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Bolivia Faces Good Economic and Social Prospects

Another blow against the IMF

On 31 March 2006, the current Stand-by Agreement of Bolivia with the International Monetary Fund (IMF) will expire – another step in Latin America’s long-lasting struggle for emancipation from IMF conditionalities. The new government of Evo Morales informed the Fund that it has no intention to negotiate a new agreement. And in spite of official warnings from Washington, the prospects for living without the IMF are not bad, reports World Economy & Development In Brief.


President Evo Morales

The expiring Stand-by Agreement of Bolivia with the IMF was signed in April 2003 for the amount of $ 248.9 million and reduced to $ 211.6 million at the request of Bolivian authorities. The scheme is related to criteria for structural and economic performance. The domestic economy is currently in good shape generating a Gross Domestic Product (GDP) growth rate of 3.9 per cent in 2005, higher than any year since 1999. The fiscal year 2005 ended with a deficit of 1.5 percent in relation to GDP, down from 5.5 percent in 2004.

With Bolivia refraining from signing a new agreement the IMF no longer has an instrument at its disposal with which to pressure the country into structural adjustment reforms as it did in the past. In 1998, the Fund urged Bolivia to privatise the social security system. The IMF also opposed the hydrocarbons law last year that raised royalties to be paid by foreign-owned companies. However, while Bolivia does not need the IMF’s money, theoretically it is still dependent on its approval in order to have access to other financing sources such as the World Bank, the Inter-American Development Bank and Northern donor governments.

Bolivia's new government, led by President Evo Morales, took office in January with a strong mandate for reform – to increase economic growth and alleviate poverty. Real GDP per capita in Bolivia is less today than it was 27 years ago and 63 percent of the population live below the poverty line, despite the country having completed numerous structural reforms and despite having operated under IMF agreements almost continuously for the last 20 years.

* How vulnerable is the Morales government?
Yet according to a new report by the Center for Economic and Policy Research (CEPR), the Morales government has a good chance to deliver on its promises to reverse the country's long-term economic failure and help the poor. The paper, Bolivia's Challenges, co-authored by Mark Weisbrot and Luis Sandoval, focuses on the country's external sector and assesses its vulnerability to pressures associated with external public debt and debt relief, grants and foreign borrowing, and trade.

”There is no doubt that the policies of the past have failed,” said Mark Weisbrot. ”The main question is whether Bolivia's new government will be able to pursue economic policies that are potentially more successful – and I think the prospects are good.” Among the reasons for a positive outlook are:

* An increase in revenues from natural gas has significantly improved Bolivia's fiscal situation, due to a controversial hydrocarbons law passed last year that increases royalties paid by foreign investors and opens contracts up to re-negotiation. The federal budget deficit for 2006 is projected at 3.0 percent of GDP, down from 8.8 percent in 2002.

* The cancellation of debt from the IMF and World Bank eliminates 36 percent of the Bolivia's external debt. If the Inter-American Development Bank also cancels its debt, about 70 percent of Bolivia's external debt would be cancelled.

* For reasons explained in the paper, the IMF is unlikely to play its traditional ”gatekeeper“ role for foreign loans and grants after the expiration of the current agreement.

* The impact of trade preferences under the Andean Trade Preferences and Drug Enforcement Act (ATPDEA) – whether or not Bolivia will sign a new Free Trade Agreement with the United States – is likely to be minimal, as the preferences affect less than 2 percent of the Bolivia's exports.

* New credit line with Venezuela?
As a precautionary measure and to help smooth the country's transition to non-concessional and domestic borrowing, the report recommends that the Bolivian government try to arrange 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. Opening a line of credit in advance - one that it is not expected to be drawn upon in the foreseeable future - would significantly reduce some risks of financial instability.

Another move that could further improve the Bolivian government's short-term and long-term fiscal situation would be to reverse the privatisation of the country's public pension system. As noted by the IMF, this privatisation 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 have, the government's fiscal deficit could be substantially reduced.

* Mark Weisbrot/Luis Sandoval, Bolivia's Challenges, CEPR: Washington, DC, March 2006. Find the English version >>> here and the Spanish version >>> here.

(Posted: 30 March 2006)

* Find more on the subject:
>>> A Spectre Is Haunting Latin America
>>> World Water Forum: Bolivia’s Alternative Declaration

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