IMF executive board concludes 2022 Article IV consultation with Bolivia

WASHINGTON, USA –  The executive board of the International Monetary Fund (IMF) concluded the Article IV consultation  with Bolivia on September 14, 2022 and endorsed the staff appraisal without a meeting on a lapse-of-time basis.  

While the Covid-19 pandemic has continued to cause disruptions and tragic loss of life in Bolivia, the economic recovery from the pandemic-driven downturn has been faster than expected. Following a contraction of 8.7 percent in 2020, the economy recorded growth of 6.1 percent in 2021, led by mining, construction, and agriculture. Higher global commodity prices have boosted export receipts, helping to raise the current account to a surplus of 2 percent of GDP in 2021. Inflation has been low, at 1.9 percent yoy in June 2022, supported by strong domestic food production, the boliviano’s de facto peg to the US dollar, and subsidies and price controls for fuel and food.

Increased revenues from the mining sector and the unwinding of several pandemic-related emergency measures contributed to a reduction of the fiscal deficit, from 12.7 percent of GDP in 2020 to a still-high 9.3 percent of GDP in 2021. Although higher prices for Bolivia’s natural gas exports have provided some fiscal support, this effect has been outweighed by a decline in natural gas output and the additional subsidy expenditures needed to maintain fixed retail fuel prices. More than one-third of the fiscal deficit has been financed by the central bank, pressuring Bolivia’s stock of international reserves, which have declined from US$5.28 billion at the end of 2020 to US$4.3 billion at end-July 2022.

Growth is projected at 3.8 percent yoy in 2022, slower than in 2021 but sufficient to bring GDP back to its pre-pandemic level by late in the year. Sustained elevated commodity prices will continue to boost mining and agricultural receipts. Inflation is projected to rise to 4.2 percent yoy by the end of the year, as international prices partially feed through to food and energy. The high cost of maintaining fuel subsidies, estimated at 3.7 percent of GDP, is projected to push the fiscal deficit of 8.5 percent of GDP in 2022, close to the level of the previous year.

Risks to the outlook include uncertainties over the impact of the war in Ukraine, including the possibility of higher energy prices, which could raise subsidy costs and feed domestic inflation. With its substantial financing needs, Bolivia also faces risks from changes in external financial conditions associated with a global tightening cycle. Although the financial sector appears to have come out of the pandemic in satisfactory condition, vulnerabilities built up during a period of blanket loan deferrals may yet emerge. A resurgence of the pandemic could have negative effects on public health and economic growth.

Executive board assessment

In concluding the 2022 Article IV consultation with Bolivia, Executive Directors endorsed the staff’s appraisal, as follows:

Bolivia has made great strides in reducing poverty. Per capita GDP has more than tripled since 2005, while social programs and higher wages have improved income distribution. From 2000 to 2021, the poverty rate fell from 66.4 to 36.3 percent, extreme poverty declined from 45.3 to 11.1 percent, life expectancy rose from 62 to 72 years, and the primary school completion rate increased from 84 to 99 percent. These were major and enduring achievements.

A meaningful fiscal adjustment will be required to restore debt sustainability, eliminate monetary financing, and rebuild international reserves. If Bolivia chooses to retain its exchange rate peg, restoration of macro sustainability will require reducing the primary deficit to around 1.5 percent of GDP through a credible medium-term plan. The government would need to restrain expenditures, including by eliminating the year-end wage bonus, constraining the growth in public sector wages, limiting the growth in public investment, and scaling back subsidies. The tax base can be broadened by addressing informality, strengthening tax and customs administration (through IT modernization and improved governance), and adjusting tax policy to increase personal income taxes on higher income households. Bolivia’s external position is moderately weaker than the level implied by fundamentals and desirable policies.

Fuel subsidy reductions will need to be combined with compensation for the poorest deciles of the population. Successful implementation of an increase in domestic fuel prices will require recycling a portion of the budgetary savings to cash transfer programs that are targeted to the poorest deciles of the populations. An effective communication strategy will be critical to raise awareness of the regressive nature of energy subsidies and the benefits of shifting to market-based pricing of energy combined with targeted cash transfers.

Bolivia would benefit from greater central bank independence and a carefully sequenced transition to a more flexible exchange rate. Greater central bank independence and institutional capacity would support macro and financial stability, and facilitate exchange rate adjustments, when needed. Increased exchange rate flexibility would help preserve international reserves, reduce the current exchange rate overvaluation, and provide net welfare gains. Adoption of a flexible exchange rate alongside an inflation targeting monetary framework would substantially increase resilience to market shocks. This transition should be prepared and communicated carefully, coordinated with other macroeconomic policy measures, and accompanied by institutional independence for the central bank.

The BCB should reduce its dependence on currency swaps as a source of reserves. If fiscal reforms can be put in place, balance of payments pressures should subside and reserves can be built from external sovereign borrowing and direct purchases on the market so as to reduce the reliance on swap arrangements with commercial banks. In addition, steadily lengthening the maturity of those swaps that do remain would help lessen vulnerabilities. If needed, other mechanisms could be adopted to ensure that domestic liquidity remains adequate.

The growing interdependence of the pension system and the government should be monitored. Consideration should be given to diversifying pension fund assets into a wider range of assets – potentially including foreign currency assets – to raise average returns and diversify exposure. However, this would need to be preceded by a transition to professional and independent management of pension fund portfolios and would, even then, need to be pursued carefully so as not to exacerbate external imbalances and vulnerabilities.

In the wake of the substantial loan restructuring during the pandemic, banks’ loan books should be carefully monitored, to quickly identify signs of a deterioration in credit quality. In addition, a range of credit quotas and interest rate caps continue to constrain bank profitability; they should be gradually phased out. The regulator should closely monitor banks’ capital adequacy and liquidity positions and further progress in anti-money laundering initiatives should be pursued ahead of the FATF assessment that is expected to begin later this year.

Programs to reduce smuggling and informality would help to improve governance. The aim should be to shift this activity into the formal economy, broaden the tax base, and improve the ability to track economic developments. Reforms to tax and customs administration can help by tracking goods and improving compliance with import procedures. These efforts will play an important role in improving governance, where several priority reform areas remain.

Supply side reforms are needed to boost investment in hydrocarbons and mining and encourage the development of new industries. The hydrocarbons law should be reformed to incentivize new investments and to scale back existing requirements for producers to sell below cost to the domestic market. The mining laws should be revised to incentivize private investment in lithium and other sectors. Other reforms, including the loosening of export limits and price controls, the use of international arbitration, the development of a one-stop shop to assist foreign investors, and the removal of credit quotas and interest rate ceilings would all be welcome.

Bolivia should increase the share of electricity generation from renewable energy and facilitate an increase in green investments.

Bolivia can expand on its recent NDC commitments by setting clear emissions targets, accelerating the development of the nation’s lithium resources, and presenting itself as a destination for green investment.