Bolivia - Structural Adjustment Loan Project

Document of The World Bank FC FOR OFFICIAL USE ONLY Report No. P-281 1-B REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT LOAN TO THE REPUBLIC OF BOLIVIA May 12, 1980 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Bolivian Peso ($b)- Through November, 1979 US$1.000 = $b 20.000 $b 1.000 = US$0.050 Since November 1979, a new exchange rate regime, based on a managed float of the peso, has been in effect at the initial rate of US$1 = $b 25. The rate is to be adjusted in line with movements in Bolivia's export competitiveness. FISCAL YEAR January 1 to December 31 ABBREVIATIONS CBF - Corporacion Boliviana de Fomento (Bolivian Development Corporation) COMIBOL - Corporacion Minera de Bolivia (Bolivian Mining Corporation) ENA - Empresa Nacional de Arroz (National Rice Corporation) ENAF - Empresa Nacional de Fundiciones (National Smelting Corporation) ENDE - Empresa Nacional de Electricidad (National Power Corporation) ENFE - Empresa Nacional de Ferrocarriles (National Railways Corporation) ENTEL - Empresa Nacional de Telecomunicaciones (National Telecommunications Corporation) LAB - Lloyd Aero Boliviano (Bolivian Airlines) YPFB - Yacimientos Petroliferos Fiscales Bolivianos (Bolivian Petroleum Corporation) FOR OFFICIAL USE ONLY BOLIVIA STRUCTURAL ADJUSTMENT LOAN Table of Contents Page No. Part I The Economy ....................................... 1 Part II The Government's Economic Recovery Program ....... 9 Part III Public Investment and Financing Program . 13 Part IV The Structural Adjustment Loan .... 18 Part V Bank Group Operations in Bolivia ...... 21 Part VI Legal Instruments and Authority ...... .... 23 Part VII Recommendation ............................. . 23 Annex I Country Data .......... .. 24 Annex II Status of Bank Group Operations in Bolivia .... 29 Annex III Supplementary Loan Data Sheet ............ 33 Annex IV Government of Bolivia Letter on Development Policies 34 Annex V Imports Eligible for Compensation under the Structural Adjustment Loan ..................... 39 Annex VI Government of Bolivia Letter on Public Investment Program ............................. 41 Map This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. LOAN SUMMARY Borrower: Republic of Bolivia Loan Amount: US$50 million equivalent Terms: Repayment in 20 years, including 5 years of grace, at 8.25 percent interest per annum. Loan Description: The proposed loan would make available US$48.7 million equivalent for general balance of payments and budgetary support for the Government's economic recovery program, as outlined in a Letter on Develop- ment Policies from the Government to the Bank. Foreign exchange would be used for essential imports of raw materials, intermediate goods, spare parts and capital goods. Counterpart funds would be used to finance projects in the approved public investment program. About US$1.3 million equivalent would be made available to finance technical studies in the areas of mineral tax reform, agricultural export promotion and prefeasibility studies in mining and agriculture sectors. Estimated Disbursements: The loan would be disbursed in two tranches, US$25 million equivalent after effectiveness, and the remaining US$25 million equivalent after a performance review in August, 1980. Procurement Arrangements: Only goods purchased from Bank member countries and Switzerland would be eligible for reimbursement. Purchases would be on the basis of normal commer- cial practices, except that contracts of over US$5 million would be procured by international competitive bidding. REPORT AND RECOMMENDATION OF THE PRESIDENT OF IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT LOAN TO THE REPUBLIC OF BOLIVIA 1. I submit the following report and recommendation on a proposed structural adjustment loan to the Republic of Bolivia for the equivalent of US$50 million. The loan would have a term of 20 years, including 5 years of grace, with interest at 8.25% per annum. PART I - THE ECONOMY Introduction 2. A report entitled "Economic Memorandum on Bolivia" (No. 2195-BO) dated November 3, 1978, was distributed to the Executive Directors. A number of economic missions have visited Bolivia since then to review current develop- ments and to discuss policy measures with the Government. Annex I contains the basic country data. Background 3. Up to 1952, Bolivia's economic structure had only changed slowly since independence in 1812. The 1952 revolution sought to put an end to the colonial structure that shaped Bolivia's economy, and to deprive the landown- ing and mining oligarchy of its economic base. This objective was partially achieved. Progress was made in eradicating feudal relations, distributing the land more equitably and mitigating obstacles to social mobility, notably through an impressive effort in primary education. The agrarian reform and the nationalization of large mines, however, were followed by falling produc- tion and declining GDP throughout the 1950s. During the subsequent decade, output increased steadily at an average annual rate of about 5%, and real GNP per capita recovered to its 1952 level by 1970. 4. In spite of substantial economic progress during the early seventies, Bolivia remains one of the poorest countries in South America. The majority of its population is engaged in traditional agriculture in the inhospitable Altiplano, a 3,000 to 4,000 meter high plateau. The economic infrastructure is still primitive and the road and rail network reach only a fraction of the country. The relatively slow growth of rural population (1.9% per annum) reflects the low health and nutrition standards which prevail. Life expectancy for Bolivia is 52 years, a full decade below South American standards. The Current Economic Crisis 5. Bolivia's current economic problems stem in large measure from the consequences of unfulfilled expectations. The increase in world energy and metal prices in 1973, together with indications of sizeable petroleum and - 2 - gas deposits in the country, created an atmosphere of euphoria and great expectations. The Government, anticipating substantial increases in financial resources from sales of hydrocarbons, undertook a massive program of public investment. A large portion of this investment was undertaken by enterprises over which the Central Government exercised little control, and was financed primarily by loans from foreign commercial banks, which were attracted by Bolivia's improved economic prospects. Unfortunately, the outcome, in terms of output of hydrocarbons, was substantially more sobering than the Government had envisaged. The country was thus saddled with large repayments on short-term external debts without the expected increase in the capacity to service them. However, Bolivia's current economic crisis is more than one of needed refinanc- ing of short- and medium-term loans. In particular, past unrealistic policies of pricing, exchange rate and mineral taxation, together with excessively ambitious public sector investment, have caused severe dislocations in the economy which nece-sitate a thorough-going stabilization program, coupled with a realistic and consistent medium- and long-term development strategy. 6. Over the past several years, the principal source of disequili- brium in the economy has been the poor performance of the public sector. The financial deterioration of the sector can be traced to (i) the rapid expansion in public investment, particularly in capital-intensive processing plants, such as oil refining and mineral smelting, aimed at augmenting the domestic value-added content of Bolivia's exports; and (ii) the sharp decline in the operating surpluses of the public enterprises, particularly of the Bolivian Mining Corporation (COMIBOL) and the Bolivian Petroleum Corpora- tion (YPFB), the two largest export-oriented enterprises. As a result of sluggish world demand, prices for most of Bolivia's mineral exports deteriorated in 1975 and recovered only slowly through mid-1979. In the case of YPFB, artifically low administered prices for domestic fuel products have been largely responsible for the poor performance. 7. The impact of these factors on public finances can be seen from Table 1. Capital expenditures of the consolidated public sector more than tripled between 1974 and 1977, to a level of about 15% of GDP, at a time when public sector savings declined from about 8% of GDP to less than 4% of GDP. During 1978 and 1979, there was some leveling off of capital expenditures but since current savings deteriorated further in those two years, the overall financing deficit remained at the high level of over 10% of GDP. During the period 1974-78, most of this financing gap was filled by foreign loans, especially from commercial banks, whereas during 1979, borrowing from domestic banking sources was more important. 8. The surge in public expenditures was accompanied by a rapid increase in private consumption, and, given the openness of the Bolivian economy, this rise in expenditures partly spilled over into the balance of payments, with the share of recorded imports (including nonfactor services) rising from about 20% of GDP for 1970-1974 to about 25% of GDP during 1975-1979. By contrast, registered exports (including nonfactor services) have remained unchanged in real terms between 1974 and 1979. Several factors accounted for the poor performance of registered exports, apart from the generally unfavorable international prices for most of Bolivia's exports for the period 1975-78. These factors included the following: Table 1: BOLIVIA - SUMMARY OPERATIONS OF THE CONSOLIDATED PUBLIC SECTOR, 1974-1980 (Million Bolivian Pesos) Estimated Projected 1974 1975 1976 1977 1978 1979 1980 Current Account Surplus/Deficit (-) 3,385.5 1,776.7 1954.5 2,567.4 1,393.9 -480.0 4,125.0 Capital Revenue 36.6 41.9 57.8 162.8 448.7 100.0 72.0 Capital Expenditure 3,032.8 5,268.8 7,850.2 9,980.2 9,683.7 10,200.0 16,310.0 Net Lending 83.0 395.5 294.2 297.9 577.0 - - Overall Surplus/Deficit (-) 306.3 -3,845.7 -6,132.1 -7,548.5 -8,418.1 -10.580.0 -12,113.0 Financing -306.3 3,845.7 6,132.1 7,548.5 8,418.1 10,580.0 -12,113.0 External Borrowing (net) 1,095.0 2,078.9 4,304.0 6,645.5 4,375.4 4,200.0 7,260.0 Domestic Borrowing (net) -1,749.5 1,132.2 1,350.0 -17.0 3,394.6 6,333.0 4,853.0 Short-term Foreign Loans 348.2 634.6 478.1 920.0 648.1 47.0 - (as % of GDP) Current Account Surplus/Deficit (-) 7.6 3.5 3.3 3.7 1.7 -0.4 2.8 Capital Expenditure 6.8 10.5 13.3 14.6 11.8 10.0 11.5 Overall Surplus/Deficit 0.7 -7.7 -10.4 -11.0 -10.3 -10.4 -8.7 External Borrowing (net) 2.5 4.1 7.3 9.7 5.3 4.1 5.2 Domestic Borrowing (net) -3.9 2.3 2.3 - 4.1 6.3 3.5 Short-term Foreign Loans 0.8 1.3 0.8 1.3 0.8 - - Source: Ministry of Finance; Ministry of Planning and Coordination; IMF April 29, 1980 (i) the drop in oil production over the last five years can be attributed to the rapid depletion of old wells with no major new discoveries. At the same time, the heavily subsidized prices for domestic fuel products have encouraged a rapid increase in domestic consumption; (ii) growth of agricultural exports continued to be constrained by marketing difficulties and controlled farm-gate prices; and (iii) mining exports have been affected by the continuation of a tax structure in mining which discourages new investment (see paras 24-26), by the steady decline in the metal content of the tin ore, and by extensive labor problems during 1977 and 1978. 9. The deteriorating external resource balance, combined with increased interest payments on public debt, caused the current account balance to move from a surplus of US$127 million (5.7% of GDP) in 1974 to a deficit of US$537 million (10.7% of GDP) in 1979 (see Table 2). Most of this deficit was financed by public sector external borrowing. Notwithstanding these inflows, net international reserves declined by about US$104 million during 1978 and by US$230 million during 1979. Concomitantly, the debt service ratio increased from about 11% in 1974 to about 31% in 1979. 