Bolivia - Reconstruction Import Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY . .~ ~ ~ ~ ~ R Report No. P-4253-BO REPORT AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT EQUIVALENT TO SDR 48.4 MILLION TO THE REPUBLIC OF BOLIVIA FOR A RECONSTRUCTION IMPORT CREDIT PROJECT April 25, 1986 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its cotents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Bolivian Peso (Sb) = US$0.0000005 US$1.00 = Sb 2 million 1 million ($b) = US$0.5 MEASURES AND EQUIVALENTS 1 kilometer (km) = 0.62 mile 1 meter (a) = 3.28 feet (ft) 1 kilogram (kg) = 2.20 pounds (lb) 1 ton = 2,205 pounds GOVERNMENT FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS BAB - Bolivian Agriculture Bank BAMIN - Bolivian Mining Bank BISA - Industrial Development Bank CAO - Camara Agricola Oriente CB - Central Bank of Bolivia COMIBOL - Bolivian Mining Corporation GEOBOL - Geological Survey of Bolivia ENDE - Bolivian Power Company ENFE - National Railways Corporation IDB - Inter-American Development Bank NEP - New Economic Policy RIC - Reconstruction Import Credit SBA - Stand-By Agreement TGN - Tesoro General de la Nacion YPFB - Bolivian Petroleum Corporation  FOR CYFIA USE ONLY BOLIVIA RECONSTRUCTION IMPORT CREDIT PROJECT CREDIT AND PROJECT SUMMARY BORROWER: The Republic of Bolivia. BENEFICIARIES: State enterprises; private mining, industrial and agricultural producers and traders. AMOUNT: SDR 48.4 Million (US$55 Million equivalent). TERMS: Standard IDA. RELENDING TERMS: (i) State enterprises: 14.5%, 10 years with 3 years of grace; (ii) private sector: 14.5Z, max1mum of 1 year with 3 months of grace. PROJECT DESCRIPTION: In support of the economic stabilization and structural reform program initiated by the Government in August 1985, the proposed Reconstruction Import Credit (RIC) would help reactivate exports by providing quick disbursing financing for priority imported equipment, spare parts and other inputs needed in mining, agriculture, industry, energy, power and transport. The proposed operation would help stem the decline in agricultural, mining, industrial and hydrocarbon production and exports and facilitate railway and power operations that provide essential support to the export sectors. Funds for public enterprises would be onlent to the entities (i.e. CONIBOL, YPFB, ENFE and ENDE) by the Borrower (Ministry of Finance) through the Central Bank as its financial agent. For the private sector portion, the Central Bank would establish a rediscount facility to allow qualified financial intermediaries to provide dollar-denominated subloans to finance: (i) imports of inputs,-spare parts and equipment of private miners, industrial and agricultural producers and traders; and (ii) essential domestic materials required by industrial exporters. The foreign exchange risk would be borne by the public enterprises (unless the Government decides with IDA's agreement to pass on the Credit proceeds as a capital contribution in which case the Government bears the foreign exchange risk) and the private sector subborrovers. Thi docunent hasaric d iabuten nd may beuxd by ripents ony in the perfmnce of their official dutieL Its contents may not odmvise be disclosed without World Bank authodain  - il - ESTIMATED DISBURS ENTS: IDA FY 87 88 (US$ Million) 45 10 RISKS: The Government is committed to carry out its economic stabilization and reform program. The program has been effective in reducing the rate of inflation and improving the macroeconomic policy framework, but has been accompanied by an initial severe cut in the purchasing power of the population at large. The expected positive response of exports has been delayed by a severe deterioration in Bolivia's terms of trade. There is a risk that the Government cannot keep the program on track and that the benefits of the proposed Credit would not materialize fully. In order to sustain the program, the Government must demonstrate positive effects of economic reactivation, which will require an increase in imports above present depressed levels. The proposed Credit would assist in that effort. APPRAISAL REPORT: No Staff Appraisal Report has been prepared for this Project. MAP: IBRD 16591.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 48.4 MILLION TO THE REPUBLIC OF BOLIVIA FOR A RECONSTRUCTION IMPORT CREDIT PROJECT 1. I submit the following report and recomnendation on a proposed Reconstruction Import Credit to the Republic of Bolivia for the equivalent of SDR 48.4 million (US$55 million equivalent) on standard IDA terms. PART I - THE ECONOMY 2. An Economic Report (No. 5680-BO) was distributed to the Executive Directors in August 1985. The following discussion is based on that report and the findings of several missions which visited Bolivia after the Government adopted its economic stabilization and reform program. Country data sheets are presented in Anex I. Background 3. Over the past century, Bolivia's economy has functioned as a dual system in which the modern economy extracted resources to finance accumulation of assets abroad and had few linkages with the non-modern economy in which the majority of the population lived. The modern economy was based on mining (originalUy silver, later tin) while the rural population's main activity was subsistence agriculture. The country's political life was dominated by the mining and land-owning oligarchy. 4. Bolivia's defeat in the Chaco War with Paraguay (1935) brought deep dissatisfaction with the then existing situation and generated pressures for change. These culminated in the 1952 revolution, led by Mr. Paz Estenssoro and Mr. Siles Suazo, which sought to put an end to the colonial structure that had shaped Bolivia's economy, and to deprive the land-owning 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. However, the agrarian reform and the nationalization of the large mines were followed by falling production and declining GDP throughout the 1950s. During the subsequent decade output increased steadily at an average annual rate of about 5Z, and real GDP per capita recovered to its 1952 level by 1970.  -2- 5. The 1970s were a period of apparent prosperity. The 1973 commodity boom (including oil and gas), together with political stability, brought GDP and export growth. While public sector investment expanded and was financed by external borrowing, the private sector remained dormant and continued to transfer resources abroad. Political considerations and the expectations of rapid growth of export revenues and public income led to the execution of many uneconomic and unviable projects, and to the maintenance of unrealistic pricing, foreign exchange, and mineral taxation policies. Returns on investment remained low and, after the expected benefits failed to materialize, the country became burdened with large repayments of short-term external debt without the capacity to service them. 6. The pattern of growth during this period was characterized by a reinforcement of the role of the state in the economy both through dir-act participation in productive activities and through increasing inter- vention. Growth of the directly productive sectors was weaker than that of the service sector, resulting in a vulnerable economic structure, with relatively little real economic development. The incentive system was distorted by extensive controls over prices and the exchange rate, and by excessive mineral taxation. Furthermore, expansion of private sector activity was limited by the small domestic market, the weak transport and communications network, and the lack of management capacity and of a trained labor force. Economic Deterioration 7. The underlying weaknesses of the 1970s growth became apparent late in the decade as commercial banks changed their perception of the country's export potential and debt servicing capacity and reduced their exposure in Bolivia. This decision reduced the inflows of foreign exchange substantially, and coincided with a fall in oil production, a drop in the prices of mining exports, and an increase in debt service requirements. At the same time, Bolivia entered into a period of political instability. 