minimize economic losses; and (iii) an efficient system for enforcing both unsecured and secured credit claims. Important progress has already been made in incorporating comments to the draft law from World Bank staff on earlier versions.

16. The law on corporate workout mechanisms to be submitted to Congress will provide a legal framework for a debtor enterprise to reach an out-of-court agreement with its creditors on a restructuring plan, including a business reorganization plan and a restructuring of claims on the debtor enterprise. The main principles of the mechanism include: (i) the agreement would be between the debtor enterprise and its creditors; (ii) a group of creditors would decide whether to accept a plan, following an independent review of the debtor's proposal and prospects; (iii) creditors would be treated no worse under the agreement than in a formal bankruptcy proceeding; and (iv) there would be recourse to formal bankruptcy proceedings if a qualified majority of creditors do not reach agreement on a plan.

Table 1. Bolivia: Quantitative Performance Criteria and Indicative Targets, 2003
    2003
    Performance Criteria
Indicative Targets
    End-Mar. End-June End-Sep. End-Dec.

(Cumulative amounts from December 31, 2002 in millions of bolivianos)
Deficit of the combined public sector1 800    1,450    2,250    3,793   
Net domestic financing of the combined public sector2,3 500    -200    -25    73   
(Cumulative changes from December 31, 2002 in millions of bolivianos)
Net domestic assets of the central bank2 725    250    -500    -245   
  Of which: central bank net credit to the nonfinancial public sector 350    175    -325    -82   
(Cumulative changes from December 31, 2002 in millions of U.S. dollars, unless otherwise indicated)
External debt of the public sector with maturities up to one year4 15    10    10    0   
Nonconcessional external debt of the public sector (net)4,5 15    50    100    150   
Net international reserves of the central bank6,7 -170    -90    0    65   
External arrears, stock at end of period (continuous performance criterion) 0    0    0    0   
Projections for calculation of adjusters to the program8        
(Cumulative change from December 31, 2002 in millions of bolivianos)
Adjuster for currency issue        
  Currency issue (program) -611    -473    -501    258   
  Maximum adjustment to net international reserves target 0    25    50    75   
Adjuster for the deficit of the combined public sector        
  External financing for social spending (programmed disbursements) 348    348    541    928   
  Maximum adjustment to the limit on the deficit of the combined public sector 0    60    120    175   
(Cumulative amounts from December 31, 2002 in millions of U.S. dollars, unless otherwise indicated)
Adjuster for net external financing of the nonfinancial public sector        
  Net external financing of the nonfinancial public sector (program)9 26    199    262    433   
  Maximum adjustment to limit on domestic financing of combined public sector (Bs millions) 150    500    500    500   
Adjuster for nonconcessional external debt of the public sector        
  Maximum adjustment to the nonconcessional external debt limit 0    0    35    70   
Financing through HIPC and beyond-HIPC debt relief (program)10 14    31    45    64   

1The deficit limit will be reduced (increased) by the amount of the shortfall (excess) between actual and projected financing through HIPC and beyond HIPC debt relief. The financing from HIPC relief comprises refinancing and the amortization component of stock of debt reduction operations. The deficit limit will also be reduced by the amount, if any, of the shortfall between actual and projected external financing for social spending, subject to the maximum adjustment shown in this table.
2The limits will be adjusted downward by the amount of any overdue obligations to foreign creditors.
3This limit will be adjusted upward by the shortfall, if any, of the actual cumulative net external financing to the nonfinancial public sector from the projected cumulative external financing, subject to the maximum adjustment shown in this table.
4Subject to the exclusions indicated in Table 2 of the Technical Memorandum of Understanding. The term "debt" has the meaning set forth in point No. 9 of the Fund's Guidelines on Performance Criteria with Respect to Foreign Debt, adopted on August 24, 2000.
5The debt limit will be reduced by the amount, if any, of the shortfall between actual and projected disbursements of loans for financial and corporate restructuring, subject to the maximum adjustment shown in this table.
6This target will be adjusted upward by the amount of any overdue obligations to foreign official creditors.
7
The targets will be adjusted downward by the shortfall, if any, of currency issue from the projected change shown in this table, subject to
the maximum adjustment shown in this table.
8For the first three adjusters, the first line shows the projected levels under the program, that will be used for the calculation of the adjuster, up to a ceiling defined in the second line.
9Does not include the HIPC debt relief through rescheduling or the amortization component of stock of debt reduction operations under HIPC Initiative and beyond HIPC.
10 Comprises refinancing and the amortization component of stock of debt reduction operations under the HIPC Initiative and beyond HIPC, both for the financial and nonfinancial public sector.


Table 2. Bolivia: Definitions and Adjusters of Quantitative Performance Criteria

I. Definitions
Nonfinancial public sector (NFPS), comprising:
(i) General government (central administration, public sector social security, prefectures, municipalities, and other decentralized agencies); and
(ii) Nonfinancial public enterprises.
The public sector is defined to include:
(i) Nonfinancial public sector; and
(ii) the Central Bank of Bolivia (BCB) and other financial public sector entities, including NAFIBO and FONDESIF.
Net domestic financing of the combined public sector, sum of:
(i) Increase in the net claims of the domestic financial system on the NFPS (excluding deposits in the BCB related to foreign loans administered as trust funds;
(ii) Cash operating results before distribution to the treasury's account of the BCB;
(iii) Change in the NFPS liabilities to the private sector in the form of fiscal certificates;
(iv) Increase in the domestic floating debt of the NFPS (liabilities incurred for goods and services received but not yet paid for, excluding claims on and liabilities to other entities within the NFPS); and
(v) All domestic borrowing from the nonfinancial private sector; including the net increase in any new domestic debt instruments issued by the government and held outside the NFPS.

