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Bolivia: Staff Report for the 2001 Article IV Consultation and Request for Third Annual Arrangement Under the Poverty Reduction and Growth Facility

Author(s):
International Monetary Fund
Published Date:
June 2001
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I. Introduction

1. A staff mission visited La Paz and Santa Cruz during November 26-December 15, 2000 and February 12-22, 2001 to conduct the Article PV consultation discussions, collect information to update the debt sustainability analysis for the HIPC Initiative, and negotiate the program for the third annual PRGF arrangement (described in the attached Memorandum of Economic and Financial Policies). Discussions were concluded in meetings at headquarters with staff and management on April 6.1

2. At the conclusion of the last Article IV consultation on February 7, 2000 (EBS/99/235), Directors commended the authorities for their solid track record since 1985, but noted that improvements in poverty and social indicators had been modest. They welcomed the authorities’ commitment to maintaining the public sector finances on a sound basis, but underscored that the fiscal framework should incorporate the costs of needed social outlays. Bolivia has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement. Bolivia is on the 12-month consultation cycle.

3. The current three-year PRGF arrangement, in an amount of SDR 100.96 million (80 percent of quota), was approved by the Executive Board on September 18, 1998. The second annual arrangement was approved by the Executive Board on February 7, 2000, but neither of the reviews was completed before the arrangement expired, owing to delays in meeting prior actions in the areas of tax administration and financial sector legislation. As a consequence of the noncompletion of the reviews, the second and third loans provided under the second annual arrangement were not disbursed; the authorities are requesting that they be rephased over the period of the third annual arrangement.

4. In February 2000, the Boards of the International Development Association (IDA) and the Fund agreed that Bolivia had reached the decision point for the enhanced HIPC Initiative (IDA/R 2000–7 and EBS/00/4), and would be eligible for debt relief of US$854 million in net present value (NPV) terms at end-19982 on its stock of public and publicly guaranteed external debt. At that time, directors set conditions for Bolivia’s reaching a floating completion point under the enhanced HIPC framework. The authorities have developed a long-term strategy for poverty reduction, incorporating a macro framework that provides a basis for a PRGF-supported program. The strategy will be supported by assistance under the HIPC Initiative, and will form the basis for coordinating external assistance and setting government spending priorities. The staffs of the Fund and the Bank have prepared a completion point document for consideration by the Executive Boards of the Fund and IDA.

II. Background and Performance Under the Program

5. Bolivia has a long track record of substantial progress in the areas of macroeconomic stability and structural adjustment; however, poverty remains widespread. Through sound fiscal, monetary, and exchange rate policies and a comprehensive program of structural reforms since 1985 (including extensive privatization, financial sector liberalization, central bank independence and recapitalization, fiscal decentralization, trade liberalization, and pension reform), real GDP growth averaged 4 percent a year during the 1990s, as inflation was reduced to low single digits. Foreign direct investment rose above 10 percent of GDP during the latter part of the decade, and gross international reserves rose to 7½ months of imports of goods and services. Despite the overall good performance of the 1990s, external shocks—notably the sharp depreciation of the Brazilian real in early 1999, and a drop in key export prices—and the negative impact on domestic demand of the successful coca eradication program, resulted in a sharp economic slowdown in 1999. Real GDP growth fell to 0.4 percent. Although there was some reduction in poverty during the 1990s, about two-thirds of the population were below the poverty line in 1999.

6. The program for 2000, supported by the second annual arrangement under the PRGF, was designed to encourage an economic recovery, while maintaining a sound macroeconomic framework. Real GDP growth was projected to recover to 4 percent, while inflation was to be contained at 4-4½ percent. The deficit of the combined public sector was programmed to narrow only slightly to 3.7 percent of GDP,3 while growth rates of broad money and bank credit to the private sector were expected to recover in line with nominal GDP growth. The external current account deficit was expected to widen slightly to just over 6 percent of GDP, while net international reserves were expected to fall moderately (after adjusting for the overperformance during 1999).

7. The economic recovery in 2000 was weaker than expected, owing to sluggish growth of domestic demand. Real GDP grew by only 2.4 percent despite strong export volume growth, as real domestic demand is estimated to have grown by only 1.6 percent (Table 1). The continued success of the government’s coca eradication program and the customs reform, which reduced commercial activity based on contraband imports, lowered incomes in the informal sector. The virtual elimination of illicit coca cultivation over the last two to three years may have lowered incomes by 3 percent or more of annual GDP. Periods of severe social unrest during 2000 also hindered real GDP growth, mainly by disrupting transportation. Inflation remained subdued during 2000, rising slightly to 3.4 percent, despite pressure on domestic fuel prices in the first half of the year from higher world oil prices. In July 2000 the government brokered an agreement among private distributors for a one-year freeze of fuel prices.

Table 1Bolivia: Selected Economic and Financial Indicators
AveragePrel.2000Prog.
1990-9719981999Prog.Prel.2001
(Annual percentage change)
Income and prices
Real GDP4.35.20.44.02.44.0
Real domestic demand4.76.6-1.84.41.62.5
GDP deflator11.37.33.04.85.54.3
CPI inflation (period average)11.97.72.24.24.63.7
CPI inflation (end-of-period)11.14.43.14.0-4.53.44.0-4.5
(In percent of GDP)
Investment and savings
Gross domestic investment15.923.118.919.718.819.5
Public8.47.07.16.97.07.1
Private, including stockbuilding7.416.111.812.811.812.4
Gross national savings 1/10.315.313.013.613.314.0
Public4.61.72.82.72.73.1
Private5.713.610.211.010.610.9
Combined public sector 1/
Nonpension balance-2.9-0.70.60.40.70.6
Pension-related balance-0.7-4.0-4.1-3.9-4.4-4.3
Overall balance-3.6-4.6-3.4-3.6-3.7-3.7
Foreign financing3.42.71.92.21.92.5
Domestic financing0.21.91.51.31.71.2
(Annual percentage change, unless otherwise stated)
Money and credit
Broad money (at current exchange rates)31.313.74.210.63.47.7
Credit to private sector (at current exchange rates)30.423.84.19.3-2.67.9
Interest rates (percent, end-of-period)
Lending rate in U.S. dollars16.515.616.315.3
Yield on treasury bills in local currency19.712.212.213.2
Yield on treasury bills in U.S. dollars9.18.68.68.8
External sector (US$ million) 1/2/
Current account-349-667-448-522-464-469
(Percent of GDP)-5.5-7.8-5.9-6.1-5.5-5.4
Capital and financial account354792515522425313
Of which: foreign direct investment1989551,014785731778
Overall balance5125260-39-155
Exceptional financing 3/138316161610
Financing gap45
Merchandise export volume, percent change6.34.1-1.87.211.44.2
Merchandise import volume, percent change9.016.0-8.86.4-0.10.0
Terms of trade, percent change (deterioration -)-0.9-1.6-0.20.90.60.1
Gross official reserves 4/
(Months of imports of goods and services)5.07.27.06.16.65.6
(In percent of broad money)29.831.332.527.732.228.5
Public sector external debt (US$ billion) 5/6/4.44.74.64.94.44.5
(Percent of GDP) 5/6/71.254.754.955.751.852.2
Debt-service ratio 5/6/7/38.028.619.023.618.416.7
End-of-period exchange rates
Bolivianos/U.S. dollar4.475.656.006.38
Nominal effective rate (percentage change) 8/19.4-0.51.5-1.9
Real effective rate (percentage change) 8/-1.83.81.4-1.5
Memorandum items
Overall fiscal balance (in percent of GDP) 9/-3.6-4.7-3.8-3.7-4.1-3.8
External current account balance (in percent of GDP) 9/-5.5-8.0-6.7-6.8-6.2-5.9
Sources: Central Bank of Bolivia; ministry of finance; and Bank/Fund staff estimates and projections.

Includes actual and anticipated assistance under the HIPC Initiative, using the new HIPC accounting conventions.

For the 2001 external sector figures, enhanced HIPC assistance is presented as closing the financing gap.

Includes grants for debt-reduction operations in effect prior to July 2000 and rescheduling operations under the original HIPC framework.

Does not include Bolivia’s capital contribution to the Latin American Reserve Fund. Import coverage for the following year.

Debt and debt service reflect assistance under the HIPC Initiative, of which the original became available after September 1998.

Includes obligations to the Fund and debt with public guarantee.

On public sector medium- and long-term external debt (including payments to the Fund) in percent of exports of goods and services.

Weights based on average trade, excluding trade related to natural gas, in 1996-97.

According to previous accounting conventions.

Sources: Central Bank of Bolivia; ministry of finance; and Bank/Fund staff estimates and projections.

Includes actual and anticipated assistance under the HIPC Initiative, using the new HIPC accounting conventions.

For the 2001 external sector figures, enhanced HIPC assistance is presented as closing the financing gap.

Includes grants for debt-reduction operations in effect prior to July 2000 and rescheduling operations under the original HIPC framework.

Does not include Bolivia’s capital contribution to the Latin American Reserve Fund. Import coverage for the following year.

Debt and debt service reflect assistance under the HIPC Initiative, of which the original became available after September 1998.

Includes obligations to the Fund and debt with public guarantee.

On public sector medium- and long-term external debt (including payments to the Fund) in percent of exports of goods and services.

Weights based on average trade, excluding trade related to natural gas, in 1996-97.

According to previous accounting conventions.

8. The government twice approved plans to reactivate the economy during 2000, partly in response to social unrest. The first economic stimulus package, approved by congress in April, contained several specific tax breaks and emergency spending measures, including a zero duty rate on imported capital goods4 and a labor-intensive public works program in the main municipalities. It also included a program to encourage commercial banks to reschedule outstanding loans. The stimulus package was enhanced in November, following a second episode of unrest, mainly by broadening incentives to banks to reschedule loans and expand their lending operations. The government engaged in negotiations with various groups during the year to address their specific concerns, including land and water rights in the countryside, teachers’ salaries, military actions in the coca growing regions, and a strike by the national police (rank and file officers were granted a 50 percent wage increase).

9. Fiscal discipline was generally maintained during 2000, even though government revenue shortfalls and measures to stimulate the economy led to a modest relaxation of the program’s end-year fiscal limits. In particular, an expected increase in tax revenues failed to materialize, reflecting the weak economy, delays in the implementation of various tax and tax administration measures, and lost revenue from the tax breaks in the first stimulus package (Tables 2 and 3). Nontax revenue fell by nearly a full percentage point of GDP, owing mainly to the end of the vehicle registration program early in the year. Fuel taxes were reduced in early 2000 to mitigate the pass-through of rising world prices, generating revenue losses that were only partly offset by increased excise taxes on other items. Current government expenditures, including wages, were largely held in check but pension costs proved to be higher than expected. As part of the plan to stimulate the economy, capital spending, which had been sluggish for much of the year, was accelerated in the fourth quarter to meet original program targets. Under these budget pressures, the authorities reached agreement with staff in July to permit a modest relaxation (0.3 percent of GDP) of the end-year limits on the overall balance and domestic financing of the combined public sector. The modified program was not presented to the Board, because prior actions for completing the review program were not met.

Table 2Bolivia: Operations of the Combined Public Sector 1/(In percent of GDP)
Prel.2000Prog.
199719981999Prog.Est2001
Balance excluding pensions (deficit -)-0.8-0.70.60.40.70.6
Current revenue21.622.923.023.222.523.1
General government20.322.822.922.822.122.7
Taxes17.619.618.419.418.519.3
Hydrocarbons4.45.45.25.35.05.5
Other13.214.213.214.113.413.9
Nontax revenue2.73.24.53.43.63.4
Public enterprise operating balance0.7-0.6-0.30.20.00.1
Central bank operating balance0.70.70.40.20.50.3
Current expenditure of general government17.618.718.018.417.618.0
Wages8.38.38.58.18.28.3
Interest2/2.32.12.02.22.32.6
Other7.18.37.58.17.17.1
Official grants1.41.41.82.02.22.4
Of which: HIPC assistance from grants0.00.10.70.50.70.8
Capital revenue1.00.70.80.50.60.3
Capital expenditure7.27.07.16.97.07.1
General government6.66.76.96.86.87.0
Central government2.72.02.93.43.2
Local governments3.94.73.93.43.6
Public enterprises0.70.30.20.20.20.1
Pension-related balance (deficit -)-2.5-4.0-4.1-3.9-4.4-4.3
Revenue1.00.00.00.00.00.0
Expenditure3.44.04.13.94.44.3
Pensions3.23.63.73.64.14.0
General government employer contributions0.20.40.40.30.30.3
Overall balance (deficit -)-3.3-4.6-3.4-3.6-3.7-3.7
Financing3.34.63.43.63.73.7
External2/2.72.71.92.21.92.5
Of which: HIPC assistance from refinancing0.00.00.20.20.20.2
Domestic0.51.91.51.31.71.2
Central bank-0.9-0.6-1.40.10.40.1
Commercial banks0.8-0.8-0.20.00.40.0
Pension funds0.91.71.91.21.71.4
Other-0.21.71.30.0-0.7-0.2
Memorandum items:
Overall balance before grants (deficit -)-4.7-6.0-5.3-5.6-5.9-6.1
Primary deficit (-)-1.0-2.5-1.5-1.4-1.4-1.1
Savings3.01.72.82.82.73.1
Military expenditure2.22.31.91.9
Overall balance before enhanced HIPC Initiative 3/-3.3-4.7-3.8-3.7-4.1-3.8
Total assistance under the HIPC Initiative0.00.31.00.80.91.2
Original HIPC0.00.31.00.80.90.8
Enhanced HIPC0.4
HIPC assistance from stock-of-debt reduction0.00.20.10.10.10.2
On interest0.00.00.10.10.10.1
On amortization0.00.20.00.00.00.1
GDP (in billions of bolivianos)41.647.048.654.252.557.0
Sources: Ministry of finance; Central Bank of Bolivia; and Fund staff estimates.

This table is based on HIPC relief projections in the Poverty Reduction Strategy Paper. The program for 2001 has adjusters for HIPC relief as described in Table 1 of the MEFP. In January 1998, coverage was extended to include 65 provincial municipalities (the 10 largest cities had already been included) and the operating outlays of Fondo Nacional de Desarrollo Regional and the Vice Ministry for Public Investment In January 1999, coverage was extended to include 111 municipalities.

Reflects lower scheduled debt service, starting in 1998, owing to HIPC assistance in the form of stock-of-debt reduction.

Reflects previous accounting of assistance under the original IIIPC Initiative. Under this method, all relief on interest owed by the general government was subtracted from scheduled interest payments, while the remaining debt relief was treated as exceptional external financing.

Sources: Ministry of finance; Central Bank of Bolivia; and Fund staff estimates.

This table is based on HIPC relief projections in the Poverty Reduction Strategy Paper. The program for 2001 has adjusters for HIPC relief as described in Table 1 of the MEFP. In January 1998, coverage was extended to include 65 provincial municipalities (the 10 largest cities had already been included) and the operating outlays of Fondo Nacional de Desarrollo Regional and the Vice Ministry for Public Investment In January 1999, coverage was extended to include 111 municipalities.

Reflects lower scheduled debt service, starting in 1998, owing to HIPC assistance in the form of stock-of-debt reduction.

Reflects previous accounting of assistance under the original IIIPC Initiative. Under this method, all relief on interest owed by the general government was subtracted from scheduled interest payments, while the remaining debt relief was treated as exceptional external financing.

Table 3Bolivia: The Fiscal Impact of the HIPC Initiative(In percent of GDP, unless otherwise indicated)
Prel.Projections
199920002001200220032004
1. HIPC assistance given 1/1.00.91.21.81.51.4
A Interest due before HIPC assistance 2/1.21.31.31.21.21.2
B. Interest paid before HIPC assistance 2/1.21.31.31.21.21.2
C. HIPC assistance on interest (as a result of stock-ofdebt operation only)0.10.10.00.10.10.1
D. Interest due after HIPC assistance 2/1.11.21.31.11.11.1
E. Amortization due before HIPC assistance1.41.51.61.71.81.7
F. Amortization paid before HIPC assistance1.41.51.61.71.81.7
G. HIPC assistance on amortization (as a result of stock-of-debt operation only)0.00.00.20.40.50.4
H. Amortization due after HIPC assistance1.31.41.41.31.31.3
I. HIPC assistance provided as grants (to cover debt service due)0.70.70.81.00.80.8
J. HIPC assistance provided as exceptional financing (to cover debt service due)0.20.20.10.20.20.1
Total HIPC assistance (C+G+I+J)1.00.91.21.81.51.4
Total HIPC assistance (in millions of U.S. dollars)84.779.0104.9159.1144.0142.2
Net cash flow to the budget from HIPC assistance B+F-(D+H-I-J)1.00.91.21.81.51.4
2. Poverty-related government expenditure 3/
Before enhanced HIPC relief 4/10.610.910.711.011.111.4
After enhanced HIPC relief11.212.212.212.4
Memorandum items:
Other donor inflows (disbursements plus grants excl. HIPC assistance)4.24.85.45.15.24.9
Total net external flows (HIPC and other donor flows less debt service due)2.62.93.53.93.83.4
Total assistance under the enhanced HIPC framework0.00.00.41.21.11.0
Tax revenue18.418.519.319.619.720.1
Domestic debt3.13.33.23.13.02.8
Overall fiscal balance after HIPC assistance-3.4-3.7-3.7-3.5-3.2-3.0
Sources: Ministry of finance; Central Rank of Bolivia and Fund staff estimates and projections.

Total assistance under both the original and enhanced fameworks.

External interest of the non-financial public sector (excluding liabilities of capitalized enterprises).

Expenditures on health, education, basic sanitation urban and rural development.

Equal to the authorities actual and projected poverty-related expenditure less enhanced HIPC assistance (all of which is expected to be used for poverty-related expenditure).

Sources: Ministry of finance; Central Rank of Bolivia and Fund staff estimates and projections.

Total assistance under both the original and enhanced fameworks.

External interest of the non-financial public sector (excluding liabilities of capitalized enterprises).

Expenditures on health, education, basic sanitation urban and rural development.

Equal to the authorities actual and projected poverty-related expenditure less enhanced HIPC assistance (all of which is expected to be used for poverty-related expenditure).

