¿Estamos Saliendo Adelante? Assessing Bolivia’s Macroeconomic Stability

Falling central bank reserves spark speculation and threaten inflation, increasing frictions within the MAS party.

March 16, 2023

A giant banner of President Luis Arce on the Ministry of Economy and Finance in La Paz advertises Bolivia's "lowest inflation in the region" (Charles Dolph)

The long lines outside branches of Bolivia’s state-controlled Banco Unión to acquire dollars in major cities from La Paz to Santa Cruz over recent days reflect growing uncertainty about the country’s macroeconomic trajectory. The rush to buy dollars follows the central bank’s (Banco Central de Bolivia, BCB) March 6 announcement that it will sell them directly to the public. This capped a month in which the BCB rolled out a battery of measures aimed at bolstering international reserves in defense of the fixed exchange rate with the U.S. dollar, which has been the cornerstone of Bolivia’s macroeconomic stability for more than a decade.

Until last month, the official discourse of President Luis Arce’s administration was of the Bolivian economy’s sustained recovery from the downturn provoked by the Covid-19 pandemic, encapsulated in the slogan "Estamos Saliendo Adelante," or “We’re Moving Forward.” Rather than calming fears about the government’s ability to address mounting macroeconomic challenges, however, recent measures have had the opposite effect. This is evidenced by a short-term measure aimed at injecting dollars into the national banking system by temporarily lifting legal requirements that banks hold between four and 10 percent of their assets in dollar reserves.

Increased demand for dollars reflects the fall of BCB reserves to precarious lows. The decline has generated speculation that the Arce administration may devalue Bolivia’s currency, the boliviano, from its fixed exchange rate against the dollar in place since 2011. Economically, this would have inflationary effects at a time when Bolivia’s recovery from the Covid-19 pandemic remains fragile. It would also have serious political ramifications. Luis Arce is widely credited with overseeing sustained macroeconomic stability as former president Evo Morales’s long-serving finance minister, affording him essential political capital first as presidential candidate in the 2020 elections and subsequently in office. Indeed, his administration touts Bolivia’s “lowest inflation in the region” as its major achievement. A bout of inflation now would thus inflict a damaging political blow to Arce amid growing divisions within the Movimiento al Socialismo (MAS) party.

Macroeconomic Uncertainty in Bolivia

The potential political fallout from any macroeconomic shift helps explain the otherwise confusing government statements about its own recent measures. For example, regulatory authorities attributed high demand for dollars to unfounded rumors circulating on social media, and declared that anyone circulating false information in order to fuel speculation faces potential criminal prosecution. The BCB’s suspension of legal reserve requirements, however, enables precisely such speculative withdrawal of dollars from the banking system.

To parse out these conflicting messages, it’s instructive to turn here to the recommendations of the IMF mission to Bolivia following its September 2022 evaluation. Key among these was that the BCB should administer a “carefully sequenced transition to a more flexible exchange rate.” Seen in this light, the apparent incoherence of statements made by government officials looks more like attempted misdirection rather than failure to effectively communicate policies to the public: blaming speculation on unfounded (and possibly criminal) rumors circulating on social media is a politically expedient means of deflecting from the Arce administration’s studious adherence to IMF recommendations. 

The parallel move to incentivize Bolivia’s agro-export sector already makes exchange rate flexibility a policy reality. Among the measures announced on February 8, the BCB and state-controlled Banco Unión signed an agreement to buy dollars from exporters at the “competitive exchange rate” of 6.95 bolivianos in anticipation of the upcoming soy harvest, and the dollars that its export will bring into the economy. Here again, there is a double discourse at work. Officially, the BCB continues to “guarantee” that it will maintain the fixed exchange rate. But by buying dollars from exporters above the official bank rate of 6.86, it has effectively introduced a differential exchange rate regime, thereby departing from the linchpin of its macroeconomic program.