8. An economic program aimed at correcting the external imbalance and at reestablishing normal relations with foreign lenders was laid out in 1979. Its main elements included increasing some prices and tariffs of public sector services, increases in prices of agricultural goods, reduction of mining taxes, increases in interest rates, a devaluation, and the start of negotiations on a debt rescheduling agreement with the commercial banks. These measures were the basis for a stand-by agreement with the LMF and a World Bank Structural Adjustment Loan (SAL) in 1980 (para. 81). After initial compliance with IMF targets and with the tranching conditions of the SAL, the country's economic situation again deteriorated. The economic program was interrupted by a change in Government through a military coup in July 1980. Rapid growth of public sector expenditures (payment of unscheduled salary bonuses, increase in interest payments on external debt) combined with lower revenues (fall in mining production, combined with the programmed reduction of taxes on mining) resulted in a large fiscal deficit. Public investment fell because of a lack of counterpart funds for externally financed projects, GDP stagnated, and the balance of payments deteriorated.  -3- 9. The deterioration of the economy continued to accelerate under three military governments and in the Siles Administration (1982-85). The factors contributing most directly to this deterioration were inconsistent, partial, and control oriented policies which attempted to reactivate the economy and to improve wages through foreign exchange, price, and financial controls and nominal wage increases. Because of the failure to take into account the limitations imposed by the external sector and the disregard for financial and fiscal constraints, these efforts were counter- productive. The lack of direction and the inconsistent policies brought uncertainty which discouraged productive activities, while inflation accelerated and external debt arrears accumulated. No sustained or consistent effort was made over this period to stabilize the economy or to deal with structural problems. The evolution of the major policy areas was as follows. 10. (i) Public Sector. The public sector deficit was the main source of accelerating inflation; it increased from 9% of GDP in 1980 to 29% in 1984, with the Central Government and municipalities accounting for 82Z of the total. Large deficits in the preceding years had been financed with external resources, so that public domestic borrowing could be limited to an average 2.5% of GDP during the 1970s. As fresh foreign sources of finance disappeared, the deficit was largely financed by domestic borrowing --mainly from the Central Bank- and by accumulation of arrears. This extensive domestic borrowing was the direct result of contraction of Central Government revenues as those linked to the nominal level of the exchange rate, mainly import duties and mining exports, declined sharply; central government tax revenues fell from 9% of GDP in 1980 to 3% in 1984. In 1983 revenues linked to the exchange rate were only 8% of their 1976 real level. With the acceleration of inflation, delays in tax payments increasingly eroded revenues and tax administration became more difficult. On the expenditure side, operations of the key public enterprises deteriorated steadily, as frequent government changes eroded controls and support. During 1983-85 the public sector operated without budgets, and spending was uncontrolled, accommodated by monetary expansion. The major state enterprises (especially those concerned with mining and petroleum products COMIBOL and YPFB) were severely affected by the overvaluation of the exchange rate, their output fell and so did their transfers to the Central Government. Meanwhile, employment by the Central Government continued to increase (from 106,008 in 1980 to 143,000 in 1984), adding to the deficit. 11. (ii) External Sector. Management of the external sector was probably the most deficient aspect of economic policy. Rapid deterioration of the economy was triggered by the worsening of the balance of payments situation during 1981-82, after external financing had dried up, and exports began to decline because of falling production and prices for minerals and the unfavorable fixed exchange rate. Growing exports of gas to Argentina did not help compensate for this deterioration, because Argentina fell behind in its payments for gas, unilaterally withheld proceeds to service Bolivia's debt to Argentina, and insisted on significant counter trade in products for which Bolivia had little use. Imports were curtailed drastically (they fell by 42X in 1982), which led to  -4- further reductions in domestic production. The Government's response was to introduce exchange controls, which further penalized legal exports and distorted the allocation of foreign exchange. With foreign exchange availability restricted by administrative controls, the exchange rate in the parallel market depreciated rapidly. By mid-1985 the parallel/official exchange ratio had increased to 968Z from 173% at the start of 1982. The exchange rate regime contributed directly to inflarion as its rapid depreciation translated into domestic price increases and indirectly through its effects on fiscal revenuea as it affected taxes on international trade and the revenues of YPFB and COMIBOL. Under these circumstances, relations with foreign financial institutions could not be normalized. As a result, foreign exchange flows to the Central Bank from exports dried up, and their allocation became increasingly arbitrary. 12. (iii) Monetary Policy. Monetary policy was dominated by the ne-%; to finance the public sector deficit. Initially (1980-83) increases in money supply produced similar rates of inflation but, as monetary expansion accelerated, velocity increased and the rate of inflation outpaced money growth. By April 1984 inflation had accelerated to the hyperinflationary rate of 63% per month and over the following 18 months averaged 47Z. As the willingness to hold cash balances decreased, monetary emission increasingly translated into a more than proportional increase in price levels. The larger increase in prices meant that real cash balances fell during this period by 60%. Over this period the exchange rate depreciated continually, real interest rates became increasingly negative, and real wages deteriorated continuoirsly, with nominal adjustments becoming progressively ineffective. The monetary base shrank from the equivalent of US$561 million in 1980 to US$71 million by August 1985. The velocity of circulation increased over the same period from 15 to 56. Monetary instruments such as reserve requirements lost all effectiveness to curtail money growth. Negative real interest rates discouraged savings in the banking system and resulted in a sharp process of financial disintermediation. 13. (iv) Wage Policies. Salaries in real terms had been falling since 1978 and in 1982 they were 38% below the 1970 level. Organized labor pressed hard for improvements and these pressures intensified when President Siles assumed power in 1982. The Government attempted to meet the demands but lacked the means to do so. The initial strategy was to provide bonuses for a variety of reasons (for transport, productivity, vc_. end, recreation, vacation, patriotism, etc.). Indexation to inflatic was later attempted, but proved unmanageable when inflation accelerated. With a few exceptions (workers in the oil sector or who received part of their salaries in kind), salaries kept falling in real terms, leading to an increasingly conflict-ridden situation characterized by strikes and other disruptions of producticn. This contributed to a worsening of the overall economic situation, acceleration of inflation, and a further decline in real wages. The living standard of lower income urban groups was worsened by the negative redist-ibutive effects of the overvalued exchange rate and negative real interest rates (access to foreign exchange at the official rate and credit was limited to few groups). Rural incomes suffered somewhat less as the relative price of foodstuffs increased.  14. (v) External Debt. Public sector borrowing of more than a year's maturity increased from US$172 million in 1974 to US$629 million in 1978, with debt outstanding in that year reaching $1.7 billion (over 50% of GDP). After 1978, debt continued to grow, but a large part of the increase was due to borrowing from Latin American governments and regional multilateral institutions, as well as conversion of short-term to medium-term debt and several rescheduling arrangements. By the end of 1984, public medium-term debt had reached US$3.2 billion, about 93Z of GDP, with 23% of it owed to multilateral institucions, 49Z to bilaterals and 28Z to private institutions. Debt service obligations increased to the range of US$600-700 million annually, which was close to 100% of exports. These rising debt service claims led to a reduction in import capacity, declining access to new credit for project and trade financing, and a loss of maneuverability in domestic macro-economic management. 