Bolivia - Structural Adjustment Program Project

The Wor %t.e.. ,;.,. ,, FOR OMnCI GAZg 4?,~F -sc RquportN, P-5586-BO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 30 MILLION (us$40 MILLION EQUIVALENT) TO THE REPUBLIC OF BOLIVIA FOR A STRUCTURAL ADJUSTMENT PROGRAM August 12, 1991 Thi document has a resticted dbtibutdon ad may be used by recplets only In the perfonrance of thder official dute Its contenSt may not otherwise be diclosd without World Bank authorization.  risgal Year January 1 to December 31 CURRENCY EOUIVALENTS Currency Unit = Boliviano iBs) Exchange Rate Effective March 1991 us$1.00 2 Bs 3.51 Be 1.00 - $0.23 ABBREVIATIONS AFP - Administradores de Fondos de Pensiones (Pension Fund Administrators) BAB - Banco Agricola de Bolivia (Bolivian Agriculture Bank) BAMIN - Banco Minero (Mining Bank) BANEST - Banco del Estado (State Bank) CEDES - Central Bank Certificates of Deposit COMIBOL - Corporaci6n Minera de Bolivia (Bolivian Mining Corporation) CNV - Comision Nacional de Valores (Stock Exchange commission) CRA - Certificado Reintegraci6n Arrancelaria (Customs Certificate) ENDE - Empresa Nacional de Electricidad (National Electricity Company) ENFE - Empresa Nacional de Ferrocarriles (National Railways Corporation) ENTEL - Empresa Nacional de Telecomunicaciones (National Telecommunications Company) ESAF - Enhanced Structural Adjustment Facility ESF - Emergency Social Fund ESW - Economic and Sector Work FDC - Fondo de Desarrollo Campesino (Peasant Development Fund) FONEM - Fondo Nacional de Exploracifn Minera (National Mining Exploration Fund) FSAC - Financial Sector Adjustment Credit GSF - Gerencia de Sistema Financiero (Financial System Unit) GTZ - German Aid Agency IBRD - International Bank for Reconstruction and Development IBSS - Instituto Boliviano de Seguridad Social (Bolivian Social Security Institute ICI - Institution Eligible to Intermediate Development Credit IDA - International Development Association IDS - Inter-American Development Bank IMF - International Monetary Fund LAB - Lloyd Aereo Boliviano (Bolivian Airline) SAFCO - Sistema Integrado de Administraci6n Financiera y Control (Integrated System of Financial Administration and Control) SBEF - Superintendencia de Bancos (Superintendency of Banks) SDR - Special Drawing Right SNSR - Superintendencia Nacional de Seguros y Reaseguros (Superintendency of Insurance) USAID - United States Agency for International Development YPFB - Yacimientos Petroliferos Fiscales Bolivianos (Bolivian Petroleum Corporation)  VOR OFFICIL UsE ONLY PESIDT' BBS BOLIVIAs STUCUR-ADJUSTUIN CREIT Bogrmrr Republic of Bolivia tanas 8DR 30 million (equivalent to US$40 million) S2=m8 SStandard IDA terms Obijctig.gt The objective of the proposed Structural Adjustment Credit is to Increase the level and efficiency of investment through improving the regulation and aupervision of the financial system, improving the allocation of resources by the financial system and capital markets, reducing the share of production carried out by the public sector, improving the performance of public sector investment and enterprises, reducing the burden of bureaucratic impediments to investment and increasing resources devoted to human resource development. Credit Descriptions The Credit would support a set of reforms directed at reaching the above-mentioned objectives. These reforms includes (i) maintenance of a coherent macroeconomic policy aimed at continued stability; (ii) financial sector reform to strengthen banking supervision, privatisz or close and liquidate loss-making public banks, improve the allocation of donor-financed credit, establish a mechanism for handling bank crises and improve the laws and regulations governing pensions, insurance, and securities marketsi (iii) signature of performance contracts and improvements in operation of the major state enterprises, including elimination of transfers to, and qrrears of, state enterprisesl (iv) a comprehensive privatization program with the mediumrtorm goal of divesting all state enterprises in productive sectors (with the exception of mining and hydrocarbons due to Constitutional restrictions); (v) streamlining of trade and registration procedures, including customs reform, a duty drawback system, simplification of export approvals and simplification of firm registration and control mechanisms; (vi) cooperation with the Bank in improving public sector investment project selection; and (vii) increases in the share of current expenditures devoted to primary health care and primary education. This document has a uestkwced disttibutlon and may be used by recipients only in the %rformance of their official duties. Its contents may not otherwise be disclosed without Work I Bank s %thorination.  - Li - Za addition, there is a technical assistance component to support improved supervision of the banking system, establish a mechanism for handling hank crises, assist in determining refoms to facilitate capital market development, assist in the reform of major public sector enterprises r'nd in the privatization program and support efforts to streamllne trade and registration procedures. A pollcy matrix spelling out the objectives of the proposed Credit, measures already taken, measures to be taken under the Credit and proposed timing, Is provided as Annex IV. Rsnefits The proposed operation would Lncrease the efficiency and level of investment and thus permit an acceleration of growth, after the disastrous declines in output in the early 1980s and four years of stagnation in per capita income. These benefits would result from the elimination of loss-making public banks, improved efficiency of the hanking system through stronger regulation and supervision, a reduction in the cost of financing through. increasing the role of equities markets as opposed to expensave financing from commercial banks, improved efficiency in the operation