10. All quantitative financial performance criteria and benchmarks for 2000 were met, except for the end-year financial benchmarks on the fiscal deficit and its domestic financing (Table 4). In these latter two cases, the modified limits agreed with staff were met by a narrow margin. The target for net international reserves and the limit on net domestic assets of the central bank were met by a wide margin, mainly reflecting a substantial overperformance in 1999 that was carried over to the 2000 program.5

Table 4Bolivia: Financial Benchmarks and Performance Criteria - First and Second Annual Arrangements Under the Current PRGF 1/
19992000
Dec.Jan. 2/Mar. 3/Jun. 4/Sep. 3/Dec. 4/
(In millions of bolivianos)
Deficit of the combined public sector
Unadjusted limit2,0663124751,0402,066
Adjusted limit1,9993124751,0402,048
Actual1,8921253249362,196
Margin107186152104-78
Domestic financing of the combined public sector
Unadjusted limit821138-28231821
Adjusted limit754222117391900
Actual74936-35325917
Margin518615266-17
Net domestic assets of the central bank 5/
Unadjusted limit495482639653488629
Actual-583-301-32696-95
Margin998873912324639
(In millions of bolivianos)
Net international reserves of the central bank 5/
Target-100-146-185-155-120-85
Adjusted target-134-195-178-143-106
Actual30-32-22-8619
Margin16416315658124
Nonconcessional external debt 6/
Limit01010100
Actual-38-42-40-50-29
Margin3852506029
External debt with maturities up to one year 6/
Limit01010100
Actual00000
Margin01010100
(In millions of bolivianos)
Memorandum items:
Adjuster for:
Net proceeds from sale of assets 7/
For deficit and domestic financing of combined public sector67670008
For NIR and net domestic assets of the central bank6767676785
Severance payments 8/00
External disbursements shortfall 9/8414516097
Debt relief HIPC 7/00
Shortfall in currency issue 8/135218218218
Source: Data provided by the Bolivian authorities.

Program limits and targets adjustable for net proceeds from the sale of assets in excess of US S45 million in 1999 and in 2000, for the difference between programmed cash outlays for severance payments and actual cash outlays, for any overdue obligations to foreign official creditors, for the difference between actual interest relief from HIPC over projected interest relief during 1999, and for the difference between projected cumulative currency issue and actual cumulative currency issue in 2000 up to a maximum equivalent to USS35 million.

Target evaluated at the end of January because of the expected increase in the demand for foreign currency banknotes associated with the year 2000 problem at the end of December 1999.

Performance criteria.

Benchmarks.

Cumulative flows from January 1, 1999.

Net disbursements of public and publicly guaranteed external debt.

In excess of programmed amount.

Less than programmed amount.

Shortfall of net external disbursements in relation to programmed amounts, maximum of Bsl60 million in 2000.

Source: Data provided by the Bolivian authorities.

Program limits and targets adjustable for net proceeds from the sale of assets in excess of US S45 million in 1999 and in 2000, for the difference between programmed cash outlays for severance payments and actual cash outlays, for any overdue obligations to foreign official creditors, for the difference between actual interest relief from HIPC over projected interest relief during 1999, and for the difference between projected cumulative currency issue and actual cumulative currency issue in 2000 up to a maximum equivalent to USS35 million.

Target evaluated at the end of January because of the expected increase in the demand for foreign currency banknotes associated with the year 2000 problem at the end of December 1999.

Performance criteria.

Benchmarks.

Cumulative flows from January 1, 1999.

Net disbursements of public and publicly guaranteed external debt.

In excess of programmed amount.

Less than programmed amount.

Shortfall of net external disbursements in relation to programmed amounts, maximum of Bsl60 million in 2000.

11. Banking activity continued to contract during 2000, and there was some weakening of bank performance indicators, although banks’ net external position improved sharply. Slow economic growth contributed to a fall in both broad money and bank credit to the private sector in U.S. dollar terms6 (by 3 percent and 9 percent, respectively) during the year (Table 5). The fall in credit also was affected by the ongoing restructuring of the balance sheet of the country’s largest bank, which was purchased by foreign investors in late 1998; more conservative lending practices encouraged by the phasing-in of stricter prudential norms, that require the categorization of new credits based on borrowers’ cash flow, instead of collateral; and uncertainty created by social unrest. With the drop in lending, the share of banks’ nonperforming loans doubled to 10.3 percent at end-2000, and rose further to 12.7 percent in March 2001 (Table 6). However, the net foreign asset position of the banks, including repayment of medium- and long-term external liabilities, improved by US$365 million (11 percent of bank liabilities) during the year.

Table 5Bolivia: Monetary Survey 1/
2000Prog.
199719981999Orig. Prog.Adj. Prog.2/Prel.2001
1. Central Bank
(In percent of currency issue at beginning of period)
Net international reserves28.9-53.910.24.0-35.0-6.0-27.1
(Flow in millions of U.S. dollars)102.7-211.542.315.0-115.8-23.4-100.0
Net domestic assets-14.366.0-10.25.738.86.236.6
Net credit to nonfinancial public sector-20.1-13.0-28.03.03.68.51.6
Net credit to financial intermediaries-2.359.06.4-17.813.9-20.610.0
Of which: open market operations19.4-3.0-2.1-16.29.816.0-10.2
Medium- and long-term net foreign liabilities2.427.18.112.020.18.420.7
(Flow in millions of U.S. dollars, increase -)8.7106.133.3-44.8-77.932.7-76.4
Other5.7-7.13.48.61.39.94.2
Currency issue14.612.10.09.73.80.29.4
II. Banking System
(In percent of broad money at beginning of period)
Net short-term foreign assets1.1-0.85.9-0.1-3.16.6-0.7
(Flow in millions of U.S. dollars)33.3-29.7221.5-5.0-117.1244.4-24.1
Net domestic assets13.09.9-6.64.72.0-8.63.8
Net credit to the public sector-0.4-3.5-3.50.31.01.70.2
Credit to the private sector17.019.9-1.93.3-1.6-10.73.3
Medium- and long-term net foreign liabilities-2.60.10.70.63.03.40.8
(Flow in millions of U.S. dollars, increase -)-79.03.027.120.4112.3126.127.4
Other-1.0-6.6-1.90.60.6-3.0-0.5
Broad money14.19.0-0.74.6-1.1-2.03.1
(12-month percentage change)
Currency in circulation14.46.4-0.99.63.80.89.8
Broad money 3/14.19.0-0.74.7-1.1-2.03.1
Liabilities in bolivianos (M2)16.98.0-2.59.80.53.84.9
Foreign currency deposits 4/13.58.3-0.93.5-1.4-2.62.8
Credit to private sector15.517.8-1.62.6-1.3-8.82.9
Credit in bolivianos39.829.6-3.48.35.7-2.38.1
Foreign currency credit 4/14.717.3-1.52.6-1.6-9.02.7
Memorandum items:
(Average stock in percent of GDP)
Currency issue4.34.44.24.33.93.83.9
Broad money 3/41.542.444.745.443.242.840.7
Credit to private sector45.849.448.448.547.151.849.1
(In percent of total deposits for credit at current exchange rates)
Dollarization (end-period stocks)
Foreign currency deposits 4/91.992.292.992.693.592.693.2
Foreign currency credit 4/96.296.096.392.396.396.396.3
(12-month percentage change at current exchange rates)
Broad money 3/17.313.74.210.65.03.47.7
Credit to private sector19.223.84.19.35.7-2.67.9
(12-month percentage change in U.S. dollars at current exchange rates)
Broad money 3/13.47.9-1.83.4-1.9-3.02.6
Credit to private sector15.217.5-2.02.1-1.2-8.72.8
Source: Central Bank of Bolivia; and Fund staff estimates and projections.

Flows in foreign currency are valued at the accounting exchange rate for the corresponding period. The banking system comprises the central banks, and the National Financial Institution of Bolivia, a state-owned second-tier bank.

Original program adjusted for overperformance of the program in 1999.

Includes special certificates of deposits (CDDs) issued by the central bank during the liquidation of failed banks.

Includes deposits and credits in bolivianos that are indexed to the U.S. dollar.

Source: Central Bank of Bolivia; and Fund staff estimates and projections.

Flows in foreign currency are valued at the accounting exchange rate for the corresponding period. The banking system comprises the central banks, and the National Financial Institution of Bolivia, a state-owned second-tier bank.

Original program adjusted for overperformance of the program in 1999.

Includes special certificates of deposits (CDDs) issued by the central bank during the liquidation of failed banks.

Includes deposits and credits in bolivianos that are indexed to the U.S. dollar.

Table 6Bolivia: Commercial Bank Performance Indicators(In percent)
20002001
199719981999Jan.Feb.Mar.Apr.May.Jun.Jul.Aug.Sep.Oct.Nov.Dec.Jan.Feb.Mar.
Profitability
Ratios to total assets (period average) 1/
Operating income4.55.34.83.94.14.24.24.24.24.24.24.24.14.14.04.14.24.2
Profit before tax0.91.51.20.40.60.60.60.60.60.60.60.50.50.40.30.40.50.5
Ratios to equity capital (period average) 1/
Profit before tax13.320.913.04.16.06.56.46.36.56.26.05.34.84.13.43.65.14.6
Profit after tax6.414.58.3-0.61.41.91.81.71.91.61.40.70.20.4-1.1-0.51.10.5
Asset quality
Ratios to total loans (end-of-period)
Past due loans up to 30 days2.41.71.51.91.61.22.22.22.42.42.71.33.02.82.7
Nonperforming loans 2/3.63.75.36.37.17.47.78.47.78.39.310.010.911.510.310.712.112.7
Nonperforming loans net of provisions 2/1.61.11.64.94.94.75.25.44.25.36.26.67.27.75.27.28.48.7
Liquidity
Ratios io total deposits (end-of-period)
Total loans110.9119.4112.7110.1109.7109.1108.7108.5109.3108.2106.9106.2106.8105.5102.4101.199.898.9
Total liquid assets33.525.529.728.427.928.628.827.725.726.224.723.923.523.427.224.725.326.9
Operating income4.55.34.83.94.14.24.24.24.24.24.24.24.14.14.04.14.24.2
Capital adequacy
Ratio of qualifying capital to total risk-weighted assets (end-of-period)10.911.612.212.712.612.712.712.913.013.313.213.313.313.513.513.7
Source: Superintendency of Banks; and Fund staff estimates.

Averages in 2000 and 2001 are cumulative from January of each year.

Adjusted to exclude the estimated share of loans overdue by less than one month, winch were included in official statistics of nonperforming loans prior to January 2000.

Source: Superintendency of Banks; and Fund staff estimates.

Averages in 2000 and 2001 are cumulative from January of each year.

Adjusted to exclude the estimated share of loans overdue by less than one month, winch were included in official statistics of nonperforming loans prior to January 2000.

12. In contrast to the program’s projections, the external current account deficit narrowed in 2000, owing to the strong export growth. Exports grew by 11 percent in real terms (17 percent in U.S. dollar terms), with natural gas and soybean export volumes rising by 75 percent and 24 percent, respectively. As a result, the current account deficit fell to 5.5 percent of GDP in 2000, despite unanticipated net imports of services (Table 7).7 Foreign direct investment fell to 8½ percent of GDP, reflecting the completion of the natural gas pipeline to Brazil, reduced privatization sales, and the continuing decline in investment commitments of capitalized enterprises.8 The unexpected improvement in banks’ net foreign asset position, however, led to a sharp decline in the capital and financial account surplus. With a loss in net international reserves of US$23 million, gross reserves declined to 6½ months of imports of goods and services at end-2000, but remained ample, and well above the program projection.

Table 7Bolivia: Summary Balance of Payments, 1997-2001(In millions of U.S. dollars, unless otherwise noted)
Prel.2000Prog.
199719981999Prog.Prel.2001
Current account-553-667-488-527-464-469
Trade balance-684-879-704-671-600-554
Exports, f.o.b.1,1671,1041,0511,1201,2301,302
Of which: gas69573690122212
Imports, c.i.f.-1,851-1,983-1,755-1,790-1,830-1,857
Of which: capitalization and pipeline-349-510-405-257-243-134
Services (net)36342634-246
Income (net)-196-162-196-260-225-282
Of which: interest due on external public sector debt 1/-155-144-126-148-129-131
Of which: investment income (net)-56-44-52-105-80-131
Transfers (net)292340386369385361
Of which: original HIPC assistance from grants01162595539
Capital account656792515395425313
Capital transfers25100000
Direct investment (net)8769551,014785731778
Of which: from capitalization570638506322297168
Portfolio investment (net)-53-75-61-11555-135
Public sector loans205104113126112154
Disbursements371320280322290347
Amortization 1/-166-216-167-195-178-194
Other, including errors and omissions-398-202-551-402-473-483
Overall balance10312526-133-39-155
Exceptional financing0316171610
Of which: original HIPC assistance from rescheduling0316171610
Net international reserves (increase -)-103-128-4211623100
Financing gap 2/45
Memorandum items:
Gross reserves (end-of-period)1,4031,1891,2111,0881,1641,059
(In months of imports of goods and services) 3/7.67.27.06.16.65.6
Total assistance under the HIPC Initiative27858579105
Original framework2785857860
Of which: assistance from debt reduction1378710
Enhanced framework145
Of which: assistance from debt reduction111
(In percent)
Export volume growth4.34.1-1.87.211.44.2
Import volume growth25.516.0-8.86.4-0.10.0
Terms of trade change2.9-1.6-0.20.90.60.1
(In percent of GDP)
Current account-7.0-7.8-5.9-6.1-5.5-5.4
Current account before HIPC assistance 4/-7.0-8.0-6.7-6.8-6.2-5.9
Merchandise exports14.713.012.612.814.515.0
Merchandise imports23.423.321.120.521.621.4
Of which: capitalization and pipeline4.46.04.93.02.91.6
Direct investment (net)11.111.212.29.08.69.0
Grants and loans 5/7.06.15.55.55.65.9
Source: Central Bank of Bolivia; and Fund staff estimates and projections.

Reflects lower scheduled debt service, starting in 1998, owing to original HIPC assistance in the form of stock-of-debt reduction.

To be filled by debt relief under the enhanced HIPC framework.

In months of imports of goods and services in the following year.

Before any assistance under the HIPC Initiative.

Official transfers and loans to the public sector, excluding HIPC debt relief.

Source: Central Bank of Bolivia; and Fund staff estimates and projections.

Reflects lower scheduled debt service, starting in 1998, owing to original HIPC assistance in the form of stock-of-debt reduction.

To be filled by debt relief under the enhanced HIPC framework.

In months of imports of goods and services in the following year.

Before any assistance under the HIPC Initiative.

Official transfers and loans to the public sector, excluding HIPC debt relief.

13. The economic slowdown appears to have persisted through the early months of 2001. Production indices for cement and electricity declined, and a localized drought in the soybean farming region damaged about 30 percent of the crop. Lower than expected revenue from taxes on imports suggests that domestic demand remains weak. Meanwhile, the 12-month inflation rate fell to 1.0 percent in April, and the 12-month growth rates of broad money and bank credit remain negative in U.S. dollar terms. Net international reserves have stabilized, following the expected unwinding of temporary factors that led to a surge in reserves in late 2000. In April, social unrest escalated again, and the government’s ruling coalition continues to have difficulties pursuing its legislative agenda in congress. With national elections scheduled for June 2002, political opposition has intensified.

14. Although there were significant delays and setbacks in the execution of the structural adjustment program, some important advances were achieved, mainly in the area of tax administration and budget management (Table 8). In particular, progress was made with the institutional reforms of the customs agency and internal revenue service (SI), aimed at enhancing transparency and strengthening tax collections through the creation of autonomous, professionally staffed agencies. In April 2001, the senate approved a new tax procedures code, which is awaiting final approval by the lower chamber of congress. The tax code will strengthen the enforcement of taxes by requiring that contested tax obligations be paid before judicial review is pursued; making tax fraud a crime; and clarifying—in line with best-practice in tax systems—key issues regarding the use of sworn tax declarations and the application of the statute of limitations. In the area of budget management, the treasury began operating with a single treasury account in January 2001 and a new financial management information system (SIGMA) was implemented in all of the central government ministries. However, the tax policy reform, which was a performance criterion for end-2000, has been postponed for consideration until after the June 2002 elections and, as discussed below, congressional approval of a law to strengthen the financial system also has been delayed, because of changes in the approach taken to the introduction of limited deposit insurance.

Table 8Structural Benchmarks: Status of Implementation, 2000
Performance Criteria/BenchmarkPolicy MeasureTimetable for ImplementationProgress to DateMeasure Completed
Public Sector Institutional Reform
Performance criterionSubmit to congress draft amendments to the tax code that will strengthen the tax authorities’ ability to enforce tax laws.March 2000Tax code initially submitted in April 2000 but subsequently withdrawn and modified. As of end-2000, draft tax procedures had been resubmitted, and was before the Senate. Full passage to be made part of the program for 2001.Partly
BenchmarkSubmit to congress the new draft tax administration law that will restructure the Internal Revenue Service, giving it more autonomy.April 2000Law was approved in December 2000Yes
BenchmarkEnactment of tax code and tax administration, laws.June 2000Issuance of implementing regulations for the new tax procedures code and the Internal Revenue Service to be made structural benchmarks under third annual arrangement.No
BenchmarkReach decision on new computerized control system to be adopted by customs and begin implementation.December 1999Contract was signed in March 2000, full implementation expected in October 2001.Yes
BenchmarkIssue implementing decrees on customs procedures and penalties.February 2000Issued in August 2000.Yes
BenchmarkAutomated international customs transit control system to be fully operational.July 2000The automated system has been implemented in three customs offices as a pilot program since February 2001. Full implementation is expected by end-June 2001.Partly
BenchmarkEstablishment of controls a posteriori in the Customs Administration.September 2000World Trade Organization will provide TA for implementation. Private consultants are designing software. Implementation expected to begin June 2001.Partly
Privatization
Prior actionoffer the state smelting company Vinto for sale.December 1999Implemented in December 1999.Yes
Prior actionComplete the bidding process for the privatization of the refineries of YPFB.November 1999Implemented in November 1999.Yes
BenchmarkComplete privatization of the residual assets of YPFB, including the natural gas network, jet fuel stations, and natural gas bottling plants.June 2000Storage facilities and jet fuel stations sold in December 2000. Sale of gas networks and bottling plants has been delayed to 2001.Partly
BenchmarkComplete the privatization process fully, including the dairy product company Milka, the electricity companies SEPSA, SETAR, and the electricity generation of Trinidad (COSERELEC).December 2000Milka was privatized in December 1999. SETAR and COSERELEC to be privatized in 2001.Partly
Tax System Reform
BenchmarkModify the simplified and integrated tax regimes (involving tax exemption of small traders and inclusion of the largest ones in the general tax regime).December 31, 2000Currently under revision by the Finance Ministry. Approval delayed indefinitely.No
BenchmarkElaborate and implement a comprehensive reform of the tax system in several steps with the objective of making the tax system more progressive and fair.During 2000Authorities will prepare a proposal for consideration by the next government following national elections in June 2002.No
Performance criterionSubmit to congress the draft legislation for the reform of the tax ststem.October 2000Postponed until the next government takes office following national elections in June 2002.No
Labor Market Modernization
BenchmarkInitiate consultation on labor reform.January 2000Implemented February 2000.Yes
BenchmarkSubmit to congress a new draft labor legislation.October 2000Postponed until the next government takes office following national elections in June 2002.No
Financial Sector and Capital Markets
Performance criterionPublication of the law establishing a comprehensive bank resolution framework, including a deposit insurance scheme.March 2000Stalled in congress due to concerns about the deposit insurance scheme. Congressional approval of amended bill to be a performance criterion for October 2001 under the third annual arrangement.No
BenchmarkIssue norms for consolidated supervision of financial conglomerates, in line with the core principles established by the Basle Committee on Banking Supervision.June 2000Pending congressional approval of the law.Partly
BenchmarkIssue norms on credit risk to ensure a more precise definition of risk weights for mortgages and on the strengthening of internal and external audits.June 2000Pending congressional approval of the law.Partly
BenchmarkComplete and implement new regulations on securitization and develop plans for the establishment of a secondary housing mortgage market.March 2000General regulations on securitization were approved in April 2000.Yes
Social Reforms
BenchmarkHealth: Implement the basic Health Insurance System, designed to provide a basket of basic health services free to the entire population.October 2000In the process of implementation. The consolidation of the basic Health Insurance System is now a strategic action in Bolivia’s Poverty Reduction Strategy Paper.Partly
BenchmarkEducation: Develop a reform proposal for higher education in order to reduce the share of public resources for higher education.September 2000Final Document presented to the World Bank. Financing was approved.Partly
Legal and Judicial Reforms
BenchmarkSubmit to congress revisions to the civil code procedures.October 2000Approval of the new Civil Code will make tills measure obsolete. The draft will be submitted to the senate by June 2001.No
BenchmarkSubmit to congress revisions to the commercial code.December 2000Revisions are in progress; expected to be completed in first half of 2001.No
Roads and Transportation
BenchmarkSubmit a new transport law. with corresponding regulation, to promote competition in the transport sector.June 2000Draft of the law will be officially presented to congress by June 2001.No

15. While poverty incidence remains high, progress has been made in improving some social indicators in recent years. For example, in conjunction with the IDB’s social sector credit, nearly all targets for a selected set of social indicators developed under the original HIPC Initiative were met for 1999 and the first half of 2000 (Table 9). All spending targets for priority projects specified in the credit for the first half of 2000 were reached, and despite budgetary pressures, poverty-related expenditure as a whole increased relative to GDP in 2000 (Table 10).