10. Real GDP growth, which had averaged over 5.5% annually for the period 1970-1977, amounted to only 3.3% and 2.1%, respectively, during 1978 and 1979. These declining growth rates coincided with the intensification of pressures on domestic prices. As measured by the GDP deflator, the rate of domestic inflation accelerated from an average of about 10% during 1975-1977 to about 17% in 1978 and 19% in 1979. Government's Response to the Crisis 11. Over the past two years, successive governments in Bolivia have felt the need for taking serious economic measures to halt the deteriorating economic situation. Action was delayed primarily because of frequent political changes that have occurred over the period. Finally, on November 30, 1979, the Govern- ment of President Gueiler took a series of economic measures the key objectives of which were the reduction of fiscal and balance of payments deficits. In particular, the following measures were adopted: Table 2; BOLIVIA - BALANCE OF PAYMENTS SUMMARY, 1974-1979 (Current US$ Million) Estimated 1974 1975 1976 1977 1978 1979 Exports (incl. NFS) 622.9 522.4 623.4 721.3 721.5 874.1 Imports (incl. NFS) 479.2 667.3 711.2 827.9 1018.3 1292.0 Resource Balance 143.7 -144.9 -87'.8 -106.6 -296.8 -417.9 Interest -17.2 -23.7 -36.9 -57.0 -84.4 -126.0 Other Factor Service Income (net) -13.2 -7.7 -4.3 -20.1 -30.8 -35.1 Current Transfers (net) 13.7 13.1 14.0 15.0 27.0 42.0 Current Account Deficit 127.0 -163.2 -115.0 -168.7 -385.0 -537.0 Net Direct Foreign Investment 16.7 53.4 12.1 9.0 13.0 18.0 Public M&LT Loans (net) 91.1 101.1 232.1 343.3 218.8 209.7 (Gross Disbursements) (143.5) (152.3) (297.1) (437.3) (327.2)c/ (352.0) (Amortization) (52.4) (51.2) (65.0) (94.0) (108.4)- (142.3) SDR Allocation - - - - - 6.1 IMF Drawings (net)a - - - - 19.7 - Short-term Capital- -123.8 -45.6 -62.0 -123.6 29.6 73.2 Change in Reserves (- = increase) -111.0 54.3 -67.2 -60.0 103.9 230.0 Memorandum Items Debt Service Ratio (%) 11.2 14.3 16.3 20.9 26.7 30.7 Current Deficit (-) as % of GDP b/ 5.7 -6.5 -3.9 -4.9 -9.2 -10.7 Import Coverage of Gross Reserve-- 5.1 3.0 3.7 4.2 2.3 1.4 a! Including errors and omissions. b/ Coverage of imports (incl. NFS) in months, at end of period. c/ After refinancing of US$155 million. Source: Central Bank of Bolivia March 28, 1980 - 6 - (i) Exchange Rate Adjustment. In view of the relatively high domestic inflation rates of the past few years, and the fixed exchange rate since 1972, the competitiveness of Bolivia's exports had steadily eroded. As part of the stabilization program, the fixed relationship of US$1=$b 20 was abandoned on November 30, 1979, and a new exchange rate regime based on a managed float was established at US$1=$b 25. This implied a depreciation of 25%. Further adjustments would be made to ensure the maintenance of Bolivia's export competitiveness. (ii) Increase in the prices of hydrocarbons. The Government has increased the prices of petroleum derivatives sold in the domestic market by about 100% on average, actual price increases varying by product. For instance, the price of regular gasoline was tripled to the equivalent of US$0.76 per gallon. This measure is expected to yield additional revenues of about US$135 million (over 2% of GDP) during 1980, to be shared between the Treasury, YPFB and local governments. This should permit YPFB, the greatest beneficiary from the measure, to undertake new investment in exploration and development. The measure should also dampen somewhat the domestic demand for hydrocarbons, which has grown sharply in recent years, thereby increasing the quantity available for export. (iii) Monetary policy changes. These include the elimination of dollar-denominated peso deposits, and the restructuring of the system of interest rates and legal reserve requirements to encourage the growth of peso-denominated financial savings. 12. These economic measures formed the basis for an agreement with the IMF for a stand-by arrangement. Under this arrangement, approved by IMF Board on February 1, 1980, Bolivia is eligible to draw US$115 million during 1980. The program also includes ceilings on net domestic borrowing of the public sector from the banking system, and on the magnitude of external borrowing of less than 10 years' maturity, as well as targets for the levels of international reserves. 13. The Government is also pursuing a major debt refinancing opera- tion with foreign commercial banks. The aim of the Government is to arrange for a seven-year (including three years of grace) refinancing loan of about US$200 million, which would be used to repay some of the Central Bank short-term borrowing. 14. While the stabilization and debt refinancing programs outlined are expected to play a significant role in removing some of the short-term fiscal and balance of payments dislocations, they address only indirectly the longer-term structural problems of the Bolivian economy. Therefore, the Government is initiating, with Bank assistance, an Economic Recovery Program which would strengthen Bolivia's export capacity and improve growth perform- ance in the medium- and long-term. The program includes, in addition to the - 7 - stabilization actions, measures to improve the composition of public sector investment, rationalization of mineral taxation, changes in pricing policies of certain agricultural products and adjustments in the tariffs and prices of public enterprises. Details of the Economic Recovery Program are pro- vided in Part II. Balance of Payments and Creditworthiness 15. The balance of payments performance for 1980 is expected to be considerably better than that during the past two years owing partly to the impact of the stabilization program and partly to the improved commodity prices for minerals and hydrocarbons. Exports of minerals are expected to increase over 1979 by about 27% in nominal terms, and exports of natural gas to Argentina are expected to increase significantly as additional pumps begin to operate on the pipeline during the year. Total exports of goods and nonfactor services are projected to increase from US$874.1 million in 1979 to about US$1,171 million in 1980, a nominal increase of about 34% (see Table 3). By contrast, imports of goods and nonfactor services are projected to increase by only 6% in nominal terms in 1980, primarily because there was considerable speculative stocking of imports during 1979 in anticipation of exchange rate adjustments. On this basis, the current account deficit in 1980 is projected at about US$354 million (6.3% of GDP), compared to US$537 million (10.7% of GDP) in 1979. 16. Over the period 1980-1985, the current account deficit is projected to average about US$417 million annually, with the largest deficits expected over the period 1982-1984, the period of construction of the proposed gas pipeline to Brazil. In addition, amortization payments on existing and new debt to be contracted are expected to average about US$230 million annually. Thus, the annual external capital requirements to cover both current deficits and requisite amortization payments are estimated to average US$647 million annually. 17. It is projected that net direct foreign investment would provide, on an average, about US$63 million annually. Gross disbursements from medium- and long-term project loans already committed are expected to average US$100 million annually. Disbursements from new project and non-project loans (including IBRD program lending) are projected to amount to US$479 million annually, many of these inflows being related to the construction of the gas pipeline. Complemented by potential net disbursements from the IMF, averaging about US$60 million annually, this would be sufficient to cover the indicated capital requirements and also to provide for strengthening of international reserves. 18. Bolivia's public external medium- and long-term debt has grown rapidly in recent years. At the end of 1974, such debt outstanding and disbursed was US$630 million, or about 28% of GDP. By the end of 1979, it had risen to about US$2.0 billion, or about 40% of estimated GDP. Particularly Table 3: BLJMIA - PROJECTED BAIANCE OF PAYMENTS, 1980-1985 (Current US$ Million) Actual Estimated Projected 1978 1979 1980 1981 1982 1983 1984 1985 Exports (incl. NFS) 721.5 874.1 1,170.7 1,294.6 1,472,7 1,659.4 1,921.1 2,538.5 (Tin) (373.7) (411.7) (478.5) (509.5) (572.5) (642.0) (696.3) (787.5) (Tungsten) (39.5) (38.5) (43.2) (51.2) (58.7) (64.6) (74.0) (81.4) (Silver) (33.8) (62.6) (151.8) (169.5) (182.0) (195.0) (224.0) (245.0) (Petroleum) (42.3) (43.3) (45.0) (61.7) (92.9) (143.0) (230.1) (285.6) (Natural Gas) (79.8) (105.1) (232.2) (263.4) (297.3) (315.0) (350.5) (731.7) (Other) /a (152.4) (212.9) (220.0) (239.3) (269.3) (299.8) (346.2) (407.3) Imports (incl. NFS) /a 1,018.3 1,292.0 1,370.4 1,472.0 1,772.3 2,080.0 2,330.0 2,377.0 Resource Balance -296.8 -417.9 -199.7 -177.4 -299.6 -420.6 Net Interest Payments -84.4 -126.0 -130.8 -140.0 -160.0 -185.0 -210.0 -230.0 Other Factor Service Income (net) -30.8 -35.1 -73.2 -73.9 -75.3 -78.8 -81.1 -85.0 Current Transfers (net) 27.0 42.0 50.0 55.0 59.0 63.0 67.0 70.0 I Current Account Balance -385.0 -537.0 -353.7 -336.3 -475.9 -621.4 -633.0 -83.5 Direct Foreign Investment (net) 13.0 18.0 20.0 25.0 75.0 100.0 125.0 35.0 Public M & LT Loans (net) 218.8 209.7 290.4 242.4 338.3 555.0 495.0 180.0 (Gross Disbursements) (327.2) (352.0) (460.4) (462.4) (538.3) (815.0) (770.0) (440.0) (Amortication) (108.4) (142.3) (170.0) (220.0) (200.0) (260.0) (275.0) (260.0) SDR Allocation - 6.1 6.0 - - IMF Drawings (net) /b 19.7 - 109.0 120.0 120.0 - - - Capital Transactions n.e.i. Ic 29.6 73.2 -21.7 - 17.6 41.4 88.0 30.0 Change in Reserves ( - = increase) 103.9 230.0 -50.0 -51.1 -75.0 -75.0 -75.0 -161.5 Memorandum Items Current Account Deficit as % of GDP -9.2 -10.7 -6.3 -5.2 -6.4 -7.4 -7.1 -0.9 Debt Service Ratio /d 26.7 30.7 25.7 27.8 24.4 26.8 25.2 19.3 Import Coverage of Gross Reserves /e 2.3 1.4 1.6 1.9 2.1 2.4 2.5 3.0 /a Including balance of payments adjustment; /b assumes stand-by is followed by an Extended Fund Facility; /c including errors and omissions; /d debt service payments as % of exports (incl. NFS); /e in months, at end of period. April 29, 1980 , - 9 - because of the shorter maturities of much of the recent borrowing, the growth in debt service has been more rapid than the growth of debt. Service payments on this public debt were about 31% of exports (including nonfactor services) in 1979, compared to about 11% in 1974. 19. Debt and debt service, in relation to GDP and exports, are now above the levels that are desirable for an open economy that is not diversi- fied. The role of external borrowing will necessarily be limited by the need to improve these indicators. The projected debt service ratios, after the debt refinancing of 1980, are shown in Table 3. The ratio is projected to remain around 25% until 1984, because repayments on some loans refinanced in 1978 and 1980 will start falling due after 1981, whereas the substantial increase in export revenues from sales of natural gas to Brazil could not commence until 1985 even if this project proceeds without delay. The balance of payments situation over the next four or five years is, therefore, expected to remain tight, and debt refinancing may become necessary again around 1983. However, the debt burden is projected to decline considerably after 1984. A gradual improvement in the structure of the external debt is foreseen, in line with the Government's limits on the authorization of new public sector indebtedness of less than ten years' maturity. PART II - THE GOVERNMENT'S ECONOMIC RECOVERY PROGRAM 20. Bolivia's long-term development problem derives from the need to integrate its long neglected indigenous population into the modern economy. This process is likely to be a slow and difficult one, as well as one that will require sizeable resources. Therefore, only with a far healthier balance of payments and more solid public finances than it has now can the country hope to deal with its fundamental development problems. Consequently, the two main objectives of the Government's Economic Recovery Program, in the short- as well as medium-term, are strengthening of the country's balance of payments position and improving the quality and pro- ductivity of public investment within the context of closely monitored and controlled public expenditures and borrowing. 21. Bolivia's overall merchandise exports have experienced no real growth between 1974 and 1979. To a large extent, this poor performance has been the consequence of an overvalued exchange rate, inappropriate domestic pricing policies for hydrocarbons and agricultural products, lack of specific incentives for agricultural exports and a structure of mineral taxation which has discouraged investment and production. The financial situation has deter- iorated primarily because of the excessively ambitious and highly capital- intensive public investment as well as the lack of control over the operations of the major public enterprises. After considerable procrastination by successive administrations, the Government of President Gueiler adopted a number of measures, and expects to adopt others, which would not only assist in alleviating the short-term financial problems but also provide the basis for sustained export-oriented development over the next several years. In the following paragraphs, the main elements of the Government's economic program are described, whereas a summary of the program is provided in the chart on the following page. - 10 - BOLIVIA - KEY ASPECTS OF BOLIVIA'S ECONOMIC RECOVERY PROGRAM Main Economic Problem Symptoms Governet's Response Expected Tapact Program Loan Contribution 1. Overvalued exchange rate. Uncompetitive exports and balance of pay- Exchange rate adiusted oi November 30, Stimulate exports, strengthen balance payments disqeilibrium. Capital inten- 1979. Commitment to flexible exchange of payments. Stimulate labor use in sive investment. rate. Tndustry, Thee. two measaures are part of a stabiliation program agreed to with the IM., Agreameet with rho IMP en this program 2. Unrealistic pricing of hydrorarbons. Production and exports of petroleum producta Prices of hydrocarbone increased by about Enourage domestic ,oservation, and preceded proposed loan. declining. Smuggling and excessive domestic B100%. production, and sntimuate exports, ronsumption encouraged. 3. Heavy burden of short-term external High debt service ratio. Debt refinancing being negotiated with More manageable debt service burden. borrowing. foreign banks. i. Inappropriate mining taxation. Little incentive to invest. Undetaken a major reform of mining Stimulate investment, production Mining tax reform was discussed Continuous decline In production and taxation and eports of enerals. by Government with Bank. export volume. 5. Inappropriate agriculture pricing Steady decline in production and Farm-gate prices of teral agricultural Stimulate production and exports of Changes e agricultural pricing policies, export of agricultural product,. products raised. Further adju meats ex- agricultural products. Policiee endorsed by Bank in pected in the near future. discussions with Goversent. 6. Inappropriate magnitude and com- Inadequate contribution to growth Prepared a public investment and financing Creater contribution to growth and Preparation of a realistic position of public investment. and exports. Large public financing program with aemphasis on prodoctive, exports. More realistic financing, public investment and inancing gap, Heavy debt burden. Slow export-oriented projects. Lower long-term debt burden. Vaster program received assistance project execution. disbursements en project loas, from Bank. 7. Une it tariff policies of Large overall rinancing deficits and Ineasee n tariffs of major Imp oved tfi n-oa din of Changes in tariffs eadorsed polcenterprises. hav debt huren of mjoretrrse,etrr enterpriseseneprss intse pef-h Bank in disn...fsi- writh Price distartions. financing rati.s. Government. 