15. In sum, when President Paz Estenssoro took office on August 1985, he inherited an economy beset by extraordinarily complex problems. GDP, exports, and investment had been falling for the fortrth year in a row. Over 1980-84 GDP had fallen by 16% while GDP per capita had declined by 27%. Sectors most affected by this decline had been manufacturing (34%), construction (30%) and mining (22%). Inflation was accelerating uncontrollably (in August 1985 inflation was running at an annualized rate of 22,256%). Central Administration revenues in 1984 as a share of GDP had fallen to below 3%, and the deficit was in excess of 20%. The deficit of the consolidated public sector had reached 29Z of GDP. The official exchange rate sLjod at $b 67,000 while the parallel rate exceeded $b 1 million/US$. Theze was a substantial accumulation of external debt payments arrears (US$700 million on public debt, 20% of GDP) and imports were compressed to less than two-thirds of the average 1979-81 level. Unemployment stood at 15% and there was a proliferation of marginal activities (small-scale smuggling, black-market operations, etc.). Increasing distortions in the formal economy had shifted a growing share of economic activities to the underground economy, especially in the external trade area. The situation was exacerbated by the weakness of the public administration, lack of confidence in government policies, and deteriorating incomes of the urban poor caused by the price distortions. Attempts to introduce stabilization measures during the previous Administration had failed becausc of the weakness of the Government and strong opposition from the labor movement. PART II - THE NEW ECONOMIC POLICY The Economic Program 16. The new Government adopted a bold and pragmatic stabilization and structural economic reform program known as the -New Economic Policy- (NEP) in an effort to check the rapid deterioratior of the economic and social situation. Measures introduced on August 29, 1985 were designed to stabilize the economy and to launch structural reforms that would lay the foundation for the resumption of economic growth. The NEP consists of a set of coherent economic measures whose design is well-conceived and comprehensive, aimed at stabilizing the economy and introducing structural reforLs simultaneously. Measures included in the NEP are:  -6- (a) A sharp reduction of the fiscal deficit and elimination of Central Bank financing of the public sector through monetary emission. The sharp reduction of the fiscal deficit is being achieved through elimination of Government subsidies, a drastic rise in the pricec of hydrocarbons (gasoline prices were increased by a multiple of ten), public utility tariff increases, elimination of subsidies to public enterprises, and a restoration of fiscal revenues. The latter is to be brought about by ieturning economic activities to formal channels as a consequence of the unification of the exchange rates. (b) A managed float of the exchange rate through an auction system was introduced, which has devalued the peso in nominal terms by 97%. (c) The phasing out of Certral Bank financing of the Treasury (TGN); and tightening of controls over public sector revenues and expenditures by centralizing all accounts in the TGN. (d) In November 1985, an implementation Decree revising the structure and levels of public sector salaries was issued. The objectives are to bring expenditures on wages in line with the financial capacity of the Central Government and public enterprises, and to reduce wage inequalities among public sector agencies. The minimum wage was increased from $b 15 million to $b 30 million per month (equivalent to about US$15) and is to remain at that level until May 1986. The Decree also provided for the consolidation of bonuses into 12 monthly salaries and the phasing-out of payments in kind through subsidized foodstores (pulperias), which were a major source of inefficiency in several public enterprises (pulperias contributed to large financial and productivity losses because they encouraged excessive growth of employment, inefficiency and wage distortions). A ceiling on public sector agencies' expenditures on wages was set at the nominal amounts spent idi July, 1985 plus an additional 25Z in nominal terms (the latter much below the subsequent rate of inflation). Thus, in order to raise wages, an entity must lay off workers. In December 1985 an Emergency Employment Fund to be financed through compulsory loans was established. This was a temporary revenue measure pending the adoption of a comprehensive tax reform. (e) A comprehensive tax reform, currently before Congress, has been designed. The central features are a 10% value added tax, a 10% income tax (against which the VAT can be deducted), a 1% transactions tax, and a property tax with rates between I and 5%. 17. Additional structural reform measures include the following:  -7- (a) Freeing prices across the economy (in the financial, goods and labor markets), and using economic criteria to set those prices that are inherently not market determined. External trade was liberalized and import tariffe have been reduced to a flat 10 of the CIF price plus IO VAT. Previously existing tariffs had averaged 35Z but with wide range of dispersion. (b) The reorganization and decentralization of CONIBOL and YPFB was initiated, to improve their efficiency. (c) The Central Bank and the Finance and Planning Ministries were instructed to propose monetary and tax reforms consistent with the new economic policy; elements of the monetary reform have been formulated, while the iax reform is currently before Congress. 18. The overall structural reform effort is aimed at reducing Government intervention, establishing market prices, and restoring incentives for private sector activity so as to increase the efficiency of the Bolivian economy. The program represents a drastic departure from past policies. It is comprehensive and austere, going beyond, in some aspects, the recommendations of several international entities which have sought to help Bolivia resolve its economic crisis. Because the program is extensive, covering simultaneously stabilization and structural reforms, there is a varying degree of implementation of individual measures. Some of them took effect immediately (e.g., devaluation, increase of oil prices, freeing of prices), others have only set the basis for what constitute long run structural reform processes (e.g., reorganization of public enterprises, tax reform, rationalization of public sector tariffs) and some will have to be revised because, as implementation has proceeded, gaps and even inconsistencies have surfaced. The team in charge of implementation, however, is capable and sufficiently flexible to make the required adjustments according to specific circumstances. The substantive policy approach, however, has been made repeatedly clear. Individual measures and the status of implementation are summarized in Table 1. Initial Results and Economic Program for 1986 19. Initial results of program implementation were encouraging. Inflation was reduced from a monthly rate of 60% in August to -2% in October and 3% in November. Money emission by the Central Bank likewise showed a dramatic reduction from a 60Z expansion in August to 34% in September, 16% in October and 0% in November. After the float of the peso on September 3, the gap between the official and-parallel rates had been effectively eliminated and the exchange rate stabilized at about $bl,100,000 to the US$. There was also an improvement in the fiscal accounts. Revenues of the Treasury increased from 5.5 trillion pesos in August, to 6.1 in September, 6.3 in October, and 16.7 in November. In the aggregate, the deficit of the consolidated public sector is estimated to have been reduced from 29% of GDP in 1984 to 10% in 1985. This improvement stems in large measure from the surplus generated by the Petroleum Public Enterprise (YPFB) which generated 6.9% of GDP.  -8- Page 1 of 2 Table 1: THE NEW ECONOHIC POLICY (DECREE LAW NO. 21060 OF AUGUST 29, 1985) A. Stabilization Measures St tus Action/C omment - Exchange rate adjustment. In place. Peso was devalued by 93Z on September 3, 1985. - Increase in price of In place. Average retail price of liquid hydrocarbons. hydrocarbons to be maintalned at US$0.23 per liter. - Financing ceilings for public Fiscal program for Objective is to reduce need for Central sector agencies. 