IMF Executive Board concludes 2021 Article IV consultation with Bolivia

Washington, DC: On June 14, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Bolivia.

The Covid-19 pandemic has had devastating effects in Bolivia, causing unprecedented disruption and tragic loss of life, with more than 15,000 deaths and 400,000 cases reported to date. The necessary quarantine imposed in March 2020 restricted mobility and access to work, and production declined in all sectors except agriculture, causing GDP to contract 8.8% in 2020. L The dampening of import demand led to an improvement in the current account, which tightened by 3%. percentage points to ½ percent of GDP. Slower growth and falling food prices have compressed inflation to 0.9% in 2020.

To fight the pandemic, the authorities have increased public health spending and provided support to households, businesses and the financial sector. One-time spending for direct relief programs, such as Bono Contra el Hambre, and increased spending on the health sector and social support, have helped mitigate the impact of the pandemic. The cyclical slowdown lowered revenues, bringing the public sector deficit to 12.7% of GDP in 2020. Fiscal expansion contributed to a decline in international reserves, which fell from US $ 6.5 billion to the end of 2019 to 4.7 billion US dollars at the end of March 2021.

The economy is expected to rebound in 2021, with growth of 5.0%, supported by the authorities’ program to vaccinate the entire adult population as quickly as possible. Rising international commodity prices are expected to stimulate recovery in the mining and hydrocarbon sectors, while growth in the agricultural sector is expected to remain strong. Modest improvements in the budget deficit in 2021 are expected, supported by revenue recovery, the phasing out of one-off COVID-19 spending items, and slower wage growth and spending on goods and services.

Risks to the outlook include uncertainties over how the pandemic will unfold and the pace of vaccinations in Bolivia and its major trading partners, as well as the expected rise in global commodity prices. Resorting to financing from international markets could expose Bolivia to changes in external financing conditions, while deferrals of loan payments linked to Covid-19 could increase financial stability risks.

Board assessment [2]

Directors commended the Bolivian authorities for their proactive response to the pandemic, including fiscal support to households and businesses, increased support to the health sector and their considerable efforts to increase immunization. While Directors agreed that macroeconomic policies should continue to support recovery in the near term, they also stressed the importance of preserving medium-term fiscal and external sustainability while fostering a more inclusive and greener economy.

Directors welcomed the firmness of the authorities’ fiscal response to the crisis. They recommended maintaining the targeted financial support needed for affected households while the health crisis continues. At the same time, Directors stressed the need to place short-term political efforts in the context of a clear medium-term plan that brings the budget deficit to a sustainable level in the medium term and stabilizes the debt-to-GDP ratio. They stressed that fiscal consolidation should include measures to mobilize revenue and to rationalize and refocus spending in order to continue to improve social welfare and reduce poverty.

Directors noted the authorities’ preference for maintaining the current exchange rate regime, which has resulted in low and stable inflation. At the same time, they encouraged the authorities to further explore the potential benefits and necessary preconditions for greater exchange rate flexibility in the medium term, noting that this transition would require substantial preparatory work but could increase resilience to foreign exchange. exogenous shocks, prevent a further loss of reserves and increase the competitiveness of non-hydrocarbon industries. Directors welcomed the support provided to the financial sector during the pandemic through a loan deferral program and encouraged the supervisory authority to strengthen its monitoring of banks’ profitability, liquidity and capital while the moratoriums are in effect.

Directors encouraged the authorities to implement structural reforms that promote private domestic investment and foreign direct investment. To this end, they recommended phasing out restrictions on prices and exports, relaxing credit quotas and interest rate ceilings, reducing subsidies to public companies in the hydrocarbon sector, and responding to social equity concerns through targeted tax support. Directors noted that resolving governance issues and uncertainty in the regulatory environment are critical to supporting job creation and boosting long-term growth.

Directors welcomed the impressive reduction in poverty achieved since the mid-2000s and noted that further progress in poverty reduction will depend on increased support to the education and public health systems. They welcomed the authorities’ continued investment in greener energy sources to diversify domestic energy consumption away from fossil fuels, provide new sources of income and support economic recovery.