Press Release No. 15/571

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with Bolivia

December 18, 2015

On November 20, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Bolivia.

Benefiting from the commodity boom, Bolivia has achieved strong economic performance and poverty reduction over the past decade. Real GDP growth has averaged about 5 percent since 2006, and the poverty ratio has declined by 16 percentage points. However, given Bolivia’s dependence on commodities, lower commodity prices pose significant challenges to deliver the objectives in the Patriotic Agenda 2025, while maintaining debt and external sustainability.

Real GDP growth is projected to stay relatively strong at 4.1 percent in 2015, despite the sharp decline in oil prices that is starting to have an impact. A sizable public investment budget, strong credit growth to the private sector, and robust private consumption are expected to support activity. Growth is expected to decelerate to 3.5 percent over the medium term, as the full impact of the new commodity price normal is felt and given impediments to enhancing private investment. The fiscal deficit is projected to widen and the current account balance to swing into deficit in 2015, and twin deficits are expected to persist over the medium term. The authorities are finalizing a 5-year development plan (Plan Quinquenal), including public investment projects in a number of areas to catalyze growth.

While headline financial indicators are solid, the 2013 Financial Services Law is affecting the allocation of credit flows. Minimum credit quotas to productive and social housing sectors have accelerated loans to those sectors.

Key external risks include a slowdown in key trading partners, additional softness in oil prices, and further dollar strength. Bolivia-specific risks center on uncertainties related to natural gas reserves and long-term export contracts, and large credit cycles under the new financial services law.

Executive Board Assessment²

Executive Directors commended the Bolivian authorities for a prudent macroeconomic management which has supported strong non-inflationary GDP growth and greatly improved social outcomes over the past decade. Looking ahead, Directors agreed that the likelihood of a protracted period of depressed export prices poses challenges to the outlook and risks are tilted to the downside. They noted, however, that the sizable policy buffers built during the commodity upcycle allow for a gradual approach in adjusting to a less favorable external environment, and provide a strong base for further structural and institutional reforms.

Directors concurred that prospective budgetary deficits in the context of slower growth and tighter global financial conditions may have an adverse impact on Bolivia’s fiscal position. Accordingly, they encouraged the authorities to improve the non-hydrocarbons fiscal balance through a variety of tax and expenditure measures. A better articulated medium-term fiscal framework centered on a clear fiscal anchor would enhance the credibility of the authorities’ fiscal plans. In this regard, Directors also recommended a more comprehensive system for monitoring the quasi-fiscal activities of state enterprises to better manage fiscal risks.

Directors welcomed the effectiveness of the authorities in anchoring inflation expectations and promoting de-dollarization. They shared the view that progress on these fronts would be cemented by granting greater operational independence to the central bank in the new law under preparation. The credibility of monetary policy would also be boosted by relegating direct lending to a separate sovereign wealth fund with transparent investment rules and strong governance. Directors generally saw merit in creating conditions for a move toward greater exchange rate flexibility at an appropriate time to facilitate adjustment to large external shocks and enhance competitiveness.

While noting the overall soundness of Bolivia’s financial sector, Directors pointed to risks stemming from some regulations set under the Financial Services Law, particularly credit quotas and interest rate caps. They encouraged the authorities to closely monitor developments and modify the regulations appropriately if financial imbalances emerge. In this context, compilation of a real estate price index would greatly aid policy evaluation and design.

Directors agreed that increasing private investment is essential to support growth both in the near and the longer term. In this regard, they welcomed progress in strengthening the legal framework and recommended further efforts in this area. Directors also encouraged the authorities to address long-standing structural impediments to private investment, notably inflexible labor markets and pervasive state-intervention in product markets.

Directors commended the authorities for the significant declines in inequality and poverty achieved over the past decade. In order to preserve these gains under an expected tighter fiscal envelope, they recommended well-targeted social transfers with a focus on the quality of education and healthcare.