Press Release No. 98/48

Press Release: Bolivia to Receive US$760 Million in Debt Relief

October 4, 1998

The International Development Association (IDA) and the International Monetary Fund (IMF) agreed (with the support of the Inter-American Development Bank (IDB)—Bolivia’s largest external creditor) that Bolivia has met the requirements for receiving close to US$760 million in nominal debt service relief from its official external creditors under the Heavily Indebted Poor Countries (HIPC) Initiative. In net present value terms, total relief from all of Bolivia’s creditors is worth about US$450 million, equivalent to over 13 percent of total debt outstanding at the end of 1997. Bolivia has established a strong track record of macroeconomic performance and policy reform, and is the first country in Latin America to receive debt relief under the Initiative (the second country overall).

In view of Bolivia’s heavy debt service burden in the coming years, the exceptional assistance from the IDB, the IDA, the IMF, and other major multilateral creditors will be significantly frontloaded, allowing the debt service ratio to fall below 20 percent of exports starting in 1999. The planned debt reduction will enable a sustained increase in social sector spending of almost 1 percent of GDP over the next four years, free up resources for investment, and allow Bolivia to consolidate its adjustment efforts.

The IDB’s assistance to Bolivia will amount to about US$250 million (US$155 million in net present value terms) and will be provided through a combination of: (i) a write-off of selected concessional loans from its Fund for Special Operations, and (ii) the payment of part of interest obligations on selected loans from its ordinary capital using its Intermediate Financing Facility. The IDB’s assistance will be significantly frontloaded, with over 60 percent of the relief (in net present value terms) delivered by 2003.

The IDA will frontload its assistance of about US$65 million (US$54 million in net present value terms) by covering the entire debt service due to the IDA through the use of resources from the HIPC Trust Fund until these funds, including interest earned, are exhausted. The IDA’s assistance under the Initiative will average about US$18 million a year during 1999–2001.

IMF assistance of US$30 million (US$29 million in net present value terms) will take the form of a grant deposited in an interest-earning escrow account and will be used to meet Bolivia’s debt service to the Fund under an agreed schedule. The assistance will be delivered over the period 1998–2002, with over 85 percent of the relief delivered by end-2000. The assistance willcover over 30 percent of Bolivia’s debt service to the Fund through the year 2000.

Bolivia has experienced a dramatic improvement in its macroeconomic performance over the past decade. Inflation fell from hyperinflationary rates in 1985 to less than 7 percent in end-1997; international reserves and foreign direct investment have increased significantly; and the external debt burden—while still high—has eased significantly. Although growth has increased from virtual stagnation in the previous decade to an average of about 4 percent in real terms, it remains below potential, and poverty is still pervasive.

The Bolivian government has therefore developed a program that seeks to achieve a significant reduction in poverty through faster economic growth and stronger social programs. The cornerstone of the program is structural reform, with an emphasis on improvements in education, health, fiscal decentralization, and governance. Other reforms include completing the process of privatization, deepening domestic capital markets, and making labor markets more flexible. The authorities expect these policies to boost economic growth to 5½ to 6 percent a year over the medium term.

Since the HIPC Initiative was approved in September 1996 as a means of dealing comprehensively with the debt burdens of the world’s poorest countries, seven countries have qualified for exceptional assistance. Total nominal debt service savings projected for these countries is about US$6 billion. Assistance to Uganda and Bolivia, the only two countries that have so far obtained debt relief under the Initiative, amounts to about US$1.5 billion in nominal terms.