1986 agreed with the Bank financing of public sector. DIF. - Limits on public sector Salary Decree issued Expenditures on salaries constrained to expenditures on salaries. on November 30, 1985. July 1985 levels plus 25Z; salaries not to be increased until May 1986. New hiring is not permitted. - Subsidized stores (y10e2ian) In place. Food stores are no longer subsidized. are eliminated and replaced by salary equivalent. - Taxes affecting mineral exports In place. Taxes now affect presumed profits rather are consolidated and a than gross revenues. Updating of flexible bcais for calculation presumed production costs have been on is established. schedule. - Treasury authorized to issue In progress. Objective is to consolidate public sector credit notes to pay for accounts and defer cash payments. floating debt of public sector agencies. B. Structural Reform Measures - Exchange rate adjustment In place. An auction system was established, the mechanism. exchange rate responds to market conditions and is within 5X of the parallel market. - Financial market In place. Active and passive interest rates were liberalization, freed. operations in foreign exchange and indexed loans and deposits are authorized. - Price of goods and services are In place. Main impact is on agricultural goods freed, prices. - Exceptions are those vhich by their nature cannot be market determined: Urban transport tariffs In progress. Main municipalities have reached to be set by municipalities, agreements with transport companies. Electricity tariffs to be set To be revised. ENDE has proposed that tariffs be by municipalities. regulated, as before 1982, by the National Directorate of Electricity at the Ministry of Energy.  - S ~ ~ ~ ~ ~ ~ ~ ~ 9 Page 2 of 2 Table 1: THE NEW ECONOMIC POLICY (DECRE LAW NO. 21060 OF AUGUST 29, 1985) B. Structural Reform Measures Status Action/Coent Electricity tariffs for To be revised. Tarlffs vere not to excead the equlvalent lndustrilal use to be 4 1/2 U.S. cents per kilovatt-hour. negotiated between usere and According to EID a bigher tariff is supplierm. required. Matter under review. * Pharmaceutical products and To be implemented. Mechanism. being studied. telephone service to be regulated by responsible agencies. * Iaternational telephone call Belig reviewed. Mechanisms being studied. tariffs not to exceed those of connecting lines. * Railway tariffs not to exceed Being revised. EW E clalm that Argentine, Brazillan and those charged by neighboring Chilean railroad copanies are heavily countries connecting lines, subuidized. A study to establish a rationl tariff system Is underway. - External trsde is liberalized, Being lmplemented. Customs service l being reorganized. import tariffs reduced to a Total costs to Importers are not to flat 10 plus 1OZ of prevlous exceed 202 of CIF price. tariff. - Private labor market is In place. Usges to be set by negotiations between liberalized, restrictions on labor and management. firing personnel removed, number of paid holidays reduced to 10. - COMIBOL is to be reorganized. In progress. Four subsidiaries were to be established. Completion wlll require time because of the complexity of task. TBRD is provlding direct support. - YPmB Is to be reorganized. Being revised. Three subsidiaries were to be established. Company's role and structure to be redefined. - Corporacion Boliviana de In place. Assets have been transferred to regional Fomento is dissolved, development corporations. - Transport company (ENTA) is In place. Services have been transferred to dissolved. municipalities. - National Smelting Company In progress. Plants under COHISOL until regional (ENAP) and Sociedad subsidiaries are created. Complejo/Karachipaupa are dissolved. - System of reserving aining In place. Opens large areas for private areas for the State (fiscal exploration. reserves) is removed (except Nutun, North and South Lopez provinces and 2 km. around COOIBOL concessions). - Tax reform. In progress. Comprehenlve tax reform has been submitted to the Congress. - Monetary reform. In progress Reform Is under study.  - 10 - 20. A slip in the management of the program towards the end of the year resulted in a temporary deterioration in these trends. While the Central Bank curtailed its financing of the public sector, lack of full control over public sector agencies led to a substantial accumulation of domestic arrears. The process of clearing these up coincided with year-end bonuses to public employees to provide some compensation for the drastic reduction in real wages, expansion of credit to the agricultural sector, and credit for military expenditures. This led to a 50X increase in monetary emission in December. Inflation accelerated again to 16X in December and 33Z in January and for a short period the rate of exchange in the parallel market was substantially above $b2 million to the US$. 21. In part as a response to these developments, President Paz reshuffled the cabinet on January 22, 1986. The key ministries of Planning and Finance have been entrusted to two of the main architects of the NEP, reaffirming the Government's commitment to the program. The new cabinet has brought the program back on track. Monetary emission and fiscal expenditures have been controlled effectively, albeit to some extent through build-up of arrears. As a result, inflation has been zero in February and March and the exchange rate has stabilized at slightly less than $2 million to the US$; the spread between the official and parallel rate is less than 5%. The new cabinet also sent to Congress a tax reform package which, if adopted, would avert the need for further increases in petroleum product prices which the Government is considering now in order to raise fiscal revenues quickly. 22. On the basis of the original economic program, the Government, with the assistance of the IMF, has prepared a short-term economic program. The objectives for 1986 are a sharp reduction of inflation (from over 8,000% in 1985 to below 85%), and a stabilization of the economy after an accumulated fall of 18% since 1981. Although initially a modest economic recovery was expected resulting from the improved price signals (freeing of prices, realistic exchange rate) and the reduction of economic disturbances, the adverse evolution of prices for key Bolivian exports (gas, minerals) and floods that have affected crops in the Altiplano have reduced the possibilities of achieving growth this year. The key element of the stabilization program is the reduction of the non-financial public sector deficit from an estimated 10% of GDP in 1985 to 5.8% in 1986. Fiscal adjustment is based on the increased revenues of YPFB from the large real depreciation of the Peso and the indexation of the domestic sales prices of petroleum products to the US dollar; a very tight wage policy; and the tax reform measures still to be adopted. This target is consistent with an annual inflation rate of 80% (28% in the last three quarters). Central Government current expenditures are programmed to remain constant in real terms. The current account savings of the consolidated nonfinancial public sector is expected to improve from -6.2% of GDP in 1985 to 0.4% in 1986, and investment expenditures to increase from 4.3Z of GDP in 1985 to 7.0% in 1986, largely as a result of drawing on external financing fcr the execution of on-going projects. Other program targets include limiting expansion of money and quasi-money to no more than 40% in 1986, from 2,300% in 1985; interest rates are to remain flexible and positive in real terms; the exchange rate and trade regimes are to remain liberalized.  - 11 - 23. The IMF has agreed with the Government on a Letter of Intent and a policy memorandum for 1986 setting forth the objectives described above. While some specific measures required to attain the agreed targets are yet to be adopted by the Bolivlan authorities (tax package, control of public sector expenditures, updating Central Bank balances and enforcing reserve regulations, and adjustments in the functioning of the foreign exchange auction system) it is expected that the Stand-by Agreement (SBA) will be approved in May 1986. The Conditions for Success of the New Economic Policy (NEP) 24. The major requirement for the success of the NEP is the Government's continued determination to carry it forward, including the consistent application of exchange rate, monetary, fiscal, and wage policies. Some of the most difficult measures have already been adopted, those requiring time are under implementation, and the program's medium term objective of a market-oriented economy with minimal intervention has been made explicit. The commitment of the Government to the program has been confirmed by actions such as issuing the restrictive Salary Decree, firm handling of a general strike in September, recent cabinet changes, tentative agreement with the IMF, and the framing of a comprehensive tax reform. The stabilization program provides a consistent policy framework to maintain and improve on the relative stability already achieved. The stringency of the measures, however, is imposing a considerable strain upon the country's social fabric. 