Table 9Bolivia: Selected Social Policy Actions and Outcome Indicators, 1996-2000(In percent, unless otherwise indicated)
2000Targets Met
1999AnnualJan-June2000
199619971998TargetOutturnTargetTargetOutturn1999Jan.-June
Education
Total expenditures on primary and secondary education 1/
(in percent of GDP)3.13.33.33.33.63.31.41.6
Rural coverage-males66.068.081.072.082.774.080.083.0
Rural coverage-females54.056.777.064.078.968.075.076.9
Number of children completing 5th grade
In urban areas86,00087,00092,00094,000101,20098,000111,400115,100
In rural areas60,00063,00068,00070,00070,40075,00081,10085,100
Number of girls completing 5th grade
In urban areas41,00043,00046,00047,00050,60047,00053,80057,100
In rural areas29,00030,00031,00034,00032,60036,00037,50039,500
Cumulative number of beneficiary schools in quality
improvement programs (such as PASE, PIME, and PIE) 2/9696250125154
Number of children (age 6 or under) enrolled in early childhood development programs43,66743,01347,05158,70058,70070,00062,70068,870
Health
Share of births attended by health professionals 3/30.043.849.046.047.049.021.024.0
Share of children (age 5 or under)
Treated for
Acute respiratory infections (IRA)3/25.069.069.069.075.069.032.042.0
Acute diarrhea (EDA) 3/25.026.229.042.044.045.019.026.0
Receiving complete vaccinations4/78.086.580.082.092.085.037.039.0
In endemic areas
Share of households protected from Chagas8.013.416.017.019.022.07.07.3
Inhabitants, in areas with malaria, participating in the annual parasite index (IPA)15.321.75.04.05.02.02.0
Rural development and poverty alleviation
Number of new beneficiaries of basic water and sanitation
projects in rural and peri-urban areas132,000186,052216,662132,000214,577132,000132,00073,404
Investment in rural road improvement/rehabilitation
(in millions of US dollars)32.039.433.033.634.338.511.011.9
Number of hectares subject to cadastre and titling
regulations during the period (in millions)0.31.63.54.04.44.01.92.7
Sources: Bolivian authorities. Economic Policy Analysis Unit (UDAPE); and Fund staff estimates.

Does not include spending in alternative education and training programs.

In 1999 and 2000, the targets were modified to reflect the new units in which the implemented programs in education are measured.

In the framework of the Mother and Childhood National Insurance Program (SNMN).

Such as vaccinations for polio, DPT, measles, and BCG.

Sources: Bolivian authorities. Economic Policy Analysis Unit (UDAPE); and Fund staff estimates.

Does not include spending in alternative education and training programs.

In 1999 and 2000, the targets were modified to reflect the new units in which the implemented programs in education are measured.

In the framework of the Mother and Childhood National Insurance Program (SNMN).

Such as vaccinations for polio, DPT, measles, and BCG.

Table 10Bolivia: Poverty-Related Expenditure
Prel.Prog.Proj.Proj.
199519961997199819992000200120022003
(In millions of bolivianos)
Current expenditure1,8202,2122,5372,9333,0273,2823,5764,1534,571
Health1/6928721,0001,1721,1921,2981,4181,6521,825
Education (excluding university level)1/1,1281,3401,5371,7521,8281,9752,1492,4912,735
Of which: primary education wages9069741,0501,187
Other social expenditure2/97991011
Capital expenditure1,1191,4741,6281,8922,1252,4582,7673,2563,572
Health126160174192241380428503553
Education179325405353446521687831911
Basic sanitation222430423454577568437492540
Urban development367310307350283309425464508
Rural development2252493195435786807909661,060
Of which: rural roads58100123183266269275361399
Adjustment for revised HIPC projections3/57196186
Total poverty-related expenditure2,9393,6864,1654,8255,1525,7406,4007,6058,329
(In percent of total expenditure)32.935.535.634.736.537.838.342.543.6
(In percent of GDP)
Current expenditure5.65.96.16.26.26.36.36.76.7
Health1/2.12.32.42.52.52.52.52.72.7
Education (excluding university level)1/3.53.63.73.73.83.83.84.04.0
Of which: primary education wages2.42.32.22.4
Other social expenditure2/0.00.00.00.00.00.00.00.00.0
Capital expenditure3.53.93.94.04.44.74.95.25.2
Health0.40.40.40.40.50.70.80.80.8
Education0.60.91.00.80.91.01.21.31.3
Basic sanitation0.71.11.01.01.21.10.80.80.8
Urban development1.10.80.70.70.60.60.70.70.7
Rural development0.70.70.81.21.21.31.41.61.6
Of which: rural roads0.20.30.30.40.50.50.50.60.6
Adjustment for revised HIPC projections3/0.10.30.3
Total poverty-related expenditure9.19.810.010.310.610.911.212.212.2
Memorandum Items:
Baseline poverty-related expenditures4/9.19.810.010.310.610.910.711.011.1
HIPC assistance0.31.00.91.21.81.5
Of which: under the enhanced framework0.51.21.1
Total social expenditure5/8.59.69.99.610.410.610.511.111.2
Current6.97.27.47.47.87.87.88.28.2
Capital1.62.42.42.12.62.82.72.92.9
General government expenditure (millions of bolivianos)8,92510,38311,68613,90514,11715,17416,69717,90719,094
Total social expenditure (millions of bolivianos)5/2,7473,6024,1024,4955,0335,5616,0026,9277,609
Sources: Ministry of finance; ministry of education: and Bank/Fund staff.

Does not include spending on health and education by the ministry of defense.

Social spending by prefecturas.

Reflects revisions to projections of enhanced HIPC assistance since the publication of the PRSP. The upward revision is expected to result in a commensurate increase in poverty-related spending.

Bank/Fund staff estimated series equal to the authorities’ actual and projected poverty-related expenditure less enhanced HIPC assistance.

Health and education expenditures, including universities, and basic sanitation expenditures.

Sources: Ministry of finance; ministry of education: and Bank/Fund staff.

Does not include spending on health and education by the ministry of defense.

Social spending by prefecturas.

Reflects revisions to projections of enhanced HIPC assistance since the publication of the PRSP. The upward revision is expected to result in a commensurate increase in poverty-related spending.

Bank/Fund staff estimated series equal to the authorities’ actual and projected poverty-related expenditure less enhanced HIPC assistance.

Health and education expenditures, including universities, and basic sanitation expenditures.

III. Policy Discussions

16. The Bolivian authorities have developed a comprehensive poverty reduction strategy, which provided the overall context for policy discussions with staff. The strategy, which incorporates the main conclusions of the National Dialogue on poverty reduction held between June and August 2000 (Box 1) and was published in a PRSP in March 2001 and evaluated by Fund Mid Bank staffs in a joint staff assessment,9 aims to reduce the incidence of poverty and extreme poverty by about one-third and one-half, respectively, by 2015. With strong economic growth as a necessary condition for meeting these targets, the PRSP presents a sound macroeconomic framework that emphasizes medium- and long-term fiscal and external debt sustainability, and an extensive structural agenda. It also establishes indicators for monitoring progress with poverty reduction, and envisages oversight by civil society at the local, regional, and national levels on the use of HIPC resources, as discussed in the National Dialogue.

17. The government’s medium-term economic program in the PRSP is designed to raise output growth to 5 percent in 2003, and 5½ percent annually in 2008 and beyond, while maintaining inflation below 4 percent (Table 11). Public and private sector investment are projected to rise gradually in relation to GDP over the medium term. With support from HIPC debt relief, public sector investment would focus on education, health, and rural development, in addition to a major expansion of the country’s road system. While much of the private sector investment is expected to be directed toward the capital-intensive extractive industries (i.e., natural gas and mining), the PRSP calls for promoting investment in labor-intensive sectors (e.g., agriculture, manufacturing, and construction) through private sector participation in infrastructure investment, improved property rights and land titling, and efforts to open up foreign markets for Bolivian agricultural products and manufactures.

Table 11Bolvia: Medium-Term Macroeconomic Framework
Prel.Prog.ProjectionsAverage
1999200020012002200320042005200620072008-15
(Annual percentage change)
Economic growth and prices
Real GDP at market prices0.42.44.04.55.05.05.05.25.45.5
Real domestic demand 1/-1.81.62.53.03.84.34.64.55.35.5
GDP deflator3.05.54.33.13.53.53.63.33.43.5
CPI (period average2.24.63.73.93.83.73.63.53.53.5
CPI (end of period)3.13.44.03.93.83.73.63.53.53.5
(In percent of nominal GDP)
Gross investment18.918.819.519.520.020.921.421.822.623.2
Public investment2/7.17.07.17.37.47.78.08.28.38.3
Private investment, including stockbuilding11.811.812.412.212.713.213.513.614.314.8
Savings18.918.819.519.520.020.921.421.822.613.2
Gross national savings13.013.314.414.715.116.116.616.917.718.4
Public savings2.82.73.13.84.14.75.45.96.57.0
Private savings10.210.611.210.811.011.411.211.011.211.3
External savings5.95.55.14.94.94.84.94.94.94.8
Consolidated public sector
Non-pension balance0.60.70.61.01.11.21.41.51.81.8
Pension-related balance-4.1-4.4-4.3-4.5-4.3-4.2-4.0-3.7-3.7-3.1
Overall balance-3.4-3.7-3.7-3.5-3.2-3.0-2.6-2.2-1.8-1.3
Net domestic financing1.51.71.21.00.50.30.20.10.0-0.3
Net external financing1.91.92.52.52.72.72.52.21.81.6
External sector
Current account balance-5.9-5.5-5.14.9-4.9-4.8-4.9-4.9-4.9-4.8
Net foreign direct investment12.28.69.08.36.86.45.95.95.95.3
Memorandum items:
Nominal GDP (millions of US dollars)8,3268,4578,6609,0069,51910,09710,77711,56012,470
Sources: Bolivian Central Bank, Bolivio’s Poverty Strategy Paper (EBRP); and Fund staff estimates and projections.

Based on the balance of payments figures from the Central Bank of Bolvia.

Based on information from the ministry of finance.

Sources: Bolivian Central Bank, Bolivio’s Poverty Strategy Paper (EBRP); and Fund staff estimates and projections.

Based on the balance of payments figures from the Central Bank of Bolvia.

Based on information from the ministry of finance.

18. The authorities agreed that the program for 2001 should be in line with the goals for achieving long-term fiscal and external debt sustainability but also should reflect the objectives of supporting an economic recovery and stepping-up pro-poor spending. The program is based on real GDP growth of 4 percent led by a further expansion of natural gas exports and a pickup in domestic demand. In particular, a substantial investment project in the mining sector, the distribution to the elderly of accumulated profits from the capitalization program, and stepped-up government spending associated with the implementation of the PRSP in the second half of the year are expected to boost demand.10 The program projects a recovery in broad money and in banks’ lending activity, and the external current account deficit is projected to be about unchanged in relation to GDP. Net international reserves would be allowed to decline by US$100 million during the year, implying an increase of about US$20 million over the last three quarters of the year.

Box 1.The National Dialogue 2000

Bolivia’s second National Dialogue was held during the period June-August 2000. Through this participatory process, the civil society was engaged by the government to identify the obstacles to poverty reduction, and present proposals for the Bolivian Poverty Reduction Strategy, the Estrategia Boliviano, para la Reduction de Pobreza (EBRP).

The dialogue was organized through workshops starting at the municipal level, followed by meetings at the regional aid national levels. In all three stages, participants included government delegates and representatives of various civil groups, such as NGOs (some of them sponsored by the Catholic Church), business sector, small producers, indigenous people, and miners. However, not all branches of society participated in these discussions. In particular, the political opposition did not attend.

The discussion focused on three agendas: social, economic and political. The Dialogue reached agreements in several areas: (i) the determination of priority policy areas (productive infrastructure, support to production, health, education, land tenure, environment, and gender and indigenous issues); (ii) the decentralized administration of the HIPC resources by municipal governments; (iii) the definition of a transparent mechanism for distributing HIPC resources to municipalities based on poverty indicators; and (iv) the need to establish social oversight and mechanisms for the monitoring of the HIPC funds.

The agreements of the National Dialogue are widely reflected throughout the EBRP. Further, the deepening of the decentralization process, the distribution mechanism for HIPC resources, and the design of social oversight mechanisms are expected to be implemented through the Law of the National Dialogue, which was before congress as of early May.

A. Fiscal Policies

19. The fiscal program for 2001 seeks to achieve a balance between the need for further fiscal consolidation over time, and the objective of avoiding a fiscal tightening during the present period of weak domestic demand. The overall deficit of the combined public sector is programmed to remain unchanged at 3.7 percent of GDP, consistent with the macro framework in the PRSP. This deficit represents an underlying adjustment of 0.6 percent of GDP, since privatization revenue declines by 0.3 percentage point of GDP, and the change to the new accounting for HIPC relief disguises a 0.3 percentage point reduction in the deficit using the previous accounting conventions.11 Revenue gains are expected to result from the impact of tax administration reforms on the efficiency of domestic tax collections, increased fuel taxes (once the current price freeze expires at midyear), and improved collections by customs as recent administrative measures take hold. The wage bill is expected to be held in line with nominal GDP growth, and a modest increase in public investment is targeted. About two-thirds of the deficit would be financed by concessional external credits, allowing for a reduction in the stock of nonconcessional debt during the year, while domestic financing would be reduced, permitting a modest decline in the borrowing from private pension funds and a settlement of arrears of the floating debt of the larger municipalities.

20. The cost of the 1997 pension reform (4.3 percent of GDP in 2001) continues to place a heavy burden on the public sector finances, with upward revisions stemming from the failure to close enrollment of new retirees under the old, unfunded system. To curb future costs, the authorities have committed to closing enrollment into the old pension system by end-2001.

21. After the authorities and staff agreed on the fiscal program for 2001, a fiscal financing gap arose from a revenue shortfall in the first quarter of the year, and an agreement reached with pensioners in March 2001 that would provide for a 55 percent increase in the minimum pension, to be implemented in two steps. The fiscal gap for the year is estimated at 1.1 percent of GDP, based on revised projections that assume a pickup in tax revenue will accompany a recovery of output and demand in the second half of the year (Box 2). Nearly half of the estimated revenue shortfall for the year took place in the first quarter, reflecting both a weaker tax base and lower efficiency than projected. To close the gap, the authorities have decided on a set of measures, consisting mainly of expenditure cuts in addition to the restraint of expenditure in the first quarter. The reductions in spending are being planned with a view to minimizing the impact on poverty-related expenditure; some impact may be unavoidable, however, in view of the large proportion of public investment that falls within the priority areas identified in the PRSP.

Box 2.Bolivia: Fiscal Gap and Measures, 2001 1/

Fiscal program deficit3.7
Fiscal gap1.1
Lower revenues0.6
Lower grants0.1
Pension increase0.3
Measures1.1
Tax regularization0.2
Spending cuts
Goods and services0.3
Transfers0.1
Investment0.4
1/ Discrepancies between constituent figures and totals are due to rounding.

22. Some revenue gains are expected to result from a further “tax regularization,” which provides additional time for the payment of tax liabilities, but which also has elements of a tax amnesty, since interest and penalties could be reduced. Such programs can lower future tax collections owing to moral hazard, as they can weaken the discipline to pay taxes on time. The authorities have indicated that they would seek to minimize this risk by tightening up on tax enforcement procedures at the same time.

23. The authorities’ economic program encompasses the following structural reforms in the fiscal area aimed at further enhancing transparency, strengthening tax administration, and improving the monitoring of expenditures and budget management at all levels of government:

  • Customs reform. Over the past year, Customs has recruited new staff through a series of hirings conducted under strict guidelines, and progress has been made toward installing modern control systems for processing taxes on imports. The reform will continue along these lines with completion of the installation of automated systems for transit and customs controls, and a system of a posteriori control of import duties. The government is committed to strengthening the Customs administration by assuring the full funding of the agency’s budget and by providing resources to double the Customs police to 100 full-time officers.
  • Reform of the internal revenue service (SI). The important elements in the implementation of the new law on the SI are the appointment of an independent board of directors, exams for selecting professional staff on a competitive basis, and regulations aimed at the reform’s objectives for human resource management and the financial and operational autonomy of the SI. The appointment of the Board is an important next step, both because it should precede the issuance of regulations and extensive staffing changes, and for the effective implementation of the tax procedures code. Issuance of the regulations by August 2001 is a structural benchmark. The SI is installing an automated system for filing tax returns and selecting cases for audit.
  • Tax procedures code. As of mid-May 2001, the tax code had been approved in the first of two readings in the lower chamber of congress. To ensure early passage, the draft law has been given priority over other legislation to be considered by the chamber of deputies; if, by the end of the ordinary congress in early June, the tax code has not been finally approved, an extraordinary congress will be called in order to complete passage of the code. Full congressional approval of the tax code is a performance criterion for September 2001, and the implementing regulations are to be issued by the end of 2001.
  • Fiscal decentralization. Congressional approval of the proposed national dialogue law will provide for a phased transfer of responsibilities for current spending on health and education from regional to municipal governments, to better coordinate needs and spending programs.
  • Municipal adjustment programs. To address the problem of over-indebtedness in some of the major municipalities, the government has provided access to refinancing in return for commitments to improve fiscal sustainability. These agreements call for reforms to improve revenue collections and personnel reductions to reduce expenditures (Box 3).
  • Expenditure and financial management. In 2001 the financial management information system (SIGMA) and the coverage of the single treasury account will be expanded to cover the rest of central government yielding greater expenditure control, more detailed data, and greater fiscal transparency. The government is committed to implementing SIGMA at the local government level with financing from the World Bank and the IDB.