A line forms outside a branch of the state-controlled Banco Unión on Tuesday, a location where the Central Bank is selling dollars to the public (Charles Dolph)

Running on Empty? Central Bank Reserves After the Commodities Boom

The dwindling of BCB reserves appear to be forcing the Arce government’s hand with respect to IMF policy recommendations and lowland exporters. Grasping what is at stake in this conjuncture requires a more expansive view of the political economy of contemporary left governments in Bolivia and Latin America.

An early 21st century global commodities boom swelled international reserves held by Latin American central banks. Every country in the region accumulated substantial reserves, which collectively rose from $163 billion in 2001 to $833 billion by 2014. Bolivia was no exception. Exports of natural gas, in particular, drove the accumulation of reserves from under $1 billion in 2002 to a high of over $15 billion in 2014. Across the region, state capture of natural resource rents financed redistributive social spending through subsidies on food and energy and conditional cash transfers, which helped substantially to cut poverty.

Beginning around 2014, however, the fall in global commodities prices, including for Bolivia’s key export of natural gas, precipitated a steady erosion of reserves. To be sure, Bolivia has not experienced the kind of severe crisis that falling oil prices—compounded by U.S. sanctions—contributed to in Venezuela. However, BCB reserves have steadily declined since 2015 and, exacerbated by the economic shock of the Covid-19 pandemic, have fallen to their lowest level since 2004 at under $4 billion. Arce and the MAS, then, are somewhat belatedly confronting the limits of an extractivist economic model which were felt earlier elsewhere in the region.

The extractivist dynamic feeds on itself in a vicious circle, at once problem and solution. The rapprochement with agro-exporters as suppliers of dollars to the BCB represents just one facet of this. Mining is another. For example, a key measure under debate is the so-called Gold Law (Ley de Oro). Mired in parliamentary proceedings since 2021, the law would monetize Bolivian gold with the explicit goal of injecting foreign exchange into the BCB in defense of the fixed exchange rate. In the process, the proposed law provides leverage to mining cooperatives. These are allied to the Evista wing of the MAS party loyal to former president Evo Morales, which is in open feud with the Arce wing over leadership and has vowed not to approve the law without the cooperatives’ consensus. This leaves cooperatives, which currently sell much of their gold on international markets where they receive higher prices, positioned to extract maximum concessions from the government on everything from domestic prices to ignoring deleterious environmental practices in exchange for backing the Gold Law.    

Moves to monetize gold and buy dollars from agro-exporters illustrate a major shortcoming of the MAS in power. Not only has the party been extractivist in orientation, as many critics observe, but the social wealth this generates has not facilitated any transformation of Bolivia’s productive structures. As a result, nearly 20 years after coming to power, the MAS—however forces realign internally—is more reliant than ever on extractive activities in primary sectors such as mining and agriculture to generate much needed foreign exchange. Once again, macroeconomic stability is pursued at the cost of proliferating environmental and social toxicities.    

These dynamics around central bank reserves come to bear on how we assess the achievements, shortcomings, and prospects of contemporary left governments in Bolivia and the region. Some suggest that these governments have faced insurmountable structural limits to their transformative ambitions. Others counter that this view downplays the agencies and contingencies of class struggle involved in the regional leftward turn. A more historically dynamic understanding of these governments’ trajectories would evaluate them in terms of their own politics and strategies, including their extractivist orientations to macroeconomic stability.

The compulsions of the dollar currently facing the Arce administration evidence broader shortcomings of progressive governments in Latin America to confront this structural challenge. The BRICS bank once generated hope as a potential alternative to U.S.-dominated financial institutions such as the IMF and World Bank for development financing. But these ambitions have never really panned out, now less than ever following the Russian invasion of Ukraine. Meanwhile, the recent announcement by presidents Lula da Silva of Brazil and Alberto Fernández of Argentina—the first and third largest Latin American economies, respectively—to form a common currency, the sur (“South”), was roundly met with skepticism. It was quickly walked back to clarify that at best they sought to construct some shared monetary unit as an alternative to the dollar in which to conduct bilateral trade, although even this seems unlikely. Confronting the monetary dynamics of global capitalism thus remains a major pending task of regional left governments. 

What’s Next in Bolivia?

