Bolivia - Current economic position and prospects

RETURN TO RESTRICTED REPORTS DESK CO P Report No. WH-189a WITHIN '"k~'l ONE WEEK This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or co.mpleteness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF BOLIVIA February 5, 1969 Western Hemisphere Department  CURRENCY EQUIVALENTS U.S. $1.00 11. 88 Pesos Peso 1. 00 = U.S. $0. 0842 Pesos 1, 000, 000 = U.S. $84, 175  TABLE OF CONTENTS Page No. BASIC DATA i-i SUMIARY AND CONCLUSIONS i-ii I. RECENT DEVELOPMENTS 1 II. FINANCING OF THE PUBLIC SECTOR 11 III. BALANCE OF PAYVENTS: PAST, PROSPECTS AND POLICIES 15 STATISTICAL APPENDIX This report is the result of visits to Bolivia by Mr. Alberto Favilla in April 1968 and by IMessrs. Robert Skillings and Thomas Burke in October 1968.  BASIC DATA Area 419,470 square miles Population (1967) 4.6 million Average annual rate of increase, 1958-68 2.5 percent Gross Domestic Product at Factor Cost (1968 est.) $b.8777 million Average annual gro%wth rate in real terms 196048 4.9 percent 1967-68 5.0 percent Per capita GDP (1965 est.) US$160 GDP by Industrial Origin (%) 1955 1963 Agriculture and livestock 31.7 23.3 Mining 6. 8.7 Petroleum 3.9 8.3 Industry 11.2 13.2 Construction 3.6 6.6 Others 41. 3 39.9 Savings and Investments as Percent of GNP 1958-60 1965-67 1968 Gross domestic investment 148 16.4h 26.7 Gross national savings 3. 8 11.6 11.2 Identifiable public sector -o.6 2.8 1.6 Private sector and other 4. 8.8 9.6 Net capital inflow (including official 11.0 4.8 5.5 grants) Central Government Finances 1966 1967 1968 ($b. rnillions) Capital Expenditures 243.2 410.5 500.6 Investment and capital transfers 217.4 53 473.9 External debt amortization 25.8 26.9 26.7 Financing 243.2 410.5 500.6 Balance on current account -1. 89.0 -13.9 Domestic borrowing 105.1 230.8 52.3 External grants and loans 179.6 268.7 432.2 % of ijational Money Supplr $b million % Change Income 1962 555.4 11.9 1963 662.4 19.3 13.2 1964 797.9 20.5 14.0 1965 990.0 24 .1 15.6 1966 1J109.1 12.0 16.1 1967 1,142.9 3.0 15.4 1968 (est.) 1,190.0 4.1 14.6  Balance of Payments 1966 1967 1968 (uS$ million Current Account -29.9 -36.9 -48.1 Exports 133.1 1 50.3 Imports -138.8 -151.8 -16o.0 Others -24.2 -38.5 -38.4 Amortization of long-term debt -11.8 -13.5 -14.8 Gross capital inflowT L.?7 50.1 62.9 Private capital inflow (long-term) 3.7 -0.1 -2.D Official capital inflow 37.2 44.9 65.4 Others (short term capital, reserves, errors) 0.8 5.6 -o.5 Commodity Cmncentration of Exports 1956 1963 (% of total7exports) Tin 56.1 53.9 Lead 7.2 3.1 Zinc h.7 1.7 Copper 3.4 4.1 Silver 6.4 6.2. Major metals 78.5 68.9 Cost of Living Average Annual Percent Change 1962 - 6.1 1963 - -1.2 1964 - 10.6 1965 3.1 1966 - 6.1 1967 7.8 l963(lst seven mcntls) 5.5 Public Medium and LonE-Term External Debt Outstanding, June 30, 1968 (including undisbursed) US$359.1 million Debt Service Ratio 126B (% of commodity exports) 8.7 percent* Exchange Rate US$1.00 = $b11.88 * Differs frog b-alance of payments figures for reasons indicated in note (1) on page 20.  SUPUKARY AND CGNCTLUSIOEIS 1. Uith a per capita income somewhere between US$150 and US$180, Bolivia continues to be one of the poorest countries in Latin America. About two-thirds of its population live on the high plateau of the Andes - the altiplano - which, while rich in minerals, is relatively inhospitable as far as climate and soil conditions are concerned. Only in recent years has some appreciable movement to the more fertile eastern lo0Tlands taken place; in framing a general development strategy Bolivian authorities have fluctuated between encouraging such colonization on a large scale and trying to raise the productivity of the agricultural population on the altiplano itself. The experience with both approaches has been lirmted and mixed, so that the choice is a difficult one, which will require continuing study and experimentation. 2. Bolivia's long standing dependence on tin has been declining, but this metal still accounts for some 51 percent of export earnings. Consequently, a substantial part of the country's economic developrents have long been linked to the fluctuations in tlhe tin market. Since 1952, however, wlhen a major social revolution took place, domesticallyv generated developments have been at least as important as external ones. At that time the major tin enterprises - partly ow-ned by Bolivians - were nationalized. Moreover, a land reform was enacted which, while unorganized and in many respects inefficient, profoundly changed the distribution of agricultural property. Both events coincided with a weakening of the tin market. For several years the Central Government virtually lost control of the economy as the organized miners prevented attempts to rationalize the tin industry and curtail the soaring deficits of the public enterprise which owned and administered the major mines (CO1MIBOL). Marketed agri- cultural production fell and only by 1958 seems to have recovered to pre- reform levels. From 1953 to 1958 inflation was rampant as prices approxi- mately doubled every year. After 1958, aided both by rising tin prices and - somewJhat later - by a gradual strengthening of the authority of the Central Government, a period of recovery ensued. The redundant labor force in the tin mines was reduced, COMIBOL's current account deficits were brought down and eventually eliminated, and the public sector - which had been in current account deficit - began to accumulate modest surpluses while Central Government revenues rose substantially faster than GNP. Inflation was controlled with the help of a series of annual monetary programs backed by Stand-by Agreements with the IMF; from 1960 to 1968 the average annual rate of price increases was 6 percent. Output in real terms grew 4.5 - 5 percent annually and the improving economic climate encouraged private investment and savings. The latter rose from around 6 percent of GNP at the beginning of the decade to over 9 percent in the recent past. Together. the public and private sectors, which ten years ago produced savings of less than 4 percent of GNP, raised this ratio to over 11 percent, so that now less than one-third of gross domestic investment is financed fronm abroad. as against almost three-fourths in 1958-60.  - 11 - 3. In spite of this drasLtic inaqovement, howrever, the country during the past decade could not have achieved a sizeable investment level if it had not received massive infusions of foreign assistance on concessional terms. The most important element in this were grants pro-vided by the U.S. Government. More recently these have been phased out; from 32 percent of gross capital inflows in 1965 they fell to about 7 percent in 1968. Assistance wzas also provided by the IDB, IDA and the German Krelitanstall. The Goviernment was able to attract foreign investments in the petroleua sector and sizeable deposits of petroleum and natural gas were found by Gulf Oil. Gas may be exported to Argentina by 1971 if a planned pipeline, for which external financing is sought, is built. 4. The key qauestion for the future is the degree to which the gairns of the past can be increased further. The improvement in the public savings/Gl?r relation occurred while tin prices rose to unprecedented peaks. While still high by past standards, tin prices have fallen since 1966 and in 1967 a corresponding de-terioration in the public finances occurred. Major new revenue measures of the Government reversed some of this deterioration in 1963 and some further measures are planned for early 1969. Put if tin prices show significant additional declines, as they waell may, it -Will require a substantial fiscal effort merely to prevent new slippages in public sector savings. Even with the measures already taken and those Planned for 1969, and wJith a continuation of the past austere approach to current expenditures - which in sone development oriented activities may already have gone too far - the public sector's savings are unlikely to expand as fast as GITP until the revenue base is substantially expanded. Less than full inplementation of the revenue measures planned for 1969, wo-uld further diminish the Goverrnmentts ability to undertake development expenditures. 