Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV consultation [1] for Bolivia on May 2. The authorities have consented to the publication of the Staff Report prepared for this consultation. [2]
Bolivia's real GDP growth has moderated to 2.1 percent in the first three quarters of 2024, driven by a decline in hydrocarbons production, a slowdown in services activity, and a drop in soy crops and related manufacturing due to 'El Niño' effects. The economy has also faced disruptions from road blockages and scarcity of foreign exchange (FX)―given critically low international reserves―fuels and other critical inputs. High import costs, weak agricultural production, and road blockages pushed inflation to 10 percent at end-2024, the highest level in over a decade. Unemployment has fallen, but underemployment is rising, and real incomes retrenched on average. The combination of FX shortages, slowing activity, and depreciation of the parallel exchange rate resulted in a compression of the current account deficit to 2.7 percent for 2024. The fiscal deficit surpassed 10 percent of GDP in 2023-24 with declining hydrocarbon revenues, tax exemptions, increased social spending, and higher interest payments. The deficit has been mostly financed by the central bank amid tight external financing constraints. Public debt has increased to 95 percent of GDP.
The financial sector remains well buffered. However, deposits declined in real terms and net interest margins are pressured by interest rate controls, limiting banks' ability to raise loan rates amid rising inflation and slowing credit growth. Banks have experienced improved profitability from FX trading gains, resulting in a strengthened capital adequacy ratio of 13.5 percent in 2024, while non-performing loans have remained low at 3.2 percent of total loans.
Executive Board Assessment [3]
Executive Directors agreed with the thrust of the staff appraisal. They expressed concern over Bolivia's acute fiscal and external imbalances and unsustainable policy mix and called for urgent actions to address the overvalued exchange rate, bolster foreign reserves, and implement sustained fiscal consolidation. Directors cautioned that inaction could lead to a painful disorderly adjustment and underscored the Fund's readiness to support the authorities through its various activities. They encouraged the staff to continue to closely engage the authorities on the needed adjustments. Careful communication of the policy reforms to stakeholders would be pivotal to enhance their acceptability.
Directors stressed that the untenable peg to the U.S. dollar and depleted international reserves call for a decisive shift in the monetary policy framework. They called for a realignment of the exchange rate with market fundamentals, moving toward greater exchange rate flexibility, and for front loaded fiscal consolidation and restrictive monetary policy settings, which would address inflationary pressures, alleviate FX shortages, and allow elimination of FX restrictions. Increasing interest rate flexibility will facilitate effective monetary policy transmission.
Directors recommended a credible and sustained fiscal consolidation by rationalizing the public wage bill, phasing out fuel subsidies, enhancing public investment management and spending efficiency, and mobilizing tax revenue. Eliminating monetary financing of fiscal deficits is also important. Directors also emphasized the need to mitigate the effects of the policy adjustments on vulnerable populations, including through improved targeting of the social safety net. A coherent fiscal framework can help underpin the consolidation plan.
Directors emphasized the need to strengthen financial sector supervision amid growing economic vulnerabilities. They called for close monitoring and contingency planning and encouraged the implementation of the remaining 2024 FSAP recommendations and strengthening the AML/CFT framework. Enhancing Bolivia's public pension fund operations by diversifying investments and strengthening the pension supervisor's independence is also important.
Directors called for comprehensive supply side reforms to enhance productivity and growth potential and facilitate external rebalancing by phasing out export ceilings, price controls, and credit quotas. They emphasized the need for a clear regulatory framework to attract private investment and to focus public investment on socially beneficial infrastructure projects. Further efforts to enhance transparency and the governance and anticorruption frameworks will also be important. Improving data adequacy also remains a priority.
It is expected that the next Article IV consultation with Bolivia will be held on the standard 12 month cycle.
Table 1. Bolivia: Selected Economic Indicators, 2023-30 |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] Under the IMF's Articles of Agreement, publication of documents that pertain to member countries is voluntary and requires the member consent. The staff report will be shortly published on the www.imf.org/Bolivia page.
[3] At the conclusion of the discussion, the Managing Director, as Chair of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
