Bolivia Faces Challenge of Adapting to Lower Commodity Prices

From the International Monetary Fund:

Screen Shot 2015-12-19 at 7.13.24 AMANNUAL HEALTH CHECK

Bolivia Faces Challenge of Adapting to Lower Commodity Prices

By Sumiko Ogawa
IMF Western Hemisphere Department
December 18, 2015

  • Real GDP growth to slow to 4.1 percent in 2015 but remains high for the region
  • Large buffers should enable necessary fiscal, external adjustments in a gradual way
  • Reducing non-hydrocarbons fiscal deficit and promoting private investment are key

After a decade of strong economic performance and poverty reduction, Bolivia needs to adapt its policies to the lower commodity price normal, the IMF said in its annual report on the Bolivian economy.

Screen Shot 2015-12-19 at 7.12.50 AMBolivia has achieved tremendous reductions in poverty and inequality over the past decade. This was supported by strong economic growth and prudent macroeconomic management during the commodity price boom.

With the end of the commodity boom, however, fiscal and external balances have started to weaken in 2015 and are expected to deteriorate further in 2016. The authorities face the important challenge of adjusting to a changing external environment, while continuing to deliver on their developmental objectives—as outlined in the Patriotic Agenda 2025—and preserving the social gains achieved in recent years.

Thanks to the large buffers built during the boom years, the Bolivian authorities can take a measured and gradual approach as they tackle current challenges. International reserves are more than adequate by any measure—currently at 42 percent of GDP.

Despite some deceleration, economic growth is expected to remain among the strongest in Latin America—projected at 4.1 percent in 2015 and 3.5 percent in the medium term. Supporting this growth is sizable public investment and robust credit growth to the private sector.

Increasing fiscal space
In light of persistently low oil prices, however, there will be a need for fiscal tightening over the medium term, including by refocusing and prioritizing public investment. The report highlighted the importance of improving the non-hydrocarbons fiscal balance to create fiscal space (or room in the government’s budget). A medium-term fiscal framework—which takes into account of the business cycle and oil price volatility—could help guide the deficit reduction process. In addition, a more comprehensive framework for monitoring quasi-fiscal activities would contribute to better management of contingent fiscal risks.

Given the relatively short horizon of current proven natural gas reserves, exploring and discovering new reserves is also critical to ensure external and debt sustainability. In this context, there is an urgent need to clarify fiscal regimes for the hydrocarbon and mining sectors to encourage investment.

Greater exchange rate flexibility
With a stable exchange rate against the U.S. dollar, the appreciation of the U.S. dollar has led to an appreciation of the Boliviano by more than 40 percent in real effective terms since 2010. Creating conditions for greater exchange rate flexibility will help enhance the country’s capacity to absorb external shocks and improve competitiveness.

The shift to greater exchange rate flexibility needs to be carefully crafted, however, so that the significant reduction in dollarization over the past decade will be preserved. An effective monetary policy framework, which anchors inflation expectations, would be an important condition for a smooth transition. Central bank independence and credibility, appropriate monetary policy instruments and market infrastructure, and fiscal sustainability would be required for such a framework to function well.

Ensuring financial sector stability
While the financial sector appears sound and stable so far, there have been significant changes affecting the allocation of credit flows. The Financial Services Law, enacted in 2013, introduced quotas for lending to productive sectors and social housing, and regulated lending and deposit rates. The report cautioned against the risks of excessive credit growth and concentration, and the impact this could have on financial sector stability and financial inclusion. It recommended that the authorities rely on market-based signals to achieve greater financial inclusion, and to modify key regulatory provisions should risks build up.

Boosting private investment
The report noted that enhancing private investment would be central to improving Bolivia’s medium-term growth prospects. For this, structural measures will be needed to improve the business climate and address lingering impediments, including labor market inflexibility and costs, pervasive informality, and government incursions into product markets. Building on progress made in recent years in updating the legal framework, further efforts to reduce legal and regulatory uncertainty would also be conducive to private investment.

http://www.imf.org/external/pubs/ft/survey/so/2015/CAR120815A.htm

My comments at IMF’s website were as follows… ti will be a test to see if it gets published by them…

Screen Shot 2015-12-19 at 7.11.37 AM

On top of the above, it is worth noting that over the last ten years, over $150 billion dollars were wasted under this government… luxury items were bought for the leisure of the president and his entourage.

If you are interested in knowing the levels of corruption and incompetence, please review older post in this blog, thank you.

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