of major public enterprLses that control a substantial share of production in the Bollvlan economy, improved efficiency of production of privatized enterprises, reduced transactions costs facing private sector companLes, avoidance of wasteful public sector investments and a more efficLent allocation of health and education expenditures that is essential to the long-term growth of the Bolivian economy. RLiak The proposed Credit would involve a number of risks. Given the political sensitivity of some of the proposed reforms, there is a risk that the Government may not be able to carry out the program with the required speed and thoroughness. However, the economic team is firmly committed to the program. has obtained the support of the President and already has taken many of the most politically difficult measures. The short-term effects of strLcter prudential requirements could result in a decline ln financial intermed4ation by some banks. Any fall in credit should be mitigated by a continued reduction in the public sector's claims on resources (due to privatization, closure of state banks and increased fiscal revenues), which would encourage a decline in interest rates and facilitate increased private sector lending. The Government's lack of resources may slow achievement of the proposed reforms, although tlse technical assistance component in conjunction with complementary efforts by other donors should help to reduce this problem. Finally, any failure to maintain macroeconomic stability could endanger the success of the reform process. This risk is judged to be low, since the Government has maintained stability since taking office and  - iii - the program has broad support across the ajor politiLal partLes. Conditions of tranche release will lnclude maintenance of a macroeconomic program acceptable to the Bank. DtabuxgglMot sxcept for the technical assitance component, the Credit would be diLbursed Ln three trenches. A special account will be set up for the technLcal asseitance component. Retroactive flnancing will be permitted for those eliglble iparts made before the date of the loan agreement but not before March 20, 1991, up to an amount equal to U$8 million. Schedul2 of DLgbursementat Bank PiLcal Years FY92 PX9 ZX94 - -- US$ millions- - - Annual 16.8 a/ 16.8 6.4 Cumulative 16.8 33.6 40.0 aI Includes retroactive financing. Pinancina Plan: The Inter-American Development Bank is considering two loans with conditionalLty identical to the financial sector component of this Credlt: a balance of payments support operation and a multi-sectoral credit line The Government of Switzerland is considering cofLnancing equivalent to approximately US$7 million, and USAID may cofinance the technlcal assistance program. In addition, we are exploring the prospects for cofinancing by other bilateral donors. The tentatlve financing plan would be as follows: IDA US$40.0 millilon USAID US$ 0.7 million 1on (balance of payments loan) USS40.0 million (multL-sectoral credit operation) US$80.0 million Switzerland US$ 7.0 million Total us$167.7  BOmLVA: STRUCTURA ADJUSTMnT CREIT CRDIT AND PROGRAM 01IAR .. .o.... . . . . . . . .... . . . . 9i-lu S. COURY POLICIES AND AN GROUP ASSISTANCE STRATEGY . . . . . . 1 Introuction .. .. .. .. . . . . . . . . . . . . . . . . .. I TheAdjustmentPreoess ....... ... ... 0 a......... 2 Medium-Term Prospects . . . . . . . . . . . . . . e . . * a . . . 4 BankGroup Operations andStrategy .... . ......... .... . 6 Sumary . .. .. .. .. . .. . .. . .. . .. . . . . . .. 10 II. THE STRU8CTURAL ADJUSTNNT PROGRAMI 999. 999. . 9 9. . 99.. 11 SummaryofIssuesandObjectives ..................... . 11 Financial implications of the Adjustment Program . . . . . . . . 12 Experiencewith Policy-sed Lending . ...... ..*.. ... 13 III. FINACIALSECTOR RFRM . ................... . 14 Introduction 9 9 9 9 .. . .... . * . . * * * . * * * 14 Structure and Size of the Finacial Sector . . . . . .. ... . 14 Main Issues Affecting the Financial Sector . . . . * s15 The Proposed Credit . . . . . . . . ... 9 999 9 9 9 9 99.. ... 21 IV. PUBLIC ENTERISE REFORM . . . . .. .. * . . . . . .. .... . #.. 26 OverviewofthePubliclnterpris Sector .... .. . . . .. . 27 Main IssuesAffecting Publicnterprises . .......... . 27 The Propoed Credit . . . .. . . . . . . . . . . .... .. . . 31 V. TRADE ANDREGITRATION PRO NDMMS... ............ . 33 main Issues . . . . . . . . . . . . . . . . .. . .. . . . . .. . 33 The Proposed Credit . . . . . . . . . . . . . . . .*. . *. .9. .9. 34 VI. PUBLICSECTORIVSTNENT ... ... . . . . ................... . 34 Main Issues . . .. . .9.9 . .9 . .9. .9. .9. .9 . .. . . . . . . .9 34 The Proposed Credit . . . . . . . . . . . . . . . . . . . . . . . 34 VI. SCIAL IMPACT O1 THE ADJUSTMNT PROGRAM . . . . . . . . . . . . . 35 The Government's Program to Alleviate Poverty. . . . . . . . . . 35 Impact of the Credit on Poverty. .. . . . . . ........ ..... . 36 The Proposed Credit . . . . . . . . . . . . . . . . . . . . . .9. 37 VI S CREDIT PROCEDMUS . . ... * . . 9 . . . . 9 . . . . . . . . . . . 37 Credit Arrangewmnts, Disburemento and Cofinancing . . . . . . . 37 Procurement . . .*. . . . . . . . 9 9. . 9 9 9. * 9. . 38 Credit Conditions . a * . . . 9 * * 9. 9 . .. . . . ... 39 Risks .*. .. .9 . .9.9 . .9. .9. .9. .9 . . . . . . . . . . . . .. 42 IX. REO0MMENDATION . . . 9 9 . .9 9 9 9 9 a 9 9 . . .o . . . . . 42  -2- Pas- NoE. TMLABLS 1 Sbeverane Costs ..... . * * 12 2 Uzternal Financing Requiremnts . . . ....... . . . . . .. 13 3 Financial ystem Inditor . . . . . . . . . . ....... 15 I Key Indicators . . . . . . . . . . . . . . . . . . . . . . . 43 II Status of Bank Group operations . . . . . . . . . .. .. . 49 III Governments Letter of Developuent Policy . . . . . . . . . . . 50 IV Policy Matrix . . . . . . . . . . . . . . . . . . . . . . . . . 63 V Changes in Prudential Regulation and Supervision . . . . . . . 