5. The Governmert has expressed i ts awareness of the need to maintain a climate prcpitious to private investment. Th no area is this more important than in export oriented activities. Eut even if economic policies become fullyr geared to stimulating exports - which would also involve agricultural, pricing, transport and exchange rate policies - it would take -time for them to become effective, so that Bolivia's medium- term export prospects are not bright. Given the substantial lead time between new investments and production in fuels and minerals - and the uncertainty cf results - and given the present market outlook for most minerals, exports until 1972 are largely determined by present capacity and price prcspects. Under these circumstances, an average annual gro-th of exports of 3.8 percent in 1967-72 and of 5.0 percent thereafter, may be considered a favorable result. If GNP is to continue to grow at 5 percent, an investment rate near 17 percent will probably continue to be necessary, and imports will probably have to rise at least as fast as OIPN. W3hile quite imprecise, these are essentially conservative estimates. They imply that Bolivia will continue to need to obtain a large share of its external capital on concessional terms, since other-vise the balance of payments woulf' ruicklIy become unmanageable. If all external borrowing were done at 6.5 percent, for 20 years including 5 years grace, the ratio of total debt  service to exoorts urould rise from some 8.7 percent in 1968 to some 30 percent in 1979. Mhile limited amounts of borrowing on conventional terms will probably be feasible, it seems lilcely that most of these amounts will be absorbed by suppliers' credits, so that official borrowing of significant azounts on conventional terms from other sources is not advisable.  I. RECETT DEVELOPMENTS Background 1. The presont configuration of the Bolivian aconomy originates in large measure in the events of 1952. At that time a revolution took placo which produced some fundamental social and institutional changes, the most significant of which were land reform and the nationalization of the three major mining enterprises. These measures, which were a response to economic and social problems related to the country's history, resource endowment and geographic position, could not but have lasting and numerous consequences, many of which were unintended and many of which posed to the authorities quite unprecedented problems. The social mobility which these events produced may in the long-run be one of their most profound developmental consequences, even though in the short-run they added instability to the economy. 2. At the same time, however, the country's long-term economic problems remained. These include a topography resulting in high trans- port costs, a high (65 percent) level of illiteracy, the existence of three major linguistic and ethnic divisions (Spanish, Cuechua and Aymara) and a concentration of the population in the relatively inhospitable high plateau of the Andes (the altiplano). While rich in minerals, the altiplano, which covers less than one-third of the national territory, contains about two-thirds of Boliviats population and neither its climate nor its soils favor agriculture. Only in recent years has an appreciable movement - partly spontaneous and partly induced by Government policy - to the much more fertile lowlands of eastern Bolivia taken place. However, given the cultural and historical link of the country's indigen- ous population to the altiplano, and the climatic differences between the two regions, the massive opening of the lowlands is likely to be a matter of many decades. 3. Bolivia?s population, estimated at about 4.6 million, seems to grow at a slower rate (2.5 percent) than that of most of its neighbors. Almost two-thirds are estimated to live in rural areas - which adds to the imprecision of the demographic information - and the urban growth rate in recent years seems to have been around 3.4 percent. Income, Savings and Investment 4. Bolivia's per capita income is among the lowest in Latin America. At the current exchange rate it would lie at less than US$180 in 1968; however, a somewhat lower estimate - say US$150-160 - may be more realistic. During the last decade the average annual growth rate of GDP was slightly less than 4.5 percent, reaching about 5 percent in 1967 and 1968.  -2- v. In only two of the last eleven years has gross fixed invest- ment been less than 15 percent of GNP, while in seven it was 16 percent or more. In 1968 it is estimated to be near 17 percent. W.hile the in- vestment coefficient during the decade thus was relatively high for a country of Bolivia's income level, a notable change took place in the proportion that was financed from internal savings. From about one-third in 1959 and 1960 this ratio rose to about two-thirds in 1967 and 1968, While the data on the composition of savings are highly unsatisfactory it seems that both the public and the private sectors participated in this growth; the former moved from small negative amounts to about 2-3 percent of GNP in the middle and late 'sixties, while the private sectorts savings seem to have risen from some 6 percent to around 9 per- cent of GNP. (See Table 5). All these estimates are quite precarious, but a partial verification of the impressive growth of private savings is provided by the ten-fold growth in real terms of time and savings deposits between Decemnber 1960 and 1967. Money, Credit and Prices 6. After a violent inflation from 1953 to 1957, during which the cost of living approximately doubled each year, the last decade was a period of relative price stability. Only in one year - 1959 - did the cost of living rise by 20 percent; from 1960 to 1967 the average annual increase was about 6 percent, a rate also maintained during the first half of 1968. This was accomplished by sizable external assistance - mostly from the U.S. Government - and the formulation of monetary and fiscal programs consistent with a slow-down in inflation. These programs were embodied into a series of Stand-by Agreements with the IMF; the current one extends through 1969. 7. Monetary as well as fiscal (see below, Chapter II) developments in 1967 and 1968 were affected by a series of developments in the foreign sector. The most important one was the decline in tin prices from their peak in 1966. To this, in 1967, was added a decline in external assist- ance, so that for the first time in five years, net foreign reserves fell. Since the decline in tin prices reduced export tax revenues and the de- cline in foreign assistance was mainly in budgetary support, the Govern- ment in 1967 resorted to two inflationary expedients: it increased its net debt to the Central Bank by 15 percent ($b38 million) and it added $b68 million gross (possibly $b45 million net) to its floating debt. Since the latter device raised the demand for private sector credit, the fact that total bank credit to the private sector rose by only 8 percent was partly attributable to the maintenance of fairly tight reserve requirements on the commercial banks. In 1968 credit policies were further tightened in response to shortfalls in fiscal revenues; for the first time reserve requirements were imposed on the Banking Depart- ment of the Central Bank and progressively raised to levels approaching those of the commercial banks, which, in turn, were raised by 5 percentage points in November 1968. Although there was some wreakening in domestic activity connected with the fail in tin prices, the Government did not  offset thls by relaxing its financial policies. Thus most of the monetary targets of the Government's program - embodied in a stand-by agreement with the IMF - wrere achieved and the Government proposes, in 1969, to maintain the general thrust of its cautious monetary and fiscal policies. Currency issue, which in Bolivia accounts for 75-80 per- cent of the money supply, and which in 1968 rose by some 4 percent, may rise by slightly more - some 6 percent - in 1969, as th. deterioration in the balance of payments is brought under control. (Soe beloTw, Chapter III). Agriculture 8. Between 1953 and 1956, a land reform program significantly changed the pattern of land ownership. Under the Agrarian Reform Act of August 1953, by September 1967 approximately 7700 properties with 18.9 million acres had been distributed among 192 thousand families. However, the program has not been completed. Another 8,000 properties covering some 13.1 million acres remain to be distributed and it has been estimated that some 163,000 farm families occupy land without legal title. A program of mobile units to settle claims and issue titles is to begin in March 1969 to complete the process within the next couple of years. 