25. A second critical requirement for the success of the NEP is external support for the program. After six years of economic decline and falling incomes the population is impatient and decisive action and more resources are needed to build upon the reforms now underway. In the short run, expansion of economic activity is constrained by the need to avoid the resurgence of hyperinflation. This in turn requires maintenance of the tight monetary policy contemplated in the program. The only way to allow for expansion of demand from either the public or private sector, without triggering inflationary pressures, is through a higher level of imports. Higher imports would lead to increased production and productivity by making it possible to restore productive capacity which has deteriorated from a lack of spare parts, inputs, and materials, and from an inability to rcplace worn-out equipment. These improvements would, in turn, translate into improved real wages and increased exports. 26. Under normal circumstances, the sweeping reforms undertaken in the past six months would have induced significant improvements in the balance of payments. However, Bolivia has experienced an extraordinary collapse of world markets for the two main commodities on which it depends for over 90% of its export earnings: tin and hydrocarbons. The need for external resources to allow the required higher ijiLports without increasing pressures on the exchange rate market and on prices has thus been exacerbated by these developments. The latter is crucial to regain the confidence of the private sector and to bring about a reduction of interest rates, which currently are a constraint to the sector's investment response. Rapid transfer of external resources to Bolivia can thus help sustain the economic program in the short-run.  - 12 - 27. The third condition is the need to strengthen the Government's administrative capacity to continue program implementation. There is a serious shortage of capable middle-level managers and technical staff to carry out the reforms contemplated in the program. The few qualified managers in the public sector are already fully occupied in mapping strategies and day-to-day defense of the economic program. Among the areas that need to be addressed are the monetary program, fiscal budget, tax reform, debt rescheduling, and the reorganization of public enterprises. The IMF, IDB, and USAID are providing technical support in these areas. Bank plans include assistance in the reorganization of COMIBOL and YPFB and public financial sector reform. Further, the Bank plans to provide technical support for the evaluation of the public investment program, currently under preparation. 28. Finally, the fourth main condition is to achieve a positive response from the private sector, which must provide a significant part of the required increases in investment, production and exports. Such a positive response is likely to depend critically upon the credibility inspired by the Government program -particularly control of inflation; maintaining a realistic exchange rate policy; and the availability of the required credit resources at reasonable costs. 29. Over the medium term the Government's economic program consists fundamentally of continuing implementation of the structural reforms envisaged under the NEP. Chief among these are the tax and currency reforms, reorganization and streamlining of the public sector, institutional reforms in the financial sector and liberalization of external trade. These reforms will establish a macroeconomic framework conducive to an efficient use of private sector resources and an effective public sector capable of providing support services. Resuming growth, however, will require substantial investment resources to develop Bolivia's human and economic potential. After several years of economic decline, both the public and private sectors have a very limited capacity to generate them. To enhance this capacity the Government intends to follow a strategy whose main elements are the following: - Renegotiation of the external debt under concessionary conditions; - Definition of sector strategies and investment priorities - Strict screening of public sector investment projects, including those in execution or about to be executed, and which already have financing. Resources are to be channeled to projects of high returns, short maturity periods, and which contribute directly or indirectly to improving the balance of payments. - Effective rationalization of YPFB and COMIBOL given that a large share of exports depends on them. - Programs to develop agricultural export potential, including transfer of technology, transport, marketing and credit.  - 13 - - Promotion to attract direct foreign investment to support effective use of natural resources, in particular hydrocarbons. 30. In support of this strategy the Government intends to enlist the institutional and financial support of the international community. Institutional support is required to generate the confidence of the private sector. To that effect the Government intends to complement the more stable environment already in place with formal participation in such investment guarantee agencies as MIGA and OPIC. Moreover, the Government has requested Bank support for organizing a Consultative Group meeting to be held towards the end of 1986, which would be used as a forum to present its economic program to the international community and to request technical and financial support. To this end, the Government is currently developing the main elements of a medium-term growth strategy and the corresponding financing requirements. Balance of Paymente Outlook and External Capital Requirements 31. Background. Over the 1981-85 period, the trade balance has shown continuous surpluses as the Bolivians have made drastic cuts in imports so as to meet external obligations, while the current account has been highly negative because of the large interest payments on the external debt. In 1986-87, as a result of the drastic elimination of the principal distortions in the economy, a partial recovery of exports is likely. This outlook, however, has been affected by the fall in the prices of mineral exports, particularly that of tin. Gas exports are assumed to be sustained in line with contracts with Argentina, but because of the fall in oil prices, increased pressures for lower prices are expected. Non-traditional exports (mainly agriculture), which fell from US$150 million in 1980 to US$31 million in 1985, may recover only gradually because international prices, with the exception of coffee, remain depressed. Demand from neighboring countries, which were important markets, is also expected to be below past levels. 32. Since 1982, registered imports have been sharply curtailed through controls and a quota system for allocation of foreign exchange. Consumption good imports fell in 1985 to 55% the 1981 levels, while imports of inputs and capital goods fell by 40%. These sharp reductions seriously affected production, including that of the most important public enterprises (COMIBOL, YPFB, ENFE) because of the lack of spare parts and imported inputs. The manufacturing sector reduced its output level by 31% between 1982 and 1984 in large measure for lack of inputs and imported parts. Investment was affected by the limitations on the purchase of imported equipment and, according to unofficial estimates, fell to 70% of its real 1980 level. 33. Despite tariff reductions and the liberalization of the exchange rate regime under the NEP, officially recorded imports initially did not increase significantly (they averaged US$30 million a mouth to the end of 1985) reflecting the depth of the recession and the tight credit situation. The low import levels are not sustainable for long if reactivation of the economy is to take place. Rehabilitation of productive capacity, affected by lack of maintenance and spare parts, will require a significant increase of imports in 1986.  - 14 - 34. The 1986 External Accounts. Estimates for the 1986 external accounts are suuarized in Table 2. The financing program has been designed to yield enough foreign exchange financing for an absolute minimum level of imports consistent with no further decline in GDP in 1986. The main features of the underlying financial package which has been agreed upon with the IMF are: (i) exports, taking into account the fall in tin and hydrocarbon prices and a likely agreement with Argentina on gas prices, are projected at US$571 million; (ii) anticipated rescheduling of external debt service (amortization and interest) is estimated to yield US$344 million while capital inflows from various official and multilateral sources are estimated at US$246 million, and private sources at US$108 million (including direct foreign investment and official transfers); 35. Imports for 1986 have been estimated at US$609 million, about 3X in real terms over 1985, but some 32% in real terms below the 1979-81 average. Given the deterioration of the economy, it is difficult to establish a clear relationship between imports and growth; however, this level of imports would appear to be consistent with avoiding a further fall in GDP in 1986. Furthermore, the US$36 million that we expect to disburse from the proposed Credit during 1986 (which is included in the US$609 million estimate) is focussed on the critical bottlenecks to the expansion of production, and thus should lay a foundation for a modest resumption of growth in 1987. 36. The attainment of a rescheduling arrangement with commercial and bilateral creditors that translates into debt relief in 1986 equivalent to US$344 million is based on an analysis undertaken by the IMF. Current schedules call for meetings with commercial banks and the Paris Club respectively in April and May 1986. In conjunction with the expected level of exports and other capital inflows, this rescheduling package will make possible the minimum level of imports that will be critical to initiate a modest recovery process. 37. The Medium-Term Outlook. The outlook for Bolivia's external sector in the medium term remains uncertain. Exports have declined from US$942 million in 1980 to US$621 million in 1985 as a result of the persistently overvalued exchange rate; falling international export prices; economic difficulties in neighboring countries; and social unrest that affected p.oduction. This year, the volume of exports is expected to increase by 6%; however, declining prices will result in earnings of only US$571 million. Beyond 1986, however, possibilities for increased export volume, particularly of gas, minerals and most important, agricultural products, are good. 38. While the policy environment to achieve export growth has substantially improved, international markets remain weak. The collapse of the international tin market has serious short-term repercussions but its impact on the trade balance could be alleviated by closing some of COMIBOL's mines which lose foreign exchange because of their high operating  - 15 - Table 2: PROJECTED CAPITAL REQUIREMENTS AND FINANCING, 1986 (In US$ Million) Capital Requirements 718 Exports of goods 571 Imports of goods 609 Trade Balance -38 Interest on External Debt -267 Other factor payments -105 Transfers and other net service payments 4 Balance on Current Account -406 Amortization -312 - Multilateral 63 - Bilaterall/ 164 - Commercial Banks 84 Financing 718 Direct Foreign Investment 25 Use of Reserves 20 Other capital flows (net)2/ 83 Resciheduling (estimated) 344 Capital Inflows 246 - World Bank/IDA 42 -IDB 66 - Other Multilateral 45 - Bilateral 93 /_ Includes military, suppliers and sources n.e.s. /2 Including official transfers. costs. Looking further ahead, there are good possibilities for other minerals, but response to NEP measures will be quite slow as exploration efforts have lagged and private miners remain cautious about investing in development. The main Bolivian export product is natural gas, which is sold to Argentina at prices above Argentina's alternative costs, through sales contracts through 1991. Argentina may continue to buy gas thereafter, but at substantially lower prices. There are indications that in conjunction with regularizing Bolivia's debt to Argentina, a lower price may be agreed to in 1986. The present Bolivian government intends to initiate discussions with Brazil with a view to agreeing on substantial gas sales but this requires the construction of a long pipeline, and at this stage prospects remain uncertain. 39. Agricultural and agroindustrial exports could be multiplied several times. Bolivia has much unused fertile land, but only one-seventh of arable land is cultivated and yields per hectare are low. Improved  - 16 - technology, increased fertilizer use, and changing crop patterns could significantly increase the value of production. Action is needed on numerous fronts, notably reducing transport costs, agricultural research and extension, low cost irrigation projects, credit, and improved marketing. The export potential is diverse and includes such products as soybeans, corn, coffee, cacao, wood and beef. Improved external policies should encourage a relatively rapid response in agriculture but sustained production increases and significant export diversification will depend on concerted action to develop the institutional capacity to provide support and infrastructure investments. 40. To understand the medium-term prospects of the balance of payments, some illustrative projections have been made. They are tentative since, after the disarray through which the Bolivian economy has gone, it is difficult to assess the likely response of the economy to the new policy environment. The principal assumptions are as follows: - Exports. Analysis of individual products suggests that, in response to the improved policies and particularly the new exchange rate regime, real merchandise export growth could average about 6%, p.a. between 1985 and 1990. It is assumed that mineral exports are diversified from tin to other minerals such as gold, silver and zinc. Gas exports to Argentina are likely to be maintained until 1991 but with a modest reduction in price. Rapid increases of agricultural exports are assumed. However, for many products, the outlook for prices is still fairly weak; thus nominal growth over the same period is expected to be only 8.1% p.a. - Imports. Imports are based on an average GDP growth rate of 3% p.a. for 1985-90 (implying a stagnation of per capita consumption after a 1.2% drop in 1986), a rate that is optimistic if compared to the recent record but achievable if NEP is sustained. - Debt Service Requirements. Bolivia's mediumrterm external public debt, including arrears, is projected at be US$3.8 billion at the end of 1986. Were the country to service this debt fully, annual payments during 1987-91 would average US$600 million which would represent some 60% of projected exports. The balance of payments projections, while tentative, indicate that over the five years (1986-90), in spite of a projected merchandise export growth in real terms (6%) higher than that of merchandise imports (4.7%), Bolivia would be unlikely to generate a resource surplus, although there is a narrowing of the trade deficit over the period (see Table 3). 41. The upshot of the preceding analysis is that unless an effort is made by the international financial community to put together an extraordinary financial package that will support Bolivian's economic reforms over the medium term, the likelihood of success is very low. The principal elements of such package are clear: in addition to: (i) continuing IMF support for Bolivia's stabilization program, and (ii) IDA  - 17 - assistance to underpin key structural and sectoral reforms, it will be necessary to (iii) reconvene the Consultative Group on Boliviafand increase the flow of concessional aid from donors, and (iv) undertake a major restructuring of Bolivia's debt. This multi-pronged strategy is currently being evolved, with an I1F Stand-by Arrangement expected in May 1986, with the proposed Reconstruction Import Credit aimed at supporting the recovery process by assuring critical imports, and with a Bank-coordinated Consultative group on Bolivia planned for late 1986. A restructuring of Bolivia's outstanding external debt is now being pursued (para. 36). 