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IMF Concludes Article IV Consultation with Bolivia

International Monetary Fund
Published Date:
June 2001
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On June 8, 2001, the Executive Board concluded the Article IV consultation with Bolivia.1


Bolivia has a long track record of sound macroeconomic policies and substantial structural reforms, which have made it possible to reduce inflation to low single digits, strengthen the balance of payments, and attain real GDP growth of 4 percent a year during the 1990s. The public sector deficit averaged 3-4 percent of GDP during this period, rising in the latter part of the decade as a result of the 1997 pension reform; the cost of replacing the pay-as-you-go pension system with capitalized private pension funds—a reform with long-term benefits in terms of a sustainable fiscal position—averaged 3½ percent of GDP in 1997-99, and exceeded 4 percent of GDP in 2000. Foreign direct investment rose sharply during the latter part of the 1990s, and gross international reserves increased to 7½ months of imports. Bolivia’s structural adjustment program has included extensive privatization of public enterprises, financial sector liberalization, independence and recapitalization of the central bank, fiscal decentralization, and trade liberalization. However, poverty is still widespread, with nearly two-thirds of the population living below the poverty line as of 1999.

External shocks and weak domestic demand resulted in the stagnation of the economy in 1999, when real GDP growth fell to 0.4 percent. A sharp depreciation of the Brazilian real and falling commodity prices led to a decrease in exports, while the successful coca eradication program resulted in a permanent decline in incomes in the informal sector of 3 percent of annual GDP or more, adversely affecting domestic demand. Inflation declined to 3.1 percent during 1999, the lowest annual rate achieved in over 30 years.

The economic recovery in 2000 was weaker than expected (2.4 percent growth of real GDP), owing to the sluggish domestic demand. Coca eradication continued to reduce incomes in the informal sector, while periods of social unrest temporarily disrupted transportation throughout the country, causing production losses and temporary increases in consumer prices. Inflation was held to 3.4 percent for the year as a whole. The fiscal deficit widened modestly in 2000 (to 3.7 percent of GDP), owing in part to a tax revenue shortfall and an economic stimulus package of selected tax breaks and emergency spending measures. The external current account deficit narrowed in 2000 to 5½ percent of GDP as exports staged a strong recovery, led by natural gas and soybeans. A substantial improvement in the net foreign asset position of the banks contributed to a lower financial account surplus.

Some important advances were achieved in the areas of tax administration and budget management in 2000, aimed at improving transparency and governance. The reforms of the customs and domestic tax administrations, and the expected passage of the tax procedures code presently being considered by congress, are expected to improve efficiency significantly and strengthen tax collections. Of other structural reforms that are underway, financial sector reforms included in a draft law currently before congress are among the most important.

The banking system has contracted since late 1999. Broad money and credit to the private sector both fell in U.S. dollar terms during 2000 (Bolivia’s financial system is highly dollarized), and the share of nonperforming loans net of provisions has risen to some 8% percent at end-March 2001. To encourage bank lending, the government introduced measures in 2000 that offered regulatory forbearance on rescheduled loans and low-cost funds and loan guarantees from a state-owned second-tier bank (NAFIBO). In May 2001, the government approved a measure allowing NAFIBO to provide credit to banks—to further encourage them to reschedule loans—up to a total of US$250 million, or 3 percent of GDP, and to issue subordinated credits to encourage bank recapitalization.

In February 2000, the Boards of the IMF and IDA agreed that Bolivia was eligible for debt relief of US$854 million in net present value (NPV) terms under the enhanced HIPC framework, which is additional to the assistance of US$448 million in NPV terms that Bolivia received under the original framework in September 1998. In 2000, conditions for the floating completion point under the enhanced framework were established, according to which Bolivia would maintain sound economic policies and develop a comprehensive poverty reduction strategy in the context of a broad participatory process. The National Dialogue 2000 on poverty reduction entailed extensive participation by civil society and local governments, and much of the Dialogue’s main conclusions are contained in the Bolivian poverty reduction strategy paper (PRSP), which was published in March 2001. The overall goal of the PRSP is to reduce the incidence of poverty by a third and extreme poverty by a half, by 2015.

The authorities’ economic program assumes real GDP growth of 4 percent, led by a further expansion of natural gas exports and a pickup in domestic demand, and inflation of 4-4½ percent during the year. The fiscal deficit is programmed to remain at 3.7 percent of GDP, two-thirds of which is to be financed with concessional external credits. The program projects a recovery in broad money and in bank 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, with a comfortable level of gross reserves at the year’s end, equivalent to 5½ months of imports of goods and services.

The structural reforms programmed for 2001 are focused primarily on tax and customs administration, budget management, and fiscal decentralization, with the aim of enhancing transparency, improving the monitoring of expenditure, particularly for local governments, and increasing tax revenue. The authorities also will seek congressional approval of financial sector reforms.

Executive Board Assessment

Executive Directors commended Bolivia for its prudent macroeconomic policies, which have made it possible to achieve low inflation, advance toward a sustainable external position, and realize moderate economic growth and per capita income gains in the 1990s. However, Directors expressed concern about the recent slowdown in economic activity, and noted that progress in lowering poverty has been limited. Nevertheless, they welcomed the authorities’ commitment to give greater priority to poverty reduction, as set out in the PRSP.

