Bolivia: Staff Report for the 2013 Article IV Consultation

KEY ISSUESContext. Since the mid-2000s, macroeconomic stability supported by high world commodity prices and active social policies have contributed to nearly tripling income per capita and reducing poverty in Bolivia. Prudent fiscal policies allowed saving a sizable portion of the hydrocarbon revenue windfall, improving the resilience of the economy to adverse external shocks. Reflecting this, Bolivia was one of few countries in Latin America that sustained positive growth during the global crisis of 2008–09 and weathered well the recent regional slowdown.Recent developments and outlook. Real GDP growth is projected at 6.7 percent in 2013, the highest growth rate of the last thirty years and is expected to remain above potential in 2014. Downside risks from weaker activity in trading partners or lower world hydrocarbon prices have increased, but a strong external position and sizable international reserves provide ample buffers.Macroeconomic policies. Staff recommended targeting a neutral fiscal stance in 2014, saving policy stimulus to respond to downside external shocks and adopting a medium term fiscal framework (MTFF) to manage resource wealth. The authorities reiterated their commitment to prudent fiscal policy and highlighted that work on the MTFF is an ongoing process. On monetary policy, staff noted that further tightening may be needed if inflationary pressures prove persistent and recommended discontinuing the direct lending of the central bank to public corporations and gradually exiting the stabilized exchange rate regime. The authorities did not concur with staff's recommendations.Financial sector. The Bolivian financial system remains solid and well capitalized, but the new Financial Services Law could pose a risk to financial stability. Interest rate caps and minimum credit quotas could reduce the profitability of financial institutions, lower total lending funds, over-leverage target beneficiaries, and complicate the conduct of monetary policy. Staff recommended using other instruments to achieve the objectives set out in the law.Structural and social policies. Removing uncertainties in the legal framework is critical to improve the business climate and promote private investment. Impact evaluation of social transfers and better targeting of fuel subsidies would enhance the cost-effectiveness of social policies and deepen the notable gains achieved by the authorities.