42. The details of Bolivia's debt restructuring needs will have to be worked out over the coming months. The scope and magnitude of the required restructuring is indicated by the size of the projected current account deficit. The deficit (Table 3) averages about $400 million per annum over 1987-91 (excluding amortization payments). In comparison, average external capital inflows over the 1979-83 period were about US$150 million per annum. This preliminary analysis underlines the need for a major debt restructuring effort, possibly involving a highly concessional multi-year rescheduling arrange-ant, extraordinary debt relief, and other similar measures. Table 3: BALANCE OF PAYMENTS (1984-91) (Millions of US$) 1984 1985 1986 1987 1988 1989 1990 1991 Imports of goods + NFS 582 672 737 828 939 1070 1219 1305 Export of goods+NFS 812 719 681 763 868 967 1154 1276 Resource balance 230 47 -56 -66 -71 -103 -65 -29 Balance on current account -180 -395 -406 -374 -394 -446 -433 -422 Terms of trade (1984-100) 100 98.6 80.1 75.9 74.9 74.4 75.9 78.0 43. Without a major debt restructuring effort, a further compression of imports r-.uld be required, thus prolonging current economic stagnation. Imports are already at an all-time low and are constraining production responses, both short- and mediumr-term. Bolivia is well endowed with natural resources whose development will require investments in  - 18 - infrastructure, equipment, etc. They require political and economic stability. The present Government has taken radical measures to achieve these objectives. They appear to be accepted by the population, tired of the previous disorder and economic chaos. In order to support the Government's reform effort and lay the basis for higher growth over the mediumr-term, the international financial community, including the Bank/IDA, must implement a coordinated strategy aimed at providing Bolivia with financial support that will increase the likelihood of success. The Bank/IDA's growth-oriented strategy is now being worked out and our plans are outlined in paragraphs 85 and 86 below. Bolivia, for its part, must continue to implement its policy of stabilization and liberalization of the economy as expressed in the NEP. PART III - THE PROJECT Background 44. A Bank mission visited Bolivia from September 24 to October 9, 1985 to discuss the Government's economic program and possible Bank Group support for the reforms launched in August 1985. The discussions led to the identification of an emergency import financing operation to support the implementation of the Government's economic program. The proposed operation was appraised in November-December 1985. During appraisal, import requirements were reviewed for the sectors most critical for economic recovery, and priority activities were identified; implementation arrangements were elaborated and procedures for operation organization, on-lending, procurement, and disbursement were reviewed. Negotiations were hield in Washington on April 14-17, 1986 with the Bolivian Delegation headed by Mr. Javier Nogales, Central Bank President. There is no separate appraisal report for the proposed Credit. A Credit Summary is presented at the front of this report and supplementary data and information are contained in Anr.ex III. Objectives 45. The proposed Credit supports the Government's stabilization and structural adjustment programs, as outlined in the New Economic Policy (NEP) described in Part II. Bolivia is currently undergoing a transition period after having suffered a long history of disastrous economic management. The proposed operation provides emergency assistance in support of the stabilization; it should be viewed as the first in a series of financial and technical assistance efforts needed to rebuild Bolivia's productive capacity. It is designed to initiate the reactivation of priority sectors and the rehabilitation of public enterprises which will play a key role in Bolivia's medium-term development. The Bank Group is actively helping to put together a medium-term development program for the Government including rehabilitation plans for the public enterprises which would receive financing under this operation (paras. 87-88). 46. Specifically, the proposed Credit is designed to increase exports taking into account that a central objective of the NEP is export promotion. NEP measures to achieve this to date include actions to assure  - 19 - a realistic exchange rate, freeing of prices, reductions in import tariffs and elimination of trade controls. The Project would provide fairly quick disbursing financing for priority imported equipment, spare parts and other inputs needed for the mining, agriculture, industry, energy, power and transport sectors. Bolivia's export potential is constrained severely by the lack of imported inputs, particularly intermediate and capital goods which in 1984 fell to a third of the 1981 level. The proposed Credit would alleviate this constraint. The proceeds would be used to establish lines of credit for producers and exporters who would otherwise, because of the Government's tight fiscal and monetary policy, lack the financing to purchase imported inputs and spare parts. The proposed Credit also supports Government efforts to improve the efficiency of the most important public enterprises through financing their most immediate input requirements, a first step and an integral part of the rehabilitation process. The proposed Credit would also serve as a vehicle for an intensified dialogue with the Government on its rehabilitation and structural reform programs. A mid-term review of implementation progress of the NEP and the proposed Credit operation would be held within nine months after Credit effectiveness, and at such other times as IDA would request. Project Description 47. The Credit proceeds, which would cover only a part of Bolivia's total import needs (estimated at some 6% in CY 1986), have been allocated to assure that the most significant production bottlenecks are alleviated. The proposed financing plan has resulted from a careful analysis of specific import needs and priorities for short-term recovery. Since the public enterprises, which account for a significant part of Bolivia's exports, and the private producers and exporters are short of funds or local credit to purchase imports, the Credit proceeds would be onlent to them. An indicative allocation of the Credit proceeds should ensure that these priority public enterprises receive foreign exchange financing while meeting as well the priority needs of private sector operations. The allocation of Credit proceeds also takes into account the availability of financing from other external sources, particularly for private mining and industry (for example, IDB's mining and industrial reactivation loans), although these credit lines are for the most part tied to specific investment projects and are thus generally slow disbursing. In addition to financing the import needs of producers for export and, to a lesser extent, import substitution, the proposed Credit would enhance the ability of the railway and power companies to support the export effort.  -20 - 48. The tentative allocation of Credit proceeds by sector is summarized below: Tentative Allocation of IDA Credit Funds Sector Beneficiary (US$ million equivalent) Mining COMIBOL (State Mining Company) 14.5 Private Miners 6.5 21.0 Energy YPFB (State Petroleum Company) 11.0 Power ENDE (State Power Company) 1.8 Transport ENFE (State Railway Company) 4.5 Industry Manufacturing and Agro-based Industries 4.5 Agriculture Farmers and Agricultural Traders 7.2 Unallocated 5.0 TOTAL IDA CREDIT 55.0 This allocation would be reviewed periodically with a view to ensuring that funds are availaDle for priority activities but also would be directed to those sectors that demonstrate the capacity to utilize funds effectively. Ten percent of Credit proceeds are in the unallocated category to allow for a control mechanism to reallocate funds to the most efficient priority sector. Of the total Credit proceeds, approximately 642 would go to public enterprises and 36Z to private firms or producers. The proposed import plans for the public enterprises and a list of eligible imported goods for the private sector, as discussed and agreed upon during negotiations, will be provided to IDA in a Supplemental Letter to the Development Credit Agreement. Both the mid-term program review and Credit allocation mechanisms would, in the event of the Government's failure to sustain the reform program, allow a reassessment of the operation and recourse to appropriate IDA remedies including suspension of disbursement. Detailed Features 49. Mining Rehabilitation (Annex V). The mining sector has historically been central to Bolivia's economic and political development and remains the major source of foreign exchange (some 40% of export value), tax revenues, and employment. However, decades of poor management have undermined the sector's productivity, and it faces serious long-term structural problems, particularly evident in COMIBOL (Corporacion de Minera de Bolivia), the state-holding company which accounts for 65% of total mineral production. Privately owned mining operations (24 medium-ascale concerns accounting for 25Z of production and some 2,000-4,000 small units) operate more effectively but have been severely affected by recent economic problems. The collapse of the tin market in 1985 has aggravated an already  - 21 - serious situation; several Bolivian mines with high production costs will be forced to close. The crisis has underscored the conclusion that the mining industry must become much more efficient if it is to be competitive in the world market. 