24. The government intends to prepare a proposal for a comprehensive tax reform, which would be ready for consideration by the next government. Delays in proceeding with the tax reform in 2000 reflected the difficulty in establishing a consensus on its design. The proposal would be aimed at enhancing the efficiency and progressivity of the tax system, but it also would provide for a greater revenue-generating capacity. The authorities will base the proposal on previous FAD recommendations, possibly including the replacement of highly distortionary and regressive taxes with alternative revenue sources, such as a personal income tax.

Box 3.Municipal Adjustment Plans

Overindebted municipalities have begun to reach agreements with the central government on adjustment plans (PRF) that will permit a restructuring of their debts. The FPS and FNDR will require, as a condition of access to investment funds, that municipalities prepare and carry out an Institutional Reform Plan (PAS) that aims to improve the fiscal sustainability of municipalities by addressing issues in local revenue mobilization, recurrent expenditure levels, and financial management. The municipalities entering into these agreements are given access to refinancing in return for commitments to adopt fiscal policies aimed at achieving a fiscally sustainable position within five years. The PRFs also require implementation of a financial management information system (SIGMA) to improve fiscal data at the municipal level. Overindebted municipalities as of December 31, 2000 are eligible to sign PRF agreements, and 30-50 municipalities are expected to do so.

Each PRF plan sets fiscal targets for revenue, expenditure, the deficit and debt, and has incentives and penalties associated with the fulfillment of the agreed targets. The content may vary, but they tend to include the following indicators:

Financial performance targets will be based on the following indicators:

  • Ratio of debt service to current income
  • Ratio of present value of debt to current income
  • Total income minus total expenditure and amortization
  • Total income minus current expenditure and amortization
  • Increase in current income

Structural indicators include:

  • Tax revenue per capita
  • Investment per 1000 inhabitants
  • Public employees per 1000 inhabitants

Fiscal management indicators include:

  • Tax evasion rates or effective tax rates
  • Current expenditure
  • Amount of expenditure arrears
  • Debt service to current savings ratio

Possible elements of the adjustment strategy:

  • Modernizing the tax and debt administration
  • Improving the property tax registry
  • Improving enforcement and audit
  • Employment reductions
  • Changes in the investment profile
  • Debt refinancing plans

B. Monetary and Banking Policies

25. Monetary policy will be guided by the inflation objective for 2001. The central bank will manage liquidity mainly through open market operations. The monetary program assumes that the demand for money and credit will start to recover in the course of the year; also, the limits on the central bank’s net domestic assets allow for a transfer of resources to the public sector second-tier banking institutions (about USS60 million, or 0.7 percent of GDP), which will provide credit to financial institutions for new lending as well as lending to small and medium-sized enterprises, and to encourage loan rescheduling. As part of these operations, the central bank will transfer to the public sector second-tier bank, NAFIBO, the development credits and corresponding external liabilities remaining on its balance sheet, since such lending is no longer a central bank function. Currency issue is projected to grow slightly faster than nominal GDP, and in view of the ample stock of foreign reserves of the central bank, the program allows for a moderate decline in net international reserves (US$100 million).

26. Following a muted response to last year’s measures to encourage banks’ loan rescheduling and new lending, in May 2001 congress approved a new economic stimulus package with stronger incentives aimed at increasing credit growth (Box 4). Under the latest package, NAFIBO would extend credit to banks that reschedule loans, including nonperforming loans, and it would secure funding for this program through bond sales. Staff expressed concern over the potential fiscal costs of this program, particularly to the extent that NAFIBO incurs losses that would be covered directly by the treasury. It will be important for the interest rate on NAFIBO’s lending operations to fully cover the cost of its funding through the issuance of bonds. Also, staff noted that the provision of liquidity for new lending through this scheme does not seem to be needed, in view of the generally ample bank liquidity. The authorities explained that banks would retain the credit risk for the rescheduled loans, a feature of the program that would, in their view, limit the likelihood of fiscal costs.

27. Measures to stimulate credit expansion have entailed regulatory forbearance, which may make it more difficult to detect bank weakness; early detection becomes increasingly important with the weakening of bank performance indicators. The authorities regarded the measures taken over the last year as providing needed “breathing room” for well managed banks that have been adversely affected by a prolonged drop in profitability in the corporate sector. Staff pointed out that, as the regulatory forbearance may postpone both the detection of bank problems and the timely corrective action needed to address them, the proposed financial reforms in congress take on added importance. The authorities plan to amend the proposed law, or to resubmit a modified bill, that would postpone the introduction of an explicit ceiling on deposit insurance, while maintaining other important elements. In particular, the bill would enable the banking superintendency to more effectively utilize early warnings of bank weakness for taking timely corrective actions, and improve bank resolution procedures. Passage of a modified bill is expected by October 2001 (performance criterion for the first review of the program).

Box 4.Measures to Encourage Banks’ Lending and Reprogramming in 2000-2001

First stimulus package (April 2000)

  • NAFIBO bond swap arrangement. Banks may swap reprogrammed substandard loans (categories 2-4) to clients in the productive sector with the capacity to repay for zero-coupon nontransferable NAFIBO bonds, with a credit risk weight of 20 percent for capital adequacy requirements, compared with 100 percent for the original loan. Swaps are reversed by the amount of each loan repayment; if a repayment is late by 90 days, the swap is fully undone and the loan returns to its original classification. Repayment period of reprogrammed loans would be 5-10 years, including a grace period of up to 2 years. Total limit of program: US$250 million.
  • Reprogramming with own resources. Banks may reprogram any loan to clients in the productive sector with capacity to repay, including loans in default (category 5, the lowest category). Reprogrammed loans will not be subject to immediate downgrading. Total limit of program: US$250 million.

Second stimulus package (November 2000)

  • Reprogramming measures (above) are extended to clients in any sector (except consumer credits) with the capacity to repay, and the 5-year minimum repayment period is eliminated. The NAFIBO bond swap arrangement is extended to reprogramming of category 1 loans, which also had a risk weight of 100 percent.

Third stimulus package (May 2001)

  • Special Fund for Economic Reactivation (FERE). The FERE will be financed through the emission of up to US$250 million of bonds by NAFIBO, and will provide credits to banks that reprogram loans to clients with the capacity to repay. FERE credits to banks will have a minimum 12-year term, including a 2-year grace period; the interest rate will be established with each bank individually. Banks can receive credit from NAFIBO for 100 percent of reprogrammed loans, excluding consumer credits; and 50 percent of reprogrammed consumer credit. Except for consumer credits, reprogrammed loans will have a minimum term of 8 years; consumer credits will have a maximum term of 4 years.
  • NAFIBO bond swap arrangement. The grace period for late debt service payments on reprogrammed loan is extended to 180 days, before the swap is undone.
  • Real estate collateral for provisioning. Forty percent of the value of real estate collateral (up from 25 percent) can be applied to provisioning requirements on new loans.
  • Capitalization Program (PROFOP). The PROFOP will provide one-time subordinated credits to capitalize banks, on terms to be determined. The maximum amount available will be US$80 million, financed through the transfer to NAFIBO of the development portfolio (and corresponding liabilities) of the central bank.

28. The weakened bank performance, evidenced by a rise in nonperforming loan ratios throughout much of the banking system, gives cause for concern but, at the same time, several developments have improved the banking system’s ability to withstand stress: the restructuring of the balance sheet of the largest bank in the system; a change in loan classifiaction criteria that will improve the quality of bank loan portfolios; increases in provisioning requirements that are being phased in over the five years to 2004; a significant improvement in banks’ net foreign asset position; and increases in bank capitalization in the latter part of the 1990s (see Figure 4). Increasing stress in the banking system has resulted from the economic slowdown in both the formal and informal sectors, the restructuring of the largest bank in the system following a change in ownership, and the adaptation to more stringent prudential regulations. The stress—unsurprising in view of the contraction of credit and lending rates that, at about 15 percent for U.S. dollar-denominated loans, are high in real terms—could increase further if the assumed economic recovery is slower or weaker than expected. These developments underline the importance of implementing without delay the financial sector reforms mentioned above, and exercising vigilance in bank supervision.

C. External and Exchange Rate Policies

29. The external current account deficit in 2001 is projected to remain stable in relation to GDP, with modest growth of export volumes and little change in the terms of trade (Table 12). Excluding natural gas, however, exports are projected to be stagnant in 2001. Foreign direct investment is projected to increase to 9 percent of GDP, owing mainly to a large investment project (San Cristóbal) in the mining sector. Gross official reserves would remain comfortable at just over months of imports.

Table 12Bolvia: Medium-Term Balance of Payments, 1999-2007(In millions of U.S. dollars, unless otherwise noted)
Prel.Est.Prog.Projections
199920002001200220032004200520062007
Current account-488-464-439-439-466-484-523-562-614
Trade balance-704-600-554-540-501-503-507-505-555
Exports, f.o.b.1,0511,2301,3021,4631,6641,8261,9962,2062,358
Of which: gas36122212291346384427491506
Imports, c.i.f.-1,755-1,830-1,857-2,003-2,165-2,329-2,504-2,712-2,913
Of which: capitalization and pipeline-405-243-134-94-64-8000
Services (net)26-246101421293542
Income (net)-196-225-285-305-330-359-391-436-473
Of which: interest due on external public sector debt-126-129-134-122-120-121-125-134-142
Of which: investment income (net)-52-80-131-153-176-197-219-244-268
Transfers (net)386385394396351357347344372
Of which: HIPC assistance from grants625572917579736154
Capital and financial account515425327439584619672698758
Direct investment (net)1,014731778748648648640677735
Of which: from capitalization5062971681188010000
Portfolio investment (net)-6155-135-135-135-150-150-150-150
Public sector loans113112167175228241245233218
Disbursements280290347360411412404395383
Amortization 1/-167-178-180-185-182-171-159-162-165
Other, including errors and omissions-551-473-483-348-156-120-62-61-45
Overall balance26-39-1121118134150136144
Exceptional financing1616122018141077
Of which: HIPC assistance from refinancing1616122018141077
Net international reserves (increase -)-4223100-20-135-149-159-143-151
Memorandum items:
Gross reserves (end-of-period)1,2111,1641,0591,0531,1351,2191,3451,4581,575
(In months of imports of goods and services)2/7.06.65.65.25.25.35.45.55.5
Total assistance under the HIPC Initiative8579105159144142130118109
Original framework857860514036302625
Of which: assistance from debt reduction7710101010101010
Enhanced framework451081041061009284
of which: assistance from debt reduction11384138374038
(In percent)
Export volume growth-1.811.44.212.612.17.37.38.54.9
Import volume growth-8.8-0.10.05.85.35.25.56.35.4
Terms of trade change-0.20.60.1-2.2-1.10.00.00.00.0
(In percent of GDP)
Current account-5.9-5.5-5.1-4.9-4.9-4.8-4.9-4.9-4.9
Current account excluding HIPC assistance 3/-6.7-6.2-5.9-6.0-5.8-5.7-5.6-5.4-5.4
Merchandise exports12.614.515.016.217.518.118.519.118.9
Merchandise imports21.121.621.422.222.723.123.223.523.4
Of which: capitalization and pipeline4.92.91.61.00.70.10.00.00.0
Direct investment (net)12.28.69.08.36.86.45.95.95.9
Grants and loans4/5.55.65.95.75.65.24.74.34.0
Sources: Central Bank of Bolivia; and Fund staff estimates and projections.

Reflects lower scheduled debt service, starting in 1998, owing to HIPC assistance in the form of stock-of-debt reduction.

In months of imports of goods and services in the following year.

Previously, assistance under the HIPC Initiative was treated as exceptional financing.

Official transfers and loans to public sector, excluding HIPC debt relief.

Sources: Central Bank of Bolivia; and Fund staff estimates and projections.

Reflects lower scheduled debt service, starting in 1998, owing to HIPC assistance in the form of stock-of-debt reduction.

In months of imports of goods and services in the following year.

Previously, assistance under the HIPC Initiative was treated as exceptional financing.

Official transfers and loans to public sector, excluding HIPC debt relief.

30. The authorities intend to continue with a de facto crawling peg exchange rate policy, with the aim of maintaining internal price stability and gradually improving their external competitiveness.12 The recent depreciation of the Brazilian real and continued strength of the U.S. dollar may create some temporary strain on competitiveness, particularly with regard to bilateral trade with Brazil, and the authorities will continue to monitor closely exchange rate developments. The authorities and staff agreed that the crawling peg system has served Bolivia well in helping the economy to adjust to terms of trade shocks, in the context of limited exposure to portfolio capital flows, while avoiding the volatility that could result from a freely floating exchange rate, and the adverse impact that this could have in the highly dollarized financial system. It is essential that monetary policy be consistent with this exchange rate framework.

31. Bolivia maintains an open exchange and trade system. Tariff rates are zero and 5 percent for capital goods and 10 percent on all other goods, and there are no major nontariff barriers. Based on the greater transparency and efficiency in customs procedures in recent years, arising from the ongoing reform of customs administration, Bolivia’s rating on the Fund’s Index of Aggregate Trade Restrictiveness has been revised to 1, the least restrictive rating.

D. Implementation of the Poverty Reduction Strategy

32. The authorities will soon begin implementation of their comprehensive long-term strategy to reduce poverty, supported by assistance under the enhanced HIPC Initiative. The strategy, mapped out in the PRSP that incorporates the conclusions of the National Dialogue 2000, identifies a comprehensive agenda for infrastructure projects, social expenditures, and institutional reforms aimed at reducing the incidence of poverty and extreme poverty in Bolivia by one third and one half, respectively, by 2015 (Table 13). The four main components of the strategy are to enhance employment and income opportunities for the poor; develop the productive capacities of the poor; provide greater security and protection; and increase social participation and integration. Together with these four components, the strategy incorporates three cross-sectoral issues—gender equity, interests of indigenous peoples, and the sustainable use of natural resources—and develops an institutional framework for its implementation. Upon reaching the completion point under the enhanced HIPC Initiative, the government will begin to direct the new flows of debt relief to municipalities for poverty reduction projects. As decided in the National Dialogue, this assistance will be distributed to municipalities using a formula developed during the National Dialogue that weights the allocations toward the poor.

Table 13Bolivia: Poverty and Social Indicators
Prel.Targets (PRSP)
1990199419961997199819992000200520102015
Poverty
GDP growth per capita2.22.22.02.52.8-1.80.12.83.53.6
Poverty incidence (income based, in percent)1/
National63.262.762.455.847.940.6
Urban54.351.550.445.541.037.0
Rural77.381.679.368.959.952.0
Extreme poverty (national)37.936.536.229.722.817.3
Health
Life expectancy at birth (number of years)2/58.359.360.461.461.962.162.765.167.168.9
Infant mortality rate (per 1000 live births)75.067.057.450.544.439.5
Maternal mortaility rate (per 100,000 live births)390374304246200
Childbirths handled institutionally (in percent)32.639.342.745.249.065.0
Pregnant women with prenatal checkups (in percent)19.323.926.430.134.049.0
Residential infestation by Chagas disease (in percent)60.051.423.610.95.0
Education
Percentage of population with 8 or more years of schooling50.751.656.361.467.0
Academic lag 3/44.042.837.735.730.8
Continued school attendance in first 4 years of primary school
National64.669.980.084.990.2
Urban67.473.383.487.591.9
Rural61.866.776.982.588.5
Students at risk in language23.413.48.4
Students at risk in mathematics27.619.615.6
Basic sanitation
Households with piped water (in percent)70.071.174.7
Households with basic sanitation (in percent)57.559.264.8
Households with electricity (in percent)65.767.371.3
Source: Bolivian Central Bank, Bolivia’s Poverty Reduction Strategy Paper (EBRP), National Statistical Institute & Poverty Diagnostic (World Bank, 2000)

Poverty indicators in 1997 were calculated based on income. This limits their comparability to the figures in 1999, which were calculated with information of the survey on household consumption.

In 1996, the figure corresponds to that observed in 1995.

Percent of students with age above the minimum required for their school year.

Source: Bolivian Central Bank, Bolivia’s Poverty Reduction Strategy Paper (EBRP), National Statistical Institute & Poverty Diagnostic (World Bank, 2000)

Poverty indicators in 1997 were calculated based on income. This limits their comparability to the figures in 1999, which were calculated with information of the survey on household consumption.

In 1996, the figure corresponds to that observed in 1995.

Percent of students with age above the minimum required for their school year.

33. The program of social policies will be carried out in accordance with the strategy described in the PRSP. Intermediate targets have been set for several social and economic indicators in order to evaluate the progress of the strategy in a timely manner, and provide a reference for the social monitoring mechanisms. In line with the PRSP, the public investment program will focus on roads, education (especially at the primary level), primary health care, basic sanitation (especially in rural areas), rural electrification, establishment of clear property rights for agricultural lands, and small scale irrigation.

34. To complement the planned improvements in budget management, civil society will play an important role in monitoring the use of HIPC resources. In conjunction with the Catholic Church and other civil groups, a network of social oversight committees will be established to monitor the use of HIPC resources and to provide feedback for setting future priorities. This network, which was discussed in the National Dialogue, will be formalized with congressional approval of the proposed National Dialogue Law. The government will issue norms that require municipalities to report on poverty-related and social-sector spending, showing separately the use of HIPC resources, as well as a breakdown between current and capital outlays.13 These data, which will be compiled on a quarterly basis by the finance ministry’s programming unit (UPF) for the 111 municipalities that report to it, will facilitate effective social oversight. In addition to the general requirement for local governments to report on poverty-related expenditure, the authorities also plan to conduct a tracking survey on a selective basis for an in-depth evaluation of the use of HIPC resources.

35. The PRSP provides a significant step toward a medium-term budget framework that will be further developed in the period ahead. It outlines poverty-related spending needs, which account for a major proportion of all public investment, and takes account of associated recurrent outlays, providing an accounting framework for ensuring that spending levels and financing needs are in line with the fiscal program. This will be expanded into a more comprehensive medium-term framework in order to improve the fiscal planning needed for the effective implementation of the antipoverty strategy. By the end of the first quarter of 2002, the ministry of finance will prepare the methodology and budget guidelines for the preparation of medium-term budget plans. For the 2003 budget, the line ministries will be required to submit three-year expenditure plans (subject to indicative ceilings prescribed b. the ministry of finance) with their annual budget request. These plans would form the basis for future budget requests.

E. Other Structural Reforms

36. The authorities plan to complete by the end of 2001 the privatization program which has sharply reduced the role of public enterprises in the economy.14 Following the privatization in 1999-2000 of most of the state oil company’s assets, the remaining gas networks and the LPG bottling plants are scheduled to be sold during the fourth quarter of 2001. The government also intends to offer for sale in 2001 the electricity distribution company of Tarija (SETAR), the electricity generation and distribution company of Potosi (SEPSA), and the electricity generation company of Trinidad (COSERELEC).