70 VI Methods for Handling Financial Institution Crises . . . . . . . 84 VII Evaluation of Recommended Measures for the Banco del ENtado . . 90 VIII Intervention and Liquidation Procedures for State Banks . . . . 97 IX Legal Study . . . . . . . . . . . . . . . . . . . . . . . ...101 X Study of the Contractual savings System . . . . . . . . . 109 XI External Audit -of Insurance Companies and Pension Funds . . . 115 XI Irmprovement in Registzation Systems . . . . . . . . . . . . . . 118 XIII Supervision of Securities Markets . . . . . .. ....... 119 XIV Public Enterprise Reform and Privatization . . . . . . . . . . 122 XV Trade and Registration Procedures . . . . . . . . . . . . . . . 124 XVI Study of Tax Bvasion . . . . . . . . . . . . . . . . . . . . . 126 XVII Technical Assistance . . . . . . . . . . . .. . . . . . . .. 127 XVIII Supplementary Loan Data Sheet .. . .......... . . . . 134  REPORT AD RNC(U=aD&N OF TIM MS= OF TUE IDTIUSIAL KVELOrKW ASSOCZATION TO TIM EXECTIVE DIRZECTOIS ON A M0O1 D CRCD1T TO Tl U OF B I FOl A STRUCTMAL A1 ME PA 1. I submit the following report and recommendation on a proposed credit to the Republic of Bolivia for SDR 30 million (the equivalent of US$40 million) on standard IDA terms In support of a program of structural adjustment. The Inter-American Development Bank is considering two parallel leans for a total of US$120 million. USAID may provide cofinanoing for the technical assistance program. We are continuing discussions with other donors, who may cofinance the Credit at a later stage. I. COUNTRY POLICIES AND BANM GROUP ASSISTANCE STRATEGY Introductlon 2. Bolivia is one of the poorest countries in Latin America with a per capita income of US$620. The education level of its 7.3 million inbabitants is very limited; and health indlcators are among the worst in the continent. Bolivia's landlocked position and mountainous terrain render transport costs high and access difficult. Both internal communieations and links to neighboring countries are poorly developed. About one-half of the economically active population is employed in agriculture, primarily on the highlands of the altiplano where subsistence farming precominates. Although the mountains are rich in minerals, there has been insufficient exploratory work to exploit new minerals. Bolivia has important hydrocarbon resources, in particular, natural gas, but export prospects are uncertain. The manufacturing sector is sma11 and dominated by a few agro-industrial enterprises. 3. Buoyant commodity prices and relative political stability provided easy access to foreign financing in the 1970.. Fixed investment increased to more than 20S of GDP in the uid-70s, and for several consecutive years, Bolivia's GDP expanded at over 5? per year. The growth of investment reflected, primarily, large-scale public investment projects, many of which were highly questionable in terms of social payoff. Investment, as a proportion of GDP, began to decline in the late 1970.. Public and private savings declined at an even faster rate, increasing external borrowing (particularly from commercial banks) and rapidly increasing the external debt. By the early 1980s, severe internal and external imbalances had become apparent. Savings, investment, and with them GDP, began to contract (in absolute value) and external financing sources began to dry up. At the same time, tax collections dropped off sharply, as rapidly rising inflation eroded the real value of tax receipts, tax collection efforts deteriorated and the real tax base shrunk. With the authorities trying to maintain the sixe and wage levels of the public sector, the public sector deficit widened from 72 of GDP in 1980 to 232 of GDP in 1984. Given the absence of open market instruments, the impact of widenoing deficits could not be softened by substituting private for public savings. Instead, domestic credit expansion fueled inflation, which ran at a rate of almost 24,0002 during the 12-month period preceding September 1985. Maintenance of a fixed exchange rate system with periodic maxi-devaluations, in the faco of hyperinflation, led to a  2 masive overvaluation of the peso with the parallel rate being, at times, as much as 15 times the official rate. 4. Bhhind the poor economic performce of the early 1980. lay deep- seated structural problem. Of primary importance was the increased role of the state end its dsclining effectivenss. Aftes. the 1952 revolution, the Goverment share in the econom started to assume large proportions. Numerous state enterprises were created which operated in an unclear policy environment without proper controls or support. Frequent changes of governments exacerbated uncertainties about the policy framework, organization, and procedures. Public sector management was exceptionally weak. These problems led to declining Goverrmet revenues, uncontrolled current expenditures, and poor investment project performance. The financial system was characterized by a decreasing level of resource mobilization, distorted credit allocation to finance the public sector, growing solvency problems of the commercial banks, and an increasing decapitalization of the state banks. The environment for private investment was poor, and the private sector focused on trading and other short-term activities. Capital flight was substantial and capacity was under-utilized by videning margins. The Ad4ustment Process 5. Following several years of declining output, culminating in hyperinflation of over 24,0002 in annual terms, the Government in late 1985 launched its New Economic Policy which stopped the hyperinflation and undertook a long-term adjustment program to reduce the role of the state and to rebuild a free market economy. The exchange rate was freed and set through an auction system, which resulted in an immediate devaluation of the official rate by 932; strict budgetary controls were