9. These changes increased the need for state-provided extension services and agricultural credit, which were virtually non-existent before the reform. This may have been one of the reasons for the para- doxical fact that in the initial years after the reform sizable emigration from the rural areas was reported. Although agricultural production - at least the amount reaching urban markets - declined in the first several years, by 1958 production seems to have recovered to pre-reform levels. 10. Since 1960, total agricultural production has been generally increasing between 2 and 5 percent per year. There was an unusually severe drought in 1967/68 which lowered production, but estimates for 1969 indicate that production is increasing again. The output of different crops, however, has varied. While the output of new crops such as sugar, cotton, coffee and rice, developed mainly in the Santa Cruz area, has increased substantially - to the point where Bolivia is self-suffi- cient in sugar and rice - the output of traditional crops such as corn, potatoes and quinua grown mainly on the altip lano have not increased as much or have actually decreased (see Table 7). 11. Among the causes responsible for the generally weak performance of agriculture on the altiplano are the minifundia resulting, in part, from the land reform law which set limits on the maximum but not the minimum holdings. This aspect, coupled with primitive production tech- niques - including the general absence of non-labor inputs such as fertilizer and improved seeds - and related marketing problems has tended to keep increases in production low.  - 4-- 12. Attemnpts to ease the problems of production and population con- centration on the altiplano with colonization programs in the sparsely populated eastern region, particularly in the Beni and Santa Cruz areas, have had mixed results. Aoproximately 500,000 acres are being utilized for colonization and settlement for some 13,000 families. However, the increases in production seem to have been relatively small. Moreover, in the first several years the attrition rate approached 50 percent but, more recently, improvements in screening applicants, better facilities and services hlave helped retain more colonists. Nevertheless, ethnic and family ties as well as, in some cases, resistance to changes in occupation, e.g. from mining to agriculture, remain as serious obstacles. More recently, therefore, the emphasis of public policy in agriculture has shifted toward providing more non-labor agricultural inputs, such as fertilizer and seed, in the traditional areas. 13. In certain respects, agricultural development was retarded by the attainment of other policy objectives. Although there have been few direct price controls (an exception is meet for which the price differ- ential between high and low quality cuts is kept artificially low, thus discouraging the production of high quality beef), the Government has kept down prices of most agricultural goods through its import policy of low tariffs on agricultural items. For the last several years, agri- cultural iaports have fluctuated around $25 million, which include many products that could probably be produced economnically in Bolivia, e.g. animal fats and vegetable oils. Moreover, until recently, agricultural credit has been mainly directed to small farmers where economic returns were low. Only sin&s 1961 haA the Government-owned Agricuiltural Bank begun to play an important role, assisted by external financial sources. 14. Bolivia has large areas of underutilized land with agricultural potential, particularly in the area of Santa Cruz, where with adequate infrastructure, especially farm-to-market roads, and a sufficient supply of inputs (i.e. entrepreneurial talent, working capital, improved seeds, fertilizers and farm machinery), major gains in agricultural production could be obtained. The impressive results obtained in cotton production indicate Bolivia's agricultural potential when modern techniques, irrigation, improved seeds and other agricultural inputs are used. The Government, with foreign technical and financial assistance, is designing a compre- hensive program for livestock development. Part of this program, financed with the help of an IDA credit for beef livestock development in the Beni region, is already in operation. Encouragement is also being given to products substituting for imports, such as hard fibers, oil seeds and animal fats. Good possibilities exist in Europe and the UJnited States for exports of Brazil nuts, alpaca hair and wool, and in neighbor- ing countries for selected exports of rice, lumber, and vegetables. The same is true for beef if proper incentives are given through the price system. Bolivia has a qtlota of 50,000 bags of coffee under the Inter- national Coffee Agreement which can be expanded by 5,000 bags per year up to a limit of 100,000 bags. It does not appear that Bolivia will have  - 5 - any difficulty in meeting this quota; however, higher prices could be obtained if quality were improved through better seed selection, planting distances and pruning. Mining 15. Since the colonial period, mining has been a major factor in the economy, silver being replaced in modern times by tin as the mainstay of the sector. Although mining accounts for only 9 percent of GNP and 3.6 percent of the economically active population - approximately 45,000 jobs - much of the rest of the monetary economy is dependent on it because it generates about 69 percent of the country's total export earnings. 16. The volume of mineral production rose by 8.8 percent in 1966 and by 6.6 percent in 1967 compared to an average growth rate of 7.4 per- cent for 1962-65. Tin output rose from 23.4 thousand metric tons in 1965 to 26.9 thousand metric tons in 1967 (see Table 8). This increase occur- red despite a decline in the world market price from $1.77/lbs. in 1965 to $1.51/lbs. in 1967 (London Cash). The imposition of tin quotas in September 1968,based on production levels for the past three years,put estimated 1968 tin exports just under the 1967 level of production, 26.8 thousand tons. Zinc production, whiclh showed a decline in 1966, recovered substantially in 1967. There were also production gains in copper and antimony, while output of lead declined in 1967 (see Table 8). But the general decline in mineral prices from their 1965 peaks are ex- pected to keep production levels at approximately their 1967 level for the next year or two. An exception is zinc, the production and export of which is expected to increase from the present 10,000-13,000 ton level to over 50,000 tons following the initiation of operations in late 1969 at the new Matilde mine. 17. An important part of the recent increase in Bolivia's mining output came from COMIBOL, the state mining enterprise that accounts for 65 to 70 percent of Bolivia's tin production. COMIBOL1s production of tin rose from 16.6 thousand metric tons in 1965 to 18.6 thousand metric tons in 1967. Notwithstanding this progress, and some success in reduc- ing costs, COMIBOL continues to be faced with production costs that are high by international standards, and with a lack of investment funds. The following table gives some detail of COTBOL's production costs, profits and losses in its tin mining operations:  - 6 - COIIBCI's Tin Production Costs and Operating Results 1960 - 196? (US$ equivalent per pound) Average Cost Ex-It-Bne Transuort Av erage Profit (including Marketing Total Selling or depreciation) and Royalties Price loss 1960 n.a, .a. 1.25 0;97 -0;28 1261 n.a. n.a. 1-U 1.17 -0.27 1962 n.a. 0.. 1 6 1.0-3 1963 n.a. n.a. l.49 1.16 -0. 