Headline, August 27 2023/ ''' '' BOLIVIA -STUDENTS- BOLSTER '' '''


BOLSTER '' '''

'' THE GREENBACK SCRAMBLE. '' BOLIVIA ON THE BRINK : OUT OF GAS AND GOOD IDEAS. After two decades of statist policies, the country's economic model is going bust.

 '' THERE IS NO SHORTAGE of dollars '' announces a banner on the homepage of Bolivia's central bank. '' Our economy is strong, solvent and stable.'' The need for the post suggests otherwise. For the past many weeks, Bolivians have desperately been trying to buy dollars.

In February, the central bank stopped publishing data on its foreign-currency reserves. In March it took the unusual step of selling greenbacks directly to the public after exchange houses started to run out.

When the queue got too long the bank made Bolivians book appointments online. Investors are spooked. in 2028. Bonds maturing in 2028 have lost a third of their value since January.

The dollar shortage is partly a result of tighter 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 war in Ukraine, and the annual cost of importing fuel doubled to more than $4 billion [or 10% of GDP].

The government began dipping into its reserves to prop up the currency which has been pegged at 6.96 bolivianos to the US dollar since 2011, and to subsidise fuel.

Yet although the country's dollar shortage was exacerbated by short-term problems, it has been long in the making Bolivia's economic model is bust.

In the early 2000s Bolivia experienced robust growth on the back of natural-gas exports. Evo Morales, the leftist president elected in 2005, struck it lucky.

Soon after he came to power, multilateral institutions wrote off debt for many of the world's poorest countries. Gas prices doubled to record highs in 2006.This allowed Bolivia to accumulate the largest foreign reserves in its history :

They rose from 12% of GDP in 2003 to 52% by 2012. Real GDP per person has grown by half since 2005. According to the World Bank the proportion of people living on the equivalent of less than $2.15 a day [ after adjusting for inflation] fell from 15% in 2005 to 2% by 2009. Annual inflation was 1.7% last year, the lowest in the region.

PUNDITS praised Bolivia's economic miracle. But it was not sustainable. The government spent much of the windfall from natural gas on fuel subsidies, inefficient state firms and propping up the exchange rate. Fuel prices have been frozen since 2005 at $0.54 a litre, compared with a world average today of $1.31.

In 2006 Mr. Morales nationalised the country's vast gas fields. Private companies were forced to sign new contracts with the state firm, Yacimientos Petrol√≠feros Fiscales Bolivianos [ YPFB ], and hand over majority control. 

They also pay royalties amounting to 50% of gross production. The state takes a bigger share of revenue from oil and gas companies than in any other country in Latin America after Mexico, says Marcelo de Asis of Wood Mackenzie, a research firm.

Such statist, populist policies have inhibited investment.In 1999, after the country's energy sector was privatised, annual net inflows of foreign direct investment as a share of GDP hit a peak of 12%.

Over the past five years it has averaged 0.1%. In 2014 the price of gas fell, and so did production. Annual investment in gas fields declined from over $1 billion in 2015 to $300 million last year.

THE GOVERNMENT refused to adjust its policies when gas prices fell. INSTEAD it piled on debts and used its reserves to fund its expensive subsidies. 

Public debt has doubled since 2014 to a whopping 80% of GDP, above the regional and world average, and dangerously high for a lower middle-income country.

A study by Foundacion Milenio, a think-tank, found that the profits from YPFB hid combined losses from Bolivia's 62 other state-owned enterprises that regularly exceeded 4% of GDP.

Bolivia has run persistent and large fiscal deficits for a decade. The deficit is 7% of GDP. The IMF expects growth to slow to 1.8% this year. In 2021 Bolivia had a current surplus of 2% of GDP. But the IMF expects this to turn into a 2.5% deficit this year.

It is unlikely that Bolivia's reserves can make up the funding shortfall. These have fallen from $12 billion in 2012 to less than $3.5 billion. Only 370 million of that is cash, too little to cover even three months of imports.

The Serving of the Latest Global Operational Research on Boom and Bust, and Bankruptcy, continues. The World Students Society thanks The Economist.

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