introduced to keep expenditures to the levels of revenues; most price controls were eliminated and specific prices and tariffs increased to bring them close to international levels (for gasoline, electricity and transport); far-reaching reform of the tax system reduced the basic tax categories from 400 to nine; the trade regim was liberalized, including elimination of most quantitative trade restrictions and reduction of tariff rates; and steps were taken to reorganize some public enterprises and abolish or reduce others (COWIBOL, the state mining company, was reduced in size by the dismissal of 23,000 workers). The financial system was liberalized, removing regulatory constraints on financial transactions and freeing the determination of interest rates. An important start was made to improve public sector administration by establishing the Financial Administration and Control System (SAYCO) for monitoring public expenditures and better data systems for planning and monitoring public investment. In early 1987, the Government launched an ambitious program to alleviate the impact of the economic crisis on the poorest groups through the Emergency Social Fund, which supports small sub-projects to generate productive employment and social assistance efforts (e.g. maternal health care and school feeding). The Government sustained ths adjustment program in the face of the collapse of the international tin price in 1985/86 and difficulties caused by delays in payment by Argentina for Bolivian gas shipments. The new policy stance succeeded quickly in restoring macroeconomic stability. Immediately following the introduction of the New Economic Policy, inflation fell dramatically and has generally remained between lO and 202. 6. Despite the remarkable achievements of the former administration, the new Government faced a near financial crisis upon taking office in August  3 1989, created by arrears in Atgentine paymento for gas shipuente, the settlement of large obligations with foreign oil contractors, a deteriorating fiscal position, and an outflow of short-term capital due to election-relted political uncertainty. The Governmt took decisive steps to restore confidence and incre"e revenues through large licreass to public prices and tight controls on expenditures, This program has been successful. The fiscal deficit has remained within agreed IMP targetes fallWng from 6.72 of GDP in 1988 to 3.3X of GDP in 1990. The consumer price ine'a rose by 18S In 1990. 7. The Government has achieved considerable succest in its negatiations with foreign creditors, Including elimination of Bolivia's debt to Argentina In return for canceling Argentiua's arrears on gas payments, further progress In retiring Bolivia's commercial bank debt, establisbmeat of a new mechanism for retiring a portion of Bolivia's debt with Brazil and the receipt of a highly-concessional debt rescheduling agreement from the Paris Club, including the so-called Toronto terms. Altogether, these agreements reduced Bolivia's debt to GDP ratio from 1021 at end-1987 to 791 by end-1990, despite a total net inflow of almost 71 of GDP estimated over this period. Debt service fell to 422 of exports in 19909 compared to 721 in 1987. 8. The IM has supported the Government program through. the Enhanced Structural Adjustment Facility (ESA!). The third-year ISAJ arrangement was approved by the IW Board on July 3, 1991. A joint Bank/lind/Governmunt Policy Framework Paper has served as the basis for the adjustment program in each of the previous three years. The IMP nd the Bank have cooperated very closely oan the Bolivian program. IM staff participated in doiscussions during development of this Credit, and our policy recommendations are identical. 9. Despite the high quality of macroeconomic policy, the recovery from the 1980-85 economic crisis has been slow. GDP grew for the first time in six years in 1987, but by only 2.12. GDP growth has averaged only 2.81 in the period 1988-89, and GDP per capita has stagnated in real terms since 1986. A major reason for the poor performance of the economy has been the low level of investment. Gross domestic iavestment was only 11% of GDP in 1990, and private fixed investment was only 41 of GDP. Net direct foreign investment wss less than 12 of GDP, despite attractive opportunities in hydrocarbons and mining. Additionally, continued losses by public banks, the weak portfolios of some private banks, and some low-productivity public sector investaents indicate that a portion of this low level of investment is not allocated efficiently. There is some evidence of an improvement in the supply response in 1990, including a rapid expansion of agricultural exports, reports of increased Interest by foreign investors and a sharp rise in non-tin, private sector mining. 10. In accordance with its strategy to focus public sector intervention towards improving education, health and poverty alleviation, the Government has made a significant shift in its investment program toward the social sectors. Expeditures for health have increased from US$9 million in 1989 to US$20 million in 1990, and a well formulated national health program has been established. Expenditures on education also increased somewhat from US$10 million In 1989 to US$14 million In 1990, but the sector is still lacking a major policy reform to improve the delivery of services. These increases, though small compared to the absolute requirements, are a major step towards fulfilling Bolivia's policy goals as well as developing the strong human resource base necessary for sustained economic development.  