33 196b4 1,28 0.6o 1.88 1.68 -0;20 1965 122 0-5L 1;76 1.70 -O.06 1966 1O01 0.L41 a.42 1.60 +0.18 1967 107 0.4 107 l19 +0.02 1962 (lst 6 months) 1.01 0.35 I-36 1.2s0 +0.0 Source: COiEBOL 18. Unit costs of tin production for COM11BOL, which were bLaught down by more than one-fifth during 1965-66, rose again to $1.17 per pound in 1967 mainly as a result of added benefits to miners in the form of bonulses related to total production. Cost declires in 1968 are largely the result of labor force reductions. COJTO01 is planning to reduce its labor force in 196B, perhaps by a total of 1,000 men. In 1967 approximately 22,500 persons were on CONB3OLts payroll, compared writh nearly 29,000 in 1960. However, there are pressures for i=provements in working conditions in the mines and additional social benefits, which may offset the planmed cost reductions. C0ONO1 is hoping to continue to reduce its costs by another $0.10 to $0.20 per pound by increasing the metal recovery through a new technique involving volatilization (a process of upgrading ore concentrates prior to their being smelted). However, the process is still experinental. A more immediate prospect for COrdIBOL to improve its financial position stems from an apparently successful application of the flotation process for tin recovery from bailings. A pilot plant using this technique has recently been put in operation by a private company at Catavi. It is expected that this plant will produce between 60 and 70 tons of fine tin per month. Several more of these plants are to be installed at other COflIBOL mine sites. 19. C001101 is likely to remain a high-cost producer if no rew mines are put into operation with higher grades of ore, and labor productivity is not improved. I1o0t of COICOL's mines have been operating for at- least 20- -rears and some of the major ones are almost at the point of exhaustation (at the large Catavi mine, for instance, the average metallic content in tin ore has decreased from 1.11 percent in 1952 to 0.16 percent in 1966). C014031L  could also improve its cost position by a more efficient organization of ore move ment and by increasing tile productivity of its labor force. Estimates for 1965 indicate that nroductivity did not exceed 0.4 tons of ore per man/day whereas meos privately owned mines in Bolivia, of medium size, were obtaining at least 1.0 tons/man/day. This problem could be solved by retraining and further reducing the disproportionlate number of persons working on the surface, many of whom are kept for reasons of social policy. 20. In 1961, a program of financial and technical assistance for COMIBOL was initiated from three sources: the Inter-American Development Bank (IDB), the United States and the Federal Republic of Germany. Under the first two phases of this "triangular operation", CaIIBOL received approximately $32 million to cover operating deficits and to finance exploration, equipment and plant improvement. The third plan, approxi- mately $10.1 million, scheduled for completion in 1969 has enabled new exploration and has given some positive results. But there is little chance that COMIBOL itself can generate the funds needed to develop new mines in the foreseeable future. COPJBOL's management would lilke to develop new mines in zones assigned to it jointly with experienced foreign companies under leasing agreements or as mixed enterprises. It moved in this direction in 1965 and 1966 but in 1967 new legislation required that in such cases COMIBOL must retain 51 percent owinership and also manage the operation. This law is likely to make it difficult to attract private participation. 21. The privately owned medium-sized mines appear to have done reasonably well in the past few years, partly because of relatively high world market prices and partly because they have been able to hold their costs down. Tin production from this group increased from 3.1 thousand metric tons in 196h to 4i9 thousand metric tons in 1967. This group is also an increasingly important producer of copper. But aside from those investments planned and under way, e.g. Matilde, it is unlikely that any further large investment will be made in the near future, given pre- sent tin quotas and the general level of mineral prices. 22. The small private mines produce a little more than 10 percent of Bolivia's tin production and about half of the lead production. This category is characterized by a large number of miners producing only small amounts. MoPst smnall mines are operated with a small labor fcrce using crude or primitive production techniques and recovery methods. Although property size and volume do not justify elaborate installations, simple additions of equipment enabling operators to reach a semi- mechanized state could substantially increase production. The Gorporacion Boliviana de Fomento (Cl) and the Banco linero (WIIN) have received funds, respectively, for loans to small miners from IDB (47.3 million) and the U.S. Agency for International Development (AID) ($5.7 million). However, few of these funds have been disbursed because of delays in establishing the ore reserves necessary for equipment loans and because of delays in reorganizing the BAXIN along more efficient lines. Petroleum 23. In the wake of the Chaco var (1932-1935), the Bolivian Govern- ment nationalized the properties of the Standard Oil Co. of New Jersey.  - 8 - A state petroleum company, Yacimientos Petroliferos Fiscales Bolivianos (YPFB), was organized to continue the operations of the properties. The capacity of YPEB to generate funds was limited, both because of the Government's petroleum price policy to help develop transportation and because of the relatively small volume of production; moreover little attention was paid to cost controls and to the adoption of technical advances. In 1955, the Government in an attempt to solve the problem of oil imports decided to open up the country to foreign oil companies and drafted a new petroleum code wLich was adopted in 1956. Several compan- ies responded, but only the Gulf Oil Company, through its subsidiary the Bolivian Gulf Oil Company (BOGOC), is currently active. Another company, Atlantic Richfield retains some concessions. 24. Petroleum production did not increase substantially until 1966 when BOGOC initiated production. It rose by 55 percent in 1966 to almost 6.1 million barrels and again in 1967 by 42 percent to 14.5 million barrels (see Table 9). This sharp increase in output is due to increases from BOGOC, whose production in 1968 is expected to reach 15.7 million barrels. YPFB's production for the first half of 1968 increased by 20 percent to about 1.5 million barrels. 25. BOGOC initiated exports of crude oil by pipeline to Arica (Chile) from its fields in Santa Cruz during October 1966. This pipeline has a current capacity of about 25,000 barrels/day; and, with two additional pumping stations, the throughput of the pipeline could be increased to 50,000 barrels/day. There is, however, insufficient storage in Arica to do this and it will be necessary to reach agreement with Chile before existing facilities and exports can be expanded. 26. BOGOC's crude oil reserves are estimated to last about 18 years at present export levels (see Table 9). YPFB is reported to have only a two or three year reserve of oil left; to meet an export agreement with Argentina, it has been buying oil from BOGOC. The only major exploration under way currently is a joint venture between YPFB and BOGOC on the altiplano the results of which are several years into the future. Given these trends, no large increase in oil production is foreseen in the next several years, once the throughput to Arica has reached 50,000 barrels/day. 27. Better prospects exist for natural gas; currently the reserves are estimated at 2 trillion cubic feet. An agreement was recently reached between Argentina's Gas del Estado (a Government-owned gas mono- poly) and YPFB and BOGOC for Bolivia to export gas to Argentina. The agreement is for 20 years and calls for 4 million cubic meters/day for the first seven years and 4.5 million cubic meters/day for the following 13 years. Such exports could have a gross value of approximately $14.5 million annually in the first seven years. The construction of the gas pipeline should take about 18 months and is expected to be in operation by mid-1970, at an estimated cost of $50 million.  28. YPFB would like to step up its exploration activities and to build several light petrochemical plants but it operates under severe financial constraints which are the results of high costs. It has not regularly paid ta-es to the Governmenb and it has been slow in passing on the tax on retail sales which it collects for the Government. ConsequentGly, the financial rehabilitation of YPFB is an important objective. 