The macroeconomic path forward in Bolivia, and its political implications, remain murky. The Gold Law is mired in intra-MAS political squabbling, and even if passed does not on its own fundamentally change Bolivia’s structural relation with the dollar.

Recent measures also defer mounting questions of fiscal policy. Since the government began rolling out new measures in February, a climate of public opinion has taken form declaring fiscal spending as the major drain on BCB reserves, which raises the specter of cuts to subsidies especially on gasoline and diesel introduced in the late 1990’s by Hugo Banzer (1997-2000). A gasolinazo now, with its directly inflationary effects, could have enormous political and social consequences—a fact that IMF recommendations blithely neglect when calling for such market liberalization. So entrenched are these subsidies that even Evo Morales, at the height of his power and popularity in 2010, bowed to opposition from his own political base against his attempt to roll them back. It’s hard to imagine Arce, amid a growing split within the MAS, successfully pushing this through or escaping unscathed from any attempt to do so.

An alternative to fiscal austerity is to increase tax revenues. Indeed, the MAS began overhauling the national tax agency in 2015. Arce further responded to widening inequality resulting from the Covid-19 pandemic by making taxation central to his presidential campaign and subsequent administration. He has consistently touted an annual wealth tax and other reforms which aim to make Bolivia’s tax system more progressive and increase the state’s fiscal capacity. But serious fiscal transformations take time. Surely, it’s something of a missed opportunity by the MAS to have waited until the gas boom slowed and rents began to dry up to embark on this, now leaving it open to growing pressure for fiscal austerity.       

Meanwhile, some media outlets quickly declared that currency devaluation is already underway, with exchange rates up to 7.1 reported in Santa Cruz’s informal market. Despite fear-mongering that devaluationary pressure would prompt the government to freeze dollar accounts through a corralito like that implemented in Argentina during its devastating 2001-02 crisis, such an argentinización of Bolivia’s economic and social situation seems unlikely. The temporary lifting of banks’ reserve requirements and the BCB’s move to sell dollars directly do the exact opposite, and furthermore Argentina’s corralito came at the end of a decade in which the dollar had thoroughly permeated its banking system. By contrast, savings and credit in Bolivia have been successfully “bolivianized” over recent years. With 99 percent of domestic credits and 86 percent of savings accounts denominated in the national currency, Bolivia’s financial system is insulated from any generalized run on the dollar such as happened in Argentina.

Still, a devaluation and resulting inflation of any magnitude would puncture the aura of macroeconomic invincibility so central to the tenure of the MAS, and especially Arce. This, in turn, could further exacerbate growing divisions within the MAS and potentially facilitate the reemergence of Evo Morales as its presidential candidate in 2025 elections.

How current developments unfold will depend largely on how the administration manages international reserves. In addition to the deep unpopularity of past attempts to cut Bolivia’s fuel subsidies, regional left governments’ disastrous attempts to force fiscal austerity provide a cautionary tale. In Brazil, for example, the ill-fated São Paulo transit fare hike in 2013 and the Dilma Rousseff administration’s wider turn to austerity fueled the unraveling of her presidency.

Conversely, the recent agreement with Bolivia’s agro-exporters to supply dollars to the BCB risks newly emboldening them politically. The MAS and agribusiness interests reached a tenuous coexistence beginning in 2009, but this social force is historically antagonistic to progressive governments in Bolivia and regionally. Large landowners dominating soy production in Paraguay, for instance, were at the center of the parliamentary coup against Fernando Lugo in 2012. Such considerations are hardly ancillary in Bolivia, where tensions between Santa Cruz and the central government in La Paz are simmering in the wake of the 2019 coup against Evo Morales and recent detention of Santa Cruz governor Fernando Camacho in connection with the resulting judicial case.     

In sum, ongoing macroeconomic developments in Bolivia, and their myriad and unpredictable consequences, bear careful attention.

Charles Dolph is an anthropologist and Postdoctoral Research Fellow at University College London (UCL). He researches monetary politics, agrarian transformations, and taxation in South America. He is currently in La Paz, Bolivia conducting research on fiscal reforms as part of a comparative project in the anthropology of taxation at UCL.

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