4 Medium-Tom Pro9sucts 11. Although Bolivia's adjustment program has succossfully created the foundations for sustainable growth, Bolivia is now entering its fifth year of slow growth. CDP ros by only 2.S5 a year in the period 1987-90, below the annual 2.82 rise in populationt consumption per capita continuer to decline; and private investment remains below 52 of GDP (and a portion of that amount is financed by donor funds). Slow growth, in part, has been due to the collapse in tin prices, erratic payments from Argentina for Bolivian gaa shipments, and a severe drought. The larger problem, however, is the low level and impaired produ^tivity of investment. Constraints to improved investment performance include: (i) an inadequate legal framew-rk to encourage private investments (ii) misallocation of capital through the finencial system; (iii) inefficient operation of public enterprises; (iv) weak institutions and cumbersome bureaucratic procedures governing trade and company registration; and (v) inadequate levels of infrastructure and social services. 12. The Government's medium-term strategy aims to achieve a GDP growth rate of at least 42 per year, to maintain price stability, and to alleviate poverty (projections data are given in Annex I): (i) Higher GDP growth will depend largely on an acceleration of private lector economic activity. Private savings must rise strongly, from 32 of GDP in 1990 to over 62 by the year 2000. This, coupled with increased inflows of direct investment, would enable private investment to rise from the very low 4S of GDP in 1990 to over 72 by the year 2000. Key public policies essential to facilitate an increase in the level of private sector investmeut include: maintenance of an appropriate incentives structure with free determination of interest rates, wage rates and other prices; a low and uniform tariff policy and the absence of quantitative constraints on trade and capital flows; and a substantial increase in infrastructure and other public services. (it) Stability will require continued tight fiscal policies and market determination of the exchange rate. The further decline in the deficit of the nonfinancial public sector in 1990 was achieved through a sharp decline in the primary deficit (i.e. excluding interest payments), from 1.3Z of GDP in 1989 to neat zero in 1990. This is a remarkable achievement for the Government of Bolivia, which had a primary deficit throughout the 1980s. It will be essential to maintain a primary surplus over the next ten years to ensure stability. Given constraints on external lending, any substantial increase in the deficit would have to be financed either by an unsustainable rise in domestic debt or by inflationary rates of money growth. Deficit control will be facilitated by elimination of loss-making public enterprises in the financial and productive sectors and by increased private sector participation in mining and hyerocarbons (which cannot be privatized owing to Constitutional restrictions) and in the provision of some public services.  S (iii) Substantial increases in public sector expendAtures and a reallocation of e<penditures to serve the poorest groups are essential to^aake any progress in alleviating the worst instances of poverty. Health and education presently account for less than 10X of total puJ-lic sactor investment, and current expenditures in the social sectors are disproportionately directed at curative health care and university level education, as opposed to primary health care and basic education. This imbalance must be corrected if real progress is to be achieved in reducing poverty and developing the human capital essential for economic growth in the long term. 13. The principal dilemma facing the Government which emer&as from this analysis is that a decline in the deficit of the public sector must be accompanied by an increase in the supply of essential public goods, both to com'lement private investment and to alleviate the worst instances of poverty. To some extent, increases in public goods can be financed through eliminating losses (for example by public banks and state enterprises) and by improvements in the efficiency of investment. However, it is likely that the increases in public goods necessary to support acceptable levels of growth will require some increase in expenditures. Higher levels of public expenditures can only be reconciled with continued declines in the deficit by raising tax revenues. Tax collections under the present system are well snort of potential, and it ts likely that considerable increases in revenues can be achieved through imjroved administration and control. The Bank and the IMF have worked closely vith the Government to improve tax enforcement, and this Credit would support this effort through a study of means of reducing tax evasion and development of an action plan to implement the study's recomendations (see A nex mV). 14. A major question is whether g owth of 41 per year is consistent with the availability of external and internal finance, given Bolivia's large debt burden, low asvin&s rate and worseniag terms of trade projected as of 1992. To achieve this average growth rate, investment would have to rise from 112 of GDP in 1990 to 18X in 2000, financed by higher domestic saving., increased private capital inflows, and continued assistance from donors, including new lending and debt -elief from bilateral creditors.' Domestic savinas is expected to rise from 8X of GDP in 1990 to 162 by 2000, encouraged by a stronger fiscal effort and increased confidence in the maintenance of appropriate macroeconomic policies. While domestic savings would rise substantially from present levels, savings would remain below the average of 171 of GDP achieved in the decade of the 1970s. An improved incentives framework should encourage increased inflows of net Drivate capital, from close to zero in 1990 to above 1X of GDP by 2000, which together with an increased private domestic investment effort should result in a stronger supply rasponse2. Disbursements from official donors should average 52 of GDP from 1991-2000, a decline from the 71 of GDP received in disbursements over the past two years. The expected decline in debt-creating capital I Bolivia is not expected to be creditworthy to receive lending from commercial banks over the next decade. a This may be a conservative estima*,e of the potential for private capital inflows, given the recent passage of laws which provide a more appropriate environment for foreign investment than previously.  