29. The petroleum code of 1956 provides incentives to foreign oil companies and helped induce the investment of the Gulf Oil Company, referred to in paragraph 23. After negotiations in 19686 BOGOC has agreed to elimi- nate its depletion allowance and has increased its taxes to the Government to about 50 percent of its net income. The Government recognizes that it will be very difficult for Bolivia to expand oil exploration and develop- ment unless additional experienced foreign private operators are attracted to the country and that to this end the maintenance of an adequate investment climate will be indispensable. Unless Bolivia can succeed in stimulating a mnuch higher level of exploration, a further expansion of the petroleum industry (apart from the output of gas already mentioned) seems improbable. Manufacturing arn Construction 30. Manufacturing output rose by an estimated 6 percent in real terms during 1968, about the same as 1967. (See Table 3). Since 1960, the growth rates have ranged from 5 to 10 percent. Large relative advan- ces in production were made in wood products and furniture, food process- ing and beverages, textiles and chemicals (see Table 10). Cement produc- tion also increased, but it was again insufficient to meet growing demand. As a result, 37,000 metric tons were imported in 1967 against 23,000 tons in 1966. 31. There are still complaints of idle manufacturing capacity and also of a shortage of working capital in many firms. While it is likely that additional working capital would lead to some increases in output, much of the excess ceapcity appears to be economically unusable. At the same time, the scarcity of managerial personnel and of skilled labor continues to be a constraint on efficient industrialization. 32. The Government has taken a number of steps to stimulate the indusbrial sector. An investment promotion lawi was passed in October 1965 giving tax incentives and granting exemptions from customs duties to new investments. The Institute for the Promotion of Private Investrment (INPI30L) was created to administer the law. By February 1968, INPIBOL had received 132 applications from local and foreign private sources under this law, representing investments of about $52 million. A small, but increasingly important, source of investment funds is the Industrial Bank, a private concern, created in July 1963 with a loan from USAID, and equity participations from ADELA and local investors. It subsequently received a loan from IDB.  - 10 - Tourism is now receiving considerable attention and may be expected to grow but it is not likely to become a major industry in the near future. 33. The Corporacicn Boliviana de Fcrmento (CDF), a public develcp- ment agency, which grants credit to mining, iindustry and other investnonrt projects has had some favorable impacts on these sectors. But its role has become increasingly corplex. In recent years it has been granting credits to the private sector with assistance from the IDB and it has also expanded its own enterprises, managed directly by CBF. CBF operates, or is a major stockholder of, a cement plant, a Brazil nut processing plant, a hard fiber factory, a fish canning plant, a cocoa butter plant, two sugar mills, a milk plant, a slaughter house, an irrigation project, breeding centers for cattle and hogs and a number of others, including EL4DE (electric power). This wide range of activities has given its organi- zation an unwieldy character. Consequently, the Bolivian authorities have stated that they want to define CBF's functions more clearly and to trans- for most of its enterprises to the private sector. 34. The interest taken by private groups in tne industrial promotion law shows that the scope for industrial development is far from exhausted. For example, ready opportunitios seem to exist for the production of pro- cessed foods, wearing apparel, construction materials, and for sirmple as- sembly operations. Industrial expansion much beyond these limited goals would - for the time being - probably be confronted by the limitations of a small market and high transport costs. 35. Construction activity, virtually dormant for years, increased significantly in 1965 and 1966 and advanced impressively in 1967. The most important factor in this trend has been road building and other pub- lic works, although residential construction also increased substantially. The forward momentum in housing appears to have originated from the in- creased construction activities of the Nationial Housing Corporation (CONAVI). Its activities are financed by a 2 percent levy on salaries paid to workers, a portion of the sales taxes on manufacturing, printing and construction companies and special contributions by the Government. In mid-1967, Bolivia initiated an $8.5 million program to construct 3,500 houses, of which 2,000 would be built on a self-help basis with fi- nancial assistance from an IDB loan of $5.5 million. These units are in addition to 2,100 other units built during 1965-1966, also with a loan from IDB ($4.0 million) and 240 units financed by USAID with PL480 grants ($1 million equivalent). Additionally, privately financed housing has been assisted in recent years by newly established savings and loan as- sociations; it is estimated that they have financed an additional 300 houses. Additional dollar financing designed to fund long-term mort- gages for over 2,000 new private housing units has been authorized by USAID in the form of housing guaranties totalling $5 million. These are likely to be disbursed during the next two years. A further propos- al to make $214 million in guarantied funds available to the Central Savings and Loan Bank is under active consideration. A substantial in- crease in private residential construction is likely to result.  II. FfINAICLIG OF TIE PUBLIC SECTOR 36. Bolivia's public sector is relatively extensive (including a large part of the mining, petroleun and transport). Public enterprises are subject to a high degree of centralized decision making as regards matters deemed by the Government to affect overall public policies. The Central Government's capital expenditures are smaller than those of the remainder of the public sector, but the level and financing of this re- mainder is to a large extent determined by the same factors as those shaping the Central Government's finances, namoly (a) developments in the export sector and domestic policy responses to such developments, and (b) foreign assistance. 37. One of thle overriding influences on the structure of the public finanices in the last decade and a half has been the national nmining cor- poration - COMBIOL - which resulted from the nationalization of the three large tin enterprises in 1952. The unstable social and political situa- tion that prevailed until the late 'fifties made it next to impossible to run COMIBOL on a comnercial basis; labor costs were uncontrollable, un- economic mines could not be closed and the mounting current account def- icits had to be met by the national Treasury and the monetary authorities and were a major element in the violent inflation of 1253-58. It was the gradual stabilization of the political climate in the 'sixties that proved to be the essential prerequisite for improvements in the public finances; aided by high tin prices in the mid 'sixties, as well as by some measures to rationalize and reduce the labor force, COI4IBOL developed modest current account surp.uses and in 1966, when tin prices were very high, was able to pay substantial export royalties to the Central Govern- ment. In 1967 and 1968 the position of the corporation deteriorated once more, as world tin prices fell, but it is still in surplus vis a vis the Central Government, though paying little in taxes. 38. At the same time the Central Govern-ment was able to pursue a vigorous policy to improve the level and structure of its own revenues. Central Government receipts rose from about 7.7 percent of GNP in 1963 to an estimated 9.3 percent in 1968. This was achieved by increasing reliance on domestic taxes; during the period taxes on foreign trade fell from 59 percent of current receipts to 48 percent while taxes on income and property rose fromn less than 17 percent to over 28 percent. One im- portant element in the latter category are the tax payments by the Gulf Oil Company which did not yet exist in 1963 and are expected to be over one-fifth of all direct taxes in 1969. (See Table 13). Current expen- ditures also rose substantially in 1964 and 1967, but fell in real terms from 1966 to 1968 and are budgeted to rise by less than 1 percent in cur- rent prices in 1969. Over one-fourth of the total increase in current expevoe- ituros frcm 1964 to 1968 wias caused-by rising military expenditures - large- ly for counterinsurgency activities - whose growth, hcwever, ceased in 1963. 