Chronicle of a Crisis Foretold

Bolivia may still be one of the poorest countries in the Western hemisphere but, particularly since Evo Morales became the country’s first indigenous President in 2006, his Movement for Socialism (MAS) has overseen immense improvements in living standards. Though still significant, poverty and inequality have massively reduced. Bolivia has had the lowest inflation rate in the region, so it hasn’t borne the full brunt of the cost-of-living crisis of the past two years. In fact, managing the economy has been seen as one of the government’s strengths.

Recent weeks have seen some chickens come home to roost, however, as the country faces a foreign exchange crisis and credit rating downgrades. Some clues lie in the reasons for low inflation. Bolivia has long pegged its currency to the US dollar, which has the advantage of helping ensure relative price stability. Subsidies also keep a lid on prices, but at a cost. The State imports oil and fixes petrol prices at €0.49 per litre. Maintaining energy subsidies costs the government an estimated 3.7% of GDP, not far off half the 8.5% of GDP budget deficit expected this year. About a third of that budget deficit is financed by printing money.

Bolivia had used bountiful gas exports to build up foreign reserves amounting to $15bn by 2014. Essentially, they have run these down to maintain the dollar peg and part-finance the budget deficit without generating inflation. Running dangerously low on dollars, liquidating their remaining gold reserves can only buy time.

Unless it can quickly tap its massive lithium deposits to export for hard currency, Bolivia will either have to reduce its budget deficit and stop printing money or else end its currency peg and let inflation rip. In one fell swoop, they could likely end the current crisis by ending the petrol subsidy. Of course, this would feed through to inflation, but not to the same extent as would a chaotic end to the currency peg. Moreover, in a country that has long been intensely politically polarized, and even more so since the contested elections and alleged coup in 2019, there is a risk that such a move disrupts Bolivia’s fragile political economy.

But, not only are fossil fuel subsidies environmentally detrimental, they are also regressive, providing more benefit to the better off who consume most. There is no easy solution, but axing them seems to be the path of least resistance.

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