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Mark Weisbrot
Luis Sandoval

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Bolivia’s Challenges


by Mark Weisbrot , Luis Sandoval

9 March 2006

Bolivia’s new government took office in January 2006 with a strong mandate for economic reform, and with promises that such reform would both increase economic growth and benefit the poor. Nonetheless an electoral mandate for economic change does not necessarily translate into reform.
There are various external pressures, from foreign governments (especially the United States), multi-lateral
lending institutions, and other sources that can influence policy. This paper looks at Bolivia’s
potential vulnerability to pressures in conjunction with external public debt and debt relief, grants
and foreign borrowing, and trade.

The demand for new economic policies stems from a long-term economic failure: real GDP per
capita in Bolivia is less today than it was 27 years ago (see Figures 1 and 2), and 63 percent of the
country lives below the poverty line. Furthermore, Bolivia has completed numerous structural
reforms (see Figure 3) that economists from multi-lateral lending institutions have recommended,
and has operated under IMF agreements almost continuously for 20 years. In the IMF’s April 2005
country report on Bolivia, the authors discuss the Bolivian “puzzle” - “that a country perceived as
having one of the best structural reform records in Latin America experienced sluggish per capita
growth, and made virtually no progress in reducing income-based poverty measures” (IMF 2005a, p.4).

More than 70 percent of Bolivia’s $6.7 billion public debt is external, and most of this external debt
(more than 90 percent) is owed to multilateral lending institutions (see Table 1). The IMF cancelled
almost all of Bolivia’s debt to it this year and the World Bank is set to cancel $1.53 billion. The
Inter-American Development Bank (IDB) holds $1.6 billion of Bolivia’s debt, and is also expected
to cancel this debt, although this has not yet been decided.

Net foreign borrowing by Bolivia has diminished in recent years, to $79.7 million or 0.9 percent of
GDP in 2005 (See Table 4). Concessional, low-interest foreign lending to Bolivia can be expected
to be reduced in the near future, as the country’s per capita income level passes the maximum
amount that allows for eligibility for such loans.
Grants and donations from foreign countries comprise about $110 million, or 1.05 percent of GDP,
in the government’s budget for 2006 (See Table 3).
With regard to debt cancellation, loans, and aid flows, it would be politically difficult to treat Bolivia
differently from other countries in the same category. The IDB cancellation would be expected to
apply to the four Latin American HIPC (Heavily Indebted Poor Countries) debtors, under which
Bolivia has received prior debt cancellation. Bolivia has passed the “completion point” for the
Enhanced HIPC initiative, meeting a set of quantitative financial benchmarks and structural reform
criteria under the IMF’s Poverty Reduction and Growth Facility (PRGF). The IMF and World Bank
decided that “virtually all quantitative targets had been met” (IMF and IDA 2001, p. 21) under the
PRGF. A “long track record of sound macroeconomic policies and substantial structural
adjustment” (IMF and IDA 2001, p. 4) according to the IMF and World Bank, had enabled Bolivia
to reach the completion point under the original HIPC initiative.

Since meeting these conditions Bolivia’s macroeconomic performance - according to the criteria
most important to the multilateral lenders - has improved considerably. In 2002 the government
was running a public sector budget deficit of 8.8 percent of GDP; for 2005 it is 3.5 percent and the IMF projects 3.0 percent for 2006 (IMF 2005b, p. 26). The country has also gone from a $324
million (4.1 percent of GDP) current account deficit in 2002 to a $205 million (2.1% percent of
GDP) surplus for 2005 (IMF 2005b, p. 30). So it would be very difficult to conceive of a
performance-based reason to deny debt relief, loans, or grants to Bolivia.
It would also be difficult to single out Bolivia with regard to trade preferences in the U.S. market.
Although preferences under the Andean Trade Preferences and Drug Eradication Act (ATPDEA)
are set to expire at the end of the year, they will very likely be extended. Even if Bolivia eventually
loses these preferences because it does not sign a new Free Trade Agreement with the United States,
this would affect less than two percent of the country’s exports.

Another question with regard to external pressures regarding the new government’s economic
policies is the future role of the IMF in Bolivia. Traditionally, the IMF has served as a “gatekeeper”
for other sources of external financing, and therefore - together with its dominant stakeholder, the
U.S. Treasury Department - has been able to exert considerable influence over economic policy. For
a number of reasons discussed below, it seems unlikely that the IMF will play this role in Bolivia in
the future.

The new government is therefore in a relatively good position to choose policies that could
accelerate growth and deliver on its promises to the poor. The May 2005 hydrocarbons law has
substantially improved the fiscal situation of the government for the foreseeable future. Although
the government does depend on some foreign financing for its operations, this dependence has been
diminishing as the fiscal situation has improved and should fall considerably as the World Bank and
IDB debt - accounting for about three-quarters of the country’s external public debt - are cancelled.

One thing that the new government could do, as a precautionary measure and to help smooth the
country’s transition to non-concessional and domestic borrowing, is to apply for a line of credit with
the Venezuelan government. Venezuela’s lending from its surplus foreign exchange reserves to
Argentina and Ecuador has been a very important source of financing for those countries, and will
almost certainly be available to Bolivia should it become necessary. But by opening a line of credit in
advance - one that it is not expected to draw upon in the foreseeable future - Bolivia can
significantly reduce some risks of financial instability. For example, this pre-approved credit would
reduce the risk of the kinds of runs on deposits that the country experienced in 2002 and 2004, as
depositors would know that the country has access to an additional supply of foreign exchange
reserves.

Another move that could improve the government’s fiscal situation in the immediate future as well
as for many years, would be to reverse the privatization of the country’s public pension system. As
noted above, and also by the IMF (IMF 2005a, p. 17-18), this privatization has created very large,
long-term transition costs, as the income from current payroll taxes is not available to pay current
retirees. By returning to a “pay-as-you-go” system as the United States has, the government’s fiscal
deficit could be substantially reduced. The potential deficit reduction from switching back to a
traditional public defined-benefit system is large enough that this option is definitely worth
considering.

Mark Weisbrot is Co-Director and Luis Sandoval is a Research Assistant at the Center for Economic and Policy Research (www.cepr.net) in Washington, D.C.

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