39. The principal measures which were taken in the recent past or which are planned for the near future, concentrate on further increases in Government revenues. In the first-half of 1968 the rates as well as the system of valuing imports for customs duties were changed, resulting  - 12 - in on average increase in effective duties of at least 20 percent. While the immediate result was to reduce imports, this is expected to be tran- sitory. In addition, in 1968 the Government succeeded in renegotiating its tax agreement with Gulf Oil. Since 1969 will be the first full year of the new agreement, revenues derived from GuLf shouild rise from about *$bL8 million to $b63 million. itreover, the Government has stnted its intention to enact a new land tax, w^hich is designed to fall most heavily in the first year on the country's 3,500 largest agricultural establish- ments. The timing and yield of this tax are still uncertain. Other tax measures planned affect the sales and income taxes, and may yield some $b25 million in 1969. 40. In spite of the appreciable governmental savings effort which these figures imply, no sizeable public investment effort could be mounted solely on this basis. l/ The Central Government's investments in recent years were largely financed by foreign assistance, a large, albeit declining, part of it in the form of U.S. Government budget support grants. The following figures give an indication of the changing size and structure of the Central Government's capital expenditures and their financing: Sum of annual 1968LZ/ 19691 increments, 1964-69 Total, Capital Expenditures 18665 500,6U-- 561.7 375.2 Investments and capital transfers 160.5 473.9 523.1 362.6 External debt amortization 26.0 26,7 38.6 12.6 Financing 186.5 500.6 561.7 375.2 Budgetary savings -28.0 -13.9 1 39.6 167.6 External financing 184.8 432.2 385.0 200.2 (Grants) (93.5) (10.6) (1o,o) (83,5) (Loans) (91.3)(L21.6)G375,0) (283.7) Domestic borrodring 29.7 82.3 37.1 7.4 1/ The fiscal accounts showf current account deficits in years in which the Central Government sector of the national accounts show surpluses because in the former the current transfers to public enterprises are counted as Government expenditures while in the latter they are not, counting,instead, as negative public enterprise savings. 2 Estimate. 3/ Preliminary Government estimate. Includes yields of land tax and other intended new measures. Source: Table 12  - 13 - 41. The estimates for 1969 thus imply that one-quarter of the Central Government's capital expenditures will be financed by current savings and another 7 percent by domestic borrowing. While the pro- portion financed from abroad is still high, it has not only been declin- ing significantly, but also represents a sizeable increase in the commitments to future efforts, as the grant component has been largely replaced by loans. Although these, in the main, are still on concess- ional terms, they nevertheless represent a real decline in the foreign subsidy component of the public investment effort. 42. The main fiscal issues before the Government concern (a) the degree to which reliance in the future can be placed on containing the growth of clurrent expenditures, and (b) the degree to which untapped revenue potential can be mobilized. Regarding the former, it is note- worthy that Central Government consumption expenditures (wages and salaries and purchases of goods and services) between 1963 and 1968 rose by 5.9 percent in real terms, but that this rate i3 made up of a much slower growth until 1967 and a 9 percent increment in 1968. It should, there- fore, be possible to reduce the increase in these expenditures to the GNP growth rate in the next few years. However, current expenditures are also affected by the transfers to other public enterprises and agencies. In the past, the most important one among these was CONIBOL; whether current deficits there can be avoided in the future will depend both on the price of tin and on the ultimate success of the mine-rationalization program. Other agencies deserving special attention are the social security agency, whose current deficits have been rising in recent years, and the railways, which in 1968 were budgeted to have a small cash surplus on current account! but whose generation df funds is still inadequate to cover maintenance and re placements. 43. Regarding the future growth of Central Government revenues in real terms it is unlikely that the past r8te of increase can be maintained unless deliberate efforts are made to diversify and expand the revenue base. The tax payments from Gulf are an example of what can be done in this field; if the gas pipeline to Argentina is built it should yield the Government a further $b35-L0 million at present prices and exchange rates. The degree to which the Government is willing and able to stimulate and promote other projects with similar tax paying potential will be one of the main determinants of Bolivia's long-term development prospects. U.. In recent years, over half of total public investment was con- centrated in the transport sector. Road and airport construction and improvements have been financed in large part by USAID. The roads being built under present plans will ocrnct the mining and agricultural areas with the four major cities - La Paz, Oruro, Cochabamba and Santa Cruz. The Government is also re-equipping the main airline with jets and improv- ing the ground facilities at major airports. The railways have bought new equipment financed by Japanese and German suppliers' credits. 45. Two major power projects were recently completed with two credits extended by the International Development Association (IDA) and one by the IDB in 1964. The Chururaqui hydroelectric plant (11 yi), close to La Paz, owned by the Bolivian Power Company (BPC) and the Corani. hydroelectric plant (27 HIW), close to Cochabamba, owned by Empress Nacional de Electricidad (ENDE), a government entity. The genera.npr; capacity of these two projects is estimated to be sufficient to rme-et; thn  - 14 - growth load only through 1969, Accordingly, BPC has already begun con- struction of a new 27 I'IW hydro station (Harca) and ENDE has completed studies for another 34 MW hydro stationi (Santa Isabel) for which IDA fi- nancing has been requested. ENDE also expects to receive IDB financing for power plants at Potosi and Sucre (12 I4W combined) and has initiated construction of a 10 inW thermal station in Santa Cruz, with a loan from USAID. 46. IDB has made a $9.5 million loan to "Empresa Nacional de Telecomunicacionesll (ENTEL), a recently created government entity, to help finance the first stage of a telecommunications system to connect the four principal cities of Bolivia: La Paz, Cochabanba, Santa Cruz and Oruro. The project also includes a high frequency system from Santa Cruz to Corumba, on the Brazilian border, and a pilot scheme to install telephone lines in the altiplano. Moreover, with a suppliers' credit of $4.5 million from Japan, 18,000 additional telephone lines are being installed in La Paz. 47. Investments in the social sector have been rather small. With the help of IDB and suppliers' credits from Germany, water and sewerage facilities are being built in La Paz, Sucre, Oruro, Potosi and Santa Cruz. Only the major cities have sewer systems. Running water was available to only 11 percent of the pcpulation in 1967, and less than 8 percent were served by public sewerage facilities. Only about 60 percent of elementary school age children attend school and of these approximately 72 percent fail to complete primary school. The retention rate for secondary schools is also low. Investments in education are being made with assistance from IDB and USAID. In general, the education system appears to be in need of considerable improvement to bring it into closer harmony with the needs of the economy. La. The growth which Bolivia has experienced in the last few years can be traced, in the main; to the impact on the economy of favorable tin prices which prevailed through 1966 and the construction boom generated by large infrastructure investments in roads and the revival of housing in 1967. The near-term export outlook for minerals, however, does not appear promising, and unless the level of gross domestic investment is maintained, it is unlikely that Bolivia will continue to achieve a satis- factory rate of economic growth in the years immediately ahead. Since the level of domestic savings is closely linked to the country's foreign trade performance, it would seem desirable that Bolivia place emphasis on investment projects that would diversify and increase exports in the future, such as the development of new mineral deposits, hydrocarbons and agricultural products. There is also considerable potential for import substitution relative to many agricultural products, e.g. vegetable oils, now being imported. 