8. Lack of control over expenditures Excessive short-term debt and poor Strengthening of controls on external Improved public sector savings Setting up of monitoring unit and borrowing of public enterprises, financial situation of enterprises. borrowing. Plans for settieg up of a performance, lower short-term in the Ministry of Planning onit in the Ministry of Planning to debt. to receive Bank support. monitor expenditures of major public enterprie. April 3, 1980 - 11- Economic Stabilization Measures 22. These measures, already described in paragraphs 11-13 of this report, consist of the establishment of a new exchange rate regime, adjust- ment of the domestic prices of hydrocarbons, monetary policy changes and refinancing of short-term external commercial bank debts. With the excep- tion of the debt refinancing exercise, which is progressing satisfactorily, all the other measures have already been taken. The aim of the 1980 stabilization program is to reduce the current account balance of payments and the overall fiscal deficits from their high levels of the past year. The Government has also indicated its expectation to enter into an Extended Fund Facility arrangement with the IMF at the expiration of the present stand-by arrangement. Medium Term Objectives and Policies 23. Public Investment and Financing Program.. Prior to 1974, public investment averaged around 7% of GDP. Over the next few years, public invest- ment rose rapidly, reaching a peak of about 15% of GDP in 1977. A large portion of this investment was undertaken by public enterprises over which the Central Government exercised little control, and was financed primarily by loans from foreign commercial banks. Several of the large scale projects in oil refining and mineral smelting were not economically justified and led to significant excess capacity. (For example, oil refining capacity has been increased three-fold since 1974, and now exceeds production by about two- thirds.) Such projects have contributed to Bolivia's current economic diffi- culties by absorbing a large portion of financial resources without making a significant contribution to the country's economic development. The Government has completed the preparation of a medium-term public investment and financing program for the period 1980-1983. The program is designed to support the Government's medium term objectives summarized in its Letter on Development Policies (see Annex IV), including, in particular, the shifting of resources into sectors offering prospects for expanding the range and volume of Bolivia's exports, so as to attain an average annual export growth rate of about 6% and to diminish over time the excessive dependence on tin exports. Part III summarizes the main features of the investment and financing program together with Bank staff assessment of this program. 24. Reform of Mining Taxation. Bolivia's main export sector is mining. It is, therefore, a serious matter that the structure and level of taxation of the sector is such as to create substantial disincentives to its expansion and to efficient utilization of installed capacity. The two major mineral taxes are: (i) the regalias, which are levied on the difference between gross value of production (i.e. exports) and presumed operating costs which are brought up-to-date only infrequently; and (ii) the export tax, which was originally imposed as a temporary levy in 1972 to capture some of the "windfall" gains (resulting from the devaluation in that year) but which has continued as a levy on gross values. In addition to these two taxes, there is a multiplicity of earmarked and "nuisance" taxes which bring in very small amounts of revenue and are a source of administrative and compliance difficulties. No fewer than forty such taxes are levied on mining exports and property, but together they - 12 - account for less than .5% of mining sector taxes. Overall, the level of mineral taxation in Bolivia is one of the highest among the major tin-producing countries. The existing structure of mining taxation in Bolivia has a number of serious drawbacks. These include: (a) the present tax structure has adverse effects on incentives for efficiency, exploitation and concentration since the system makes the processing of low-grade ore unprofitable. It also leads to inefficient use of concentrators since the taxes are based on the concentrates actually produced, not on the ore taken from the mine; and (b) the present tax regime serves to dampen incentives for both exploration and development because it does not take into account inter-enterprise cost variances of any kind, including exploration costs. Under the existing system, the mine that spends large sums on exploration and development pays the same taxes as a mine that spends none. The exploration incentive is further dampened by the low rates of land taxes (patentes) since it is profit- able for individuals to hold large tracts of potentially rich land as unex- ploited reserves. These problems were carefully analyzed in a study by the Institute of International Development of Harvard University, under the technical assistance program financed by the Bank Group. 25. The Government has just adopted significant changes in mining taxa- tion. The main features of the reform are: (i) the elimination of the ad valorem export tax; (ii) the updating of the presumed costs. The new presumed costs for tin are US$3.80/lb, US$3.30/lb and US$3.55/lb respectively, for COMIBOL, medium miners and small miners, compared to a level of US$1.85/lb before; (iii) the rate of the regalia has been increased from 38% to 53%; and (iv) an adjustment mechanism has been adopted which would allow for more realistic (and more frequently adjusted) deduction of presumed costs from taxable base. Under the new system, the presumed costs would be updated in line with the floor price of the International Tin Council. As a result of these reforms, COMIBOL and private miners together are expected to pay about US$40 million less in taxes than they would have paid without these measures. 26. The present reform of mining taxation can be expected to go a long way in encouraging investment and production. However, further reform in this area may be needed over the next several years for rationalization of the tax system to (i) increase incentives for exploration and development of low grade ores; (ii) increase substantially land taxes (patentes); and (iii) modify the adjustment factor for presumed costs to take into account changes in relevant costs. Financing would be provided from the proposed loan for a study to analyze these and other aspects of further tax reform (see Part IV). The study would also analyze the level of mineral taxation in Bolivia. 27. Changes in Agricultural Pricing and Marketing Policies. Two of the major drawbacks to agricultural exports in Bolivia have been: (i) the low domestic farm-gate prices for several agricultural products with export or import-substitution potential; and (ii) lack of institutional support, inadequate marketing technology and low standards of quality. With regard to (i), the Government has allowed significant increases in farm-gate prices for beef (by about 55%), dairy products (by 62%) and poultry (by 25%). The - 13 - Government recognizes that further action would be required in this area in the future. In particular the Government is expected to increase the farm-gate price of coffee and to eliminate the quota which constrains exporters to sell a considerable portion of their coffee in the domestic market. At the same time, the Government would introduce differential pricing for be-f, with higher prices for better cuts, unlike the present system where beef is sold by weight, regardless of quality. The Government's objective is to set prices so that they provide adequate incentives to producers for export and to adjust these prices as necessary to meet this objective. A small proportion of the proposed loan would be used to carry out a study of the institutional and marketing support that would be needed for promoting agricultural exports. 28. Adjustments in the tariffs and prices of public enterprises. The Government recently increased the tariff rates of AASANA (airport services) by 70%, of ENDE (power) by 30% and of ENFE (railroads) by 30%. These tariff changes should help to improve the financial position of these entities. However, further increases would be necessary. The Government has stated its intention that public sector tariffs would be periodically adjusted to allow enterprises to earn satisfactory rates of return and to cover a significant portion of their financing for investment. The Government also intends to increase further the prices of hydrocarbons which would be necessary to bring the domestic prices closer to international prices. 29. Proposed Exports of Natural Gas. Finally, one of the promising aspects of Bolivia's long-term export prospects beyond 1985 is the potential for sales of natural gas to Brazil. The plan is for sale of about 400 million cubic feet of gas per day for 20 years to Brazil, about half of the estimated available supplies from known and prospective reserves. This is a sensitive issue in Bolivia since the view is sometimes expressed that sales of gas to Brazil on such a large scale would inhibit the development of energy- based industries in Bolivia. The Government's view is that the development of domestic industry and export of gas to Brazil are not mutually exclusive, and a program, partly financed by the Bank, is under preparation to ascertain the magnitude of gas reserves. The gas pipeline project is included in the Government's public investment program; work is expected to commence in 1982 and to be completed by late 1984. The Government has stated its intention to initiate construction of the pipeline once sufficient reserves have been confirmed and agreement has been reached with prospective buyers on the sale price. PART III - PUBLIC INVESTMENT AND FINANCING PROGRAM 30. The Bolivian Government has prepared a medium-term public invest- ment and financing program for the period 1980-1983. In this, the Government has pursued the following objectives: (a) to give increasing priority to pro- ductive projects in agriculture, mining, and hydrocarbons sectors, particularly to projects with export potential; (b) to complete ongoing priority projects - 14 - potential; (b) to complete ongoing priority projects before initiating new ones; and (c) to maintain adequate levels of investment in social and transport infrastructure consistent with the needs of the country. 31. The magnitude of the program appears feasible, and the 1980 level of investment (11.5% of GDP if fully executed, compared to about 12.4% of GDP for the period 1976-79) is consistent with the ceiling on total expenditures under the one-year IMF stand-by arrangement. With regard to the composition of the program, the Government has decided to postpone indefinitely or delay most of the projects that appeared to have doubtful economic justification. 32. Table 4 summarizes the main features of the public investment program for 1980-83. One feature of the program is the projected increase in the share of productive sectors (agriculture, mining, hydrocarbons and industry) in total public investment from about 33% in 1979 to about 54% in 1983. The major projects in the agricultural sector are in the areas of rural development, irrigation and colonization programs. In the mining sector, the planned investment for 1980 and 1981 is dominated by Karachi Pampa lead-silver smelter, but the investment of COMIBOL is expected to increase rapidly over its exceptionally low level of US$7 million in 1979. In the hydrocarbons sector, the largest planned project is the gas pipeline to Brazil, on which work should commence in 1982 and which would account for about 55% of the planned investment for the sector in 1983. Other proposed projects include the gas pipeline to the Altiplano, the Vuelta Grande gas recycling project, certification of gas reserves, exploratory drilling in several parts of the country and secondary recovery operations in Monteagudo and Camiri. 33. The Government feels that the relative share of investment in the transport sector has been too large for the available resources over the past few years. Accordingly, its share in total public investment is expected to decline from an estimated level of over 26% in 1979 to about 15.5% by 1983. The strategy is to complete on-going road projects and to avoid large investment in new roads. The planned purchase of airplanes by the national airline, LAB, is also being spread out over 4 years, 1980-83. 34. In the social sectors (education, housing, basic sanitation and health), the objective is to maintain the share of these at around 20% of public investment over the period 1980-83. Health and social welfare are expected to have the largest share (47%) of the investment in the social sectors, mainly because of the low health standards and the poor quality of health services. Financing of the public investment 35. The overall public sector investment over the 4-year period 1980-83 is estimated at about $b89,832 million, averaging about 12.7% of GDP annually. Financing of this level of investment is predicated upon improvement in public sector savings and continued inflows of external resources in support of the public investment program. - 15 - 36. Central Government savings are expected to reach a level of $b2,000 million by 1983, compared to a deficit of about $b2,700 million in 1979 (see Table 5). This improvement is expected for a variety of reasons: (i) because of the financial problems of COMIBOL and YPFB over the last several years. these enterprises made lower than expected tax payments to the Treasury, a serious shortfall for the Treasury which depends for about 30% of its total revenues on these two entities. The improved financial situation of these enterprises is expected to result in higher revenues to the Central Government; (ii) the Government intends to improve the collection of internal and customs taxes and to reduce import duty exemptions where unwarranted. There is also a plan for a reform of the tax system (which is expected to be ready for legislative action before the end of 1980) to extend the coverage of the income tax to financial enterprises, and to introduce some new indirect taxes; (iii) in the area of expenditure control, the Government intends to strengthen its supervision of the main public enterprises. Details on this are provided in para. 42. 