Press Release No. 03/46

Press Release: IMF Approves One-Year US$118 Million Stand-By Arrangement for Bolivia

April 2, 2003

The Executive Board of the International Monetary Fund (IMF) today approved a one-year SDR 85.75 million (about US$118 million) Stand-By Arrangement for Bolivia to support the country's economic program through April 2004. The approval opens the way for the immediate release of SDR 42.88 million (about US$59 million).

Following the Executive Board discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, said:

"The Bolivian authorities are putting in place a program to stabilize the economic situation in 2003 and lay the basis for sustained economic growth and poverty reduction. The core elements of the economic program are fiscal consolidation, a strengthening of the banking and corporate sectors, and protecting and making more efficient social safety net spending.

"The 2003 budget begins a phased reduction in the fiscal deficit consistent with putting the public finances on a sustainable basis over the medium term. The program relies on a balanced package of measures, especially higher taxation of the hydrocarbon sector, introduction of a new tax procedures code, collection of tax arrears, and control of public spending. If needed, the government stands ready to rephase low-priority public investment, while protecting the social safety net and other poverty-reducing expenditures, in order to achieve the fiscal targets under the program.

"The authorities are introducing a coordinated strategy to strengthen the corporate and banking sectors and, thereby, help restore economic growth. The main elements of this strategy are the appointment of a high level management committee; modernization of the bankruptcy law; introduction of a framework for voluntary, out-of-court corporate restructuring agreements; and strengthening of the regulatory framework for the banking sector. The strategy should improve the corporate sector's financial position and thereby also strengthen the banking sector.

"The government has carefully sequenced reforms to address social tensions and restore public confidence. It is working with Congress and civil society to help advance its fiscal and legislative agenda, and to develop the medium-term structural reforms that could be supported as soon as possible by a successor arrangement under the Poverty Reduction and Growth Facility. The participatory approach is necessary to build broad popular support for the government's economic reforms and stabilization measures. These reforms and measures are crucial for raising Bolivia's economic growth prospects, creating job opportunities, and reducing poverty.

"In the context of the difficult economic and political challenges ahead, the Fund stands ready to work in close cooperation with the Bolivian authorities as they take firm steps to ensure the success of the economic program supported by the Stand-By Arrangement, and as they develop their medium-term structural reform program," Ms. Krueger said.

Recent economic developments

Real growth in Bolivia has been weak for the last four years at 1½ percent on average. Adverse shocks included the impact of coca eradication on incomes, the impact of low metal export prices on mining output and foreign direct investment, and contagion from the regional financial and economic developments. The economy's vulnerabilities have been heightened by fiscal imbalances and highly dollarized financial and corporate sectors.

The external and current account deficit remained relatively high at 4 percent of GDP in 2002 despite stagnant economic activity. Foreign direct investment was also very high at more than 7 percent of GDP, although it has been declining since 1999.

The fiscal deficit more than doubled over the last two years to 8¾ percent of GDP in 2002. Revenues were restrained by weak domestic demand, delays in tax reforms, and a freeze on domestic fuel prices. At the same time, expenditure surged reflecting increased real wages and a stepped-up public investment program.

Monetary policy was accommodative of a large government financing need. In addition, the central bank had to contend with two rounds of deposit instability, in mid-2002 and in February 2003, that left the dollar deposit base 17 percent below its level at end-2001.

Financial vulnerabilities in the highly dollarized financial system have increased significantly. Banks recorded losses in two out of the three last years and the average nonperforming loan ratio more than doubled in this period, although all banks in the system report capital adequacy ratios in excess of the minimum requirement.

The nonfinancial public sector debt rose sharply in 2002 to 62¼ percent of GDP. Both domestic and nonconcessional external debt have increased rapidly to finance the large fiscal deficits. As a result, debt indicators have deteriorated significantly from the path envisaged in 2001.

Program Summary

The economic program for 2003 focuses on stabilizing the economy after the recent civil disturbances and resulting financial instability, and laying the basis for a return to growth. The program projects a gradual economic recovery led by the hydrocarbon sector, with real GDP growth reaching about 3 percent in 2003, and rising to 4-5 percent in the medium term. Growth will also be fostered by the boost to manufacturing, in particular textiles, from the expanded preferential access to the US market for the Andean countries; and by agricultural growth benefiting from improved irrigation systems and road infrastructure.

The fiscal program aims to reduce the combined public sector deficit from 8¾ percent of GDP in 2002 to 6½ percent of GDP in 2003. The authorities intend to sustain the adjustment over 2004-05, so that the deficit can fall to 3-3½ percent of GDP by 2005. The program is based on the 2003 budget and will allow for an increase in social spending financed by higher external funding from multilateral and bilateral sources. The authorities have emphasized that the budget emerged from consensus-building efforts with key groups of public sector employees and within the legislative branch. The fiscal program depends on a combination of revenue measures, such as the elimination of some tax exemptions and a broadening of the base of some taxes, and expenditure measures that involve the reduction of the size of government and savings in pension costs.

The monetary program in 2003 will be conducted through control of the central bank's net domestic assets and targets a small buildup of US$65 million in net international reserves. Some increase in broad money in US dollar terms can be expected to take place as confidence returns to the economy and bank deposits recover, providing room for a gradual resumption of private credit.

As part of strengthening the corporate and banking sectors, the authorities intend to put in place the legal framework, mechanisms, and instruments needed to carry forward the corporate restructuring process. A flexible out-of-court workout mechanism will be introduced, coupled with modern formal bankruptcy proceedings. Plans to strengthen financial regulation over the next several months are also part of the program. This includes putting into place a framework for bank resolution and clarifying the institutional responsibility for the broad oversight over the financial sector.

Bolivia joined the IMF on December 27, 1945; its quota is SDR 171.5 million (about US$236 million). Bolivia's outstanding use of IMF credits totals SDR 142 million (about US$195 million).