49. Selected infrastructure projects also appear to have a high investment priority, particularly power and farm to market roads. The efforts to raise agricultural production are likely to require substan- tial amounts of credit which, however, can only be utilized effectively  - 15 - with considerable technical assistance to farmers. Therefore, agricul- tural education to provide additional extension services would seem to have high priority. 5O. Considerable improvements will be needed in the future in Bolivials public investment planring mechanism. Currently, the National Secretariat for Planning and Coordination prepares two-year plans as guides for public investment. Re!cently, the agency has been reorganized and is considering the preparation of a general public sector investment program. However, there is as yet no effective mechanism to determine priorities, to coordinate financi.al and investment decisions or to devise specific measures that will translate general objectives into concrete policies. It is in these that the Planning Secretariat could make an increasingly useful contribution to Bolivia's development. III. BALANCE OF PAYMETS: PAST, PROSPECTS AND POLICIES 51. From the late 'fifties to 1967 almost without exception Bolivia had annual net capital imports of US$30-1t5 million. Since during the period a further US$10-15 million per year was devoted to debt amortiza- tion, annual gross capital inflows fluctuated between US$14 and 60 mil- lion. Until 1965, between one-third and one-half of the annual gross capital inflows were provided by official transfers, mostly in the form of budget support from the U.S. Government. After 1965 the proportion of these official grants and donations in total capital inflows dimin- ished rapidly; it was 27 percent in 1966, 13 percent in 1967 and 7 per- cent in 1968, and for 1969 it is expected to shrink further (see Table 16). 52. Nevertheless, official capital continues to be the preponderant element in Bolivia's external finances; the most significant switch has been from grants to loans to the Central Government, but even these still carry with them a sizeable subsidy element inasmuch as they come princip- ally from USAID, the IDB Fund for Special Operations and IDA. Another important source of official credit has been the German Kreditanstalt which participated in the "Triangular Operation" (see above, para. 20) to rehabilitate COIIBOL. Neither the IDB nor the IBRD have made loans to Bolivia on conventional terms. 53. The relatively constant level of the current account deficit until 1967 obscures one of the most significant features of Bolivia's development in the past decade. *While the absolute amounts of capital inflows did not shrink significantly, real income grew appreciably, real investment even more, and internal savings more still. The following figures summarize the changing relative role of the foreign sector during the period:  - 16 - Average Annual Annual Averages Rate of Change Between Periods 1958-60 1965-67 (%) Gross Domestic Investment ($b million, 1953 prices) 499 771 6.4 Gross National Savings ($b illion, 1958 prices) 129 526 22.3 Net Capital Inflow ($b million, 1958 prices)l/ 370 245 GNP at market prices ($b million, 1958 prices) 3370 4713 4.9 Investment/GNP ratio (%) 14.8 16.14 Savlngs/GOP ratio (l) 3.8 11.6 Net Capital Inflow/GNP ratio GO 11.0 4.8 Net Capital Inflow/Gross Domestic Investment ratio (%) 74.1 31.8 1J The decline is illusory. The dollar figures were US$ 31 million in both periods. The discrepancy arises from inconsistencies in the deflators used in the national accounts and because the exchange rate did not depreciate paEnpassu with domnestic prices. The figures shown above were calculated by using the official GNP in constant prices and deriving savings and investment figures in constant prices by applying the invrestment arnd savings ratios calculated for the current price data. (See Tables 4 and 5.) 54. Focports as w-tell as imports rose by over 50 percent, but 'while in the case of the former the larger part of the increase was price- induced, the growth in imports reflected primarily an expansion in the absorption of consumpticn and investment goods. This difference between the causes for the growth in the two trade flows carries with it impor- tant implications for the future, inasmuch as it will no longer be possible for Bolivia to count on comparable increases in the prices of its main exports. On the other hand, maintenance of the past growth in real consumption and investment will require a continued expan- sion in Bolivials capacity to import and, consequently, its current account earnings. Only a vigorous policy to promote an expansion and diversification of the productive base for exports will bring this about.  - 17 - Exports 55. In the tfifties Bolivian exports fell sharply under the impact of declining volumes of tin output. Only rarely could Bolivia meet her quota under the International Tin Agreement, and her share in world tin exports shrank from 20 percent in 1951 to 15 percent in 1958. During this period Bolivia's tin exports fell by 67 percent, and export earnings were further affected by a 27 percent drop in unit values. Total exports declined from their 1951 peak of US$151 million to US$63 million in 1958; i.e. by 58 percent. After 1958 tin prices recovered, almost without interruption, until 1965. Since then they have been declining steadily, but are still some 50 percent above the 1958 level. Of the total in- crease in Bolivia's exports between 1958 and 1967 of about US$72 million, about US$32 million can be attributed to the rise in tin prices and US$23 million to increased volumes of tin exports. 56. The remainder of the increase is chiefly accounted for by the initiation of substantial petroleum exports in 1967 when the pipeline to Arica began to onerate. The value of these exports remained at some US$26 million in 1968 and can only be increased if an agreement is reached with Chile regarding the construction of additional installations in Arica (see above, para. 25). The second major change in the export structure of Bolivia is expected to occur at the beginning of the tseventies, when the planned pipeline to Argentina will permit the ex- ploitation of the sizeable natural gas deposits discovered in recent years (see above, para. 27). Given the normal lead time betw.^een begin- ning of exploration and production, the fact that little activity - outside that of Gulf Oil - has taken place in recent years in the search for minerals and fuels, makes it unlikely that in the next few years other major changes will occur in the structure of exports, unless these originate in aZriculture. For this to happen, however, the general mix of agricultural development policies (pricing and exchange rate policies, credit, transport investment, etc.) will have to be adapted to the goal of increasing the quantity and quality of production of those commodities for which Bolivia has the potential to become an efficient producer. In niuch of Bolivit'n agriculture, at best this is likely to be a rather slowi process. Imports 57. No definitive information is available on the composition of im- ports after 1266, and even before. that date the classification of. the 6ffi- cial trade st3tistics leaves much to be desired. Approximately 36 percent of- 1966 imports were consumer goods, half of them foodstuffs. Fuels and raw materials accounted for 24 percent and the rest was capital goods. Between 1963 and 1966 the latter category accounted for over 63 percent of the increase in total imports, reflecting both the increase in domestic investment and the absence of a significant capital goods industry in Bolivia. The structure of imports in 1967 seems to have been broadly' similar.' (See Table 18.) A noteworthy feature of the composition of imports is that only 3.5 percent of the intermediate products and 2.7 percent of the capital goods are classified as being for agriculture;  even granting that the classification may be deficient, this structure adds strength to the impression that far too few resources are devoted to modernizing and improving the productivity of the sector employing about one half of the labor force. 