37. Current savings of the rest of the public sector are also expected to increase over the period. The financial position of YPFB has improved considerably because of the increase in the domestic prices of petroleum products. COMIBOL has benefited greatly from the exchange rate adjustment (most of its costs are domestic whereas most of its sales are foreign) and from higher mineral prices. It is also expected to benefit further from the Government's mineral tax reform. The financial positions of the other enter- prises, especially ENDE, ENFE and AASANA, are expected to improve owing to the recent tariff changes as well as planned tariff adjustments. 38. Net domestic borrowing is projected to average about 3.5% of GDP annually, compared to about 6.3% in 1979. Together, public savings and net domestic borrowing are expected to finance about 60% of the 1980-83 public investment program, 39. The remaining financing, about $b35,652 million in current prices, (or 40% of total public investment) is expected to be in the form of net external inflows. A large proportion of these inflows is expected for projects in mining and hydrocarbons sectors. 40. On the whole, the public investment program appears realistic in terms of its objectives, magnitude, composition and the Government's ability to finance it. Most of the projects which appeared incompatible with the Government's objectives have been eliminated or delayed. During 1980, about 77% of expenditures are on projects initiated in prior years. 41. While the program generally reflects the Government's effort to allocate scarce resources to projects of high priority, it is constrained by a shortage of attractive projects in agriculture and mining. For this reason, a portion of the proposed loan funds would be allocated to studies aimed at identifying specific priority projects in agriculture and mining sectors (see Part IV). Table 4: BOLIVIA - SUMMARY OF THE PUBLIC INVESTMENT PROGRAM, 1980-83 (Million Bolivian Pesos) Estimated Programmed Actual P r o i e c t e d Total % of 1979 1979 1980 1981 1982 1983 1980-83 Total ( Current Prices 1/ Agriculture 986.0 780.0 2030.0 2720.0 2950.0 3177.5 10,877.5 12.1 Mining /2 1080.0 850.0 2465.3 2952.5 3450.0 4272.5 13,140.3 14.6 Hydrocarbons 1152.0 1093.8 2387.5 3320.0 4057.5 6557.5 16,322.5 -18.2 Industry 1300.0 659.9 1699.7 1020.0 1242.5 1652.5 5,614.7 6.2 Energy 1448.0 879.8 1062.5 2475.0 2912.5 2065.0 8,515.0 9.5 Transport 2904.0 2679.5 3662.5 3525.0 3997.5 4500.0 15,685.0 17.5 Communications 274.0 214.0 262.5 525.0 482.5 562.5 1,832.5 2.0 Education 712.0 449.9 667.0 692.5 775.0 1177.5 3,312.5 3.7 Urban & Housing 1678.0 1257.8 770.0 692.5 845.0 1007.5 3,315.0 3.7 Basic Sanitation 564.0 535.9 652.5 705.0 842.5 1000.0 3,200.0 3.6 Health & Social Welfare 900.0 799.4 650.0 1815.0 2422.5 3130.0 8,017.5 8.9 TOTAL 12,998.0 10,200.0 16,310.0 0 .1 23972-5 29,102.5 89,832.5 100.0 0 ( Constant 1980 Prices ) Agriculture 1282.5 1016.9 2030.0 2365.2 2332.0 2283.5 9,010.7 12.2 Mining /2 1408.1 1108.2 2465.3 2567.4 2727.3 3070.4 10,830.4 14.6 Hydrocarbons 1502.0 1426.1 2387.5 2887.0 3207.0 4712.5 13,194.5 17.8 Industry 1694.1 860.4 1699.7 887.0 982.3 1187.6 4,756.6 6.4 Energy 1887.9 501.9 1062.5 2152.2 2302.4 1484.0 7,001.1 9.5 Transport 3786.2 3493.5 3662.5 3065.2 3160.1 3233.9 13,121.7 17.7 Communications 357.2 279.0 262.5 456.5 381.4 404.2 1,504.6 2.0 Education 928.3 586.6 667.5 602.2 612.6 846.2 2,728.5 3.7 Urban & Housing 2187.7 1639.9 770.0 602.2 668.0 724.0 2,764.2 3.7 Basic Sanitation 735.3 698.7 652.5 613.0 666.0 718.6 2,650.1 3.6 Health and Social Welfare 1173.4 1693.1 650.0 1578.2 1915.0 2249.4 6,392.6 8.8 TOTAL 16942.7 13,304.3 16,310.0 17,776.1 18.954.6 20,914.3 73,955 0 100.0 1/ Assuming domestic inflation rates of 35%, 15%, 10% and 10% for 1980, 1981, 1982 and 1983. 2/ Including investments by ENAF. April 29, 1980 Table 5: BOLIVIA - FINANCING OF THE PUBLIC INVESTMENT PROGRAM, 1980-83 (Million Bolivian Pesos; Current Prices) Estimate-d Projected 1979 1980 1981 1982 1983 Public Sector Investment 10,200 16,310 20,442 23,977 29,102 Financing 10,200 16,310 20,442 23,977 29,102 Current Surplus -480 4,125 8,225 8,650 8,,875 (Central Government) (-2,700) (-1,325) (1,500) (1,875) (2,000) (Rest of Public Sector) (2,220) (5,450) (6,725) (6,775) (6,875) Net Domestic Borrowing 6,333 4,853 6,157 6,870 6,352 Net External Borrowing 4,200 7,260 6,060 8,457 13,875 Other /1 147 72 - - - As % of GDP Public Sector Investment 10.0 11.5 12.6 12.9 13.8 Current Surplus -0.4 2.8 5.1 4.7 4.2 Net Domestic Borrowing 6.3 3.5 3.8 3.7 3.0 Net External Borrowing 4.1 5.2 3.7 4.5 6.6 1/ Includes capital revenues Source: Ministry of Planning and Coordination and Mission estimates. April 29, 1980 - 18 - Control over Public Expenditures and Borrowing 42. While the preparation and approval by the Bolivian authorities of a realistic investment program is important, it is equally important to ensure that the execution of the program is in line with the objectives and targets of the program. As already mentioned, one of the main reasons for the financial deterioration of the public sector in the past has been the lack of Government control over the expenditures and borrowing of the major public enterprises. The Government plans to strengthen the special unit in the Ministry of Planning and Coordination for controlling and monitoring expendi- tures of the main public enterprises. It also plans to initiate measures for improving the information system of these enterprises. The UNDP is expected to strengthen the staffing of the monitoring unit and to provide training for the staff, with the Bank expected to act as Executing Agency. In the area of controls on external borrowing, the control on foreign borrowing of public enterprises has been extended to include loans with maturity of less than one year. It is expected that these measures should assist the Government in controlling the expenditures and borrowing of the main public enterprises. The level of public investment programmed for 1980 - US$652 million - is not expected to be exceeded. PART IV - THE STRUCTURAL ADJUSTMENT LOAN 43. In September, 1979, the Government made a request for Bank program assistance, and a mission was sent to Bolivia. Since then,'three missions have returned to Bolivia to continue the macroeconomic evaluation of the need for program assistance and, in addition, to provide technical assistance to the Bolivian authorities in the preparation of a realistic medium-term public investment program. Objectives 44. The proposed loan has been developed through a close dialogde between the Bank and the Bolivian authorities and is aimed at supporting the Government in its economic recovery program. The loan has several objectives: (i) to provide support to the Government's stabilization and debt refinancing programs. The loan would be part of the Government's monetary and fiscal programs for 1980; (ii) to help the Government in the formulation and adoption of a more export-oriented long-term development strategy, based on selective action in the agricultural and mining sectors; (iii) to support the Government in executing a realistic public investment and financing program. In this context, the objective is to set up a mechanism for Government control over the expenditures and borrowing of the major public enterprises. One aspect of this would be the maintenance of realistic tariffs and prices charged by the main enterprises. These objectives are discussed in the Government's Letter on Development Policies (see Annex IV). 45. Given the long-term nature of some of these problems and policies, and the prospects for tight balance of payments and public finances for the next few years, Bolivia may well need additional program assistance during the period 1981-83. In this context, the Bank would suggest further - 19 - reform in the areas where action has already been taken and explore new areas where policy changes might prove useful. Development of the proposed and subsequent structural adjustment loans to Bolivia is thus expected to provide an effective vehicle for a far-reaching dialogue between the Govern- ment and the Rank on the economic adjustment program which is expected to rebuild the creditworthiness of the country. Allocation of the Loan 46. All but US$1,300,000 of the loan would be used to help finance imports of raw materials, intermediate goods, spare parts and capital goods. Annex V identifies the agreed upon eligible imports. It is estimated that eligible imports in 1980 will total about US$650 million. The proposed loan would finance about 8% of this, thus ensuring rapid disbursement. 47. Up to US$1,300,000 of the proposed loan would be made available to finance the foreign and domestic cost of technical and pre-feasibility studies necessary for formulating future economic policies and for improving the quality of public investment. The Government plans to spend about US$50,000 to finance a study of the structure and level of future mineral taxes as well as of specific investment incentives in the sector. Another US$50,000 would be used to analyze the key problems and constraints to the expansion of agricultural exports, including a study of the required institutional and other support. The remaining US$1,200,000 would be used to prepare pre-feasi- bility studies for projects in agriculture (US$400,000) and mining (US$800,000) (Schedule 2 to the Loan Agreement). The terms and conditions of employment of consultants for the various technical studies would be satisfactory to the Bank, and findings of the various studies would be reported to the Bank promptly on completion of these studies. Counterpart Funds 48. The Bolivian peso equivalent generated by the sale of foreign ex- change to importers of US$48.7 million (the loan funds allocated for technical studies would not generate counterpart funds) would be credited to a special account in the Central Bank and used to finance development projects in the approved public investment program (Section 3.02 of the Loan Agreement). Disbursement and Procurement 49. The loan would be disbursed in two tranches in accordance with progress on the execution of the economic program. US$25 million would be available for disbursement after the loan is declared effective. The remaining US$25 million would be available for disbursement after a review of performance by August 31, 1980 (Section 3.06 of, and Schedule 1 para 2(d) to, the Loan Agreement). The review would consist of: (a) analysis of progress on the Government's stabilization program as defined in the Letter on Development Policies. This would involve ascertaining that Bolivia's export competitive- ness is maintained; and (b) restatement by the new administration, expected to take office in August, of its willingness to pursue the policies defined in the Letter on Development Policies. - 20 - 50. The proposed loan would reimburse the foreign exchange cost of eligible imports and foreign and domestic cost of studies, on the basis of evidence provided by the Central Bank. The Central Bank would be responsible for the collection of the necessary documentation, the reparation and submission of withdrawal applications, and the main- tenance of necessary accounts for the loan funds. A minimum value of 50,000 pesos (about US$2,000 at present exchange rate) is proposed for eligible invoices (Schedule 1, para 4(c) to the Loan Agreement). 51. All imports would be procured from Bank member countries and Switzerland. All procurement would be through normal commercial channels, except in the case of contracts costing over US$5 million which would be procured in accordance with international competitive bidding. 52. Reimbursement would not be permitted for goods imported and paid for before January 1, 1980 (Schedule 1, para 4(a) to the Loan Agreement). It is expected that the entire portion of the loan allocated for imports would be disbursed by December 31, 1980. Benefits and Risks 53. The principal benefits anticipated from the proposed loan are the following: (a) The loan would support the Government's efforts to restore Bolivia's creditworthiness by adopting a more export-oriented strategy in the key areas of mining taxation and agricultural pricing and marketing policies. (b) It would assist the Government in implementing a realistic public investment program. (c) The loan would permit the importation of essential raw materials, intermediate goods, spare parts and capital goods items. The proposed loan would finance about 8% of such imports in 1980. (d) The loan would help ensure, through counterpart funds generated, that execution of high priority projects is not delayed because of the Government's fiscal problems. (e) The Bank's loan and the IMF stand-by arrangement are expected to encourage commercial banks to refinance a substantial part of Bolivia's external debt. (f) The loan has provided, and will continue to provide, an effec- tive vehicle for a dialogue on economic issues and policies. 