Bolivia Faces Challenge of Adapting to Lower Commodity Prices

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

Bolivia 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...