La Paz, Bolivia
May 25, 2001

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,

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.

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.

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 1½ 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 Cristóbal 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.

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.

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 (interrupción del período de prescripción) 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

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 CEDEIM, 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 LAIA 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 LAIA 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.