Press Release No. 97/42

Press Release: IMF Approves Third Annual Loan for Bolivia Under the ESAF

September 12, 1997

The International Monetary Fund (IMF), on September 10, approved the third annual loan for Bolivia in an amount equivalent to SDR 33.7 million (about US$46 million) under the Enhanced Structural Adjustment Facility (ESAF),¹ and an extension of the loan’s period through September 1998 to support the government’s economic and reform program for 1997 and 1998. The loan will be disbursed in two equal semiannual installments, the first of which is available immediately.

Background

Since 1985, Bolivia has implemented a comprehensive program of macroeconomic stabilization and structural reform in line with the medium-term strategy aimed at lowering inflation, promoting faster economic growth, and reducing poverty. In 1995 and 1996, the combined deficit of the overall public sector was extremely low by historical standards, which helped to combat successfully the inflationary pressures that had surfaced in 1995. Although the rate of economic growth of 4 percent in 1996 was less than satisfactory for substantial progress in reducing poverty, a pickup in foreign direct investment in 1996 suggests that structural reforms will begin to bear fruit and that Bolivia is on the road to higher sustained growth.

Medium-Term Strategy and the 1997 Program

The authorities’ medium-term strategy seeks to raise sustainable economic growth and alleviate poverty, while ensuring progress toward lower inflation and a viable balance of payments. The capitalization/privatization program and the pension reform should help achieve these goals, but at the same time these reforms will incur some additional fiscal costs over the next several years. As a result fiscal policy is designed to absorb these costs gradually to ensure that domestic savings continue to increase and to help promote further development of local capital markets, which in turn would support more investment and growth. The government also plans to strengthen its social programs to reduce poverty further. Against this background, the combined public sector deficit is expected to increase to 3.3 percent of GDP in 1997 from less than 2 percent of GDP in 1996 and then decline to 3.2 percent of GDP in 1998 and 2.9 percent in1999. Expected relief under the HIPC Initiative would support the planned expansion in social programs and help cover the cost of structural reforms.

In 1997, fiscal control was sustained during the political transition, and the new government that took office on August 6 endorsed the economic program, which demonstrates the continuity of economic policies in Bolivia. The economic program for 1997 aims to reduce inflation to 7 percent and achieve a GDP growth of 5 percent. There is likely to be a widening of the external current account deficit to 7.5 percent of GDP in 1997 from 5.1 percent in 1996, as imports of intermediate and capital goods rise significantly owing to investment by capitalized enterprises and the construction of a gas pipeline to Brazil. Excluding these imports, however, the deficit would remain at 2.4 percent of GDP.

Structural Reforms

The process of redefining the role of the state in economic activity will be completed under this program, and the new government has reaffirmed Bolivia’s commitment to divesting public enterprises. Immediate plans include the privatization of the state metal smelter company, Vinto, two distribution companies of the electricity company, ENDE, and two remaining small companies of the former regional development corporations.

To further strengthen financial supervision, the central bank has issued regulations to adopt Basle norms for risk weighting of bank assets from mid-1998 and to raise the minimum ratio for capital to risk-weighted assets to 10 percent from 8 percent starting in 1999. By end-1997, it will issue new regulations on reserve requirements. A superintendency of pensions, created in March 1997, will become fully staffed and operational in 1997 to ensure that the new private pension funds can operate effectively as financial intermediaries.

To improve governance and public accountability, the government will intensify judicial reform and reforms of public service and customs. It will continue to strengthen the sectoral superintendencies that regulate public utility sectors and will introduce a program to improve commercial and property registers.

Addressing Social Needs

Although social indicators have improved moderately in recent years, about 70 percent of the total population, and 90 percent of the rural population, live in poverty. To improve the coverage and quality of public services, the government will continue to implement education reform; implement an integrated national health plan which covers, in particular, mothers, infants, and elderly citizens in needy urban and rural areas; accelerate the land titling process to strengthen the property rights of small farms; and increase investment in rural infrastructure, especially in roads, sanitation, and irrigation.

The Challenge Ahead

Bolivia has made significant economic progress since 1985 and the smoothness of the political transition demonstrates the broad acceptance within Bolivia of the direction of economic policies. Thus the challenge for the future is to maintain the strength of macroeconomic policies and to press forward with deepening the structural reforms, with the principal objective of promoting faster sustainable growth and further reductions in poverty.

Bolivia joined the IMF on December 27, 1945; its quota² is SDR 126.2 million (about US$171 million). Bolivia's outstanding use of IMF credit currently totals SDR 176 million (about US$239 million).