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Cablegate: Idb and Imf Discuss Engagement Strategies With

VZCZCXYZ0007
PP RUEHWEB

DE RUEHLP #3346/01 3452116
ZNR UUUUU ZZH
P 112116Z DEC 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 1617
INFO RUEHAC/AMEMBASSY ASUNCION 6375
RUEHBO/AMEMBASSY BOGOTA 3699
RUEHBR/AMEMBASSY BRASILIA 7569
RUEHBU/AMEMBASSY BUENOS AIRES 4819
RUEHCV/AMEMBASSY CARACAS 2071
RUEHPE/AMEMBASSY LIMA 2144
RUEHME/AMEMBASSY MEXICO 1965
RUEHMN/AMEMBASSY MONTEVIDEO 4269
RUEHQT/AMEMBASSY QUITO 4708
RUEHSG/AMEMBASSY SANTIAGO 9293
RUEHSO/AMCONSUL SAO PAULO 2092
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS LA PAZ 003346

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: EAID ECON EFIN EINV BL
SUBJECT: IDB AND IMF DISCUSS ENGAGEMENT STRATEGIES WITH
BOLIVIA

-------
Summary
-------

1. (SBU) The Inter-American Development Bank (IDB) is
realigning its USD 400 million of loans in the pipeline for
Bolivia with the country's national development plan. The
IDB is preparing an interim strategy for Bolivia and hopes to
implement a more permanent strategy after the constituent
assembly. The International Monetary Fund (IMF) will likely
send a mission to Bolivia during the first half of 2007 to
help the government prepare macroeconomic projections prior
to a donor meeting the GOB would like to convene in Brussels
in May 2007. The IMF predicts that the government will face
a USD 2.3 billion financing gap by 2011 and is skeptical that
donors will commit the needed amount. The IDB has agreed to
provide debt relief for Bolivia. The amount of relief will
be discussed at the IDB meeting in January. Bolivia's fiscal
situation is positive, but inflationary pressures and pension
reform costs could cause problems in the future. The
government is considering establishing a budget stabilization
fund for hydrocarbons revenues to prevent deficits when gas
prices fall that would likely shift resources away from the
regions to the central government. End summary.

------------------------------------
IDB Lending Plans and IMF Engagement
------------------------------------

2. (SBU) Inter-American Development Bank Senior Economist
Guillermo Zoccali told Econoff on December 1 that the IDB was
seeking to realign its USD 400 million of loans in the
pipeline for Bolivia with the country's national development
plan. He said that the bank would likely reprogram USD 60
million of the USD 400 million and give an additional USD 80
million in concessional loans in 2007. He said that donors
were worried that Bolivia was not being monitored by the
International Monetary Fund (IMF) and suggested that Bolivia
should engage with the Fund through its "policy support
instrument," which would not impose conditions, but would
entail monitoring to provide a positive signal. He said that
the IDB was preparing an interim strategy for Bolivia and
hoped to delineate a more permanent strategy focused on
employment, poverty reduction, and government capacity
building after the conclusion of the constituent assembly.

3. (SBU) IMF Assistant Director Antonio Furtado told Emboffs
on December 8 that the fund would likely send some sort of
mission to Bolivia in the first semester of 2007 to help the
government prepare macroeconomic projections, in preparation
for the consultative group meeting of donors that the GOB
hoped the European Community would host in May 2007 in
Brussels. The Fund proposed to send an Article Four mission
in March for this purpose; the government is considering the
proposal. The Fund already prepared an estimated financing
gap based on the GOB's five-year national development plan.
Based on the high levels of public investment envisioned in
the plan, the Fund estimated that by 2011, the government
would have a USD 2.3 billion financing gap. Furtado noted,
however, that the GOB has been investing roughly 9 percent of
GDP annually, but that the plan calls for public investment
of 14 percent of GDP. Furtado was skeptical that the
government was capable of such a significant spending
increase. Furtado also doubted that donors would commit the
large amounts needed to cover the financing gap, as that GOB
had not yet proposed specific projects based on its
theoretical national development plan.

-----------------------------
IDB Debt Relief to Go Forward
-----------------------------


4. (SBU) Zoccali said that the IDB had agreed to go forward
with debt relief for Bolivia, but had not agreed upon the
amount. Because the special operations fund would not be
replenished, the debt cut-off dates for Bolivia would likely
be pushed back to the end of 2001 or 2003, earlier than
originally anticipated. Zoccali said that the bank would
meet in January 2007 to discuss debt relief details.

--------------------------------
Positive Macroeconomic Situation
--------------------------------

5. (SBU) Zoccali said that Bolivia's fiscal situation is
positive, due to windfall hydrocarbons revenues. Government
sources indicate that the government as a whole will have a
5.9 percent of GDP surplus at the end of the year, with the
national treasury having a 0.3 percent surplus and the rest
attributed to regional governments. According to Zoccali,
the government predicts a 3 percent deficit in 2007.
Zoccali, like Furtado, was skeptical that the government
would be able to effectively execute the high spending levels
that it has projected for next year. Furtado predicted that
higher government spending would increase inflationary
pressures in the coming years. He added that the GOB's
ministry of the presidency, which has taken control from the
finance ministry, was considering reverting to a government
pension system, which could increase GOB expenditures
significantly in the future.

-------------------------
Budget Stabilization Fund
-------------------------

6. (SBU) Zoccali said that the government was considering
establishing a stabilization fund for hydrocarbons revenues.
In periods of high natural gas prices, the government would
deposit a portion of revenues into the fund to stabilize
future budgets. Zoccali said the IDB would encourage the
government to set aside some savings for future generations,
because gas is a non-renewable resource. Zoccali explained
that one of the central government's main reasons for setting
up the fund would be to shift more resources toward the
central government and away from regional governments in
order to correct funding imbalances that threaten to leave
the national treasury with a financing gap next year. The
managers of the stabilization fund would have access to
hydrocarbons revenues before they were shared with regional
governments, as required by law, and would be able to
purchase national treasury bonds to finance central
government operations. A law would be required to establish
the fund, but GOB officials are wagering that a stabilization
fund law would be easier to pass than a law changing revenue
distribution that would take funds away from regional
governments.

-------
Comment
-------

7. (SBU) Although the current macroeconomic situation is
positive, long-term growth will depend on the country's
ability to generate productive jobs, diversify revenue and
decrease dependence on hydrocarbons and minerals, manage
inflation, and control pension costs. A budget stabilization
fund for hydrocarbons revenues seems to be a good idea, but
could inflame regional governments if they deduce that their
revenue shares are being cut. End comment.
GOLDBERG

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