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Bolivia on the brink of economic crisis

“Tnot here Shortage of dollars,” a banner appeared on the homepage of the Central Bank of Bolivia. “Our economy is strong, solvent and stable. The need for the post suggests otherwise. Bolivians have been desperately buying dollars for the past few weeks. In February, the central bank stopped releasing data on its foreign exchange reserves. Step, sell dollars directly to the public. When queues get too long, banks let Bolivians make appointments online. Next available is in July. Investors are spooked. Value of government bonds due 2028 since January Shrunk by a third.

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Part of the reason for the shortage of dollars is the tightening of global financial markets. When the Federal Reserve started raising interest rates last year, it became harder for Bolivia to take on foreign debt. Then came the Ukraine war, doubling the annual cost of imported fuel to over $4 billion (or 10% gross domestic product). The government began drawing on its reserves to prop up the currency, which has been pegged to 6.96 bolivianos us USD since 2011 and subsidizes fuel. However, while short-term problems have exacerbated the country’s dollar shortage, it has been the case for a long time. Bolivia’s economic model is broken.

In the early 2000s, Bolivia experienced strong growth, supported by natural gas exports. It was lucky that leftist president Evo Morales was elected in 2005. Soon after he took office, multilateral institutions wrote off the debts of many of the world’s poorest countries. In 2006, natural gas prices doubled to record highs.This allowed Bolivia to accumulate the largest foreign exchange reserves in its history: reserves rose from 12% to gross domestic product It dropped to 52% in 2012 in 2003 (see Figure 1).real gross domestic product Since 2005, per capita growth has halved. According to the World Bank, the percentage of the population living on less than $2.15 a day (adjusted for inflation) fell from 15% in 2005 to 2% in 2019. Annual inflation was 1.7 percent, the lowest in the region last year.

Pundits hail Bolivia’s economic miracle. But this is not sustainable. The government spends most of the natural gas windfall on fuel subsidies, inefficient state-owned enterprises and propping up the exchange rate. Fuel prices have been frozen at $0.54 per liter since 2005, compared with a world average of $1.31 today. In 2006, Morales nationalized the country’s vast natural gas fields. Private companies were forced to join forces with state-owned Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), and surrender majority control. They also pay a 50% royalty on the total production. The state receives a larger share of revenue from oil and gas companies than any other country in Latin America after Mexico, said Marcelo de Assis of research firm Wood Mackenzie.

This nationalist, populist policy has stifled investment. After the country’s energy sector was privatized in 1999, annual net foreign direct investment inflows accounted for gross domestic product reached a peak of 12%. Over the past five years, it has grown by an average of 0.1%. Natural gas prices fell in 2014, as did production. Annual investment in gas fields fell from more than $1 billion in 2015 to $300 million last year.

The government refused to adjust policy when gas prices fell. Instead, it is heavily indebted and uses reserves to pay for costly subsidies. Public debt has doubled to a staggering 80% since 2014 gross domestic product, above regional and world averages and dangerously high for low- and middle-income countries.A study by the think tank Fundación Milenio found that people from YPFB Concealed aggregate losses of 62 other Bolivian state-owned companies, which often exceeded 4% gross domestic product.

Bolivia has been running a large and persistent fiscal deficit for a decade. 7% deficit gross domestic product. this International Monetary Fund Growth is expected to slow to 1.8 percent this year. Bolivia’s current account surplus at 2% in 2021 gross domestic product. but International Monetary Fund This is expected to turn into a 2.5% deficit this year. Bolivia’s reserves are unlikely to make up for the funding shortfall. These have fallen from $12 billion in 2012 to less than $3.5 billion. Only $370 million of that was in cash, not even enough to pay for three months of imports. Much of the rest is gold, and one faction of the government is reluctant to sell it. The situation is likely to deteriorate further since the bank last published weekly data in February.

pumping problem

In February, the government passed laws encouraging farmers and gold cooperatives to sell them dollars by offering them a better exchange rate. “People are freaking out and thinking: why is the central bank buying dollars and what will happen to bolivianos?” said a money changer in the capital La Paz. Six months ago, he used to buy $3,000 a day and sell half of it. “Today we don’t even get $500.” Bolivians are taking their savings, exchanging them for dollars and stashing them at home. In the week leading up to March 12, the central bank sold $24 million to the public. Another money changer said that when dollars ran out, customers started buying euros, Brazilian reals, Peruvian sols or Chilean pesos. Now he’s running out too.