37. There is a need to reduce labor market rigidities through a modernization of labor legislation, but the needed consensus has not yet been achieved. Meanwhile, pilot programs to demonstrate the benefits that a modern labor law would permit are being implemented (for example, hourly work that is agreed upon by private firms and university students).

IV. Medium-Term Outlook

38. The medium-term projections developed by the authorities for the PRSP are based on the faster growth that is needed to achieve significant reductions in poverty over the long term. The targeted path for real GDP growth (5-5½ percent over most of the period) is somewhat higher than the growth experienced in the 1990s, but staff agrees with the authorities that the growth targets are achievable, through increased investment, both public and private, and greater efficiency of investment. However, this will require that the structural impediments to growth be addressed, including the weak public administration and related issues of governance, and labor market rigidities. Inflation is projected to remain contained at 3½–4 percent over the medium and long run, and the crawling peg exchange rate policy would be implemented over the foreseeable future. The framework is dependent upon a planned reduction of the overall deficit of the combined public sector from 3.7 percent of GDP in 2000 to 1.3 percent of GDP in 2008 and beyond. This fiscal adjustment would help to free up domestic financial resources for private investment. Reducing pressures on domestic financing will also facilitate stable monetary and exchange rate policies. Tax policy reform will be crucial for achieving the projected increase in tax revenue from 18.5 percent of GDP in 2000 to 21.8 percent of GDP in 2008, necessary to support increased public investment in the medium term.

39. Over the medium and long term, the external current account deficit is projected to be in the range of 4½-5 percent of GDP, as strong export growth, particularly in the hydrocarbons and mining sectors, would match growth in imports and a rising deficit on interest and dividends. This deficit would be fully covered by foreign direct investment (FDI) flows. The projected decline in FDI to 5-6 percent of GDP over the longer term assumes no major new investment projects for natural gas, despite recent large increases in proven reserves. Net international reserves are projected to decline until 2003, before achieving a steady annual accumulation, as gross reserve coverage falls to about 5 months of imports of goods and services in 2003, before leveling off.

40. Debt relief to be provided under the enhanced HIPC Initiative would reduce Bolivia’s outstanding debt by nearly 30 percent in NPV terms. An updated debt sustainability analysis, based on end-2000 data, shows that the NPV of debt would fall to 138 percent of exports atend-2001 after enhanced HIPC assistance (Table 14), compared with the enhanced HIPC target of 150 percent of exports. Moreover, additional bilateral debt relief by Paris Club members beyond that provided under the HIPC Initiative would reduce this indicator another 24 percentage points.15 The flow of enhanced HIPC relief is projected to average about US$100 million a year through 2005 (Table 15).

Table 14Bolivia: Indicators of Medium-and Long-Term External Public and Pubicly Guaranteed Debt and Debt Service, 1999-2007 1/
Prel.EstProg.Projections
199920002001200220032004200520062007
(In millions of U.S. dollars)
Debt outstanding
Nominal (after HIPC assistance)4,2924,4473,8944,0844,3004,5194,7414,9395,123
Of which: publicly guaranteed280261245226211199190184178
NPV before HIPC assistance3,2723,3423,3993,4193,4613,5433,6693,7923,930
NPV after HIPC assistance2,6352,7471,9952,1022,2212,3842,5832,7722,970
(In percent of exports of goods and services)
Debt outstanding 2/
Nominal (after HIPC assistance)315.6323.9270.0257.9245.9233.6223.2213.1204.3
Of which: publicly guaranteed20.619.017.014.212.110.39.07.97.1
NPV before HIPC assistance240.6243.4235.7215.9197.9183.2172.7163.6156.7
NPV after HIPC assistance193.8200.1138.3132.7127.0123.2121.6119.6118.4
Debt service due before HIPC assistance 3/25.523.823.822.319.817.815.915.314.6
Of which: multilateral creditors13.211.917.817.215.013.512.011.410.8
Of which: publicly guaranteed2.11.81.61.31.10.90.80.70.7
Debt service due after HIPC assistance 3/19.018.416.713.012.211.010.210.510.5
(In percent of GDP)
Debt outstanding
Nominal (after HIPC assistance)51.552.645.045.345.244.844.042.741.1
Of which: publicly guaranteed3.43.12.82.52.22.01.81.61.4
NPV before HIPC assistance39.339.539.338.036.435.134.032.831.5
NPV after HIPC assistance31.632.523.023.323.323.624.024.023.8
Debt service due before HIPC assistance4.04.14.34.34.03.73.43.33.2
Of which: multilateral creditors2.12.03.23.33.12.82.62.52.3
Of which: publicly guaranteed0.30.30.30.30.20.20.20.20.1
Debt service due after HIPC assistance3.03.23.02.52.52.32.22.32.3
(In millions of U.S. dollars)
Memorandum items:
Exports of goods and services
Current year1,3101,4531,5631,7351,9472,1222,3042,5272,693
Three-year moving average1,3601,3731,4421,5841,7481,9352,1242,3182,508
GDP8,3268,4578,6609,0069,51910,09710,77711,56012,470
Sources: Central Bank of Bolivia; and Fund staff estimates and projections.

Figures for 1999-2000 on debt stocks after HIPC assistance reflect assistance under the original HIPC framework only. Beginning in 2001, figures also incorporate the entire amount of the assistance under the enhanced framework.

In percent of three-year historical average exports of goods and services.

In percent of current year exports of goods and services.

Sources: Central Bank of Bolivia; and Fund staff estimates and projections.

Figures for 1999-2000 on debt stocks after HIPC assistance reflect assistance under the original HIPC framework only. Beginning in 2001, figures also incorporate the entire amount of the assistance under the enhanced framework.

In percent of three-year historical average exports of goods and services.

In percent of current year exports of goods and services.

Table 15Bolivia: Scheduled Debt Service on Medium- and Long-Term External Public and Publicly-Guaranteed Debt, 1999-2007(In millions of U.S. dollars)
prel.prog.Projections
199920002001200220032004200520062007
Debt service due1/334.0345.9365.4383.8382.2375.6364.7383.7391.3
Principal201.8210.1227.2250.9253.1246.6232.4244.3245.1
Multilateral173.5172.5184.9207.5204.7200.3186.7193.2191.1
IMF33.429.629.927.627.734.732.237.535.8
World Bank18.919.912.714.515.917.518.921.323.1
IDB63.464.480.289.188.487.981.583.275.7
CAF44.745.848.263.160.849.445.043.847.8
Other13.112.813.913.112.010.89.17.58.7
Official bilateral21.828.535.638.243.441.842.646.447.3
Paris Club18.825.231.233.837.838.638.942.341.8
Non-Paris Club3.03.34.44.45.73.23.42.72.2
Unspecified 2/0.00.00.00.00.00.00.31.43.3
Commercial6.59.16.75.35.04.63.14.76.6
Interest132.2135.8138.2132.9129.1129.0132.3139.4146.2
Multilateral92.490.693.290.687.186.489.095.0100.6
IMF1.21.21.31.31.11.00.80.70.5
World Bank12.510.99.310.913.116.621.327.333.7
IDB57.454.152.150.148.446.344.444.243.0
CAF16.419.726.324.721.019.219.119.319.6
Other4.94.74.13.73.53.33.43.63.9
Official bilateral37.543.243.541.241.041.441.942.443.1
Paris Club36.942.739.838.937.937.035.834.633.5
Non-Paris Club0.60.53.41.41.21.11.11.11.1
Unspecified 2/0.00.00.30.91.83.34.96.68.4
Commercial2.32.01.51.21.11.11.42.02.5
Memorandum items:
Total HIPC assistance84.779.1104.9159.1144.0142.2129.9118.2108.7
Original framework84.778.459.651.040.036.230.226.325.0
On interest46.939.334.032.628.526.023.321.520.1
On principal37.839.225.618.411.510.16.94.74.9
Enhanced framework0.745.3108.1104.0106.099.892.083.7
On interest0.76.720.214.112.010.48.47.1
On principal38.587.990.094.089.483.576.6
Sources: Central Bank of Bolivia; and Fund staff estimates and projections.

After the full implementation of traditional debt relief and before debt relief provided under the HIPC Initiative.

After 2001, reflects debt service on new borrowing from bilateral lenders.

Sources: Central Bank of Bolivia; and Fund staff estimates and projections.

After the full implementation of traditional debt relief and before debt relief provided under the HIPC Initiative.

After 2001, reflects debt service on new borrowing from bilateral lenders.

41. Given the outlook for the external sector and the authorities’ commitment to maintaining prudent financial and macroeconomic policies, Bolivia should be able to meet its obligations to the Fund in a timely manner. Gross financing from the Fund would cover about 3 percent of Bolivia’s foreign financing needs over the remainder of the arrangement. Debt service due to the Fund would constitute a small proportion of Bolivia’s exports of goods and services and gross official reserves (Table 16).

Table 16Bolivia: Indicators of Fund Credit, 1999-2007
prel.Est.Projections
199920002001200220032004200520062007
Outstanding Fund credit
In millions of SDRs180.0168.8183.9180.8159.6133.0108.385.660.5
In percent of quota104.998.4107.2105.493.077.563.149.935.3
In percent of GDP3.02.62.82.72.21.81.41.00.7
In percent of exports of goods and services18.815.415.613.911.08.46.44.63.0
Debt service due to the Fund
In millions of U.S. dollars34.830.931.529.529.636.734.231.434.5
In percent of quota14.813.613.912.912.915.914.813.514.9
In percent of exports of goods and services2.72.12.01.71.51.71.51.21.3
In percent of gross service due11.910.110.29.910.012.912.310.811.4
In percent of gross official reserves2.92.73.02.82.63.02.52.22.2
Gross Fund financing
In millions of U.S. dollars23.014.950.224.10.00.00.00.00.0
In percent of Bolivia’s gross financing needs 1/3.01.84.32.10.00.00.00.00.0
Memorandum item:
Quota (in millions of SDRs)171.5171.5171.5171.5171.5171.5171.5171.5171.5
Sources: Central Bank of Bolivia; International Monetary Fund, Treasurer’s Department; and Fund staff projections.

Gross financing needs are defined as the sum of the external current account deficit, scheduled amortization, repayments to the fund, changes in gross international reserves of the central bank, change in arrears, and net private capital flows.

Sources: Central Bank of Bolivia; International Monetary Fund, Treasurer’s Department; and Fund staff projections.

Gross financing needs are defined as the sum of the external current account deficit, scheduled amortization, repayments to the fund, changes in gross international reserves of the central bank, change in arrears, and net private capital flows.

V. Other Issues

A. Data and Technical Assistance Issues

42. The timeliness and coverage of the economic database is generally adequate for monitoring purposes, but there are long delays in the publication of the quarterly and annual national accounts, and the coverage of labor market statistics is weak. The authorities have been participating in the GDDS since September 2000.

43. In recent years, the Fund has provided considerable technical assistance to Bolivia, including an MAE project funded by Switzerland for the modernization of central bank accounting and payment systems; FAD support for the reform of customs administration and the internal revenue service; and FAD advice on fiscal decentralization issues. With respect to future needs, the authorities saw the key priorities as follow-up assistance from FAD on tax and customs administration, and from STA on banking statistics.

B. Performance Criteria and Reviews

44. The third annual arrangement includes quarterly financial benchmarks through end-2001 (with the financial benchmarks for June and December being performance criteria) and indicative financial benchmarks for end-September 2001. The definitions and adjusters for the financial benchmarks and performance criteria, described in the tables attached to the Memorandum of Economic and Financial Policies, will apply to the same variables as in the first and second annual arrangements.16 The program provides for a downward adjustment in the targets for net international reserves if currency issue is lower than envisaged under the program, and an upward adjustment to the limits on domestic financing of the fiscal deficit in the event of shortfalls in external financing. Two structural performance criteria have been defined, one on passage by congress of the draft tax code (by September 2001), and one on passage of a financial sector reform by October 2001 that would strengthen the financial system. There are structural benchmarks in the area of public sector institutional reform.

45. There will be two reviews, the first to be completed by October 2001. The first of three disbursements is to be made available after approval of the arrangement, the second upon completion of the first program review and observance of performance criteria for end-June 2001 (SDR 19 million each), and a third disbursement (SDR 18.1 million) upon completion of the second review and observance of performance criteria for end-December 2001.

C. Streamlining Structural Conditionally

46. Structural conditionality in the program for 2001 is substantially more streamlined than the year before, focused primarily in the core areas of fiscal and financial sector reforms. Fiscal reforms to improve customs and domestic tax administration and financial management should improve the efficiency and equity of the tax system as well as its yield, and should serve to enhance transparency and governance. The reforms also are designed to improve the tracking of government spending at all levels of government, notably the pro-poor spending by municipalities that would be supported by HIPC assistance. A sound banking system, which is a key objective of the financial sector reforms that are planned, is crucial for good macroeconomic performance under the program. Many of the measures included in the previous PRGF-supported program will be covered under the lending programs and conditionality of the World Bank (Box 5).

D. Safeguards Assessment

47. Under its current arrangements with the Fund, Bolivia is subject to the transitional procedures governing safeguards assessments. These procedures require the Banco Central de Bolivia to demonstrate, by providing certain documentation to Fund staff, that it publishes annual financial statements that are independently audited in accordance with internationally accepted standards (the “external audit mechanism”). The Banco Central de Bolivia cooperated fully in providing Fund staff with the required documentation.

48. The staff has reviewed the documentation and noted that the Banco Central de Bolivia publishes, within three months of the financial year-end, annual financial statements that are audited by PriceWaterhouseCoopers. Based on the review, the staff concluded that the Banco Central de Bolivia’s external audit mechanism meets internationally accepted standards.

VI. Staff Appraisal

49. The Bolivian economy has grown at a moderate pace over the last decade, supported by structural reforms to improve the efficiency of the economy. However, despite improvements since 1985, progress in reducing poverty during this period has been limited. The staff welcomes the authorities’ decision to give priority to poverty reduction through the adoption of a comprehensive poverty reduction strategy, which was developed through a broadly participatory process. The macro framework of the PRSP is sound, and provides a good, consistent basis for the government’s annual economic programs.

50. The weakness of the economy has been greater and has lasted longer than had been anticipated at the time of the last Article IV consultation, owing to the adverse effects on the informal sector of an impressive coca eradication effort and of customs reform that has slowed contraband-based commerce; episodes of social unrest; weakness in the regional economy; and structural changes in the banking system that have exacerbated the slowdown in bank lending. The staff commends the authorities for a prudent management of many elements of economic policy in difficult circumstances. At the same time, the pace of structural reforms has been slow over the last one to two years, thus delaying the efficiency gains that the reforms are expected to bring. The authorities’ commitment to the economic program will be measured not only by their performance under the financial program, but also by their success in implementing key fiscal and financial sector reforms.

Box 5.Bolivia—Structural Conditionality Streamlining Assessment

1. Coverage of Structural Conditionality in the Current Program

  • Fiscal sector reforms are critical for the program’s success. The reform of the Customs administration and the domestic tax agency and a new tax procedures code are expected to improve governance and increase the efficiency and yield of the tax system. Improvements in the financial management systems at all levels of government and in expenditure-tracking capabilities will enhance governance and facilitate monitoring and evaluation of the PRSP.
  • Financial sector reforms should promote the soundness of the banking system. The proposed financial sector reforms encompass improved bank resolution procedures, and rules to allow prompt corrective actions by the banking superintendence Approval and implementation of these reforms is needed, as these measures are central to a healthy financial system, and aim to reduce the duration and cost of bank problems.

2. Relevant Structural Conditions not Included in Current Program

  • Tax policy reform and labor market reform are examples of macro-relevant measures that are important in the long run, but not crucial in the short run, and are in various stages of implementation. Tax policy reform is needed to increase the progressivity of the tax system and increase revenue-generating capacity, but it is delayed by political opposition; a tax reform proposal will be prepared. Modern labor legislation has been delayed for political reasons. Reforms permitting more flexible labor markets would help reduce unemployment and poverty over time, as noted in the PRSP.
  • Some relevant structural measures are covered by World Bank loans for the education and health sectors, decentralization, and the reform of public sector institutions, including the judiciary, the National Road Service, and the Superintendency of Basic Sanitation. Completion of the privatization program is a loan condition; privatization measures were formerly structural benchmarks under the PRGF-supported program.
  • Other relevant measures are supported by the IDB, including road infrastructure, public sector institutional reform, rural development, and investment in the social sectors.

3. Status of Structural Conditionality from Earlier Programs

See Table 8.

4. Structural Areas Covered by Bank Lending and Conditionality

World Bank lending and conditionality cover the following sectors and programs: education, roads, rural development, health care, integrated child development, regulatory reform, decentralization, other institutional reform in the public sector.

51. The authorities’ macroeconomic strategy for 2001 is appropriate. Many of the factors that led to the current slowdown are transitory, and the decision to avoid a large fiscal stimulus merits support. The planned fiscal stance reflects a balance between the need for economic recovery and higher levels of poverty-related spending, on the one hand, and further progress in ensuring fiscal and external sustainability, on the other.

52. The weakening of bank performance indicators gives cause for concerns that are, however, mitigated by developments that have improved the banking system’s ability to withstand stress in the banking system that has increased since the last Article IV consultation. These include increases in capital and in loan-loss provisions, a reduction in short-term foreign debt, and a restructuring of the balance sheet of the largest bank in the system. The stress could increase further if the economic recovery is slower or weaker than expected. In the meantime, close monitoring by the supervisory authorities of the situation in the banking system is warranted. In this regard, it will be important to approve, and begin to implement, financial sector reforms now before congress, including those related to more adequate prompt corrective action for problem banks, and strengthened bank resolution procedures. The authorities’ decision to postpone the introduction of an explicit limit to the guarantee of bank deposits is appropriate. The staff cautions against measures for the banking system that entail regulatory forbearance, as they may obscure the diagnosis of the soundness of a bank or its borrowers.

53. Implementation of the authorities’ plans for structural reform in the fiscal area is important for improving the efficiency and equity of fiscal operations, and for meeting revenue targets, hence also for the success of the program. These include: rapid passage and implementation of the tax procedures code, the restructuring of the internal revenue service, continued progress in implementing the customs reform, and the careful monitoring of the municipal adjustment programs for overindebted municipalities.

54. Staff welcomes Bolivia’s open trade and payments system, particularly the improvements in customs procedures that raised Bolivia to the top ranking in the index with respect to being free from restrictive trade policies. The staff supports the authorities’ intention to continue the crawling peg exchange rate system, which has served Bolivia well, permitting adjustment to terms of trade shocks, while limiting exchange rate volatility that could be costly in the highly dollarized financial system. If a modestly faster rate of crawl of the nominal exchange rate becomes an appropriate response to changes in Bolivia’s competitive position within the region, it could be accommodated without causing significant pressure on inflation.