6 inflows is necessary if Bolivia Is to reduce its excessive debt burden. In addition, bilateral creditors vould provide continued debt relief through the Paris Club, amounting to 1.12 of CDP from 1991-2000. This assumes provision of concessional rescheduling terms comparable to the recent agreement, at least for the next few years. Repayment of all sacheduled debt service would be futile for Bolivia and its creditors, as it would make it impossible to finmace the investment necessary to produce the output and exports essential to seTvice the debt. 15. This scenario would permit a substantial reduction in dependence on foreign lending and a sharp decline in the debt burden; the current account deficit is projected to fall from 81 of GDP In 1990 to 52 by 2000, and the debt to GDP ratio from 791 in 1990 to 502 In 2000. Consumption per capita is projected to rise by less than 12 per year on average, a relatively slow recovery from present, depressed levels. This io a feasible scenario, consistent with Bolivias' potential and predicated on a considerable adjustment effort. However, it will not be achieved unless the comprehensive structural reforms proposed under this Credit are implemented in the very near future. Further delay and continued economic stagnation will underm!Me public support and make the sacrifices required for successful adjustment difficult to obtain. Bank Group Ocerations and Stratega 16. Total lending from the World Bank Group as of June 30, 1991 stands at US$911.8 million, consisting of 16 loans for US$274.8 million and 41 credits (including IDA-reflow credits) totalling US$637.1 million (see Annex II). The 16 loans are fully disbursed; 21 credits (including two of the three IDA- reflow credits) have also been fully disbursed. The remaining 16 credits have US$244.4 million undisbursed as of June 30, 1991. Bolivia has repaid the Bank US$161.9 million and has a total outstanding IBRD debt of US$124.2 million and IDA debt of US$625.7 million. 17. Although the Bank Group has been involved in Bolivia since 1964, no new loans were made between 1980-1985 due to poor economic management and lack of creditworthiness. Lending operations were resumed in FY86. Total lending between FY86 and FY91 was US$503.5 million, including three policy-based operations (a Financial Sector Adjustment Credit and two Reconstruction Import Credits) and two institutional development operations to strengthen public sector management. 18. The Bank has played and will continue to play an important role in the design and implementation of Bolivia's economic reform program and in the mobilization of needed financial resources to support the program. The PFP, prepared annually by the Government, the Bank, and the IMt, establishes an appropriate polic- umbrella for Bank adjustment and investment operations. The Bank's basic strategy has been to support the objectives of the Government's economic adjustment effort by: (i) carrying out analyses of macroeconomic, structural and sectoral reform programs through economic and sector work; (ii) designing and implementing a lending program through both adjustment operations and investment lending to increase economic growth and strengthen the performance of the public sector; (iii) assisting to develop the institutional capacity of the public sector; (iv) improving aid coordinati.n to ensure adequate overall funding for Bolivia's economic  7 program; and (v) improvitg the delivery of technical assistance to key Institutions. 19. The Bank's ssestance to Bolivia focusses on several of the key priorities of the Government's development strategy. For the future, the overall level and pace of Bank assistance for Bolivia will take into accouwt the progress made in the implementation of the PPP. Tho planned volume of lending for the FY92-94 period is expected to be about two to three operatE,ons annually amounting to about US$60-65 million a year. Macroeconomic Stabilization and Structural Reform:t The Bank Is addressing necessary structural refom in economic policy to increase competition and establish an appropviate incentives framework for private sector development. Fsst Operatlonss The Financial Sector Adjustment Credit (FY88) is helping to strengthen Bolivia's banking system by improving banking regulations and supervision. The lining Sector Rebabilitation Operation (FY89) is promoting new private mining investment, supporting the restructuring of the state mining company (COMIBOL) to become a holding company, strengthening key mining sector institutions, and assisting the Gaverrmeut in dealing with mining envirormental issues. *uture Ogerations: The center piece of IDA lending operations will be the proposed Struetural Adjustment Credit described in this document. Public Sector Administrations Weaknesses in public sector administration remain serious constraints on Bolivian development, and the Bank has an active technical assistance program to improve the efficiency of public sector mnagement. Past Onerations: The Public Financial Management Operation I (PM - FY88) and its follow-on project P0 II (FtY91) are designed to strengthen financial management through reform of tax administration, restructuring of the central bank, and changes in the finacial administration and control system over the public entities. The lconmlic Management Strengthening Operation (FY89) is supporting needed improvemeats in the management of the public investment program, advanclng the process of decentralization, increasing the coverage