IMF Executive Board Concludes 2016 Article IV Consultation with Bolivia

December 22, 2016

On December 9, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation^[1] with Bolivia.

Boosted by the commodity boom, Bolivia has experienced substantial economic and social progress. Growth has been strong, averaging around 5 percent since 2006, and poverty has fallen by a third. During this time, the authorities built up sizable buffers and de-dollarized the financial system to a major extent. However, with Bolivia remaining one of the most commodity-dependent countries in the region, sharply lower commodity prices pose challenges to the implementation of the authorities’ development objectives laid out in their Patriotic Agenda 2025. To advance their plans, the authorities are using their policy buffers, with the sizable fiscal and external surpluses that prevailed over the past decade now turning to large twin deficits.

Real GDP growth is projected at 3.7 percent in 2016, which is still relatively strong by regional standards. A continued supportive fiscal policy and rapid credit growth linked to the Financial Services Law are buttressing activity and offsetting a major drought and temporary supply shocks in gas production. However, the fiscal and external current account deficits will remain wide. In the medium term, growth is expected to converge towards 3.5 percent, consistent with the new commodity price normal, amid persistent twin deficits. Risks to this outlook are tilted to the downside, with the potential for additional weakness in key emerging markets, further dollar strength, and a larger-than-expected impact of the drought. Longer-term uncertainties relate to future oil prices, the extent of natural gas discoveries and export contract renewals, and the possibility of an excessive credit growth volatility.

Executive Board Assessment^[2]

Executive Directors commended the Bolivian authorities for the sound macroeconomic management and poverty reduction during the past commodity boom. While slowing, real GDP growth is projected to remain robust in 2016, on the back of a sizable public investment program and strong credit growth. Looking ahead, Directors concurred that the outlook appears increasingly challenging, with risks tilted to the downside, owing to continued low commodity prices and growing fiscal and external imbalances. Given the still sizable buffers, they encouraged the authorities to plan a carefully measured approach to adjusting to the less favorable external environment.

Directors underscored the risks arising from Bolivia’s large and widening fiscal deficits. They encouraged the authorities to improve the non-hydrocarbons primary balance through streamlining expenditures while increasing their efficiency. Directors recommended an early transition to a credible medium-term fiscal framework to continue to assure debt sustainability, while also accounting for the state of the business cycle and building cushions to absorb volatility in hydrocarbon prices. They advised the authorities to ensure the financial health of state-owned enterprises, exercise greater oversight of their activities, and strengthen the evaluation and transparency of their investments.

Directors stressed the merits of enhancing the independence of the central bank, and advised phasing out the central bank’s exposures to the state-owned enterprises to avoid potential conflicts with the commitment to price stability. Most Directors encouraged consideration of gradually permitting greater exchange rate flexibility, which along with structural reforms, would improve competitiveness, facilitate the adjustment to lower commodity prices, and protect against possible future external shocks.

Directors welcomed the overall soundness of the financial sector, and encouraged the authorities to address the growing vulnerabilities. They considered that the quotas and interest caps set under the Financial Services Law appear to be inducing banks to expand credit rapidly, which could lead to greater risks and undermine financial inclusion. Directors suggested that the authorities modify key provisions of the regulations to reduce distortions and avoid an unnecessary buildup of risk. They saw scope for the authorities to utilize more market-oriented mechanisms to achieve greater financial inclusion. 

Directors agreed that accelerating structural reforms and improving the business climate are central to improving medium-term growth prospects. They encouraged the authorities to improve incentives for hydrocarbons exploration, bring wages back in line with productivity, and address the severe water shortage. 

Directors praised the authorities for the significant declines in inequality and poverty achieved over the last decade, which should be preserved. They considered that better targeting and improved efficiency of social spending could help mitigate the negative impact of lower commodity prices on inequality and poverty.