54. Two principal risks are involved in the proposed loan. One is related to the ability of the Government to carry out the economic program. The economic measures recently adopted by the Government were long overdue and are expected to have a significant effect in reducing the major distor- tions in the economy. However, by their very nature, they involve at - 21 - least short-term costs to some groups within the society. In particular, there has been considerable opposition from labor unions on the grounds that the program would lead to higher unemployment and inflation rates. Opposi- tion has also come from users of transport services and subsistence farmers. The next several months are expected to be marked by considerable tensions and the possibilities of renewed political instability can never be completely ruled out in Bolivia. 55. The possibility that an incoming government might attempt to pursue a different economic strategy is the second risk. With elections planned for June 29, 1980, it will be important to ascertain that the future administration (expected to take office in August, 1980) will continue the economic program outlined in the attached Letter on Development Policies and initiated by the present administration. Bank staff review for the second tranche would provide an opportunity for a careful assessment of the new administration's short- and medium-term economic policies and its ability to implement these policies. Indications are that most major political parties favor the con- tinuation of the economic program. PART V - BANK GROUP OPERATIONS IN BOLIVIA 56. Although Bolivia is an original member of the Bank, it did not obtain any Bank Group financing until 1964. Because of Bolivia's restricted capacity to service external debt, Bank Group financing was, except for a US$23.25 million Gas Pipeline loan, exclusively on IDA terms until Bolivia started to export small quantities of natural gas and petroleum. In view of promising prospects for rapid expansion, IDA lending to Bolivia ceased in 1975. In 1978, however, it became apparent that the expectations of large petroleum exports, and with it dynamic economic development, would not materialize. Starting with the Ulla Ulla Rural Development project, financed in equal amounts on Bank and IDA terms, Bolivia was treated as a blend country. To date, the Bank and IDA have approved 27 operations (12 credits, 14 loans and one blend operation) for Bolivia amounting to US$354.1 million, of which 8 have been fully disbursed. 57. Bank Group lending to Bolivia has assisted in the development of infrastructure and social sectors. In the agricultural sector (8 operations amounting to US$48.2 million), the Bank Group has helped the Government to develop a viable livestock industry, to increase agricultural production, to improve living conditions on the Altiplano and to promote the development of the alpaca/llama industry; efforts to strengthen the Agricultural Bank of Bolivia have met with limited success. In the power sector, through 5 operations amounting to US$53.4 million, the Bank Group has been instrumental in modernizing the sector, expanding electricity supply, improving the quality of service and setting up a regulatory agency and a public power company, which has been operated in an efficient and financially sound manner. In the transportation sector, Bank Group assistance to the railways (3 operations amounting to US$75.0 million of which US$3.3 million were cancelled) has helped to improve the railways' quality of management, efficiency of operations and financial condition; a US$23.3 million loan was made for the construction of a gas pipeline from the Santa Cruz area to the border with Argentina; - 22 - a US$25.0 million loan for an aviation development project is assisting Bolivia's efforts to develop hitherto isolated areas by providing safe and efficient freight and passenger transportation; a US$25.0 million loan for a highway maintenance project is helping Bolivia protect its investments in highways. In the mining sector, 4 operations amounting to US$35.7 million have aimed at increased exploration and production and improved sectoral coordination. A US$16 million loan is expected to prove sufficient gas reserves to satisfy the local market and to undertake further gas exports. A US$11.5 million loan for a water supply and sewerage project, of which US$6.3 million was cancelled as two cities withdrew from the project, is improving services in 70 rural communities; a US$9 million credit will help finance the expansion of water supply and sewerage services in the city of Santa Cruz de la Sierra. A US$15 million loan for an education and vocational training project is assisting Bolivia to develop its human resources in a more effective way. A US$17 million loan is helping Bolivia to improve the living conditions of the urban poor in the city of La Paz. 58. Because of the narrow scope for private investment, IFC became active in Bolivia only in 1973 through an investment of US$400,000 in a firm producing cables and plastic products. Two IFC investments since then have contributed to the establishment of a local market for long-term securities: an equity participation of up to US$550,000 in Banco Industrial S.A. (BISA) in conjunc- tion with a Bank loan of US$10.0 million for the same institution to assist in financing medium-sized industrial and mining enterprises, and US$337,500 in Banco Hipotecario Nacional to assist in the development of mortgage banking. Annex II contains a summary statement of the status of Bank loans, IDA credits and IFC investments in Bolivia as of March 31, 1980, and notes on the execution of ongoing projects. 59. Bank Group lending to Bolivia has supported a broadly based Govern- ment effort to expand and upgrade Bolivia's economic and social infrastructure. Until 1978, the Government had established an excellent record in providing the required local funds, and in general, projects were adequately carried out. During the past year, the execution of ongoing projects has been affected adversely by the shortage of local funds and changes in Government personnel, reflecting the difficult economic and political situation of Bolivia. The Bank Group is reviewing with the Government the possibilities of overcoming these difficulties. For future lending, the Bank Group is giving priority, to the identification of projects that would help Bolivia diversify and increase its exports. Once such projects, in the context of Government policies like those described above, have strengthened Bolivia's finances and debt ser- vicing capacity, it is expected that increasing emphasis will also be given to projects and programs that address the country's long standing socio-economic problems. 60. For the period 1974-78, total official development assistance to Bolivia has been as follows: Bank, US$226.0 million; IDA, US$22.7 million; Inter-American Development Bank (IDB), US$263.8 million; US Agency for Inter- national Development US$191.9 million; other, US$322.2 million. Net of undisbursed balances, Bolivia's debt to the Bank and IDA in 1978 represented 7.7% of its public debt. Bank and IDA's share of the Bolivian debt service was 3.9% in 1978. - 23 - PART VI - LEGAL INSTRUMENTS AND AUTHORITY 61. The draft Loan Agreement between the Republic of Bolivia and the Bank and the Peport of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. Special conditions of the loan are listed in Annex Ill, Section III. The conditions of disbursement of the second tranche are: (i) satisfac- tory progress on the Government's stabilization program, as defined in the Letter on Development Policies. This would involve ascertaining that Bolivia's export competitiveness is maintained; and (ii) restatement by the new administ- ration, expected to take office in August, of its willingness to pursue the policies defined in the Letter on Development Policies. 62. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 63. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 9, 1980 Washington, D.C. ANNEX I - 24- Page 1 of5 BOLIVIA - SOCIAL INDICATORS DATA SMEET BOLIVIA REFERENCE GOupS (aJUSTED AAGES LAND AREA (THOUSAND SQ. E.)V - MOST REGENT ESTIMATS) TOTAL " 1098.6 SAME SAME NEXT RIGHER MCULTTURAL 304.4 MUST RECENT GEOGRAPHIC INCOME INCOME 1960 lb 1970 /b ESTIMATE lb REGION /c GROUP /4 GROUP I Gn PER CAPSTA S) 160.0 260.0 510.0 1124.4 467.5 1097.7 tNRG CONSUMPTION PER CAPITA (1ILOGRAMS OF COAL EQUIVALENT) 147.0 229.0 318.0 943.1 262.1 730.7 POPULATION AND VITAL STATISTICS POPULATION, MID-YAl (MILLIONS) 3.3 4.3 5.2/. ULAUN POPULATION (PtC.NT O TOTAL) 24.0 28.1 30.3 59.3 24.6 49.0 POPULATION PIOJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 9.0 STATIONARY POPULATION (MILLIONS) 19.0 TEAR STATIONARY POPULATION IS REACH 2100 POPULATION DESTY PER SQ. KM. 3.0 4.0 5.0 23.5 45.3 44.6 PER SQ. KK. AGRICULTURAL LAND 11.0 16.0 17.0 80.5 149.0 140.7 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 43.0 43.1 43.0 40.9 45.2 41.3 15-64 YRS. 54.0 54.0 54.0 54.4 51.9 55.3 65 Y&S. AND ABOVE 3.0 1.9 3.0 3.9 2.8 3.5 POPULATION GROWTH RATE (PERCENT) TOTAL 2.1 2.6 2.6 2.4 2.7 2.4 URBAN 3.6 4.1 4.2 3.7 4.3 4.5 CRUDE sIRTH RATE (PER THOUSAND) 4E.0 47.0 44.0 32.8 39.4 31.1 CRUDE DEATH RATE (PER THOUSAND) 23.0 19.0 15.0 8.5 11.7 9.2 GROSS REPRODUCTION RATE .. 2.8 3.2 2.4 2.7 2.2 FAMILY PLANNING ACCEPTORS, ANNUAL (THOOSANDS) .. .. 7.6 USERS (PERCENT OF MARRIED WOMEN) .. .. .. 17.7 13.2 34.7 FOOD AND NUTITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 81.7 101.0 108.0 99.4 99.6 104.4 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 69.0 76.0 77.0 107.0 94.7 105.0 PROTEINS (GRAMS PER DAY) 43.0 46.0 48.5 60.4 54.3 64.4 OF WHICH ANIMAL AND PULSE 13.3L& 14.0 14.4 28.3 17.4 23.5 CHILD (AGES 1-4) MORTALITY RATE 36.0 27.0 22.0 6.7 11.4 8.6 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 43.0 48.0 52.0 63.6 54.7 60.2 INFANT MORTALITY RATE (PER THOtSAND) - .. .. 158.0 76.1 68.1 46.7 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 33.0 34.0 63.4 34.4 60.8 URBAN .. 92.0 81.0 79.5 57.9 75.7 RURAL .. 2.0 6.0 38.6 21.2 40.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 12.0 .. 58.8 40.8 46.0 URBAN .. 25.0 .. 77.8 71.3 46.0 RURAL .. 4.0 9.0 24.5 27.7 22.5 POPULATION PER PHYSICIAN 3900.0 2300.0 2120.0 1841.9 6799.4 2262.4 POPULATION PER 1URSING PERSON .. 2730.0 3510.0 933.7 1522.1 1195.4 POPULATION PER HOSPITAL 3ED TOTAL 380.0 510.0 .. 563.4 726.5 453.4 URBAN .. 200.0 .. 279.4 272.7 253.1 WIRAL .. 2400.0 .. L140.9 1404.4 2732.4 ADMISSIONS PER HOSPITAL BED .. .. .. 25.7 27.5 22.1 HOUSING AVERAGE SIZE OF HOUSEROLD TOTAL .. .. .. 5.0 5.4 5.3 URBAN .. .. .. 4.8 5.1 5.2 RURAL .. .. .. 5.3 5.3 5.4 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. .. 1.3 .. 1.9 URBAN .. .. .. 1.3 .. 1.6 RURAL .. .. .. 1.5 .. 2.5 ACCESS 70 ELCTRICITY (PERCENT OF DWELLINGS) TOTAL 22.0/h .. .. 54.3 28.1 50.0 Ja3AN 76.0h .. .. 80.1 45.1 71.7 RURAL 8.0 .. .. 14.2 9.9 17.3 ANNEX I -25- Page 2 of5 BOLIVIA - SOCIAL INDICATORS DATA SHEET BOLIVIA &EFERENCZ GROUPS (A.JSTED ATE 'AG!S - MOST UC EST T) SAME SAME NUT RIG=HER 40ST RECENT GEOGRAPHIC 1NCOKE LNCOME 1960 /b 1970 lb ESTIMATE /b RECION c CROUP Id GROUP /e EDUCATION DJUSTD EnoxLLsyT RATIOS PRIMART: TOTAL 64.0 68.0 80.0 107.3 82.7 2.5 MALt 78.0 80.0 88.0 [09.1 87.3 108.6 FEKALZ 50.0 56.0 72.0 107.4 73.a 97.1 SECONDARY: TOTAL 12.0 21.0 32.0 40.5 21.4 33.5 MALE 13.0 24.0 36.0 40.4 33.0 38.4 FEMALE 9.0 18.0 27.0 39.0 15.5 30.7 VOCATIONAL rOML. (Z OF SECONDAAT) 14.0 . ..18.5 9.3 11.5. PUPIL-TEACRER RATIO PRIMARY 27.0 27.0 23.0 37.1 34.1 35.8 - SECONDARY 13.0 17.0 .. 17.9 23.4 22.9 ADULT LITERACY RATE (PECEN"T) 38.8 40.0 63.0 77.4 54.0 64.0 CONSUMKPTION - PASSENGER CARS PER THOUSAND POPULATION 3.0 4.0 1.6 29.1 9.3 13.5 BADIO RECEIVERS PE!R THOUSAND POPULATION 73.0 * 82.0 74.0 172.1 76.9 122.7 TV RECEIVERS PER THOUSAND POPULATION .. .. .. 67.9 13.5 38.3 WSPAPEt ("DAILY GENERAL INTEREST-) CIRCULATION PER THOUSAND POPUlLAI:0N 27.0 42.0 35.0 76.1 18.3 40.0 CINEKA ANNUAL ATTENDAC PER CA.'TA .. .. .. 4.2 2.5 3.7 LABOR FORCE TOTAL LABOR FORCE (TROUSANDS) 2000.0/1 2300.0 2500.0 FEMALE (PERCENT) 18.9/1 19.5 20.4 21.5 29.2 25.0 ACRICULTUPE (MRCE.IT) 61.0 65.0 51.0 30.2 62.7 43.5 INDUSTRY (PERCENT) 18.1 21.1 23.0 23.8 11.9 21.5 PARTICIPATION RATE (PERCENT) TOTAL 34.1 33.2 33.0 30.9 37.1 33.5 MALE 56.0 53.7 52.7 47.3 48.8 48.0 TEMALE 12.7 12.9 13.4 13.3 20.4 16.8 ECONOMiC DEPENDENCY RATIO 0.91 . 0.9 1.0 1.5 1.4 1.4 INCOME DISTRISUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF EOUSEHOLDS .. 36.0/ .. 23.7 13.2 20.8 HIGHEST 20 PERCENT OF HOUSEHOLDS .. 59.0/ .. 58.7 48.2 52.1 LOWEST 20 PERCENT OF HOUSEHOLDS .. 4.0/ .. 2.9 6.3. 3.9 LOWEST 40 PERCENT OF HOUSEHOLDS .. 13.0L ., 9.9 16.3 12.6 POVERTY TARGET GROUPS 1 ESTI2MATD ASSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. 265.6 241.3 270.0 &URAL .. .. 134.0 185.1 136.6 183.3 ESTIMATED RELATIVE POVET INCOME LEVEL (US PER CAPITA) URBAN .. .. 105.0 396.3 179.7 282.5 RURAL .. .. 75.0 308.1 103.7 248.9 ESTTMATED POPULATION 3ELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. .. 35.2 24.8 20.5 &UR-%L. .. .. 85.0 46.6 37.5 35.3 V Noc available .Not applicable. NOTES I The adjusted group averaSes for each indicator are populazion-weighted geometric means, excluding the extreme values of the indicator and the most populated country ia each group. Coverage of countries among the indicators depends on availability of data and is noc uniform. lb Unless other.ise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, beeween 1969 and 191L; and for Most Recent iscizata, beteen 1974 and 1977. It Latin America & Caribbean; /d Lower Middle Income ($281-550 per capita, 1976); /. Intermediate Middle Income ($551-1135 per capita, 1976); /f Provisional 1976 population census gives estlast of 4.647 million; 'a Av. 1961-45; /h 196E /l 1965; IJ Population. 