and quality of statistics, and beginning a pilot program for improving public sector management and eventually reforming the civil service. Fuur Operstlonst Over the next several years the main focus of Bank efforts in this area will be on the implementation of the recently approved Second Public Financial Management Operation. Sectoral Policy Reforms and Investmentst The supply response to Bolivia's structural reforms will depend on continuation of policy reforms at the sectoral level and on appropriate investments in infrastructure and private production activities. The Bank will continue to focus its support to the Government on operations in agriculture and infrastructure, and on increasing the provision of financial resources to, and strengthening the productive base ofs the private sector. Past Ogerations: The Zastern Lowlands (FY90) project is supporting the development of commeroial export agriculture in eastern Bolivia and developing a plan for the rational and sustainable development of its renewable natural resources. The Agricultural Technology Development Project (FY91) aims to improve the research and development capacity in the sector with a view to improving the  8 productivity of farmers In the poverty stricken highland of Altiplano. The Export Corrdore Project (1189) operation ai=* to improve Bolivia's railway and road infrastructure, makin them more efficient and reliable for developng export.. The Major Cities Water end Sewerage Reb1ilitatioo Project (1191) aizs to improve both the physical and financial management of water/sewerage systes In the major cities of Bolivia. The Prwivate Enterprise Developmt Project (190) will help mall and medium Industrial enterprises improve their access to the formal credit system and strengthen their marketing, accouting and management skills. Puture Onerations: The agricultural sector will be supported by the proposed Agro-Export Developmet Project to promote increased production and exports of non-traditional products. The transport sector will be supported by the proposed Road Maintenance It wbich aims to improve the Government's management of road maintenance activities as vell as to further enhance the private sector involvement In road works. In addition, infrastructure investments are essential to enable Bolivia to export its considerable natural gas resources. The proposed Bolivia-Brazil Gas/Power Pipeline Project would develop the facilities necessary for the generation of electricity using natural gas and its export to Brazil (enclave IBRD loan). Poverty Alleviation and Human Resource Developments Improvements in public services provided to the poor are essential to achieve greater social equity and to build the human capital necessary to support economic development. Thus, the Bank will continue to place a high priority in sector work and in lending operations to provision of primary health and education services and to projects targeted on poorer communities. Past Onerations: The Integrated Health Development Project (1190) supports improvements in the delivery of health services, institutional strengthening, and training. The Social Investeant Fund (PY90) will assist the Government in financing social development projects, building on the successful experience of the Emergency Social F=ud. Future Oporations: Little work has been done to address the very severe organizational problems affecting education. A refoam program for the education sector will be supported by the proposed Primary Education Project which will address the issue of improving literacy, provision of education to a higher proportion of the population, and improving efficiency. Environment: Bolivia faces a number of severe environmental problems that constrain development. Past Overationst Several of the above projects contain components to support prudent environmental management, notably the Eastern Lowlands project and the Mining Sector Rehabilitation Operation. Future Ogerations: The proposed Environntalt Technical Assistance Project would assist the Government in t (i) formulating a strategy for addressing environmental problemst (ii) designntg a coherent set of policies and instruments consistent with the strategy; and (iii) .trengthening institutions to implement policies through appropriate regulations, laws, and incentives. Also, a proposed Wlning and Environment Project would address the very difficult environmental issues surrounding the development of Bolivia's considerable mineral resources.  9 20. Economic gad Sector Work. The intellectual underpinnings of our dialogue with the Government on policy Issues and macroeconomic and sectoral strategies have been established through our economic and sector work (ISV). In an effort to rebuild our country knowledge and investment pipelines, a major ESW program wao carried out in FY88 and FY89. Special attention was given to issues of poverty alleviation, women in development, ai4 public investment (with completion of major reports on each issue). An In-depth assessment of the public sector investment program and analysis of the sustainability of fiscal and monetary policy over the medium term was carried out under the Updating Economic Memorandum completed in FY90. Public sector investment and expenditure reviews have been carried out every year since 1987. A poverty report (8643-BO) was distributed to the Board in 1990, which provides an overview of poverty issues and will propose an action plan for poverty alleviation, with special emphasis on the role of women. On the sectoral level, analytical work in the health, education, transport, banking and financial sectors and water supply was completed during the FY87-90 period. These documents formed the basis for agreeing with the Government on a specific strategy to be followed for each sector, and for IDA investment operations. 