50. COMIBOL's problems are the largest and most urgent in the mining sector, and reforms of COMIBOL are thus a central component of the NEP. Tin output, CONIBOL's most important product, declined from 19,000 tons in 1979 to 10,500 tons in 1985. COMIBOL's major problems have included substantial Government interference, frequent management changes resulting in lack of continuity, heavy centralization, inefficiencies at the operational level, and inadequate supplies of spare parts and materials. Strong pressures of the militant labor unions have thwarted past reform efforts. As a result, COMIBOL's workforce increased from about 26,500 in 1979 to about 27,800 in 1984 despite sharp production declines. COMIBOL's production costs increased from US$190 million in 1979 to US$303 million in 1984, and unit costs of production for tin jumped from US$3.7/lb in 1980 to US$7.0/lb in 1984, while sales revenues dropped from US$421 million in 1979 to US$145 million in 1985 due to falling production and metals prices. COHIBOL's operational results (excluding exchange rate related profits/losses and royalties) thus deteriorated from a profit of about US$51 million in 1980 to a loss of US$175 mil]ion in 1985. COMIBOL's financial situation at the beginning of 1986 had worsened to the point that wage and salary payments were several months delayed and essential supplies for operations (such as explosives, chemicals and spare parts) were not covered. The most immediate issue for COMIBOL is thus the need for emergency assistance to permit sustained operations. 51. A simple injection of emergency aid will have no significant or lasting impact if it does not form part of a comprehensive rehabilitation program which tackles COMIBOL's structural problems and aims to transform it into one or several viable enterprises. Issues to be resolved include reduction of COMIBOL's excessive work force; improving its operational efficiency by reorganization of facilities, training, and theft prevention; closing nonprofitable mines (the worst of them immediately); introduction of decentralization measures; improvements of flows and quality of financial data; full and effective integration of the recently transferred smelting facilities; and design of a suitable investment program to achieve cost reductions and efficiency increases. The NEP includes specific provisions to achieve these reforms. It envisages COMIBOL's reorganization into four autonomous companies (which was proposed in a 1981 UNDP financed study for which the Bank acted as executing agency), including the integration of all parastatal smelting facilities, and the elimination of subsidized company stores (pulperias). Following the collapse of world tin markets in late 1985, the Government has shifted the focus of COMIBOL's restructuring program to give priority to immediate and short-term measures over implementation of the decentralization. As additional support to this important element of the NEP, IDA recently approved a Project Preparation Facility (PPF) advance to prepare a Rehabilitation Project for COMIBOL, to design and implement a full rehabilitation program. 52. Credit proceeds allocated to COMIBOL (US$14.5 million) would support the first stages of the planned comprehensive rehabilitation and restructuring program. They would finance COMIBOL's moat immediate  - 22 - short-term needs for the most efficient mines while the Government, with technical assistance financed by IDA, maps out the detailed program for COMIBOL's rehabilitation. The general strategy is to support and strengthen the efficient mines and to shut down losing operations. In order to assure progress of the overall restructuring program, (i) the Government would submit for IDA's review by August 31, 1986, its program for COMIBOL's manpower reductions and carry out this program by an agreed upon date; and (ii) the Government would submit for IDA's review, by August 31, 1986, a schedule for closure of mines and facilities that are not financially or technically viable and carry out such closing schedule by a date acceptable to IDA. The Credit would finance direct imports of supplies (lubricants, cables, bolts, steel plates, tools), equipment (pumps, crushers/concentrators components, mine loading, drilling and transport equipment), and spare parts (for concentrators, locomotives and for mine drilling, loading and transportation equipment) which are needed to reactivate operations. Assurances were obtained during negotiations that the Credit proceeds would finance only those mines that have promising prospects for financial viability (i.e., Huanuni, Bolivar, Santa Fe (Japo), Quechisla (San Vicente, Tatasi) and such other mines which may in the future qualify and be acceptable to IDA). COMIBOL's import plans for spare parts, materials and equipment were discussed and agreed upon during negotiations. The additional imports would allow COMIBOL to increase production from the potentially profitable mines (about a third of all mines) on average by an estimated 10% per year in 1987-88. 53. The NEP offers attractive incentives to the private miners to increase productivity and to diversify into new minerals. Most medium-scale miners have multi-mineral operations and thus their viability does not rely exclusively on tin production. Also, many miners have already adopted cost-cutting measures (e.g. reduction/redeployment of labor) and have reduced tin production from high-cost operations. The proposed Credit financing of US$6.5 million for private miners would cover about half of the urgently needed imports identified by the Association of Medium Miners and the Banco Minero (BAMIN) which, in addition to its banking operations, is also the major wholesale distributor of inputs to the small miners. BAMIN is expected to use a maximum of US$2.0 million of the proposed Credit under this component to import the spare parts, supplies apid materials, and equipment for resale to small miners. The projected import needs of the private miners take into account the effects of the decrease in tin prices on their future operations. The private miners are expected to import spare parts, materials and equipment largely similar to those of COMIBOL, using the Credit proceeds which would be provided as subloans through qualified financial intermediaries. 54. Energy (Annex VI). Bolivia is a net energy exporter and relative to its needs has a large energy resource base. Hydrocarbons contribute about 22% to GDP and generate about 20% of fiscal (central and local government) revenues and about 50% of total exports. In 1934 net primary energy protuction reached 4.4 million tons of oil equivalent (toe), of which natural gas accounted for 48.2%, crude oil and condensates for 24.7%, fuelwood for 20.7%, hydropower for 4.1% and agricultural wastes (bagasse) for 2.3%. Liquid hydrocarbon output peaked in 1973 at 47,400 BD (barrels  - 23 - per day) and declined to 24,936 BD by 1984 as a result of depletion of various fields which was not compensated by production from new fields because of lack of investments. At present about 75Z of the total liquids are produced from condensate, mostly by stripping gas of its liquid content at the surface. The dry gas is then sold or reinjected to nmantain reservoir pressures and for storage. Gas production in 1984 reached 397 MKCFD (million cubic feet per day) and about 130 MKCFD was reinjected. In 1984, the national oil company, Yacimientos Petroliferos Fiscales Bolivianos (YPFB), produced about 72Z of Bolivi3's oil and 86% of its gas. 5