11ost Recent Estimate of ON? per capita is for 1978. August, 1979 - 26 - ANNEX I DIITIM OT SCCIAL IDICATORS Page 3 of 5 Notse: Although the dat. tre draen from #orcea genrally judgd the enat athoritativ and rellable, it ahoald also be noted that they my not be interna- btonally co~g.aable because of the lack of standardi.ed definitions and concepta ued by different countrien In collecting the data. The data aec, nonetheless, useful to describe orders of -gnitude, indtcate trenda, and characterie ceartain major differencet between countriea. Tte adjueted gro;p averagce for each indicator are population-wightad geoetrio meran, eluding the extrem value. ef the indiättor sud tbe set populated country Wc - ech group. Dua to bach of date, group averagts of all indlcatora for Capital Surplus Oil eporters and of indicator. of Accesa to Water and Excreta ip.osal, Nouing, Incooe Diätributton and POerty for other country groupm are population-eighted gematric aeen. without axlusim of tbc totreme valuta and the s.t populated country. Since the coyerage of countries amg the indlcatora depend availability of date end te not unifor. caution mu~t be exeiRed in relatig averame of ne Indlcator to mntr. These aveages are sts useful me aproxtn of 'expected valuta when coparing the vata of one indiato at e tia anna the country end reference groupa. LAD AREA (thousand caha.) Acoca to EXsreta Disposal (ecent tofpoulatio) - total, rban, and raral - Total - Total eurface aren comprising land are, end Imm d ratera. ~aser of people (total, urban, and rural) served by ecreta dirposa es riculturl. - Met recent stiate of agricultural area used temporwrily percentage. of tbeir respeotive population.. Exreta diapoåal may include or permneetly for cropr, pastureo, market end kitchen gardens or to the collection end dilpo.al, with or vithout treatment, of husen exrets lie fallow. end aest-ter by water-bae eyotems er the urt of pit pri,ira end ca.ila instctltione. GNp PR CAPITA (USf) - GNP per oapite ertiates et current narket price, pulatio per Æotican - Population dbided by oumbec of practicing physic ian calolated by sam converelon mathod as World Senk Atlas (1976-76 basin); qualifid froma el cool at untvereity level. 1960, 1970, and 1978 date, Pop-lation per Nuraing Person - Population divided by nuaber of praetiing sale 2%EY CfSUMPTION PER CAPITA - Annual consumption of coercial energy and feale graduate nursea, prectical eurse, and assistant nuraet. (coa_l andlgnte,petroeum, natural ges end bydre-, nuclear and geo- Populatbon per Hoapital Bed - total, ortan and rural. - Poplation (total, urban, thermal eletricity) in kilogram~ of coal equivalent per capita; 1960, and roral> divided by their repective ousher of beapital beba ev ile ,in 1970, end 1976 dato. public and private general aend apecialized batpital and rehabilitation centers. Hoapitale are establishment. permanently taffed by at least one physIcian. POPUIATI0I AND VITAL STATISTICS tbliment providing prtncipally oustodi.l emoe nre not inoluded. Rurkl Total Populaio Md-Yea (illio.) - As of July 1; 1960, 1970, and hopitala, howeyer, include health and medical centers not pernanently Btafled 1977 date. by a phyaician (but by a medical aabietant, nurse, midwife, etc.) which offtr Urban Mpuletion (percent of total> - Ratio of urban to total population; te-patient ao-odation end provide .lbnted rangt of medical feciite diffeent definitions of orban ares may effect comparabillty of date Adaitsions per Hospital Bed - Total number of admissions to or dischrge. trom awng countries; 1960, 1970, and 1975 dat. hospitals diviLded by the euster of bed-. population Prejctiona Pepalation te year 2000 - turnt population projeotios are baed on HOUSING 1975 total population by age and tco and thcer mortalbty end fertility Average Sboe of Household (persons per household) - total, orten, end rural - raes Prjection paremeters for mortalty rates comprise of three A housebold oonatsts et a group of tnd.eiduals who ahare living quarter and ievel asumng life expectancy at birth increasing with country's their min als, A boarder or lodger oay or may not be inollaed in the per capita incoe level, and female lifte expectancy stabilozing at hou.ehold for statistical purposes. 77.5 y.er. The paraeters for fertility rate eae have threc level. Averae nber of personn per roo - total, urban, end rural - Averege ner essuing decline in fertility according to Income ,levl and past of persons pcr romn l l urban, and rural occupied con-entional doellings, fa"iy planning performance. Esach country Is then assigned ene of these respectively. DMellingo clude non-permaent structures end unocoupted pert- . oine cembinations of sortaliy ord fertility trendU for projeti-o Access to Electricity (percent of dwellings) - total, urban, and rural - Cn- purposes. vetional dwellingr with electricity in liling q,extero or percetage Stetionery opulttI -n stationary poplttlon there is no groth total, urban, and rurel dwellingo repctively. roce the tbit rate to equal to the death ote, and alec the ago structure remaino constat. This is tcheved only after fertility rates ECATION dcl_ine to the replaccent level of unit net reproduction rate, when AdJusted Enrollent Ratior aech generetio of women replaces itself exactly. Tbc statbonry popu- PrIsary rchool - total, mele end feal - rss total, nale and feral enroll- 0ation siz was es otited et the bess of the projeted charteristica ment of all ager et tbc primary level as percentages of respective priary of the population in the yser 2000, and the rate of decline of fertility chool-age population; normally inoloder obildrco aged 6-11 yeas but rate to replaceet letel. odjusted for different lengths of primary education; for countrier wit Ycer stetitcnay population is reached - The year when stetionary population universal educetio enrolloent may ecobed 100 peccet snce oe pupil soze has been reshed, ort beln er above the official ~chooi ego. Population Desity Seconay scol - total. male and female - Computed as aoLe; seonay Per sq. oM. - Mid-year population per square kiloceter (100 hectare.) of eduotion requires et least four years of pproved primry instructien; totel area provides general voctinonl, er techer traiting instr-cti.o for pipils Pef sq. km. agricultural land - Computed o above for egricltural band .ually of 12 to 17 years of ago; correopondence courses are generlly only. eluded. Population Age Structore (percent) - Children (0-14 years), working-age Vocational enrollent (percent of oecondary) - Vocational instituties include (15-64 years), and retird (65 years and over) as percentages of nid-year technical, indostrtel, or other programs which operett ~ndependently or a population; 1960, 1970, and 1977 data. depertmets of etcondary institutions. Population Greth Bete (percent) - total - Annual growth rats of total mid- Ppicl-teaer ratIo - primary, nd oeocndary - Total etuaet eroelld It ytor poulations for 1950-bd, 1960-7Ö, and 1970-77. primary and secondey levelo dieided by numte of tecerst in le core- PopulatIon Growtb Rate (peret) - urban - Annual growt rates of urban oponding levels. populations for 1950-60, 1960-70, and 1970-75. Adul it t eet) - ierote edolte (ble te read end write) ee Crude Birth Ote (per thousnd)jAnnual live tirths per thousand of mid- b prentag of t.ot dult population aged 15 ytars oad over. year populatio; 1960, 1971, end 1977 date. crde Death Rate (per i-tosnd) - Annual deaths per thousand of nio-year CONSUMPTION poulatio; 1960, 1970, end 1977 dte.. Penergee Crs (per itousnd population) - Passenger ear comprise mtOOr ctro Gross Reproduction Vett - Aerage tumber of daughters a oman will bear seting less than eight peroons; ecludte ambolancs, heareso ord military in her normal reproductive period if she experiences present age- vele. speoifio fertility rates; usually fie-year overages ending in 1960, Radieo Rescior (per thootand populetio) - All types of recive for radio 1970, and 1975. broadcasts to general public per thousand of populationt; excldes unlicense Faily Planing - Aeptors, Anualg (thoousr,o) - Andual nuber of receiver -n counties and in years otto registretion of radi ots ca in acceptors of birt-o1trol devices under ausp'ces of national family effeot; data for recent years cay tet be eceparable since . -t cuntries plnning yrogeam. abollohed lcening. Family Planing - sero (perceet of married woen) - Peccentage of mrried TV Receivers (er thousand population) - TV recivers for broteact to general women of childbeering age 15-4 yeecs) o uet birth-control devioes public per thousnd populatlocn; excludes utlicebsed TV rece-ers n countries te all narried omen in same age groop. and in year when registration of TV sets was in effeot. Newopaper Ciroulaion (pec rthoand popa-tio) - Sow the ave.rag,eirculati-o FMOD AND NUTbITION f gnecal inttreot newspaper" defined 00 a peraodcal piblication index of Food PFroduction per Capita 1969-71=100) - Index of per capita devoted prianrily to recording general newc. It Is oonsidered te de "dily' annel production of all feel comditie. Production excludes seed and if it appear. at tenot for tinen a week. feed and is on oalendar ye dbasis. Commbodities cover primry goode Cinema Annual Attendance per Capita Per Year - Beod of th le bre of ti,kets (og. sugarae,- iltend of suger) which ere edible and cntain totrieet, cll during the ycer, including admiions toorve-tn ecneo and tobile (eg. coffee and tea are excluded). Aggregate production of enach coutry oto. et based ontational average prioce price eigts. Per capita suppy et celorice (percent ef requiremets) - Computed from A O 0 rnergy equivaleot of net food topplies available in country por eapitn Total Lebor fotoe (thorsads) - Ec.ooilly 000100 perons, oicuing arred per day. Availabloe pplies comprise d~oestio production, imperts less forces and uneployed but teloding houseoives, studett, etc. efbo exports, and changes in stock. Net supplies exelude animal feed, seeda, in varlous countries are not comparable. quantities sed in feed procesing, oro losses n distribution. Require- F-ealercet) - Feenle laber force as percentage of otol lab r force. entsv tro ttimated by dA based 00 physiological needs for normal Agriculture(percent) - Labor force in f.rming, forstry, hunting and ctvity end health considering env-r nmental temperatuee, boly 'eights, fishing as percetage of total labor feoce ago and sex distributions of population, and alloing 10 peroet fer Industry (percent) - Lab r ferce in mining, construction, manufacturing ano c7sto et hooseld level. electricity, orter and get ns percentage ef totaler for. Per capite suppiy of protein (grams ner day) - Protein contoet ef per Particionoe Rte (percett) -. total, ae, end eae - Partiipation or capita net supply of food per day. Het oupply of food is defined as activity rates are ncoputed ca total, male, and foale lbor force as per- above. Requirements for all countries established by USDA proeide for a centages of total, male end femle population of al eges respectively; minimm alloewance of 60 gran of total protein per day and 20 grams of i96. 1970, and 1975 data. Thee ort ILO* participation rates reflecting animal and pulse protei, of which 10 grams should be ani. protein., ge-eex structure of the populetiot, and long tioe trend. A fe estimt-e Tese standards are lo.er than those of 75 grane of total protein end are from national sources. 25 grrms of -nimal protein as en acerage fet the worId, proposed by FAO Eontmic Dependey Ratie - cleti of population undet 15 and 65 and oeer to be tbc Third world Feed Setety. ohe intet force tn eg group of 15-6I yearn. Per capita prote supply from enimal ord pulse - Protein spply of foed deried from animtals and pulost bo grs per day. INCONE DISTRION Child (agte 1-4) r>rtality Ratt (pcr tousand) - Annual deathc per obousand Peroctaec of Private -ncome (bott la ceot ord kind) - Received by riceost in age group 1-4 yces, to children in thio ego groop; ter mst devel- 5 percent, riceet 10 percent, poorest 20 percent, and poorest 40 percent oping coutrie data derived ftro life table. ef housotolds. HFALTH POVERTY TARGET GPUPS Life Expectancy no Hirth (years) - Aetage number of ysers of life Estimated Absolute Poerty Incom Level (US$ per 00p1ta) - eren nd tr - remaining et birth; 1960, 1971, end 1977. dta. Absolute poerty income level is that ineome l e below obich a m l Infant Mortality Rate (per thousend) - Annual deaths of infants unde .o e nutritionally adequate diet plus ossential too-fod reqiremtt 10 nt yer of age per thosand live birth. afferdble. Accesst tedoft Water (percent of population - totel orbor, n trdl - tEtimated eltive eerty Inaco Level (US$ per capita) - ebtan and r - Soeter of people (total, orten, end total) eth reasonleaccessto Rural relative poverty income leol is one-third ef eerage per capita tafe oeter oupply (includes treated surface waters or utreeted lut personal incoee of the coettry. Orten leve is derived tron tbc tr bev uo~tainted water ch, au that from protected boreholes, springs, with adjustment for higher cost of living in urban areas. end suitery wells) no percentage, of their respective poplations In Estiatsed Population elow Absolute Petrty Incoe Lecel (getret) - urban end en urban rea a public fountain or standpost located not more than rural - Percent of .polation (uran ord rerel) oe ae absolute poert 210 eters from a bouse h oy be considered as beg within reasonable accessof tht houe. In total areca r-eaoble 1 ccess wold ioply that the houseif.et membere of the hosehold do not have to spend a Economic and Social Data Division disproportionate part et the day in fetching the family-o water nedte Econic Analysis and Projectons Department Augost 1979 -27- ANNEX i Fage 4 of 5 BOL1VIA - ECONOMIC DEVELOPMENT DATA Actua Estiated Pro.et.d Growth Rates As % of GDY 1974 1976 1978 1979 1980 1985 1970-74 1975-79 1980-85 1974 1979 1985 NATIONAL ACCOUNTS USS Killion at 1977 Prices and Exthange Rate Gross Do-estic Product 2944 3321 3556 3629 3738 4592 6.3 3.9 4,2 96.2 100.5 95.0 Gains from Terms of Trade 11 -89 -23 -17 83 244 - - - 3.8 -0.5 5.0 Gross Donestir Inore 3062 3232 3533 3612 3621 4836 7.2 4.4 4.8 100.0 100.0 100.0 i nports (incI. NFS) 607 767 879 985 946 1137 7.6 7.7 3.8 19.8 27.2 23.5 Exports (inri. NFS) 670 761 646 683 725 971 14.0 15 6.0 21.9 18.9 20.1 Exports (an irport capariry) 788 672 623 66b 808 1215 149 3.8 8.5 25.7 18.4 25.1 Consumption 2281 2729 3197 3349 3242 3796 5.1 7.2 3.2 74.5 92.7 78.5 Inotoent 600 598 592 582 717 962 8.7 -3.5 6.0 19.6 16.1 19.9 Doestic Savioge 781 503 336 263 579 1040 16.0 -15.0 12.4 25.5 7.3 21.5 Natiornal Savtngs 740 457 240 129 441 923 18,9 -27.0 15.9 24.2 3.6 19.1 MERCHANDISE TRADE Ourrent Us$ millio r A5 of Toral Imports 1mports consuer Goods 90.4 118.7 173.5 221.0 202.9 345.9 30.5 14.6 11.3 21.3 19.3 16.5 Pels 4.0 6.1 8.1 10.0 .0 0 30.7 38.1 8.5 18.8 0.9 0.9 1.3 Other Intermediate Goods 115.6 189.7 274.3 350.0 411.1 722.5 18.4 16.2 11.9 27.2 30.6 34.4 Capital Goods 177.2 235.7 345.3 441.0 463.3 778.0 27.9 18.5 10.9 41.7 38.5 37.0 Import Adjustment 37.3 74.9 93.9 123.0 123.4 222.9 . - - 8.9 10.7 10.6 Total Merchandise (c.f.) 424.5 625.1 897.1 1145.0 1213.7 2100.0 22.6 18.0 11.6 100.0 100.0 100 Export As % of Tornl Exort Minerals 355.4 364.5 505.6 619.0 782.0 1370.0 20.0 21.0 11.9 61.6 78. 