Notably, the government has denied there was a problem. In a rare interview on April 11, Luis Arce, the president and Mr Morales’ former finance minister, said there was no need to devalue bolivianos or remove subsidies.When asked about the government’s upbeat growth forecast for this year, the forecast was more than double that of the government International Monetary Fund, he replied, “We are going to let the international organizations down again… I am relieved when they say we are going to fall because it means we will grow even more.” Meeting with the private sector for the first time since. “Instead of fueling hope, this meeting showed that things are really bad,” said Gabriel Espinoza, a former central bank governor.

Arce has no easy way out of the crisis. Natural gas production has fallen by a third since 2014. About a third of it is sold domestically at below-market prices, while the rest is shipped to Argentina and Brazil. But according to a recent report by Wood Mackenzie, those exports will cease by 2030. This is because production will fall further (see Figure 2).

In addition, a pipeline extending from the world’s second-largest shale oil and gas field in the far west of Argentina to Buenos Aires is due to start operating in June. This would reduce Argentina’s need to import these items from Bolivia. While demand from Brazil will continue, Bolivia will have to focus on a domestic market with shrinking supply. Private investment isn’t coming anytime soon.relevant laws YPFB A new charter enacted in 2009 includes majority ownership in any joint venture.

Uyuni, Bolivia - August 14: Aerial view of an excavator moving raw materials for lithium carbonate production in the salt recovery pond of the Llipi pilot plant on the Uyuni Salt Flats, Bolivia, on August 14, 2022. The Salar de Uyuni in the province of Potosí has ​​the largest lithium reserves in the world.  Former president Evo Morales nationalized the lithium industry in 2008 and subsequently created state-run company Yacimientos de Litio Bolivianos (YLB). Despite announcements and promises, mining and export volumes never reached significant levels due to lack of investment and technology.Now, the Bolivian government is entering into strategic partnerships with foreign companies to facilitate the so-called extraction of
elusive platinum

Many within the government hope lithium will solve the country’s problems. Bolivia has the world’s largest lithium resources in brine. But unlike neighboring Chile or Argentina, it has yet to extract anything from the ground on a commercial scale. In January, a consortium of Chinese companies announced a $1 billion deal to produce the material by 2025. However, Beatriz Muriel Yingle, a La Paz-based think tank, doubts lithium can replace natural gas as a source of revenue. She noted that the terms of the deal with China have not been made public and that protests are expected to erupt if locals feel they have not been fairly compensated. This will further delay production.

The government wants to sell its $2.8 billion worth of gold reserves. But infighting between followers of Mr Morales and Mr Arce has meant the law to sell the stockpile has not been passed since it was brought to Congress more than a year ago.

Commodity chaos

Two other sources offered Bolivia some breathing room.First, its external debt at 30% of total debt is relatively small gross domestic product And mostly on favorable terms with multilateral lenders. Most of them will not expire for at least a decade. Mr Arce’s ministers are in talks with development banks for additional loans.

Second, Carlos Gustavo Machicado of the Pontifical Catholic University of Bolivia argues that the country’s large informal economy provides a buffer against economic collapse. More than two-thirds of Bolivians work in the informal sector, one of the highest rates in the world.Sales of contraband are estimated to be equivalent to nearly one-tenth gross domestic product. Since fuel is so cheap in Bolivia, much of it is smuggled abroad and sold at a higher price. Ms. Muriel estimated that as much as half of the $3 billion worth of gold Bolivia exported last year was smuggled from other countries and exported from Bolivia, which has lower export taxes. That means there are dollars in the economy, not government coffers.

“A balance of payments crisis is coming, just like in 1982,” Mr Macchicado said. That year, Bolivia fell into a crisis that ended in hyperinflation. Signs of financial stress are everywhere these days. On the streets of La Paz, speculators are selling dollars for far more than the official exchange rate. The union will negotiate a wage increase in May and is asking for a 10% raise. Mr. Espinosa estimates that inflation will rise to 6% by the end of the year. That’s low by regional standards, but high nationally. This can lead to unrest. In Santa Cruz in the east, protests have erupted since the government came to power. Mr Arce may no longer be able to deny Bolivia’s problems for long.

correct: Originally we wrote that Mr. Arce said the peso would not depreciate. Of course, it should be Boliviano. sorry.

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