55. The staff is of the view that the authorities’ program is consistent with continued progress toward external viability, while fostering growth and advancing structural reforms. There are risks to the program in the form of a possibly slower-than-expected recovery, with its attendant fiscal consequences; pressure for further support for the banking system in the event of continued stagnation of bank lending; and uncertain prospects in the regional economy. There also are political risks, as future disruptive episodes of social unrest cannot be ruled out. However, the staff notes the authorities’ record of prudent financial management and considers the risks to be of a manageable magnitude. The staff therefore supports Bolivia’s request for the third annual arrangement under the current three-year PRGF arrangement, for the extension of the commitment period through June 7, 2002, and for the rephasing of the undisbursed loans under the second annual arrangement during the period of the third annual arrangement.

56. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

Figure 1.Bolivia: Selected Economic Indicators, 1989 - 2002

Sources: Central Bank of Bolivia; Ministry of Finance; and Fund staff estimates.

1/ December over December.

2/ Since 1997, includes reduced reserve requirements on foreign currency deposits and gold re-valuation from US$250 per troy ounce.

Figure 2.Bolivia: Monetary and Financial Sector Indicators

Sources: Central Bank of Bolivia, Superintendency of Banks; and International Monetary Fund, International Finacial Statistics.

Figure 3.Bolivia: Exchange Rate and Export Price Indicator, 1990 - 2000

Sources: International Monetary Fund, International Financial Statistics; and Fund staff estimates.

1/New weights, based on trade 1996-97

Figure 4.Bolivia: Commercial Bank Performance Indicators

Sources: Superintendency of Banks.

1/Data prior to January 2000 have been adjusted to exclude loans that are less than 30-days past due, based on the average ratio of such loans to total past due loans during January-September 2000.

APPENDIX I Bolivia: Fund Releations

(As of April 30, 2001)

I. Membership Status: Joined: 12/27/1945; Article VIII.

II. General Resources Account:

SDR Million% Quota
Quota171.50100.0
Fund holdings of currency162.6494.8
Reserve position in Fund8.875.2

III. SDR Department:

SDR Million% Allocation
Net cumulative allocation26.70100.0
Holdings27.30102.2

IV Outstanding Purchases and Loans:

SDR Million% Quota
ESAF arrangements165.1396.3

V. Financial Arrangements:

Type of ArrangementApproval DateExpiration DateAmount Approved (SDR Million)Amount Drawn (SDR Million)
ESAF/PRGF09/18/989/17/01100.9644.86
ESAF12/19/949/09/98100.96100.96
ESAF7/27/885/31/94163.26163.26

VI. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs):

OverdueForthcoming
03/31/200120012002200320042005
Total0.020.121.921.827.125.0
Principal0.019.321.221.226.624.7
Charges/interest0.00.80.70.60.50.3

VII. Exchange Rate Arrangement: The Bolivian currency is the boliviano. The central bank holds a daily foreign exchange auction, accepting all bids that are at least equal to the central bank’s minimum price. If acceptable bids exceed the amount offered for auction, the lowest acceptable bids are prorated so as to exhaust the amount offered. The minimum price is adjusted from time to time in light of the evaluation of Bolivia’s real exchange rate with respect to Bolivia’s key trading partners. The administration of the system has resulted in spreads between the maximum and minimum bids of less than 2 percent. On April 26, 2001, the official buying rate was Bs 6.50 = US$1.

VIII. Article IV Consultation: The previous Article IV consultation was concluded by the Executive Board on February 7, 2000 (EBS/99/235, SM/99/308). Bolivia is on the standard 12-month consultation cycle.

IX. Technical Assistance:

DepartmentPurposeTime
FADMission to advise on tax policyJanuary 1999
FADMission to advise on modernization of the customs administrationJune 1999, ongoing
FADMission to advise on tax administrationJune 1999 and February2000
FADMission to advise on fiscal decentralizationDecember 2000
MAEMission to advise on central bank operations and development of domestic capital marketsJune 1999, ongoing
MAEMission to assess the vulnerability of the banking systemOctober 1999, April and December 2000
STAMission to advise on money and banking statisticsJanuary 1999
STAMission to advise on balance of payments statisticsAugust 1999

X. Resident Representative: Mr. Gerardo Peraza, since February 2001.

APPENDIX II Bolivia: Relations with the World Bank Group

(As of April 30, 2001)

The Bank’s lending program for Bolivia is designed to support government efforts to implement its PRSP and reorient the role of the public sector toward provision of social services and infrastructure and improving efficiency in the provision of services to alleviate poverty and develop human capital.

Proposed operations for the period FY 2000-FY 2002 will consist of 8 IDA operations for the total of US$235 million, including projects to expand and improve the quality of health services, rationalize the role of the state, increase and maintain physical infrastructure, and develop public sector institutions, including strengthening the capacities of departmental and municipal administrations and the judiciary.

The status of World Bank loans, IDA credits and IFC investments are shown in the following tables.

Bolivia: IBRD and IDA Lending by Sector(As of April 30, 2001)(In millions of U.S. dollars, unless otherwise indicated)
Number of Loans/CreditsApproved 1/Amount DisbursedUndisbursed 2/
Disbursed741,230.4246.33.7
Current16571.5246.8301.4
Environment, industry, and mining11.02.57.0
Integrated child development30.717.311.5
Road maintenance80.079.82.0
Education reform40.025.514.3
Financed decentralization and accountability15.010.53.8
Land administration20.417.80.9
Rural water and sanitation20.015.52.5
Participatory rural investments62.818.741.4
Education quality75.020.651.4
Regulatory reform T.A.20.06.113.1
Regulatory reform adjustment (including IDA reflow)41.822.318.6
Institutional reform32.02.727.6
Health sector reform25.07.015.9
Abapo-Camiri road88.00.082.2
Hydro. Sec. Soc. Env. Mgt Capac. building4.80.54.2
Indigenous peoples development5.00.05.0
Total (net of cancellations)901,801.91,493.1305.1
Of which: repaid327.9

Amount approved less cancellations.

Not always equal to the difference between the amounts approved and disbursed because of changes in

Amount approved less cancellations.

Not always equal to the difference between the amounts approved and disbursed because of changes in

APPENDIX III Bolivia: Relations with the Inter-American Development Bank

Background

As of April 30, 2001, the Inter-American Development Bank (IDB) had approved loans to Bolivia amounted to US$ 2.6 billion, of which cumulative disbursements amounted to US$2.3 billion. Bolivia’s outstanding debt to the IDB was US$1.5 billion.

The lending progra.

The IDB’s lending program for Bolivia is aimed at supporting the Government’s efforts to reduce poverty, as reflected in the pillars of the Operative Action Plan 1997-2002. This strategy, focuses on: (i) promoting sustained growth and increased employment opportunities in the productive infrastructure sectors, microenterprise, and rural development (opportunity pillar); (ii) supporting direct actions to improve access to the basic social services (equity pillar); and (iii) helping to consolidate the reform process (institutionality pillar). In infrastructure, the Bank-financed projects focused on roads, in particular, trade corridors that facilitate economic integration with neighboring countries. In the social area, the Bank is supporting reforms in health, education, and housing, including water supply and sanitation projects in urban areas. In addition, the IDB participates in the HIPC initiative with the IMF and the World Bank.

The proposed IDB lending program for Bolivia in 2001 is subject to the availability of concessional funds. It consists of nine loans for a total of US$222 million, of which about 44 percent are targeted for the social sectors and 38 percent for infrastructure. The IDB Board of Directors has assigned US$200 million for Bolivia during the period 2000-2001, US$39 million of which were approved in the year 2000 and US$47 in the first quarter of 2001.

Recent economic and sector work

During 2000, several missions visited La Paz to review the Bank’s lending program and its lending portfolio. The Board of Directors approved the Country Paper for Bolivia, which outlines the Bank’s strategy with the country, in June 9, 1999. The IDB also prepared several documents covering its lending program in support of the private sector, and is undertaking a study on the decentralization process.

IDB nonreimbursable technical cooperation and small project.

The IDB portfolio also includes active projects for US$41 million in nonreimbursable technical cooperation, and US$1.7 million in nonreimbursable small projects.

Bolivia: Relations with the Inter-American Development Bank(In millions of U.S. dollars)
NumberProjectsNumber of LoansApprovedDisbursedUndisbursed
I. Statement of IDB loans (as of April 30, 2001)
Totally disbursed (less cancellations)1,5011,501
Sectors371,065562503
Roads620112873
698/OCRio Seco-Desaguadero553916
893/SFCotapata-Santa Barbara40373
840/SFPatacamaya-Tambo Quemado51500
1039/SFVeirtilla-Tarapaya52052
1030/SFPPF: Ventilla-Tarapaya211
1065/SFPPF: Santa Cruz-Pto Suarez22
Energy168671
598/OCElectricity68671
Agriculture5912962
901/SFSmall rural projects13111
929/SFProtection of environment19712
964/SFIrrigation and drainage261114
1054/SFFPP: Agricultural Services000
1057/SFAgricultural Services Program34-34
Sanitation41749381
777/OCSewerage-water supply5757-
914/SFEnvironment770
937/SFBasic Sanitation702941
1050/SFSanitation Small Municipalities40-40
Social sectors8303135168
931/SFEducation Reform803644
858/SFBasic health service34331
950/SFSocial investment fund60537
982/SFSocial management303
995/SFPrograma de Atención al Menor20416
1006/SFHousing60654
1031/SF&Epidemiological Shield and45243
1033/SFHealth Reform101
Institutional Strengthening101072582
976/SFGovernability1275
954/SFNational register (RUN)1275
888/SFPreinvestment651
993/SFDecentralization SNIPPRE716
961/SFLoan TC Tourism532
1038/SFLoan TC Access to Justice3.3
1043/SFStrengthening tax services SNII3-3
1046/SFNational Census725
1056/SFCustoms reform and Modernization5-5
1075/SF-BOLocal Development and Fiscal Adjustment47-47
Multisectoral onlending21057926
939/SFRecapitalization of commercial banks70691
1020/SFMicro and Small Enterprises35926
Private sector11569
1151/OCAguas de Illimani1569
Technical assistance64412021
Total2,6072,083
Repaid598
Outstanding1,486
Bolivia: Relations with the Inter-American Development Bank(In millions of U.S. dollars)
AmountIn Percent of Total
II. Proposed IDB Lending Program 2001
Number of loans9
Total loan amounts222100.0
Social sectors9743.7
Local Development and Fiscal Responsibility4721.2
Education Pilot104.5
Social Security Pilot104.5
Support Poverty Reduction Strategy3013.5
Infrastructure8538.3
Socioenvironmental Impact Sta Cruz-Pto Suarez2511.3
Sta Cruz-Pto Suarez6027.0
Other4018.0
Rural Development209.0
Municipal Financial Administration104.5
Eco-tourism104.5
Source: Inter-American Development Bank.
Source: Inter-American Development Bank.
APPENDIX IV Bolivia: Statistical Issues

The timeliness and coverage of economic statistics in Bolivia is generally adequate for monitoring purposes, but several data sources remain weak and additional work is needed. For instance, data on national accounts is usually produced with delay, wages and unemployment have very limited and inconsistent coverage, and lack timeliness; price indices, although methodologically correct, are becoming outdated; and the methodology used to construct the monthly indices of economic activity could be improved, and their release made more efficient. The fiscal and monetary authorities provide data to the Fund, mainly through the resident representative office, in a timely manner, information on national accounts often presents delays. Bolivia has several statistical publications, but there is no fully articulated publication policy.

The Fund’s Statistics Department (STA) has provided extensive technical assistance on national accounts, consumer prices, external trade indices, and money and banking statistics. The authorities have been participating in GDDS since September 2000.

National accounts and economic activity

The National Statistics Institute (INE) prepares the data on national accounts. Drawing on technical assistance from STA, INE has revised its national income accounts to bring its methodology closer to international standards and developed better estimates of the contribution of informal activities to GDP. Still, some of the data sources remain weak, and the information is usually released with a delay. There is also a possibility that government consumption (in the expenditure breakdown) and the GDP for financial services (in the sectoral breakdown) might be overstated. In 2001 INE released quarterly national accounts statistics for GDP going back to 1990, but has yet to present revised quarterly figures for 1998 and 1999, as well as preliminary series for 2000.

INE also produces a monthly index of economic activity (IMAE), which is not available on a regular basis, but the methodology may need to be revised. In particular, the index may be overstating the degree of economic activity taking place in the financial sector. Further, the aggregation of sectoral indices of economic activity that are produced at different frequencies (i.e., the index of activity for manufactures is produced quarterly, while the other indices are constructed in a monthly basis) may be creating inconsistencies, as well as delays in the release of the IMAE.

Price.

The price statistics mission of February 1998 found that both the consumer price index (CPI) and producer price index (PPI) were due for revision. For the CPI, a new household budget survey is needed so that the basket of items, their weights, and the sample of outlets covered can be updated (the current index is based on 1990 expenditure data). The manufacturing PPI is based on 1990 output data, and is compiled quarterly but published only annually due to lack of resources. The INE intends to revise the PPI once 1997 industrial statistics are available, putting the index on a base of 1998=100, updating the sample of producers, and improving price collection methods. Ideally, indices will also be established for the mining, gas, energy and water industries.

Public finances

Monthly data on revenues, current and investment expenditures, and the financing for the general government (central government, local governments and decentralized entities), public enterprises and the central bank’s operating balance, with appropriate disaggregation, are provided with a relatively short lag. However, only data for 111 out of 314 municipalities are included in these figures.

The ministry of finance provides annual data to STA on the operations of the consolidated central government, and regional and local governments for publication in the Government Finance Statistics Yearbook. However, these data do not cover all operations of decentralized agencies and special funds, although the creation of a single fund for the direction of special funds will provide the authorities with more reliable information, especially at the local level. However, problems remain regarding the quality of data from local and regional governments, particularly with respect to debt.

It is currently impossible to track poverty-related spending at all levels of government, and the quality of the available data is poor. The authorities are planning to issue norms that will require municipalities to report on poverty and social spending. The data will be compiled on a quarterly basis by the Finance Ministry’s programming unit (UPF) for 111 municipalities.

The future implementation of a comprehensive financial management system (SIGMA) will help ensure proper monitoring of public sector financial operations including local debt and social spending. The Inter-American Development Bank and the World Bank are funding the project.

Balance of payments statistics

Bolivia adopted the standards of the fifth edition of the Balance of Payments Manual BPM5 in 1998, and balance of payments statistics for the period 1997-1999 have been reported to STA using the BPM5 methodology. However, the coverage of Bolivia’s balance of payments statistics is still quite narrow, particularly as regards services and financial transactions of the private sector. These weaknesses can be traced mainly to (a) the lack of a defined strategy in the Balance of Payments Department of the Central Bank that has hindered the implementation of enterprise surveys, and (b) the fact that data reported by financial institutions do not distinguish transactions between residents and nonresidents. The balance of payments mission that visited Bolivia in August 1999, reported its finding to the authorities and a two-stage action plan was developed with a view to alleviate major constraints and strengthen the balance of payments data base.

Monetary statistic.

Monetary data for publication in lFS are provided for the central bank and the rest of the banking system on a timely basis. The coverage of banks in the monetary survey is comprehensive, and in 1995 the central bank also started to compile and provide the staff with data on the operations of other banking institutions.

The central bank also provides data on key variables such as net foreign assets, currency, and credit to the nonfinancial public sector to the resident representative office on a weekly basis. Two STA missions in 1998 and 1999 have resulted in an improvement of the coverage and quality of the monetary data of the central bank, and on a strengthening of its integrated monetary database. The coverage of monetary aggregates was expanded by including the operations of savings and loans associations, cooperatives and financial funds. Since July 1999, the Central Bank has shifted to a new accounting structure that has facilitated the derivation of monetary statistics.

With regard to the other depository corporations, there are still large inconsistencies in the interbank accounts, and the plan of accounts and supplementary information for commercial banks and other banking institutions need to be improved regarding residency and sectorization by economic sector.

Survey of Reporting of Main Statistical Indicators

(AS OF MAY 18,2001)

Country: Bolivia

Exchange RateInternationalReservesReserve/Base MoneyCentral Bank Balance SheetBroad MoneyInterest RatesConsumer Price IndexExports/ ImportsCurrent Account BalanceOverall Government BalanceGDP/ GNPExternal Debt Service
Date of latest observationMay 17May 4May 4May 4Apr. 27May 4Apr. ’01Feb ’01Q4 2000May 4 (prel.); Mar. ’01Q2 2000; 2000Q4 2000
Date receivedMay 18May 18May 18May 18May 18May 18May 3Apr. ’01Mar. ’01May ’01Dec. ’00; May 01Feb. ’01
Frequency Of data 1/DWWWWWMMQW (prel.); MQ;AQ
Frequency Of reporting 1/WwWWWWMMQW;MQ: AQ
Source Of data 2/AAAAAAAAAAAA
Mode of reporting 3/CCCCCCCCOCCO
Confiden-Tialily 4/CCCBCCCCCBCC

D-daily, W-weekly, M-monthly, Q-quarterly, and A-annually.

A-direct reporting by Central Bank, Ministry of Finance, or other official agency.

C-cable or facsimile, and O-other (diplomatic pouch).

A-for use of staff only, B-for use of staff and the Executive Board, C-for unrestricted use.

D-daily, W-weekly, M-monthly, Q-quarterly, and A-annually.

A-direct reporting by Central Bank, Ministry of Finance, or other official agency.

C-cable or facsimile, and O-other (diplomatic pouch).

A-for use of staff only, B-for use of staff and the Executive Board, C-for unrestricted use.

ATTACHMENT I

La Paz, Bolivia

May 25, 2001

Mr. Horst Köhler

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Köhler:

1. The attached Memorandum of Economic and Financial 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 2001 under the program supported by the third annual PRGF arrangement.

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 two reviews of the program supported by the third annual arrangement, to be completed no later than October 31, 2001 and March 31, 2002, respectively. The macroeconomic framework will be reviewed in the context of the reviews of the program, and takes 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 request that the the two undisbursed loans under the second annual arrangement under the PRGF for Bolivia, for a total amount equivalent to SDR 22.443 million, be rephased over the period of the third annual arrangement, which will thus be for an amount equivalent to SDR 56.096 million, with two disbursements of SDR 19.0 million each, of which the first one is to be made available after approval of this arrangement and the subsequent one upon completion of the first program review and observance of performance criteria for end-June 2001, and a third disbursement of SDR 18.096 million upon completion of the second program review and observance of performance criteria for end-December 2001. We also request an extension of the three-year commitment period to June 7, 2002, to allow for three disbursements under the third annual arrangement.

4. The government of Bolivia authorizes the publication and distribution of this letter and all reports prepared by Fund staff regarding the 2001 Article IV consultation with Bolivia and the program for the third annual arrangement under the PRGF, reports prepared jointly with Bank staff regarding Bolivia’s reaching the completion point under the enhanced HIPC Initiative, and Bolivia’s Poverty Reduction Strategy Paper.

