IMF AGREEMENT ENDS

UNCLAS LA PAZ 000937

SIPDIS

SIPDIS

STATE FOR WHA/AND
TREASURY FOR SGOOCH
ENERGY FOR CDAY AND SLADISLAW

E.O. 12958: N/A
TAGS: EFIN ECON EAID PGOV BL
SUBJECT: IMF AGREEMENT ENDS



1. Summary: Bolivia's Standby Agreement with the
International Monetary Fund (IMF) expired on March 31, and
the GOB has indicated that it does not want to sign a new
agreement with the Fund. The lack of a Fund agreement could
jeopardize donations from multilateral and bilateral
institutions and undermine fiscal restraint by the GOB,
causing the Bolivian Central Bank President concern. A Fund
team will conduct its annual Article 4 review of Bolivia in
May, during which its future relationship with Bolivia will
be better defined. Although Bolivia is currently in decent
macroeconomic shape, Bolivian Finance Ministry contacts are
worried that increased government spending will result in
large gaps in the 2006 budget. End summary.

Bolivia's IMF Agreement Expires
--------------

2. Bolivia's Standby Agreement with the IMF, which began in
April 2003 and was renewed twice, expired on March 31, 2006,
without a final review by an IMF team which would have
enabled Bolivia to draw on the last portion of its IMF loan.
Bolivia has had some type of relationship with the Fund
almost continuously since 1986. According to press reports,
the GOB plans to wash its hands of the Fund. Development
Planning Minister Carlos Villegas was quoted in the press on
April 2 stating, "Today for the first time in our history,
Bolivia spoke as an equal with the Fund, and told it we are
not going to sign letters of intention."


3. IMF resident representative, Esteban Vesperoni, told us on
April 3 that the IMF had not received official notification
to this effect from the GOB but acknowledged that Finance
Minister Luis Arce had told him informally that Bolivia did
not need the Fund right now. Vesperoni told us he agreed
with Arce, as Bolivia did not currently have a balance of
payments problem. He cautioned, however, that the absence of
a Fund agreement could restrict other donors' ability to lend
to Bolivia and would make both donors and the Bolivian
Central Bank "uncomfortable." The President of the Central
Bank stated to the press on April 2 that forgoing a Fund
agreement was risky, as it could result in a lack of fiscal
discipline and less budgetary support and multilateral
financing.

Future Relationship with the Fund
--------------

4. The GOB agreed to a visit by a six or seven person Fund
team in early May to conduct an "Article 4" review, which
Vesperoni explained was an annual review, not related to a
particular agreement, that was required for all Fund members.
He said that the future of the Bolivian-IMF relationship
would be discussed at that time. He speculated that the GOB
was attempting to distance itself from the Fund in order to
avoid giving a signal to the Bolivian public that the IMF is
interfering in the drafting of its National Development Plan,
due to be released in late April. He thought that after the
Plan was completed, the GOB might be more open to discussions
with the Fund. He explained that the Fund could offer
several options that did not involve the IMF Board, which has
the ability to sign formal, binding agreements with
conditions. These could include an "intensified
surveillance" program, under which monitoring teams would
analyze Bolivia every three to six months, or a somewhat more
formal "staff monitoring program." Such programs would allow
the IMF to remain abreast of developments in Bolivia and
would send positive signals to the international donor
community, without involving formal agreements or credits.
Vesperoni said that a monitoring program would be sufficient
for Bolivia for the next six months, but was less confident
about Bolivia's long-term needs.

Monetary and Fiscal Impacts
--------------

5. Vesperoni did not see any "dark clouds" on the medium-term
horizon with respect to monetary policy (unless a potential
staff shake-up at the Central Bank changed the current
direction),but said that fiscal policy was a bit more
complicated. According to contacts, the Bolivian Treasury
currently has a USD 500 million funding gap for 2006. Other
Finance Ministry contacts have also expressed their concern
to us that new government policies, particularly in the areas
of health, education, and minimum wage, would result in large
gaps in the 2006 budget.


6. Comment: The GOB's public comments regarding the end of
the IMF agreement are part of a larger government strategy to
highlight Bolivian sovereignty and rid the GOB of foreign
influence (except from Cuba and Venezuela). The government
intends to eliminate consultants in the GOB and have all GOB
staff paid out of resources from the national treasury,
instead of by NGOs, multilateral donors, or foreign
governments, even if it means increasing the fiscal deficit.
According to press reports, Minister Villegas said that the
National Development Plan would "ensure" economic stability,
but that the focus of the plan would not be stabilization.
He added that the GOB would adopt a monetary policy that
would reduce interest rates and that public investment would
be a high priority. Given these comments, Bolivia's
macroeconomic future could be in jeopardy. End comment.
GREENLEE