21. As for the next phase of the ESW program, a genral economic review, along with public sector expenditure reviews will continue to be carried out on an annual basis. Over the next two years, the focus will shift towards the productive sectors and further privatization efforts. The main area which requires in-depth investigation is the agricultural sector, where issues related to land tenure, rural credit, export promotion, product development and extension services require a clear strategy for future development. Special focus will also be given to the issue of environmental protection, with particular emphasis on the agricultural and mining sectors. 22. Cooaration with the_ DM. The Bank has worked closely with the IMf in the design and execution of adjustment operations, in formulating the lending strategy, and in economic and sector work. Since 1987, the Bank and the IDE have carried out joint annual missions to develop with the Government the Policy Framework Paper. There has also been frequent cross-mission support. For example, Bank and Fund staff recently cooperated in the presentation of a financial reform program which will be supported by this Credit. Considerable effort is made by staff of each institution to comment on the other's work, to use a common database, and to ensure consistent conditionality in lending operations. 23. Aid Coordination and Cofinancin. The Bank has been very active in aid cooe.Onation in Bolivia over the last few years, with efforts directed at helping -..sure that both the amount and composition of donor assistance are appropriate to Bolivia's circumstances. In particular, annual Consultative Group meetings have become an effective mechanism for donor coordination and consultation, as well as for aid mobilization. The most recent Consultative Group meeting was held in October 1990, and was very successful in generating increased commitments of donor assistance to Bolivia. The meeting focused on continued macroeconomic stability, public investment implementation issues, the next phase of the adjustment process to ensure a return to growth, environmental issues, alternative development, and issues of poverty alleviation and human resource development.  10 24. A nmber of ivestment and adjustment operations have attracted a substantial amount of co-finacing (particularly the Financial Sector Adjustment Credit, Emergency Social Fund,and the Social Investment Fund); this trend is expected to continue. In addition, Bank reports, particularly the Country Economic Memoranda and the Public Tnvestment and Expenditure Reviews have facilitated Improved aid coordination by providing a policy framework and strategy which can be drawn on by other donors. 25. IFC fterations. IIC has been active in Bolivia every year for the last five years, after six years of inactivity. In F191, INC's Board approved four projectes (i) the expasnion and restructuring of Puerto Aguirre9 a port facility on the Tamengo canal which allows access to the Atlantic Ocean along the Paraguay river; (ii) GENZX S.A., a project to oubstitute gasoline vith compressed natural gas in public transport vehicle.; (iii) tinproc Bolivia S.A., a promotional company to do the pilot test work for a project to retreat tailings from the Colquirl mine and (iv) a cross-currency interest rate swap facility to help Banco Industrial S.A. (BISA) hedge against foreign exchange risk and diversify its sources of funding similar to the one approved by the Board in 1Y90 also for BISA. In FY89, IPC's Board approved a US$10 million investment in COMSUR, Bolivia's largest private mining company. Prior to this, INC had two projects in Bolivia, a loan to lISA for US$10 million approved in PY68, and another for US$1.2 mlllion to CCONCO S.A. (a medium-size mining eompsny) for extracting silver from ores, which was approved in FY87. This year IPC plans to assist in attracting private sector capital to CONIBOL (mines), and providing financial assistance to medium-size enterprises through financial intermediaries. INC expects to increase substantially its investments in Bolivia over the next three to four years. It is likely to concentrate its investments in mining, energy, and agro-industries. 26. MIGA Coerations. Bolivia was one of the first signatories of the HIGA agreement, which its Congress ratified In 1990. The Government has made its capital contribution to MIGA, although there are still no HIGA operations in Bolivia. Summary 27. Bolivia is now entering its fifth year of economic stabilization without significant growth. The elements required for resumption of real per capita income growth, are first, to maintain ecoromic stability; second, to continue economic restructuring through enacting and implementing legislation to encourage private sector investments, while moving the state out of the productive sectors and eliminating the state's role in direct .ending operations through liquidation and privatization; third, to improve the efficiency of state provision of infrastructure; and fourth, to move aggressively to alleviate poverty through better focussed involvcment in the health, education and water sectors. 28. Given the recent approval of legislation setting the incentive system for private sector investments, the performance of Bolivia over the next one to two years should be judged on (i) adherence of the Government to the fiscal and monetary targets required to maintain macroeconomic stability (agreed to under the ESAh and PIP); (ii) the pace of public sector reform (i.e. privatization or liquidation of public enterprises and improvements in the management of enterprises remaining in the public sector); (iii) pace of financial sector reform (liquidation of public sector banks and enforcement of  - 11 - finacial sector reglatlon.) and (iv) proper application of the inestment, hydrocarbons, anvd minsg lavs to entice private sector inestmete and the SAPCO 1av to control