5 574 rel 193.1 167.5 122.1 148.4 277.2 1017.3 90.5 -1.3 29.7 33.5 18.8 42.6 Othr 96.7 101.7 97.5 107.6 109.0 233.7 60.0 9.2 16.5 16.8 13.7 9.8 Export Adjust.ent -68.7 -72.1 -83.4 -86.9 -91.3 -235.0 - - - -11.9 -11.0 -9.8 Total Merchandise (f...) 576.5 561.6 641.8 788.1 1076.7 2386.0 31.6 14.7 17.3 190.0 100.0 100.0 Merchandise Trade Indices (1977 - 100) Export Prins Index 92.9 81.9 111.7 127.9 161.4 261.3 Import Porce Index 79.0 92.7 115.9 131.2 144.9 209.0 Tenrs of Trade Index 117.6 88.3 96.4 97.5 111.4 125.9 Export Voluoe Inde- 97.0 108.0 90.6 95.6 101.1 136.0 VALUE ADDED BY SECTOR US$ Million at 1977 Prices and ExchanRe Rate As % of Total Agrttulture 509 566 586 598 617 780 5.0 3.5 4.0 17.3 16.5 17.0 Industry and Miring 876 959 988 990 1020 1312 7.7 4.0 5.2 29.7 27.3 28.6 Servires 1559 1796 1982 2041 2101 2500 6.0 5.1 3.7 53.0 36.2 54.4 Total 2946 3321 3036 3629 3238 4152 6.3 3-9 4.2 100.0 100.0 100.0 PUBLIC FINANCES (PereRnt of GDP) DETAIL ON PU1LIC SECTOR lVESTMENT PROGRAM As % of Total (onolidared Pob1Oc sector> 1974 1976 1978 1980-83 turrent SurplusDeficit (-9 7.6 3.3 r./ Agriculture 12.1 Capital Expenditures 6.8 13.3 11.8 Mioing and hydroarbos 32.8 Overall Surpluo/Deficit (-3 0.7 -10.4 -10.3 ods -try and power 15.7 External Borrowing (net) 2.3 7.3 5.3 Transport and co~uications 19.5 Doneotic BorrooIng (net) -3.9 . 2.3 4.1 Publir Servi and sorial services 19.9 Other 0.8 0.8 0.8 Total 100.0 CURRENT EXPENDITURE DETAILS FINANCING (Central Got. percent of total) Wagen ond Salarios 53.5 50.3 48.3 current Sovinga 33.3 ooda and Seirves 16.0 14.7 13.4 Net D-ometic Borrowing 26.7 Trans for payments 27.5 28.8 26.5 Net Erternal Borroin g 60.0 Sther (incl. intorest payments) 3.0 6.2 11.8 Total 10.0 Total 100.0 100.0 100.0 EMPLOYHENT AND OUTPUTPER WORKER Rployed (te Th-oand.) CDP tn 1977 US$ millions ftoe Added Per Emploee (US' 1973 1977 1973 1977 1973 1977 AS .rilture 78B 854 491 58' 623.1 685.0 Indostry and Mlnig 352 435 878 967 2494.3 2223.0 Servicer 572 652 1405 1890 2456.3 2898.8 TotalfArage 1712 1941 2774 3442 1620.3 1773.3 April 29, 1980 ANNE 11 6 28 . g 5 of 5 BALACE OP PA_Y£NT5, EXTERNAL ASSISTANCE AND DEST (US$ Millin) Actual E.timatd Pro,ect.d 1974 1975 1976 1977 1978 1979 1980 1985 SUMMAY UALANCE OF PAMENTS Exports (incl. NFS) 622.9 522.4 623.4 '721.3 721.5 874,1 1170,7 2538.5 Import. (inel. NFS) 479.2 667.3 711,2 827.9 1018.3 1292.0 1370.4 2377,0 Rsso.rca balance 143.7 -144.9 -97.B -106.6 -296,8 -417,9 zuu 16i.5 Nor itterest paymente -17.2 -23.7 -36.9 -57.0 -84.4 -126,0 -1305. -230.0 Other fact.r .ervic ncme. (ner) -13,2 -7.7 -4.3 -20,1 -31.0 -35.1 -73.2 -85,0 Cutren trafers (et) 13.7 13.1 14.0 15.0 27,0 42,0 50.0 70,0 C.vrent Account balane 127.0 -163,2 -11.0 -168.7 -385.0 -537.0 -352 -63.5 Direct foreign investruent (net) 16.7 53,4 12,1 9.0 13.0 16.0 20.0 35.0 Public v6LT loan (net5 91.1 101.1 232,1 343.3 218.8 209.7 290.4 180,0 (Gross Diebuemessnt) (143.5) (152.3) (29.1) (437.3) (327.2) (352,0) (460.4) (440.0) (Aorsat"1ion) (52.4) (5.2) (65.0) (94.0) (108.4) (142,3 (170.0) (260,0) SDR Alloation - - - 6.1 6.0 - IMF drawing. (n) - 19,7 - 109.0 Short-term capital, incl. n.e,f. -123,8 -45.6 -62.0 -123.6 29.6 73.2 -21.7 30.0 chng. inreserve (--ncrase( -11.0 54.3 -67.2 -6.0 103.9 230,5 -50,0 -161.5 GUA1M AND IDAN COMMITMENTS IBRD - 32.0 68.0 92.0 34,0 IDA 6,2 7,5 - - 9.0 Other multilatorl 35.0 S2.0 66,0 9.6 123.4 Governeenta -0.8 115.7 52,9 134.7 97.8 Suppli"e 13.5 44.2 39.: 15.6 39.7 Financial institutions 71.3 99.5 219.9 27 3(6,5 Bondoa - - 15.0 - Tosal public M&T L-ons 186.8 380.9 445.8 490.6 620,4 E.timed EXTERNAL-DEBT Actual debz utstanding De Dc. 31, 1978 DEBT BURDEN 1974 1978 1979 (di.bured tnly) Dibtursed nly Percent IBRD 74.5 4.3 Inter.st on public debt 17.2 84.4 126.0 IDA 59.1 3.4 Repayments an public debe 52.4 108.4 142.3 Other multilateral 221.8 12.7 Total public debtervice 69.6 192.8 268,3 Gov-tn 578.3 33.0 Pubic debt .sice. ratio (7. 11.2 26,7 350,7 Suppli.rs 112.4 6.4 Financial institutions 630.4 36.0 AVERAGE TERMS OF PUBLIC DEST Bond, 66.8 3.8 Other 7.4 0.4 Interest as % of DOD 2. 5 4.8 6.3 Total Public M&U5T Debt 1750.7 100,0 Amortiz8tion as % af DOD 7.5 6.1 7.3 EXPOSURE IBRD DOD as % of public DOD 3,0 4.3 5.3 Bank Group DOD as % of public debt serves 6.9 7,7 8.7 IBRD debt, srvice s % of public debt service 4.9 3.6 4.0 April 291B oup de service s % of public debt service 5.3 3.9 4 3 - 29 - ANNEX II Page 1 of 4 THE STATUS OF BANK GROUP OPERATIONS IN BOLIVIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of March 31, 1980) -------- US$ million ------ Loan or (Amount less cancellations) Credit # Year Borrower Purpose Bank IDA Undisbursed Fully disbursed loans and credits 23.3 44.6 Credits 261 1971 Bolivia Livestock 6.8 0.8 455 1974 Bolivia Mining/Manufacturing 6.2 0.1 561 1975 Bolivia Agriculture 7.5 2.5 762 1978 Bolivia Ulla Ulla Development 9.0 7.4 933 1/ 1979 Bolivia Omasuyos - Los Andes Rural Development 3.0 3.0 940 1979 Bolivia National Mineral Exploration Fund 7.5 7.5 948 1979 Bolivia Santa Cruz Water Supply and Sewerage 9.0 6.6 S-025 2/ 1980 Bolivia Gas and Oil Engineering 16.0 16.0 Loans 1121 1975 ENFE Railways 28.7 0.1 1211 1976 Bolivia Rural Development 9.5 6.2 1238 1976 ENDE Power IV 25.0 0.6 1290 1976 Bolivia Mining/Manufacturing 10.0 4.4 1324 1976 Bolivia Water Supply and Sewerage 5.2 2.5 1331 1976 Bolivia Small-Scale Mining 12.0 10.9 1404 1977 Bolivia Education and Voca- tional Training 15.0 11.7 1422 1977 ENFE Third Railway 35.0 13.2 1423 1977 AASANA Aviation 25.0 21.3 1489 1977 Bolivia Urban Development 17.0 16.2 1510 1978 Bolivia Ulla Ulla Development 9.0 9.0 1587 1978 Bolivia Highway Maintenance 25.0 25.0 Total 239.7 93.6 of which has been repaid 9.0 1.1 Total now outstanding 230.7 92.5 Amount sold 0.1 of which has been repaid - 0.1 - Total now held by Bank 230.6 92.5 166.6 1/ Not yet effective. 2/ Approved February 26, 1980. - 30 - ANNEX II Page 2 of 4 B. STATEMENT OF IFC INVESTMENTS (As of March 31, 1980) Fiscal Amount in US$ million Year Obligator Type of Business Loan Equity Total 1973 Plasmar, S.A. Cables and Plastic Product 0.3 0.1 0.4 1976 Banco Hipotecario Nacional Capital Market 0.3 0.3 1976 Banco Industrial S.A. Development Financing 0.6 0.6 1978 Molino Andino, S.A. Food and Food Processing 2.3 - 2.3 Total 2.6 1.0 3.6 Repaid, cancelled or sold 1.2 0.4 1.6 Held by IFC 1.4 0.6 2.0 C. PROJECTS IN EXECUTION Credit 261-BO - Third Livestock Development Project, US$6.8 million, June 23, 1971; Effective Date: September 15, 1971; Closing Date: June 30, 1980. The credit portion of the project has been almost fully disbursed; only about US$800,000 including about US$400,000 for technical assistance remains to be disbursed and the credit should be fully committed by the Closing Date. Credit 455-BO - Mining Credit Project, US$6.2 million, January 18, 1974; Effective Date: June 18, 1974; Closing Date: June 30, 1980. The project is proceeding satisfactorily and the credit should be fully disbursed by the Closing Date or shortly thereafter. Credit 561-BO - Agricultural Credit I, US$7.5 million, June 20, 1975; Effective Date: December 15, 1975; Closing Date: June 30, 1980. Funds originally allocated for cattle and subsequently for grape orchards are fully committed; whereas demand for sheep, annual crops and sugarcane has been less than anticipated. The loan is now fully committed. Loan 1121-BO - Second Railway Project, US$28.7 million, June 5, 1975; Effective Date: August 6, 1975; Closing Date: June 30, 1980. Project progress has been satisfactory with performance targets either having been attained or exceeded. The loan is now fully committed. - 31 - ANNEX II Page 3 of 4 Loan 1211-BO - Ingavi Rural Development Project, US$9.5 million, March 8, 1976; Effective Dat-: October 7, 1976; Closing Date: June 30, 1982. There have been delays in the implementation of some components of the project. Corrective measures have been taken and the project is now proceeding satisfactorily. The average size of subloans has been smaller than anticipated; consequently, project area may have to be expanded. Loan 1238-BO - Fourth ENDE Power Project, US$25 million, June 2, 1976; Effective Date: August 23, 1976; Closing Date: June 30, 1980. The project has been delayed somewhat by poor performance of local contractors and difficulties experienced in the transportation of a major equipment component. Overall progress of the project has been satisfactory and the loan should be fully disbursed by the Closing Date. Loan 1290-BO - Banco Industrial Mining and Industrial Credit Project, US$10 million, October 15, 1976; Effective Date: April 14, 1977; Closing Date: December 31, 1980. After initial delays, the project is now proceeding satisfactorily. Loan 1324-BO - Urban and Rural Communities Water Supply and Sewerage Project; US$11.5 million, October 15, 1976; Effective Date: December 10, 1976; Closing Date: June 30, 1981. At the Government's request, the water supply and sewerage invest- ments for the cities of Sucre and Potosi were cancelled because these cities were not prepared to proceed without substantial Government subsidies. The rural component of the project is now proceeding satisfactorily. Loan 1331-BO - Small-Scale Mining Development Project, US$12 million, October 15, 1976; Effective Date: July 15, 1977; Closing Date: December 31, 1980. Owing to institutional and managerial problems, the preparation of subprojects was delayed about 15 months. To facilitate loan utilization a number of measures were taken in mid 1978. While progress has been slow so far, there are indications that commitments will accelerate during 1980. Loan 1404-BO - Education and Vocational Training Project, US$15 million, May 11, 1977; Effective Date: September 7, 1977; Closing Date: December 31, 1981. In its initial phase, the project proceeded well, but subsequently experienced delays because of the lack of Government contributions. Recent managerial problems have now being resolved through the appointment of a new project director and improved participation of teachers. - 32 - ANNEX II Page 4 of 4 Loan 1422-BO - Third Railway Project, US$35 million, June 6, 1977; Effective Date: September 29, 1977; Closing Date: December 31, 1981. The progress of the project has been seriously impaired by heavy rains and extensive floodings of January, February 1979. A reduction in the project scope is expected as the railways have to divert funds to repair damages. The Bank is discussing with Government on how best to proceed. Loan 1423-BO - Aviation Development Project; US$25 million, June 9, 1977; Effective Date: September 29, 1977; Closing Date: June 30, 1983. The project has been delayed by about one year because of poor weather conditions and, subsequently, because of management changes and delays in Government contributions. Most components are now proceeding satisfactorily. Loan 1489-BO - Urban Development Project, US$9 million, November 30, 1977; Effective Date: June 22, 1978; Closing Date: June 30, 1983. The project has been delayed one year because of slow processing of subsidiary loan agreements, frequent changes in management and delays in Government contribution. These factors continue to affect the housing component. The other components are now proceeding satisfactorily. Loan 1510-BO and Credit 762-BO - Ulla Ulla Development Project, US$9 million each, April 6, 1978; Effective Date: July 31, 1978; Closing Date: June 30, 1983. The project has advanced more slowly than expected because of the lack of Government contributions. Loan 1587-BO - Highway Maintenance Project, US$25 million, July 10, 1978; Effective Date: October 4, 1978; Closing Date: December 31, 1983. Initiation of the maintenance works delayed six months because the beneficiary has to concentrate on emergency measures to repair the damage to the road system, caused by heavy rains and extensive flooding. Credit 948-BO - Santa Cruz Water Supply and Sewerage Project, USS9.0 million, July 27, 1979; Effective Date: October 29, 1979; Closing Date: June 30, 1983. The project is proceeding as scheduled. Credit 940-BO - National Mineral Exploration Fund, US$7.5 million, July 27, 1979; Effective Date: January 21, 1980; Closing Date: June 30, 1983 There are delays in the provision of Government contributions. - 33 - ANNEX III SUPPLEMENTARY LOAN DATA SHEET Section I: Timetable of Key Events (a) Loan request made to Bank: September, 1979 (b) Appraisal mission: December, 1979 (c) Post appraisal mission: February/March, 1980 (d) Completion of negotiations: April 28, 1980 (e) Planned date of effectiveness: June, 1980 Section II: Special Bank Implementation Actions None Section III: Special Conditions: (a) The local counterpart funds generated by the loan would be deposited in a special account in the Central Bank and used to finance projects in the approved public investment program (para 48). (b) Disbursement of the second tranche of the loan would be based on satisfactory progress being made in carrying out the economic program outlined in the Letter on Development Policies. This would include a finding that Bolivia's export competitiveness is maintained; and endorsement by the new administration, expected to take office in August, of the Letter on Development Policies. -34 - ANNEX IV Page 1 LETTER ON DEVELOPMENT POLICIES Dear Mr. McNamara, Bolivia is currently facing an economic crisis which has been aggravated by delay in the adoption of corrective measures. The current account deficit of the balance of payments in 1979 amounted to about 10.5% of GDP, compared to a surplus of about 6% in 1974. This deterioration reflects a decline in export volumes, a rapid increase in imports, and increased interest payments resulting from the growth of external debt. On the fiscal side, the rapid expansion in public investment during 1975-78, particularly in capital-intensive processing plants, and the decline in the operating surpluses of the major public enterprises led to a severe disequilibrium. The overall balance of the public sector moved from a small surplus in 1974 to a deficit of about 10.5% of GDP in 1979. Real GDP growth, which had averaged over 5.5% for the period 1970-77, amounted to only 3.3% and 2.1%, respectively, during 1978 and 1979. At the same time, the rate of inflation, as measured by the GDP deflator, accelerated from an average of about 10% during 1975-77 to about 17% in 1978 and 19% in 1979. 