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Bolivia has been implementing stabilisation and structural adjustment programes for 20 years. The results of these efforts have not been encouraging at all. A few days ago, the Evo Morales administration decided not to sign a new agreement with the International Monetary Fund (IMF). This goes far beyond issues related to financing needs, as the financial institution intends to make people believe. For the new government it is about recovering the economic sovereignty and thus Bolivia’s dignity.

Bolivia has been implementing stabilisation and structural adjustment programes for 20 years. The results of these efforts have not been encouraging at all. Although they managed to reestablish macroeconomic balance, they fail to achieve a sustainable and sufficient economic growth, and did not improve the country’s poverty situation in terms of income. Likewise, people have the impression – without being wrong – that in all these years the economic policy was not defined by governments in office but by international institutions, mainly the IMF and World Bank.

“We believe that in Bolivia we have the capacity to carry out a financial programme aimed at maintaining price stability, a low inflation and deficit under control”. Such were the words used by Finance Minister, Luis Arce, when referring to the relationship of the country with the International Monetary Fund (IMF), last March 6.

A few days ago, the Evo Morales administration decided not to sign a new agreement with the multilateral institution. The previous Stand-By agreement expired at the end of March. “We do not need IMF external financing because we have a better level of reserves”, added Arce.

In fact, most macroeconomic parameters in Bolivia show very good levels. In 2005, the current account registered a surplus amounting to almost 470 million dollars, equivalent to 4.9% of the Gross Domestic Product. Exports grew by 25% and the (gross) international reserves of Bolivia’s Central Bank reached a record level of 1.83 billion dollars, equivalent to nearly 8 months of imports. Likewise, it was possible to reduce the fiscal deficit from 5.5% of GDP registered in 2004 to 2%.

However, some of these parameters are situational and result from very good levels of international prices, as well as from additional state non-budgeted revenues. For instance, with regards to exports, hydrocarbons account for nearly 50% of the total export value, having said exports grown by no less than 58% if compared to 2004, due to – in the first place – better prices. In turn, the export value of non-traditional products (soy, wood, leather, clothing, etc.) fell by 11%, which shows that the export structure has not improved in terms of an increased participation of value-added goods.

In a first reaction to the announcement made by the Finance Minister, the IMF’s spokesperson, Thomas Dawson, said that “frankly, the favourable situation is such that there does not seem to be a need for Fund resources, and this is, I believe, what the authorities have indicated, and so we remain at the disposal of the authorities to discuss any issues that they wish to”.

Macroeconomic stability even without IMF

Notwithstanding, this goes far beyond issues related to financing needs, as the financial institution intends to make people believe. For the new government it is nothing less than about recovering the economic sovereignty and thus Bolivia’s dignity, by means of defining in a sovereign way its development programmes and economic and financial policies. In fact, this should be evident for any nation that is respected.

In this regard, no room for doubt was left by the strong man of Evo Morales’ administration, Development Planning Minister, Carlos Villegas, when he stated during a press conference: “We have pointed out, from the very first day of our administration, that conditionalities are over in Bolivia. Development priorities no longer come from abroad, nor from international institutions and priorities are defined by the Government. Within this framework, we are preparing a five-year National Development Plan”.

An interesting aspect of this Development Plan, of which only the three main pillars are known until now, is that the third pillar consists in ensuring macroeconomic stability. By means of this, the Government intends to point out that it gives economic stability the importance it deserves – without turning it into the main purpose of its policy – and that it will have a responsible monetary, fiscal and exchange policy, even without an IMF programme.

The big challenges of economic sovereignty

However, to recover economic sovereignty and reduce foreign dependence is no easy task. At the present time, out of the total public investment, which reaches about 7% of GDP, only 50% is financed with domestic resources, while the other half is funded with foreign credits and grants. And in spite of the fact that the former government has managed to reduce the fiscal deficit to approximately 2% in 2005, the situation of public finances is certainly not the best.

On the one hand, the good result achieved in 2005 is highly likely to be temporary. The main reason for the low deficit level of that year was that additional resources stemming from the new Direct Tax on Hydrocarborns (IDH) were not included in the budgets of the prefectures, municipalities and universities that received them throughout the year and therefore could not be allocated, thus resulting in savings at the different government levels.

This situation is not going to be repeated within the next years. Thus, the budgeted deficit for 2006 amounts to 3.7% following donations. Without taking into account donations granted mainly by the so-called “friendly countries”, which will account this year for approximately 2% of GDP (excluding HIPC grants), the deficit would reach 5.7% of GDP. These figures show that, provided no great efforts are made to generate more domestic resources, reducing foreign dependency will not be easy.

Besides, due to the high fiscal deficit from 2002 to 2004, Bolivia’s internal debt has alarmingly increased in such a way that the payment of interests and amortizations has doubled the amount paid to foreign creditors. In 2003 and 2004, the internal debt service covered nearly 25% of fiscal revenues, being those resources needed for expenditure and public investment.