Net external financing of the NFPS comprising:
(i) External disbursements to the sector;
(ii) Total HIPC debt relief from refinancing operations;
(iii) Net disbursements of funds for the NFPS administered by the BCB as trust funds;
(iv) Unpaid current interest obligations;
  less
(v) Amortization due by the NFPS after HIPC debt relief for the amortization component of the stock of debt reduction operations, and
(vi) Net payments in settlement of the external arrears of the NFPS.

Net international reserves of the central bank:
(i) BCB liquid foreign assets;
  less:
(ii) BCB liabilities to nonresidents (including swaps and the net position under the Latin American Integration Association, LAIA, clearing mechanism) with an original maturity of at most one year;
(iii) Outstanding purchases and disbursements from the Fund (excluding disbursements from the trust fund); and
(iv) BCB net liabilities to the Latin American Reserve Fund (FLAR), including bridging loans (even those obtained by the NFPS) and those obtained by pledging gold.
The definition excludes:
(i) Gains resulting from the conversion of monetary gold into foreign exchange;
(ii) Gains resulting from the acquisition of domestically produced gold; and
(iii) Any of the commercial banks' liquid asset requirement holdings, whether or not included in the BCB balance sheet.

External debt of the public sector with maturities up to one year excludes:
(i) Normal import credits;
(ii) Reserve liabilities of the central bank; and
(iii) The use of Fun resources.

Nonconcessional external debt of the public sector, defined as:
(i) Outstanding external debt of the public sector,
  excluding:
(ii) Concessional loans with a grant element—based on the interest rate and repayment schedule of each loan and any grants or other external concessional loans in connection to the loan in question—of at least 35 percent using the OECD commercial interest reference rates as of January 15, 2003;
(iii) Changes in BCB liabilities included in the definition of NIR;
(iv) Debt reprogrammed with official creditors;
(v) The use of Fund resources;
(vi) The effect of any stock-of-debt operations under the enhanced HIPC Initiative or beyond-HIPC relief.

Cash operating result of the BCB, calculated as:
  Current receipts from:
(i) Interest on deposits abroad;
(ii) Earnings on the BCB portfolio with the NFPS and the financial system;
(iii) Interest payments by the treasury on government paper held by the BCB;
(iv) Interest on LAIA accounts;
(v) Commissions and realized foreign exchange gains; and
(vi) Other current receipts, excluding any sale of fixed assets, including gold.
  Minus current payments to:
(i) The IMF, excluding repurchases and SAF, ESAF and PRGF loan repayments;
(ii) Other international organizations, excluding amortization and interest on loans administered by the BCB as trust funds for the NFPS;
(iii) The domestic commercial banks on account of reserve requirements;
(iv) Interest on certificates of deposit and treasury bills B and D; and
(v) Administrative and other current expenditures.

Revenue and grants of the combined public sector, calculated as the sum of the following items:
From the general government accounts prepared by the Fiscal Programming Unit of the Ministry of Finance (UPF):
(i) Tax revenue (Ingresos corrientes);
(ii) Capital transfers from public enterprises (Transferencias de Empresas);
(iii) Grants (Donaciones);
(iv) Operating balance of the central bank (Cuasifiscal);
  Minus:
(v) Issuance of public fiscal certificates (Emisión de Cert. Fisc. Pub.);
(vi) Other transfers to public enterprises (Ots. Transf. a Empr.);
Plus, from the public enterprises accounts prepared by UPF:
(vii) Current revenue (Ingresos corrientes);
(viii) Grants (Donaciones);
(ix) Public enterprises surpluses (Excedentes de Emp. Pub.);
(x) Interest payments on domestic debt (Intereses Deuda Interna);
(xi) Interest payments on external debt (Intereses Deuda Externa);
  Minus:
(xii) Current expenditures (Egresos Corrientes).

II. Adjusters

The limits on the change to the NIR of the BCB shall be increased by overdue obligations to:
(i) Multilateral organizations;
(ii) Bilateral official creditors excluding debts covered under Paris Club or other bilateral reschedulings or debts under negotiation including service on rescheduling but excluding old debts to countries in the region;
(iii) Supplier's creditors without official guarantee excluding already rescheduled debt service; and
(iv) Holders of private bonds excluding zero-coupon bonds used in debt conversion schemes.

Conditions for increasing domestic retail prices of refined petroleum products in 2003:
(i) The 365-day moving average Platts price for gasoline or diesel—including projected prices for the next 60 days—implies, from January 25, 2003 on, at least 4 upward revisions of the reference prices under the supreme decree 26926 (the projected prices for gasoline and diesel will result from a daily linear projection based on the monthly future contracts' prices for NYMEX unleaded gasoline and IPE gasoil, respectively, published by the Platts Oilgram Price Report);
(ii) Cumulative monthly revenues plus grants of the combined public sector are at least 2 percent lower than projected (see Table 3); and
(iii) The cumulative deficit of the CPS exceeds the projected level under the fiscal program (see Table 3) by at least 2 percent. For the periods ending in March, June, or September, this condition would apply if the cumulative CPS deficit exceeds the limit in Table 1.


Table 3. Bolivia: Revenue and Deficit Projections
for the Combined Public Sector

(Cumulative amounts from December 31, 2002 in millions of bolivianos)
  Revenue and grants Deficit      

2003  
January 1,072       330      
February 2,089       732      
March 3,488       777      
April 5,184       833      
May 6,471       883      
June 7,660       1,429      
July 9,042       1,682      
August 10,352       1,738      
September 11,632       2,215      
October 13,132       2,407      
November 14,471       2,792      
December 15,795       3,793