1707902316 Bolivia Bolivian President Luis Arce39s worst week of economic management

Bolivia: Bolivian President Luis Arce's worst week of economic management

Bolivia Bolivian President Luis Arce39s worst week of economic management

Bolivian politicians usually spend Carnival at the major festivals organized at this time, but this year government spokesmen had to work. Their task was to calm the general population's concern about the economic situation after a week of problems and bad news. The worst of President Luis Arce's three-year term.

The decisive factor was the risk assessment agency Fitch Ratings, which lowered Bolivian debt in government bonds from “B-” to “CCC”, i.e. within the “non-investment grade” scale from “variable” security to “vulnerable”. The company said it is “rare” for bonds issued by a country to receive such a low rating. And he justified his decision, which the Bolivian government considers unfair, with the lack of international reserves from which the country suffers.

The actual level of reserves is unknown because the Central Bank of Bolivia (BCB) does not keep the information up to date since exactly a year ago there was an “extraordinary demand” for dollars and banks began rationing the US currency. At that moment, the public's expectations changed and they began accumulating dollars and selling them at a higher price than the official price of 6.96 Bolivianos per unit.

According to a private study, the BCB effectively has around $340 million, minus the gold it owns but is not allowed to sell. This figure is not even enough to cover imports of goods from abroad for a month.

The country doesn't know where it can get the foreign currency it needs. In 2023, its imports were $585 million higher than its exports, largely due to the debacle of its hydrocarbon industry and the resulting need to import more than $3,000 million in fuel each year.

In this context, we have no choice but to use the dollars that are in the hands of the population, estimated at 10,000 million. Therefore, the price of the dollar in the parallel market has inevitably increased. It is currently over 8 Bolivianos, which corresponds to a de facto devaluation of 15%. The price is even higher for importers who need large sums of money to conduct their business. Since banks are prohibited from selling them at a rate higher than the official exchange rate, they charge them “commissions” of between 15 and 25% of the requested amount.

The dollar shortage and the greenback's new prices have begun to affect importers' ability to buy. In a statement that raised concerns, the Bolivian Chamber of Pharmacy warned that the lack of dollars “may, in a short period of time, affect the country's normal supply of medicines and medical devices, as production and import become more expensive and we run the risk that suppliers to stop providing them due to non-payment.” Other sectors of the economy also expressed concerns about the future of their companies. However, the most serious problem must be solved by the government, which is obliged to support a fully nationalized fuel market with fixed and subsidized prices. Failures in the supply of gasoline and diesel due to a lack of foreign currency occur again and again and always cause panic among consumers who find themselves in endless queues at gas stations.

Despite all this, inflation remains very low at 3% per year, a figure that the government's communications apparatus maintains. The financial system is also safe because the majority of its transactions are carried out in the local currency.

Since Bolivia has relatively little debt, it could theoretically resort to borrowing to cover its current financing deficit, but the task is not easy. The sovereign risk identified in ratings like Fitch's makes the cost of the new bonds that could be issued prohibitive. In any case, the government is looking into how to do this. As for loans from other countries and multinational organizations, more than $800 million already committed is being held up in the Legislative Assembly, where the ruling party does not have the majority necessary to approve it. The opposition prevents them from solving various political problems. On the other hand, it is unthinkable that leftist Luis Arce would ask the International Monetary Fund for help.

To provide some relief, the tax authorities are taking advantage of the fact that national miners produce about 50 tons of gold annually to buy the metal and add it to their reserves. They hope to acquire gold for about $500 million in 2024. The Fitch report states that available information on this strategy is insufficient. Internally, there are doubts about BCB's ability to monetize too much gold, as it requires certification through a cumbersome process. Several economists believe that at this rate the dollar will cost 10 bolivianos by the end of 2024, a devaluation of 30%.

Follow all international information on Facebook and Xor in our weekly newsletter.