58. In 1969 and 1970 imports are expected to grow rapidly. If the gas pipeline is built, it should add directly some US$25 million to total imports in these two years and a further, undetermined, amount through the indirect effects of the increased activity on aggregate demand. This, however, is not expected to add to the pressure on the balance of payments, as the external financing that is being sought would cover more than the direct foreign exchange component. Other factors affecting imports are more hazardous to predict, in general it seems safe to assume that imports will rise at least as fast as domestic income and output, ano faster if it is attempted to raise the investment coefficient further. Outlook and Creditworthiness 59. There have been several periods during which the service on part of Bolivia's external debt was suspended. No payments were made on dollar bonds (of which $67 million are now outstanding) between World War IT and 1958, when a settlenent was reached. Service was suspended again in 1966, and uhile it has still not been resumed (Januaary 1969) a neu agreement was reached -with bondhclders representatives in July 1968, and Sovernment representatives have stated that procedural details would be completed soon. In 1968 an. agreement on compensation was reached with the British former owners of the nationalized railways. A final settlement with the former owners of nationalized mines - soae of wqhom were Bolivians - has not been reached, but substantial payments cn account of compensation were made. The present status of the claims is obscure and most of them appear dormant. mIe present Government's progress in settling outstanding claims nakes the issue of creditworthiness one of Bolivia's Drospective capacity to service additional external debt, rather than one of willingness to honor external commitments. do. The simultaneous occurrence in the past of major socic-political changes in Bolivia and wide fluctuations in her external markets, makes conclusions regarding future prcspects, derived from the extrapolation of past e-xperience, subject to greater than u saial uncertainty. Broadly, much of the 'fifties was a time of domestic disorder and economic mis- management, which lasted until the realignment of power produced by the 1952 Revolution had settled into a neew and more stable pattern. It w.jas, how.-ever, also a time of weak tin markets and would have been a time of troubles even if there had been a strong and efficient Government in Bolivia. After 19T5, doaest ic economic management gradually improved, and nowhere was this more noticeable than in the improvement of the public finances and the internal savings effort. This was, however, also a period in which tin prices first rose to unprecedented levels and even now remain well above those of the past trough. A significant part  - 19 - of the increased domestic savings originated directly fron this improve- ment and part of the remainder - attributable more directly to better economic management - was undoubtedly easier to achieve in the atmos- phere of relative prosperity induced by the external sector. 61. In this context the medium and longer-term prospects look more problematic than they might appear from a mere review of the record of the last decade. Raising domestic savings from 4 to 12 percent of GNP in a period of expanding GNP and rising tin prices may have been consid- erably easier than raising the savings ratio by - say - a further three percentage points wihen tin prices are stagnant or declining. The fact that in 1967 and 1968 the public sector savings ratio seems to have declined supports this impression. (See Table 5.) On the other hand, the Government's position is now much stronger than it was ten years ago and it is undoubtedly better placed to adopt some measures to prevent a major deterioration. What is in question is whether the savings - invest- ment gap can be narrowed much further without a substantial cut-back in the investment effort. Such a cut-back would be tolerable if it were of a purely temporary nature, but as a long-term solution it might condemn Bolivia to accepting a slower rate of economic growth, especially as some development-oriented current expenditures probably have already been curtailed excessively. Although undoubtedly improvements could be made in the way in which investable resources are utilized - so that somewhat lower investments might not result in correspondingly lower growth rates - the scope of such improvements is probably not great. Mtoreover, in part they are taking place already; the heavy dependence on external capital for investment in the past has brought with it some real improvements in project preparation in some of the public sector agencies. Cutting back investments as a long-term solution is not likely to merely affect unproductive or low priority projects. 62. The medium-term outlook for the balance of payments, consistent with a maintenance of past investment and growth rates, adds to the doubts noted above regarding a continuation of the trends of the past decade. This conclusion is based on several considerations, including particularly export prospects, import requirements and the terms on which new loans will be available. Before 1972 exports are expected to rise only slightly above their 1968 level, even though the gas pipeline is scheduled to come into full operation in 1971. The main reason for this is that tin and other metal markets are expected to weaken further. Moreover, the nature of the expected financing of the gas pipeline, under which exports will be pledged for debt service, makes it advisable to forecast only the net amounts of disposable foreign exchange, i.e. some US$8 million yearly. (See footnote 15 of Table 17). 63. If an agreement is reached with Chile regarding the oil exports through Arica, a US$20.4 million increase in these exports may be pro- jected for 1972. On this assumption, total exports in 1972 may be some 19.5 percent above those of 1968. After 1972 the picture is much cloudier. If existing exports only are projected on the basis of world market pros- pects and Boliviats probable share (in tin), very little growth - less  - 20 - than 2 percent per year - would occur. If one assumes that Government policies will oromote the development of major new supplies of exportable products in the next feaw years, an annual grmfth rate of 5 percent after 1972 might be considered a favorable result. 64. If imports are projected to grow at 5 percent per year and con- servative assumptions are also made about the future of the service accounts, the net capital requirements will growi rapidly. So Till the gross capital- inflowis needed, including amortization on the existing and the future debt. Just how- rapidly they will grow will depend, of course, on the terms on which neu debt is contracted. For illustrative purposes, two calculations are shown below; the only difference between them is that in Projection I it is assumed that all newy debt is contracted on "conventional official financing" terms (here defined as 6.5 percent interest and 20 years maturity including five years grace) wihile Projection II is based on the assumption that all new debt is contracted on the basis of current IDA terms (0.75 percent service charge, 50 years maturity, including ten years grace): I II Exports 1968 (US$million) 150. 3 150. 3 1979 " 262.6 262.6 Resource Gap 1968 t 37.6 37.6 1979 53.5 53.5 Interest 1968 4.1 4.1 1979 tt 57.1 10.4 Net Capital Inflow 1968 48.1 48.1 1979 124.0 77-3 harortization