Furthermore, in spite of the external debt cancellation that has already been implemented (as in the case of the IMF) and announced (as in the case of the World Bank and a likely similar measure by the IDB), the external debt service will continue to monopolize significant public resources. This is due to the fact that most part of annual payments are made to the Andean Development Corporation (CAF) – 47% of the total amount paid in 2005 –, which will not write off the debt.

What appears contradictory to the policy expressly aimed at reducing foreign dependency is that the Government is considering the possibility of taking more loans from the CAF, which could create a new problem of overindebtedness in the future as a result of its unfavourable lending conditions.

Tax reform stumbles against resistance

All the above points to the fact that the country will have to make great efforts in order to achieve its self-support. One of the key areas where Bolivia would have to make progress is in its tax policy. The Bolivian tax system does not collect enough resources and is unequal. Therefore, the new Government, or more precisely, the Finance Minister, took the praiseworthy initiative to propose a reform of the system. “We would like everybody to become aware of the fact that it is necessary to pay taxes. There cannot be a single person in this country that cannot contribute”, Arce pointed out.

However, his proposal to launch a new personal income tax or wealth tax, where those who own more would pay more, caused angry reactions in several sectors. Even the Vice-President himself denied it, stating that he could ensure there would be no income tax. Likewise, Jaime Solares, Executive Secretary of the Bolivian Workers Federation (COB) has already threatened with protests in view of a possible “income mega-tax”.

Meanwhile, the so-called “trade unionists”, that is to say, small tradespeople, took to the streets to defend a special system, whose elimination could be considered by the Government within the framework of this tax reform. The so-called “Simplified Tax System” collects almost nothing, but covers beyond small tradespeople, large capitalists who abuse the system in order to evade taxes.

The first acid test for the Government was the strike carried out by interdepartmental transport workers who defend another “Special System” and are not willing to be transferred to a General System where they would have to pay taxes according to their incomes which, in many cases, are quite significant. Large transportation companies, which own up to 40 buses and pay an average annual amount of 8 dollars in taxes are concealed within this system.

And finally, the private banking system requested the Government to eliminate the Tax on Financial Transactions by July of this year. Said tax was launched in 2004 and is an interesting source of income to public coffers which the Finance Ministry intends to maintain. To conclude, the Government will have to fight on several fronts and against all odds, if it aims at increasing domestic resources in an outstanding way and reducing foreign dependency.
The IMF is losing ground in its role as “watchman”

Nevertheless, beyond the question of how feasible it would be to self-support itself in the medium term, the decision to become independent of IMF conditionalities and advice which have not turned out to be exactly beneficial for Bolivia in the last 20 years, seems to be interesting.

The most recent examples of attempts (or at least declared as such) to get rid of IMF impositions are Brazil and Argentina, which reimbursed their debt to this institution in an early way. Thus, Brazil paid 15 billion dollars in December 2005, while Argentina reimbursed 9.8 billion dollars in January 2006.

However, both the economic and political benefits of this decision appear to be rather doubtful. On the one hand, in both cases, the governments reimbursed a relatively cheap debt, getting at the same time into internal and external debts with much higher interest rates than those charged by the IMF. And on the other hand, at least in Brazil, there are still structural adjustment policies and cuts in the main social spending and investments.

But, the case of Bolivia is different in two aspects. Firstly, it is the first highly indebted poor country that dares to take this step, which is an important political antecedent. Secondly, in the case of Bolivia, the thing is not about making an early debt payment to the international institution but rather about not negotiating a new agreement with it and doing without its loans.

It should be remembered that, as an HIPC country, Bolivia agreed in January 2006 to the IMF cancellation of 233 million dollars, on account of which its outstanding debt to the institution remained at only 14 million dollars. This situation is obviously quite favourable in order to make de decision to go ahead without the heavy shadow cast by the multilateral institution.

The big question is whether the other multilateral credit institutions, as well as bilateral cooperation will continue to grant loans and donations – which Bolivia, in spite of all, will still need at least in the medium term – even without the existence of an agreement with the IMF. There are some signs indicating that this is possible.

An indicator of the reduced importance of the IMF in terms of its traditional role as “watchman” of loans and foreign grants and guarantor of “good” economic policies could be the assertion by risk assessment agency Fitch, in New York, indicating that “a new programme with the IMF has not been identified as a crucial credit lending criterion”.

On the other hand, the World Bank’s Vice-President for Latin America, Pamela Cox, on occasion of her visit to Bolivia in March, gave even a clearer indication by pointing out that the Bank will continue to support the country even if it decides not to sign a new agreement with the IMF.

Finally, it should be remembered that although reducing foreign, and particularly, IMF dependency is a positive step, it is important to ensure that no new unilateral dependencies are created in the future which might increase once again the vulnerability of the country.

Related Information:

Bolivia without the IMF

External debt takes more resources away from Bolivia

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