Directors considered that the protracted sluggishness of economic activity over the past two years is having adverse effects on employment and poverty and on social spending. They noted the weakness in the economy, which appears to have been caused in part by the large decrease in informal sector incomes arising from the successful coca eradication program and the slowing of contraband trade in the wake of the customs reform. Directors encouraged the authorities to maintain sound macroeconomic policies in order to foster greater confidence, while also protecting social spending for the highest priorities set out in the PRSP.

Directors noted the importance of increasing public sector savings, mainly through substantially higher tax revenues over the medium term, for achieving planned public investment levels while narrowing the fiscal deficit. However, the lack of concrete policy measures in this area was a weakness that needs to be addressed. They emphasized that this will require significant tax reform, in addition to planned improvements in tax administration, to enhance the revenue-generating capabilities of the tax system as well as to increase its efficiency and progressivity. In this regard, Directors welcomed the proposed improvements to the tax code that are currently before the congress. Some Directors encouraged the rapid development of greater revenue generating capacity for the local governments, to strengthen fiscal decentralization.

Directors considered the weakening of bank performance indicators, including the rise in nonperforming loans since 1999, to be a symptom of the economic slowdown. They noted that there were some mitigating factors that would help banks to withstand stress, such as increases in capital and in loan-loss provisions, a substantial improvement in banks’ net foreign asset position, and stricter prudential rules on loan classification. Nevertheless, Directors stressed the need for close monitoring by the banking superintendency, and in this regard, underscored the importance of early passage of financial sector legislation that would facilitate prompt corrective action for banks with problems and a strengthening of bank resolution procedures. A number of Directors expressed concern about the implications of measures to foster the rescheduling of bank loans, both for their potential fiscal costs and because of potential moral hazard.

Directors observed that there had been delays with the structural agenda over the last couple of years, and stressed the importance of advancing expeditiously with fiscal reforms. They recognized the need to strengthen public administration and improve governance, and to improve the efficiency of customs and domestic tax administrations, including through the prompt passage of the tax procedures code now in congress. Directors expressed concern that the tax and labor market reforms have been delayed for a year, and hoped that they would be brought back into the reform agenda as soon as possible. They also stressed the need to implement planned improvements in fiscal monitoring by local and regional governments, and to build up capacity for effective budget management and expenditure control.

Directors agreed that the current exchange rate regime was appropriate in Bolivia’s circumstances, as it allowed for adaptation to terms-of-trade and other external shocks. Several Directors suggested, however, that an in-depth study of the exchange rate regime be undertaken to shed more light on its future appropriateness. Directors encouraged the authorities to monitor exchange rate developments, and to be prepared to respond to changes in the external environment with changes in the rate of crawl, if needed. Monetary policy was seen to be prudent and consistent with the price and balance of payments objectives of the authorities. They welcomed the open trade and payments system, and commended the authorities on the improvements in customs procedures that place Bolivia among countries with more open trade regimes.

Directors observed that, owing to improvements in data on municipal debt, the fiscal data for 1998 were revised, leading the authorities to conclude that the performance criteria for the fiscal deficit and domestic financing for that year were not observed, as previously believed. Directors welcomed the improvements in data collection and indicated that these revisions did not affect their assessment of Bolivia’s policy performance. They encouraged the authorities to improve the timeliness of statistics on the national accounts, and to strengthen the reporting of labor market statistics, particularly on unemployment.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report for the 2001 Article IV Consultation with Bolivia is also available.

Bolivia: Selected Economic Indicators
(Annual percentage change)
Income and prices
Real GDP5.
Real domestic demand7.76.6-1.81.6
CPI inflation (end-of-period)
(In percent of GDP)
Investment and savings
Gross domestic investment19.623.118.918.8
Gross national savings12.615.313.013.3
Combined public sector
Overall balance-3.3-4.6-3.4-3.7
Foreign financing2.
Domestic financing0.
(Annual percentage change, unless otherwise indicated)
Money and credit
Credit to private sector19.223.84.1-2.6
External sector
Current account balance (US$ million)-553-667-488-464
(percent of GDP)-7.0-7.8-5.9-5.5
Of which: trade balance-634-879-704-600
Capital and financial account balance656792515425
Of which: foreign direct investment8769551,014731
Overall balance10312526-39
Exceptional financing031616
Gross official reserves 1/
Public sector external debt (US$ billion)2/3/
(percent of GDP)2/3/56.654.754.951.8
Debt-service ratio2/4/3/25.228.619.018.4
Sources: Central Bank of Bolivia; Ministry of Finance; and Fund staff estimates.

In months of imports of goods and services in the following year. Does not include Bolivia’s capital contribution to the Latin American Reserve Fund.

Debt and debt service reflect original HIPC assistance, which became available in 1998.

Includes obligations to the Fund and debt with public guarantee.

Debt service on public sector medium- and long-term external debt, in percent of exports of goods and services.

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

In months of imports of goods and services in the following year. Does not include Bolivia’s capital contribution to the Latin American Reserve Fund.

Debt and debt service reflect original HIPC assistance, which became available in 1998.

Includes obligations to the Fund and debt with public guarantee.

Debt service on public sector medium- and long-term external debt, in percent of exports of goods and services.

1Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basic for discussion by the Executive Board. At the conclusion of the discussion, the managing director, as Chairman of the Board, summarizes the views of Executives Directors, and this summary is transmitted to the country’s authorities. This PIN summarizes the views of the Executive Board as expressed during the June 8, 2001 Executive Board discussion based on the staff report

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