2. The Government of Bolivia has formulated an integrated economic recovery program, of which important initial measures have already been taken. The program is aimed at (i) removing short-term domestic and external imbalances, and (ii) reducing or eliminating major structural problems which have affected this country's economic growth performance over the past several years. The main components of the program are the following: (a) Economic and Financial Stabilization Program; (b) Specific Measures for Export Promotion; (c) Public Investment and Financing Program. Economic and Financial Stabilization Program 3. On November 30, 1979, the Government took a series of economic measures aimed at reducing the fiscal and balance of payments deficits. One such measure was the replacement of the fixed exchange rate of US$1=$b20 by a new exchange rate regime based on a managed float, set initially at US$1 = $b25. This implied a depreciation of 25%. In the future, the exchange value of the peso will be determined in relation to the net international reserve position of the Central Bank and the relation- ship between domestic and foreign costs. Another measure was the increase of about 100%, on average, in the prices of petroleum derivatives sold in - 35 - ANNEX IV Page 2 the domestic market. This measure will not only improve the financial situation of the public sector, but also help to dampen domestic demand for hydrocarbons, thereby increasing the quantity available for export. The Government is willing to consider the formulation of further action in this area. In the area of monetary policy, we have eliminated dollar-denominated peso deposits, and have restructured the system of interest rates and legal reserve requirements to encourage the growth of peso-denominated savings. The program also includes ceilings on net domestic borrowing of the public sector from the banking system, and on the magnitude of external borrowing of less than 10 years' maturity as well as targets for the levels of international reserves. These measures formed the basis for an agreement with the IMF for a one-year stand-by arrange- ment, which was approved by the IMF Board on February 1, 1980. 4. As a result of the rapid growth in external debt and the poor export performance of the last several years, external debt service payments have risen sharply in relation to exports. We are negotiating a debt refinancing operation with a number of foreign commercial banks. Our objective is to arrange for a refinancing loan of about US$200 million, which would be used to repay some of the Central Bank and COMIBOL short- and medium-term loans. Specific Measures for Export Promotion 5. Bolivia's overall merchandise exports have experienced no real growth between 1974 and 1979. To a large extent, this poor performance has been the the consequence of an overvalued exchange rate, inappropriate domestic pricing policies for hydrocarbons and agricultural products, lack of specific incentives for agricultural exports, and an inappropriate structure of mineral taxation. It is the Government's intention to reverse this tendency and to pursue policies that will foster the development of exports in industries in which Bolivia can be an efficient producer. In addition to the action already taken on the exchange rate and hydrocarbons' prices (discussed in para 3) and to the increased emphasis on export- oriented projects in the public investment program (discussed in para 9), the following specific measures for promoting exports have been adopted, or are expected to be adopted in the near future. The two main objectives of these measures are: (i) to allow exports to grow at about 6% per annum in real terms over the period 1980-85, and (ii) to reduce the heavy reliance on exports of tin from over 50% of merchandise exports in 1979 to about 33% by 1985. a. Reform of Mineral Taxation 6. Bolivia's main export sector, mining, has been negatively affected by a structure of taxation which discouraged exploration and development. The Government has recently adopted a mineral tax reform which includes: (i) the elimination of the export tax, (ii) the updating of presumed costs, and (iii) the establishment of an adjustment factor for presumed costs, based - 36 - ANNEX IV Page 3 on the floor price of the International Tin Council. In our opinion, these measures initially provide sufficient incentives to the mining sector to develop efficiently the mineral resources of Bolivia. The Government considers that further analysis of, and possible action on, the formula to update pre- sumed costs, the provision of specific tax incentives and overall level of mineral taxation are needed. It is our objective to increase investment and production in the sector, and to increase the exports of the sector by at least 3.5% per annum in real terms between 1980 and 1985. b. Agricultural Pricing and Marketing Policies 7. Low domestic producer prices for several agricultural products with export potential have been a major drawback to agriculture exports. To promote production of commodities with the highest export and import substitution potential, the Government has significantly increased farm-gate prices for a number of agricultual products, among others for beef, by about 55%, for dairy products by 62%, and for poultry by 25%. We recognize that further action is required. Most importantly, the action would refer to (i) an increase in the farm-gate price for coffee and the gradual introduction of differential prices taking quality into account; and (ii) the introduction of differential pricing for beef, with higher prices for better cuts. It is intended to gain experience on a pilot basis before introducing differential prices on a national basis. It is our objective to set prices so that they provide adequate incentives to producers for export and we intend to adjust these prices as necessary to meet this objective. In addition, the Government expects that the findings of the Bank supported study would provide the framework for export promotion programs and relevant institutional measures. c. Future Exports of Natural Gas 8. One of the bright aspects of our country's long-term export prospects is the possible sale of large quantities of natural gas to neighbouring countries. A program, partly financed by the World Bank, is under preparation to ascertain the magnitude of gas reserves. The Government intends to take preparatory steps as early as possible to allow initiation of the construction of a pipeline to export gas immediately after sufficient reserves have been confirmed provided satisfactory agreement on the sale price has been arrived at with prospective buyers such as Brazil and other countries. Public Investment and Financing Program 9. The Government has completed the preparation of a public investment and financing program for the period 1980-83. The main objectives of the program are: to give priority to productive projects in agriculture, mining, manufacturing and hydrocarbons, particularly to projects with export orienta- tion; to complete ongoing priority projects before initiating new ones; and to - 37 - ANNEX IV Page 4 maintain essential levels of investment in social and transport infrastructure consistent with the needs of the country. We have prepared a revised and significantly cut down priorty investment program which is now in line with domestic and external financing availability. In the process, a number of large projects have been eliminated from the program while others have been delayed or cut down in size. We also expect that the feasibility reports to be financed by the World Bank will help improve the quality of public investment in the future, particularly in agriculture, mining and hydro- carbons sectors through identification of high priority projects. 10. On the financing side, we anticipate continued inflows of external assistance, plan to maintain net domestic borrowing of the public sector at levels consistent with our stabilization program, and intend to take further measures to improve public sector savings. Two such measures for increasing savings are the following: a. Maintenance of Realistic Tariffs and Prices of Public Enterprises 11. Recently the Government has increased the tariffs of ENDE by 30%, of ENFE by 30% and of AASANA by 70%. Our policy is to set public sector tariffs at levels that allow enterprises to earn reasonable rates of return and that ensure a significant proportion of self-financing for investment. In particular, the tariffs of ENDE will have to be increased significantly to help finance the envisaged large investment program. We also plan to increase hydrocarbon prices gradually in order to bring the domestic prices closer to international prices. b. Control over the Expenditures and Borrowing of Public Enterprises 12. In the area of controls over expenditures and borrowing, the Government intends to strengthen its control, particularly of the major public enterprises. Wage guidelines have been set in the context of the stabilization program. To ensure that the level of programmed investment is not exceeded, we intend to improve the information system for major public enterprises and to strengthen the mechanism of control over these enterprises through instructions based on generally accepted principles of public enter- prise management,through Government representatives in the Board of Directors of enterprises, and through strengthening, before August 31, 1980, of the staff in the Ministry of Planning and Coordination. In this connection, the proposed technical assistance of the World Bank and UNDP to help set up an appropriate control system and train staff will prove useful. In the area of controls on external borrowing, INDEF - the entity responsible for external borrowing - has been dissolved and all matters relating to external borrowing have been passed on to the Central Bank. The control on foreign borrowing of public enterprises has been extended to include loans of maturity less than one year. - 38 - ANNEX IV Page 5 13. While important and difficult measures have already been taken as outlined, the process of economic recovery will probably take three to four years and require further action. It is in the context of our program for economic recovery that we consider World Bank support essential. Yours sincerely, signed Adolfo Aramayo Minister of Finance - 39 - ANNEX V Page 1 of 2 ELIGIBLE IMPORTS All imports are eligible for Bank loan financing with the exception of the following list. The chapter numbers referred to in the exclusion list are taken from the document "Arancel Aduanero de Importaciones" used by the Bolivian authorities. The nomenclature of that document is, in turn, based on Nomenclatura Arencelaria Comun de la Subregion Andina (NABANDINA), used by countries of the Andean Common Market. Exclusion List Chapter Number Chapter Heading 22. Drinks, alcoholic beverages and vinegar. 24. Tobacco. 34. Soaps and cosmetics. 36. (only 36.05) Explosive and inflammable products. 37. Photography and cinematography products. 43. Fur products. 49. Art books. 58. Carpets and tapestries. 65. (except 65.01 and 65.02) Hats and related accessories. 66. Umbrellas, canes, etc. 67. Articles of fur, artificial flowers, etc. 70. (except 70.01, 70.02, 70.03 and Glass and glass products 70.04) 71. Pearls, precious and semi-precious stones and other articles of jewellry. 72. Coins. - 40 - ANNEX V Page 2 of 2 Chapter Number Chapter Heading 87. (only 87.02, 87.08, 87.09 and 87.10) Cars, tractors and other vehicles. 88. Aircraft. 89. Ships. 91. Watches. 92. Musical instruments, TV, radio, etc. 93. Weapons and ammunitions. 94. (except 94.02) Furniture. 95. Sculptures of different materials. 96. Brushes and brooms. 97. Toys, sports goods. 98. Various consumer items (buttons, pens, lighters, etc.) 99. Art objects and antiques. - 41 - ANNEX VI April 28, 1980 Mr. Peter R. Scherer Division Chief, LC2 World Bank 1818 H Street, NW Washington, DC 20433 Dear Mr. Scherer: Attached please find the Gcdvernment of Bolivia's public investment and financing program for 1980-83 which has been approved by the economic cabinet. While the investment level for 1980 is consistent with the budget, the levels for 1981-83 are indicative, to be updated each year. Regards, signed Adolfo Aramayo Minister of Finance BRD-13035 r å uI 977 B R A Z lL BEt..JVIA URBAN DEELOPMENT PROJECT COBI RBE AL magd XlAMAS - R A ZL Sonte Ane P E R U TRIN1DAD OSCn Borla PA P A G UA Y .\.-. .'I<. - H L E --- A R G E NNT N A