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Viewing cable 06LAPAZ2112, CENTRAL BANK OUTLOOK POSITIVE

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Reference ID Created Released Classification Origin
06LAPAZ2112 2006-08-04 19:01 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy La Paz
VZCZCXYZ0001
PP RUEHWEB

DE RUEHLP #2112/01 2161901
ZNR UUUUU ZZH
P 041901Z AUG 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 0150
INFO RUEHAC/AMEMBASSY ASUNCION 6029
RUEHBO/AMEMBASSY BOGOTA 3348
RUEHBR/AMEMBASSY BRASILIA 7198
RUEHBU/AMEMBASSY BUENOS AIRES 4461
RUEHCV/AMEMBASSY CARACAS 1736
RUEHPE/AMEMBASSY LIMA 1751
RUEHMN/AMEMBASSY MONTEVIDEO 3947
RUEHQT/AMEMBASSY QUITO 4367
RUEHSG/AMEMBASSY SANTIAGO 8931
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 002112 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/AND 
TREASURY FOR SGOOCH 
ENERGY FOR CDAY AND SLADISLAW 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD BL
SUBJECT: CENTRAL BANK OUTLOOK POSITIVE 
 
REF: LA PAZ 1791 
 
1. (SBU) Summary:  According to a Central Bank official, 
Bolivia's macroeconomic situation is positive overall, with 
first semester GDP growth of 4.3 percent, strong fiscal 
revenue inflows, low deficit projections, moderate inflation, 
high international reserves, and a sound banking system. 
However, uncertainty in the hydrocarbons sector could dampen 
future growth, while a mismatch in central and regional 
government income and spending responsibilities could reduce 
the effectiveness of public expenditure.  End summary. 
 
Strong GDP Growth, Low Deficit Projection 
----------------------------------------- 
2. (SBU) Central Bank Economic Policy Advisor Armando Pinell 
told Econoff on August 2 that the Bolivian economy was 
performing well overall, despite uncertainty in the 
hydrocarbons sector due to the GOB's nationalization policy. 
Gross domestic product (GDP) grew by 4.3 percent in the first 
half of 2006 and strong revenue inflows (2.5 billion 
bolivianos or USD 312 million during first semester 2006) 
from hydrocarbons taxes, other business taxes, and customs 
have produced a fiscal surplus.  Pinell predicts a combined 
public sector deficit at near zero for 2006, compared to 3 
percent of GDP projected in the budget, because the 
government will not immediately spend higher than anticipated 
hydrocarbons revenue.  The Central Bank will publish a new 
monetary policy paper around the end of September, Pinell 
said. 
 
Central Government Financing Gap 
-------------------------------- 
3. (SBU) Despite overall near zero deficit projections, the 
central government will likely face a serious shortfall in 
available funds by year-end if regional income is not 
transferred to central government accounts, Pinell said. 
Currently, regional governments have large surpluses that 
they are not investing, because significant income is 
transferred to them by the central government, while major 
fiscal responsibilities are not.  Pinell suggested that the 
contentious issue of revenue sharing, particularly of 
hydrocarbons taxes, would be discussed at the Constituent 
Assembly. 
 
Inflation Concerns and Revaluation 
---------------------------------- 
4. (SBU) Although the Central Bank aims to control inflation, 
which is currently around 4.5 percent and is projected to be 
the same at year-end, it is unlikely to significantly revalue 
the boliviano to do so.  A slight revaluation is probable, 
but Pinell said that the Bank would not implement a large 
increase in local currency value, because it must consider 
the impact on exporters and local producers who benefit from 
a cheap boliviano.  Pinell explained that because of strong 
appreciation of the Brazilian real last year, Bolivia is 
importing inflation from its neighbor.  Although increasing 
prices cause concern, local producers benefit because their 
cheaper goods are now more competitive vis-a-vis Brazilian 
imports. 
 
Bolivianization Increasing, Reserves High 
----------------------------------------- 
5. (SBU) Central Bank policies of encouraging local currency 
use instead of dollars have been fairly successful in 
increasing boliviano use, with approximately 20 percent of 
deposits and 10 percent of loans now held in local currency. 
Partially due to large export earnings and partially because 
of the public shift away from dollar use, the Central Bank 
has record high international reserves (USD 2.67 billion). 
 
Banking System Stable, Exchange Controls Unlikely 
--------------------------------------------- ---- 
6. (SBU) Pinell said that the financial system is sound 
overall.  Although bank deposits decreased slightly during 
the first half of the year, he explained that deposits 
actually increased in every month except May.  He attributed 
the dip in May to false rumors of GOB-imposed exchange and 
deposit withdrawal controls.  Loan portfolios increased 
during the first semester.  Pinell explained that the idea of 
implementing currency exchange controls was "in fashion when 
the Venezuelans were here", but fortunately has fallen by the 
wayside.  He did not think the GOB would seek to implement 
such controls in the foreseeable future. 
 
7. (SBU) Comment:  Although Bolivia's short-term 
macroeconomic outlook is positive, several risk factors could 
impede mid and long-term growth (reftel).  Private investment 
is likely to remain low due to the GOB's policies of 
increasing state control in the hydrocarbons and other key 
sectors.  Export revenues have already begun to decrease in 
anticipation of Bolivia's likely loss of U.S. trade 
preferences in December.  Although the Central Bank has thus 
far continued the monetary policies of the previous 
administration, the Bank's new directors seem amenable to 
changing the Bank's prior conservative policies in order to 
support GOB goals, such as employment generation, possibly to 
the detriment of macroeconomic stability.  End comment. 
GREENLEE