Sincerely yours,

_______/s/_______
José Luis Lupo
Minister of Finance
_______/s/_______
Juan Antonio Morales
President
ATTACHMENT II Bolivia: Memorandum of Economic and Financial Policies

I. Introduction

1. Since 1985, Bolivia has achieved substantial progress in the areas of macroeconomic stability and structural adjustment under a series of democratically elected governments. Anchored by sound fiscal policy and a comprehensive program of structural reforms, economic growth averaged 4 percent a year during the 1990s, as inflation was reduced to low single-digits. Direct foreign investment exceeded 10 percent of GDP during the latter part of the decade and the import coverage of gross official international reserves rose to more than six months of imports of goods and services. However, despite the overall good performance of the 1990s, external shocks and the negative impact on domestic demand of the successful coca eradication program, resulted in a sharp economic slowdown in 1999, when real GDP grew by only 0.4 percent.

2. In recent years, the government, with the support of the international community, has stepped up its efforts to reduce poverty, which in 1999 still covered nearly two-thirds of the Bolivian population. In particular, having established a track record of sound economic policies, Bolivia reached the completion point under the original Heavily Indebted Poor Countries (HIPC) Initiative in September 1998, and was one of the first countries declared eligible for debt relief under the enhanced HIPC Initiative in February 2000. In conjunction with the original HIPC Initiative, the government set an ambitious agenda to improve social welfare, as measured by a set of indicators, under the 1997 National Action Plan (POA), which was based on our first National Dialogue. The POA, which partially achieved its goals, has now been succeeded by the Bolivian Poverty Reduction Strategy (EBRP), developed over the past year and a half months in the context of a second, broadly participatory, National Dialogue that featured extensive discussion at the local, regional, and national levels. Under the EBRP, Bolivia aims to reduce the incidence of poverty by a third by 2015, while cutting the incidence of extreme poverty in half.

II. Developments Under the 2000 Program

3. The economic recovery in 2000 proved to be slower than envisaged in the program. Real GDP growth is estimated to have recovered to nearly 2½ percent in 2000, compared with the program target of 4 percent. The stagnation of domestic demand continued, owing to falling income in the informal sector from coca eradication and a reduction in contraband-based commerce, as the ongoing customs reform has reduced illegal imports. Moreover, during the year, two episodes of acute social unrest disrupted transportation and output in various sectors. Although prices surged temporarily during the unrest, the increase in consumer prices during 2000 was only 3.4 percent, compared with the program target of 4.0-4.5 percent. Exports staged a strong recovery in 2000, led by increased sales of natural gas via the new pipeline to Brazil, and the external current account deficit narrowed to 5.5 percent of GDP, from 5.9 percent in 1999. Foreign direct investment tapered off in 2000, but remained strong at 8½ percent of GDP, and net international reserves of the central bank fell by only US$23 million, compared with a programmed decrease of US$150 million (after adjustments).

4. The weaker-than-expected economic recovery and periods of social unrest exerted strong pressure on the public finances in 2000. In response to the economic slowdown, the government approved a stimulus package (PRE) in April, consisting mainly of selected tax breaks and temporary spending measures, including a temporary emergency employment program for unskilled workers. Also, domestic fuel taxes were lowered to stabilize domestic fuel prices. Tax revenues remained flat at 18½ percent of GDP, as the weak economy and tax relief measures offset the gains in tax efficiency. To maintain fiscal control, both current and capital spending were restrained. Because of the additional cost of the emergency employment program, together with the higher-than-expected cost of the pension reform, in July we agreed with Fund staff on a modest increase of 0.3 percentage point of GDP in the end-December program ceilings for the overall fiscal deficit and net domestic financing of the combined public sector. These modified targets for December were met, as were all other quantitative program benchmarks and performance criteria for 2000.

5. A weakening of activity in the banking sector, which began in 1999, continued during 2000, but a number of changes in the structure of bank balance sheets have improved banks’ ability to withstand such periods of weakness. In U.S. dollar terms, both broad money and bank credit to the private sector fell slightly during the year, mainly reflecting the weak economy. Credit was constrained also by the ongoing financial restructuring of the country’s largest bank, purchased by foreign investors in 1998. The bank’s loan portfolio was rationalized, and foreign liabilities were reduced. The phasing-in of stronger prudential norms, including the categorization of new credits based on borrowers’ cash flow, instead of collateral, also encouraged more conservative lending practices, while the social unrest further discouraged domestic lending. Commercial bank performance indicators deteriorated in 2000, including nonperforming loans which rose from 6.6 percent of total loans at end-1999 to 10 percent at end-2000. However, banks’ balance sheets have been strengthened by a significant improvement in their net foreign asset position, and increases in capitalization and in loan-loss provisions have helped maintain the soundness of the banking system, which is generally well supervised.

6. Although there were some delays in the structural adjustment program, progress has been achieved in several areas. The customs reform advanced with the issuance of regulations in August 2000 for implementation of the 1999 Customs Law that establishes an autonomous customs agency with an independent board of directors and professional staff. Some 50 percent of the professional and technical staff have been selected through a competitive selection process thus far. The selection process for the remaining 50 percent is under way and is expected to be completed by mid-2001. In December 2000, congress passed a law for the reform of the internal revenue service (SI), which allows for the restructuring of this institution along the same lines as the customs reform. Advances were also made with the privatization program. The sales of the state smelting company (Vinto) and dairy (Milka) were completed in early 2000. Further, the sale of the refineries, the storage facilities, and jet fuel stations of the state-owned oil company (YPFB) were sold by December 2000.

III. Economic Program For 2001

7. The new poverty reduction strategy (EBRP) provides the basis for reorienting policies and programs toward a more effective fight against poverty over the medium term. It incorporates a macroeconomic framework, aiming at higher rates of sustained economic growth with sound economic management. This framework, which will form the basis of our annual economic programs starting in 2001, aims to lift economic growth to 5½ percent a year by 2008, maintain annual inflation rates of 3½–4 percent, and assure long-term fiscal sustainability by gradually reducing the deficit of the combined public sector to less than I½ percent of GDP by 2008 and beyond.

8 Consistent with output growth of about 4 percent, the program for 2001 aims at limiting inflation to 4–4½ percent during the year. In addition to supporting poverty reduction projects, the assistance under the enhanced HIPC Initiative (equivalent to about ½ percent of GDP in 2001) will provide a timely economic stimulus. Led by continued export growth, the external current account deficit is projected to decline to 5.1 percent of GDP. Foreign direct investment would remain strong in 2001, especially in light of the large ongoing investment in the San Cristobal mining project, but other capital shortfalls are expected to yield an overall balance of payments deficit and a loss of official net international reserves of US$100 million. Gross reserves will be maintained at the equivalent of more than 5½ months of imports of goods and services. A targeted increase in public sector savings, based on a recovery of the tax base, and further gains in the efficiency of the customs and domestic tax administrations, is expected to help finance a growing public investment program, while still achieving a slight decrease in the fiscal deficit. The central bank will continue to control the expansion of its net domestic assets and maintain an exchange rate policy stance that preserves external competitiveness.

A. Fiscal Policy and Reforms

9. The combined public sector deficit will hold steady at 3.7 percent of GDP in 2001, as the objective of continuing the process of fiscal consolidation needs to be balanced against the need to support the economic recovery with public sector investment. Tax revenue is projected to improve by 0.8 percentage point of GDP, reflecting in part continued improvements in tax administration. Also, tax revenue from the hydrocarbons sector has been targeted to rise by 0.5 percentage point of GDP. Current spending will be held in check, with the wage bill increasing in line with expected nominal GDP, to allow for a small increase in public sector investment, to 7.1 percent of GDP in 2001, without placing undue pressure on the fiscal deficit. Net external financing is projected to cover two-thirds of the combined public sector financing requirement in 2001, mostly in the form of concessional loans from multilateral and bilateral creditors. External borrowing on nonconcessional terms will be limited so as to permit some reduction of the stock of commercial debt. Net domestic financing will not exceed Bs 701 million (1.2 percent of GDP) in 2001, mostly reflecting borrowing from the private pension funds. Net domestic financing will continue to decline steadily over time (to zero by 2006) to permit a greater allocation of the economy’s financial resources to private investment. 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 Table 1.

Table 1.Bolivia: Financial Benchmarks and Performance CriteriaThird Annual Arrangement Under the PRGF
2001
Mar.
BenchmarkOutturnJun. 2/Sep.1/Dec. 2/
(Cumulative amounts from December 31, 2000 in millions of bolivianos)
Deficit of me combined public sector 3/5094069691,3782,102
Net domestic financing of me combined public sector 4/5/279412227330701
(Cumulative changes from December 31, 2000 in millions of bolivianos)
Net domestic assets of tiie central bank 4/527322528509887
(Cumulative changes from December 31, 2000 in millions of U.S. dollars)
External debt with maturities up to one year6/1010100
Nonconcessional external debt 7/0-2400-10
Net international reserves of the central bank 8/9/-135-123-128-120-100
Projections for calculation of adjusters to the program
(Cumulative change from December 31, 2000 in millions of bolivianos)
Adjuster for currency issue
Currency issue (program)-361-486-314-281229
Maximum adjustment to net international reserves target25497499
(Cumulative amounts from December 31, 2000 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) 10/360109145191
Maximum adjustment to domestic financing of me combined public sector (Bs millions)434385128170
Financing through HIPC debt relief (program) 11/-1-141422
External arrears, stock at end of period (program)00000

Program benchmarks.

Performance criteria.

The deficit limit will be reduced (increased) by the amount of the shortfall (excess) between actual and projected financing through HIPC debt relief. The financing from HIPC relief comprises refinancing and the amortization component of stock of debt reduction operations.

The limits will be adjusted downward by the amount of any overdue obligations to foreign creditors.

This 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.

Excludes normal import credits and reserve liabilities of the central bank. 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, and reflected in paragraph 7 of the Technical Memorandum of Understanding.

Excludes: (i) concessional loans with a grant element of 35 percent or more using the OECD commercial interest reference rates (CIRRs) as of April 15, 2001; (ii) changes in central bank liabilities defined as part of the net international reserves; and (iii) debt of the private sector with official guarantee.

This limit will be adjusted upward by the amount of any overdue obligations to foreign official creditors.

The limits will be adjusted downward by the shortfall, if any, of currency issue from the projected change shown in mis table.

Does not include the HIPC debt relief through rescheduling or the amortization component of stock of debt reduction operations.

Comprises refinancing and the amortization component of stock of debt reduction operations under HIPC Initiative, less debt service on earlier FIIPC debt rescheduling operations.

Program benchmarks.

Performance criteria.

The deficit limit will be reduced (increased) by the amount of the shortfall (excess) between actual and projected financing through HIPC debt relief. The financing from HIPC relief comprises refinancing and the amortization component of stock of debt reduction operations.

The limits will be adjusted downward by the amount of any overdue obligations to foreign creditors.

This 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.

Excludes normal import credits and reserve liabilities of the central bank. 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, and reflected in paragraph 7 of the Technical Memorandum of Understanding.

Excludes: (i) concessional loans with a grant element of 35 percent or more using the OECD commercial interest reference rates (CIRRs) as of April 15, 2001; (ii) changes in central bank liabilities defined as part of the net international reserves; and (iii) debt of the private sector with official guarantee.

This limit will be adjusted upward by the amount of any overdue obligations to foreign official creditors.

The limits will be adjusted downward by the shortfall, if any, of currency issue from the projected change shown in mis table.

Does not include the HIPC debt relief through rescheduling or the amortization component of stock of debt reduction operations.

Comprises refinancing and the amortization component of stock of debt reduction operations under HIPC Initiative, less debt service on earlier FIIPC debt rescheduling operations.

10. After the fiscal program for 2001 was established, a revenue shortfall arose in the first quarter of the year that reflected a weaker-than-expected performance of domestic tax revenue. However, the deficit of the combined public sector was kept below the limit we established for the quarter, as expenditure also was restrained. We have revised the fiscal projections—assuming that an acceleration of tax revenue will accompany a recovery of output and demand in the second half of the year, and also taking account of higher outlays for pensions than initially projected—and we have decided on a set of measures, consisting mainly of expenditure cuts, to close the fiscal gap. The spending cuts are being carried out with a view to protecting poverty-related expenditure to the extent possible.

11. Given the advanced stage of the customs reform, we expect significant revenue increases from taxes on imports in 2001 (10 percent increase in ordinary customs revenue, including tariffs, VAT, excise taxes, and hydrocarbon taxes on imports). Building on the progress made last year, the Customs administration will implement modern control mechanisms such as: an automated transit control system by June 2001, using magnetic cards; a computerized customs control system being installed (ASYCUDA) is expected to become fully operational by end-2001 for exports, imports and transit regimes; and a system of customs control a posteriori for imports will be established by end-2001. The government is committed to strengthening the Customs administration by assuring the full funding of the agency’s budget in the short- and long-term (which could be achieved through assigning a fixed percentage of collections of taxes on imports) and providing resources to increase the customs unit of the national police to 100 full-time officers; these two measures will be subject to a structural benchmark under the program.

12. Domestic tax administration is being strengthened, which will improve transparency and, in the future, generate increased revenue from existing taxes. A new tax procedures code, which aims at strengthening the enforcement power of both the tax and customs administration, is well advanced in the congressional approval process. Under the new code, (i) disputes over tax liabilities will proceed through an administrative process with the payment of most or all of the disputed amount before judicial review of the case is pursued; (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) clear and adequate rules for applying the statute of limitations (interruptión delperiodo de prescriptión)will be specified. The tax code, following approval by the Senate, is now being considered by the Chamber of Deputies, where it has been approved on the first of two readings. The draft code has been given priority over all other laws being considered by the chamber of deputies, which will wait until the tax code has been approved before considering other legislation. If it has not been approved when the current congressional period ends, an extraordinary congress will then be called for the exclusive purpose of passing the tax code before the next ordinary congress begins in August. Full congressional approval will be subject to a structural performance criterion. The implementing regulations of the new tax procedures code will be issued no later than end-December 2001; this measure will be a structural benchmark under the program. Implementing regulations of the SI reform will also be issued by end-August 2001, subsequent to the appointment of the new Board of the SI; this measure will be a structural benchmark under the program. As in the case of the customs reform, the SI reform aims at removing political influence in the selection of staff and establishing a career system for professional staff recruited on the basis of merit. By September all employees will have to pass a competency examination as a precondition to becoming permanent staff.

13. To control the costs of the pension reform, which has put much pressure on the overall fiscal balance since its inception in 1997, we will close admission to the old system for new retirees by the end of 2001.

B. Monetary, Credit, and Exchange Rate Policies

14. We remain committed to a strong and independent central bank, which will continue to promote the objective of keeping inflation low and adhering to its other core responsibilities as defined in the central bank law. Inflation pressure at the beginning of the year was very low. The central bank will monitor developments in the money market with a view to keeping an adequate supply of liquidity while monitoring the development of its domestic assets. The monetary program is based on currency growth during the year about in line with that of nominal GDP. Some decrease in net international reserves is programmed, which will permit a moderate increase in the net domestic assets of the central bank. In particular, the transfer of a portion of the central bank’s development loan portfolio will facilitate NAFIBO’s support of long-term bank lending to small- and medium-sized producers. The demand for money and credit is expected to begin a recovery in the course of the year, with broad money and bank credit to the private sector both projected to grow (in U. S. dollar terms) by about 3 percent during 2001. 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 (see Table 1).

15. Sound financial sector policies will continue to be pursued during 2001. A draft law for strengthening the financial system, which is currently before congress, would reinforce the role of the Superintendency of Banks in the early detection of bank problems and their prompt correction, and provide for more effective bank resolution procedures. We have decided to postpone the introduction of a funded deposit insurance scheme, pending further study of the appropriate size of the guarantee, in line with international norms, and of the timing of its introduction. Approval of the other financial sector reforms in the draft law by October 2001 will be subject to a structural performance criterion under the program. Implementing regulations of the new law will be issued by the Committee on Prudential Norms (CONFIP) and Superintendent of Banks by end-2001; this measure will be a structural benchmark. Further, as part of the continued phasing in of stronger prudential norms that became effective in September 1999, the twice-yearly adjustments to provisioning requirements will continue this year with increases in June and September 2001.

16. The share of nonperforming loans has continued to rise in the first months of 2001, as the economic recovery in a number of sectors has not yet gained momentum. To encourage banks to reschedule their loans to clients with the capacity to repay, in May 2001 a Special Fund for Economic Reactivation (FERE) was established. It will be financed by government-guaranteed bonds issued by the second-tier bank, NAFIBO, up to a total of US$250 million, and long-term (12-year’s maturity) credit will be granted to banks that reprogram loans, allowing them to meet the productive sector’s need for a lengthening of the maturities of bank loans, while helping banks avoid a maturity mismatch. The credit risk for the restructured loans is retained by the banks, ensuring that only if a bank fails will the government’s guarantee be invoked. It is important to note that every bank negotiates with its borrowers on an individual basis, and the reprogrammed loans will be subject to the supervision of the Superintendency of Banks. The May package also provides one-time subordinated credits from NAFIBO to capitalize banks, up to a total of US$80 million, that will be financed through the transfer to NAFIBO of the development portfolio and corresponding liabilities of the central bank. This capitalization program will be designed to ensure that fiscal and quasi-fiscal costs are minimized, and will be managed within the agreed fiscal program.

17. The government will continue implementing an exchange rate policy aimed at preserving 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.

C. Poverty Reduction and Structural Reforms

18. The poverty-reduction strategy, which incorporates the conclusions of the National Dialogue 2000, identifies a comprehensive agenda for infrastructure projects, social expenditures, and institutional reforms aimed at reducing the incidence of poverty and extreme poverty in Bolivia to 41 percent and 17 percent of the population, respectively, by 2015. The four main components of the strategy are to enhance opportunities of the poor for employment and income; develop the productive capacities of the poor; provide greater security and protection; and increase social participation and integration. Together with these four components, the strategy incorporates two cross-cutting issues—gender equity and sustainable use of natural resources—and develops an institutional framework for its implementation. Upon reaching the completion point under the enhanced HIPC Initiative, the government will begin to direct the new flows of debt relief to all municipalities for poverty reduction projects. As decided in the National Dialogue, 70 percent of this assistance will be distributed to municipalities based on the concentration of poverty, and the remaining 30 percent will be distributed evenly to the nine regional departments (and, within each department, to municipalities also on the basis of poverty incidence). In conjunction with the Catholic Church and other civil groups, a system of social oversight will be established to monitor the use of HIPC resources and to provide feedback for setting future priorities.

19. The program of social policies will be carried out in accordance with the strategy described in the EBRP. Intermediate targets have been set for various social and economic indicators, in order to help evaluate the progress of the strategy in a timely manner, and provide a reference for the social monitoring mechanisms. In line with the EBRP, the public investment program will focus on roads, education (especially at the primary level), primary health care, basic sanitation (especially in rural areas), rural electrification, establishment of clear property rights for agricultural lands, and small scale irrigation.

20. In order to ensure the proper tracking of poverty-related expenditures, we are committed to developing a comprehensive financial management system (SIGMA), which will permit a more effective control of government expenditure generally. This system, already operational at the central government level, will be adapted for use by municipalities. The modifications will be completed for ten large municipalities by August, and for five small- and medium-sized municipalities by October 2001. The systems will be fully operational in these municipalities by mid-2002. The phased implementation will include an additional five municipalities to the system each month, so that by end-2003 about 100 local governments will be operating under the SIGMA. We will also develop, in association with a joint Bank-Fund mission, an action plan to improve public expenditure management for tracking poverty-related expenditures.

21. The government will issue norms that require municipalities to report on poverty-related and social-sector spending, showing separately the use of HIPC resources, as well as a breakdown between current and capital outlays. These data, which will be compiled on a quarterly basis by the Finance Ministry’s programming unit (UPF) for the 111 municipalities that report to it, will help provide for effective mechanisms of social oversight. We will work with the World Bank to plan for a tracking survey of the HIPC resources spent by at least one large city and continue periodic tracking surveys of HIPC resources in other large municipalities in the future.

22. The EBRP provides a significant step toward a medium-term budget framework that will be further developed in the period ahead. The EBRP outlines poverty-related spending needs, which account for a major proportion of all public investment, and it takes account of associated recurrent outlays and provides an accounting framework for ensuring that spending levels and financing needs are in line with the fiscal program. This will be expanded into a more comprehensive medium-term framework in order to improve fiscal planning associated with the implementation of the antipoverty strategy, while maintaining consistency with fiscal sustainability. In 2001, UDAPE will carry out the monitoring and evaluation of the strategy in coordination with the macro group. By the end of the first quarter of 2002, the Ministry of Finance will prepare the methodology and budget guidelines for the preparation of medium-term budget plans. For the 2003 Budget, the line ministries will submit three-year expenditure plans (subject to ceilings prescribed by the Ministry of Finance) with their annual budget request. These plans would form the basis for future budget requests.

23. The government intends to prepare a proposal for a comprehensive tax reform, which would be ready for consideration by the next government. The proposal will be aimed at enhancing the efficiency of the tax system, but it also would provide for a more progressive taxation and a greater revenue-generating capacity, thus supporting the objectives of the EBRP. We expect to have an outline of the tax policy proposal, adapting where appropriate the recommendations of the Fund’s Fiscal Affairs Department, by end-September 2001 and to have a proposal by March 2002. If adopted by the new government, the tax reform could be ready for full implementation by January 1, 2003. It will aim at replacing distortionary taxes with alternative revenue sources, either by increasing existing tax rates or by introducing new, more equitable taxes, such as a personal income tax. It also will address the need to modify the special tax regimes in the commercial and transportation sectors, so that the relatively few large taxpayers in these sectors can be incorporated in the general tax regime.

24. The Government of Bolivia intends to complete its privatization program by the end of 2001. Following the privatization in 2000 of most of YPFB’s assets, the remaining gas networks and the LPG bottling plants will be sold during the fourth quarter of 2001. The government also intends to offer for sale in 2001 the electricity distribution company of Tarija (SETAR), the electricity generation and distribution company of Potosi (SEPSA), and the electricity generation company of Trinidad (COSERELEC).

25. During 2001, the government intends to continue improving the process of fiscal decentralization. The draft law on the National Dialogue provides for a phased transfer of responsibilities for current spending on health and education from regional to municipal governments, so that a better coordination of needs and spending programs can be achieved. Also, the government has established a program of fiscal reform and debt restructuring for municipalities with serious problems of overindebtedness, with the aim of helping them regain control over their finances and improve their fiscal monitoring capability. The government has agreed with five municipalities on financial adjustment programs (PRF), and an additional six PRF programs, including those agreed with the development fund FNDR, are expected to be signed by the end of 2001. Although the performance targets under these programs are annual, progress will be monitored on a quarterly basis, and an evaluation carried out on a semiannual basis. A plan for further reform on fiscal decentralization will be formulated, for which the assistance of the Fund’s Fiscal Affairs Department will be requested.

26. With a view to achieving consensus on a modernization of labor legislation, pilot programs to demonstrate the benefits that a modern labor law would permit are being implemented (for example, hourly work that is agreed upon by private firms and university students).

D. External Sector

27. The external current account deficit is projected to decline from 5.5 percent of GDP in 2000 to 5.1 percent of GDP in 2001. Export growth is expected to reflect continued strong growth of Bolivia’s two major exports, natural gas and soy products. Over the medium term, the current account deficit will remain in the region of 5 percent of GDP, fully covered by foreign direct investment inflows. The central bank will be able to maintain gross international reserves at more than 5½ 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.

28. The government of Bolivia views the favorable 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 their policies, if necessary, to ensure attainment of these medium-term objectives. The government will also seek to open export markets through free trade agreements, with the aim of expanding investment in labor intensive sectors, such as manufacturing and agriculture.

29. The program for 2001 is 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 original HIPC Initiative. The assistance received since September 1998 has helped to reduce the external debt burden to a more manageable level and assists in covering the fiscal costs of structural reforms without compromising social expenditure. However, poverty remains widespread in Bolivia, and the government hopes that official creditors will consider favorably Bolivia’s request for reaching the completion point under the enhanced HIPC Initiative, which grants a further reduction in the net present value of its external debt at end 1998 from close to 214 percent of exports at present to 150 percent of exports. 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 enhanced HIPC Initiative. Bolivia does not have any external payments arrears, and will not incur any new external payments arrears at any time during the arrangement.

Attachments

Table 2.Bolivia: Structural Benchmarks and Performance Criteria, 2001Third Annual Arrangement under the Current PRGF
Performance Criteria/BenchmarkPolicy MeasureTimetable for Implementation
Public Sector Institutional Reform
BenchmarkIssue implementing regulations of the Internal Revenue Service.August 2001
Performance criterionPassage by Congress of a tax procedures code that will, inter alia: (i) shift the adjudication of disputes from judicial to administrative procedures, with the payment of most or all of the disputed amount made prior to judicial review of the case; (ii) establish lax fraud and similar violations as a crime, and (iii) adequate rules about the use of sworn tax declarations and application of the statute of limitations.September 2001
BenchmarkIssue implementing regulations of the new tax procedures code.End-December 2001
BenchmarkStrengthening the customs administration by: (i) assuring the full funding of the customs agency’s budget in the short and long term, and (ii) providing resources to increase the customs unit of the national police to 100 full-time officers.December 2001
BenchmarkAdapt the public financial management system (SIGMA) for use by ten large municipalities.August 2001
Financial sector and capital markets
Performance CriterionApprove financial sector legislation for strengthening bank resolution procedures and facilitating prompt corrective action for banks with problems.October 2001
BenchmarkApprove implementing regulations for the law to strengthen the financial system.December 2001
ATTACHMENT III Technical Memorandum of Understanding for the Third Annual Arrangement Under the PRGF

1. This memorandum sets forth the definitions of the financial and structural performance criteria and benchmarks referred to in the memorandum of economic and financial policies for the third annual arrangement under the PRGF (the “policy memorandum”). The quantitative targets and limits described below for 2001 will be measured as cumulative amounts from December 31, 2000.

Financial performance criteria and benchmarks

2. The deficit of the combined public sector referred to in Table 1 of the policy memorandum is defined as the sum of the net external financing and domestic financing of the nonfinancial public sector as specified below. The nonfinancial public sector comprises the general government (including the central administration, public sector social security institutions, prefectures, municipalities, and other decentralized government agencies) and the nonfinancial public enterprises.

3. Net domestic financing of the combined public sector is the sum of (i) the increase in the net claims of the domestic financial system on the nonfinancial public sector (excluding deposits in the central bank resulting from net disbursements of foreign loans administered by the central bank as trust funds, and including holdings of treasury bills C and time deposits resulting from the assumption of private pension funds as of November 1996); (ii) the cash operating results before distribution to the treasury’s account (or losses, as positive financing) of the Central Bank of Bolivia; (iii) all domestic borrowing from the nonfinancial private sector, including the change in domestic holdings of treasury bills C and bonds, and municipal bonds; (iv) the change in the nonfinancial public sector’s liabilities to the private sector in the form of fiscal certificates (including, but not limited to, the CEDELM, papeles D. S. 21060 and NOCREMINFIN); (v) the increase in the domestic floating debt of the nonfinancial public sector, defined as the liabilities incurred for goods and services received but not yet paid for, including public enterprise liabilities to foreign oil contractors, but excluding claims on and liabilities to other entities within the nonfinancial public sector; and (vi) the net increase in any new debt instruments issued by the government. The floating debt with respect to public sector wages as of the end of each month will include unpaid wage increases and wages for work performed during that month that have not been paid in the first 15 days of the following month. Floating debt will include the floating debt of the ten principal municipalities (nine departmental capitals and El Alto).

4. The net domestic assets of the Central Bank of Bolivia referred to in Table 1 of the policy memorandum are defined as the (i) currency issue less (ii) the net international reserves of the central bank, as defined in paragraphs 8 and 9 below. Medium- and long-term external liabilities of the central bank and net credit to the nonfinancial public sector from the central bank exclude net disbursements of foreign loans administrated by the central bank as trust funds for the nonfinancial public sector. Net international reserves and medium- and long-term external liabilities will be valued at the accounting exchange rate of Bs 6.58=US$1 in 2001. Medium- and long-term external liabilities denominated in foreign currencies other than U.S. dollars will be converted to U.S. dollars as established in paragraph 8 below. For purposes of the monetary program, the operations of the Fondo de Desarrollo del Sistema Financiero (FONDESIF) are consolidated with the central bank, while net credit to the nonfinancial public sector includes holdings of treasury bills C and net credit to the rest of the financial system and to the nonfinancial private sector includes treasury bills B and D held by these sectors.

5. External debt with maturities up to one year referred to in Table 1 excludes normal import credits.

6. Nonconcessional external debt referred to in Table 1 consists of all the outstanding external debt of: (i) the nonfinancial public sector as defined in paragraph 2,1 (ii) the central bank, and (iii) the private sector with official guarantee, excluding: (i) concessional loans with a grant element of 35 percent or more using the most recent OECD commercial interest reference rates (CIRRs) as of April 15, 2001; (ii) changes in central bank liabilities defined in paragraph 7 as part of the net international reserves; and (iii) debt reprogrammed with official creditors.

7. The external debt referred to in paragraphs 5 and 6 above will be understood to mean a current (i.e., not contingent) liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans (i.e., advances of money to obligor by the lender) made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchange of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) supplier’s credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which goods are delivered or services are provided; and (iii) leases (i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title of the property). For the purpose of this technical memorandum, the debt of a lease arrangement is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair or maintenance of the property. Under this definition of debt, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under the above definition (e.g., payment on delivery) will not give rise to debt.

8. The net international reserves of the central bank are defined as the value of (i) its liquid foreign assets; less (ii) all its liabilities to nonresidents (including swaps and the net position under the LATA clearing mechanism) with an original maturity of up to and including one year, plus (iii) the outstanding purchases and disbursements from the Fund (excluding disbursements from the trust fund); and (iv) its net liabilities to the Latin American Reserve Fund, including bridging loans (even those obtained by the nonfinancial public sector) and those obtained by pledging the gold of the central bank. 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, which will be valued at the accounting rate of US$250.00 per troy ounce; and (ii)SDR holdings and the net Fund position which for the program period will be converted into US$ 1.303=SDR 1 for 2001. The following will be excluded from the net international reserves of the central bank: (i) reserve gains resulting from the conversion of monetary gold of the central bank into foreign exchange and (ii) reserve gains resulting from the acquisition of domestically produced gold.

9. The change in net international reserves of the central bank referred to in Table 1 of the policy memorandum will be measured by differences in stocks of the net international reserves, as defined in paragraph 8.

10. The cash operating result of the Central Bank of Bolivia referred to in paragraph 3 above is defined as revenue less expenditure of the bank on a cash basis (cash losses, if negative). The cash expenditure includes current payments to (i) the International Monetary Fund (excluding repurchases and SAF, ESAF and PRGF loan repayments); (ii) other international organizations (excluding amortization and interest on loans administered by the central bank as trust funds for the nonfinancial public sector); (iii) the domestic commercial banks on account of reserve requirements; (iv) interest on certificates of deposit and treasury bills B and D; (v) operating and financial cash expenses of FONDESIF; and (vi) administrative and other current expenditures. For the purpose of consolidation with the nonfinancial public sector accounts, transfers to the treasury in lieu of operating profits will be excluded from expenditures. The cash revenue includes current receipts from: (i) interest on deposits abroad; (ii) the earnings on the central bank’s portfolio with the nonfinancial public sector and the financial system; (iii) interest payments by the treasury on government paper held by the central bank; (iv) interest on LATA accounts; (v) commissions and realized foreign exchange gains; (vi) operating and financial cash receipts of FONDESIF; and (vii) other current receipts. Any sale of fixed assets, including the gold of the central bank, will be excluded from revenue.

11. U.S. dollar-denominated debt, or boliviano-denominated debt with a maintenance-of-value clause, will be converted into bolivianos at an accounting exchange rate of Bs 6.58=US$1. Debt denominated in other foreign currencies will be converted into U.S. dollars as established in paragraph 8.

Adjusters to the program

12. The program for 2001 assumes that the currency issued will amount to the cumulative flows included under “Projected currency issue” in Table 1. The target for net international reserves of the central bank will be adjusted downwards for shortfalls in currency issued up to the designated ceiling on the adjustment.

13. The change in net external financing of the nonfinancial public sector is the sum of (i) external disbursements to the sector; (ii) total HIPC debt relief from refinancing operations; (iii) net disbursements of funds for the nonfinancial public sector administered by the central bank as trust funds; (iv) unpaid current interest obligations; less (v) amortization due by the nonfinancial public sector 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 nonfinancial public sector.

14. HIPC debt relief referred to in Table 1 of the policy memorandum includes only debt relief from (i) the reduction in amortization that results from the stock of debt reduction operations and (ii) rescheduling. In both cases, HIPC debt relief (under the original and enhanced initiatives) is included.

15. The limit on the deficit of the combined public sector described in Table 1 of the policy memorandum shall be reduced (increased) in 2001 by the full amount of the shortfall (excess) between actual and projected HIPC debt relief, as defined in paragraph 14 above.

16. The limits on the net domestic financing of the nonfinancial public sector described in Table 1 of the policy memorandum will be adjusted downward in 2001 by the amount of any overdue obligations to foreign official creditors.

17. The limits on the net domestic financing of the nonfinancial public sector will be adjusted upward in 2001 by the full amount of the difference between projected cumulative net external financing to the nonfinancial public sector and actual cumulative net external financing excluding HIPC debt relief, with a maximum cumulative upward adjustment as specified in Table 1, using the accounting exchange rate of Bs 6.58=US$1. For this purpose, the projected cumulative net external financing to the nonfinancial public sector can be found under “Projected net external financing to the nonfinancial public sector” in Table 1.

18. The limits on net domestic assets of the central bank shall be adjusted downward in accordance with the provision of paragraph 16 above.

19. The limits on the change to the net international reserves of the central bank shall be increased under the provision of paragraph 16 above and in the event that Bolivia falls behind in its payments by the full amount of 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 to such creditors; and (iv) holders of private bonds excluding zero-coupon bonds used in the debt conversion schemes.

Structural performance criteria and benchmarks

20. To meet the commitment related to customs police, as part of the structural benchmark on strengthening the Customs administration, plans will have been established for increasing the customs unit of the national police to 100 full-time officers through provision in the budget for 2002 for the requisite payroll for the 100 officers, starting in January 2002. It is understood that corresponding actions for the recruitment and hiring of these officers will be taken, consistent with this timetable.

21. The structural benchmark on implementation of the public financial management system (SIGMA) will be met through modifications to the financial management system to be finished, so that the system is ready for implementation in the nine departmental capitals and the municipality of El Alto by August 2001.

22. The performance criterion on approval of financial sector legislation will be met through congressional passage of the reforms included in the draft law on the financial system that was before congress as of end-April 2001, with the exception that the introduction of explicit deposit insurance need not be included among the approved reforms.

1The mission met with the ministers of Finance, Agriculture, Economic Development, Sustainable Development and Planning, Justice, Health, Education, Labor, Trade and Industry, and Indigenous Affairs; the President of the Central Bank and Superintendent of Banks; representatives of subnational governments; representatives of donor countries, the private sector, and the banking community; and members of civil society, including officials of the Catholic Church and representatives of trade unions and nongovernmental organizations. The February mission, together with World Bank staff, also held background meetings with the authorities and civil society regarding the Bolivian poverty reduction strategy paper (PRSP). Observers from the Inter-American Development Bank (IDB) and donor countries attended these meetings. The Bolivian delegation in April was led by Vice President Quiroga. The staff team consisted of Messrs. Lewis (Head) and Dunn, Ms. Gonzalez (all WHD), Mr. Ilahi (PDR), and Ms. Parry (FAD). Mr. Kreis, the Fund Senior Resident Representative in La Paz and Mr. Budnevich, MAE Consultant, assisted the December mission, and Mr. Peraza, the new Fund Resident Representative, assisted the February mission. Mr. Serrano (IDA), Mmes. Rubio, and Quintero (both IDB) overlapped with the missions. Ms. Carvalho (Research Assistant-PDR) and Mr. Alfandari (IDA) helped prepare the debt sustainability analysis.
2It was subsequently agreed by creditors that the debt relief would be evaluated in NPV terms as of February 2000, the time of the decision point.
3Using the new HIPC accounting conventions adopted in late 2000, the fiscal deficit was programmed to widen slightly from 3.4 percent of GDP.
4Applicable to capital goods not produced within the Andean Community. For captial goods produced within the region, the duty rate remained at 5 percent.
5The program target for net international reserves permitted a decline of US$85 million over the two-year period 1999-2000.
6Over 90 percent of deposits and credits are denominated in U.S. dollars.
7The balance of payments figures incorporate the new HIPC accounting based on the form in which debt relief is delivered. As a result, much of the HIPC relief, which was previously treated as exceptional financing, is now incorporated above the line.
8With the capitalization of public enterprises, private investors received 50 percent ownership and management control of a public enterprise, in exchange for a commitment to invest in the company. The remaining shares are held by two capitalization funds.
9Issued as EBD/01/48 and Supplements 1 and 2, and EBD/01/49, respectively.
10Disbursements of enhanced HIPC assistance during 2001 are projected to be nearly 1/2 percent of GDP.
11Using previous accounting conventions for HIPC debt relief, and excluding the impact of enhanced HIPC assistance, the fiscal deficit would decline to 3.8 percent of GDP in 2001 from 4.1 percent of GDP IN 2000.
12The central bank manages the exchange rate in daily foreign exchange auctions; it does not pre-announce the rate of crawl.
13The current system and planned improvements for tracking poverty-related expenditure are described in the completion point document, EBS/01/78, Appendix I.
14Sales by public enterprises in relation to GDP fell from over 15 percent in 1995 to less than 1 percent in 2000.
15See EBS/01/78, Table 18.
16Financial benchmarks include limits on the deficit of the combined public sector with sublimits on domestic financing; limits on the net domestic financing; limits on the net domestic assets and ceilings on the net international reserves of the central bank; and limits on the changes in nonconcessional external public debt with subceilings on borrowing of less than one year.
1The grant element of each loan will be assessed only with regard to: (i) the interest rate and repayment schedule of the loan and (ii) any grants or other concessional loans provided by a foreign official entity in connection to the loan in question.

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