How Bolivia has escaped the inflation sweeping Latin America (and why it’s not as good news as it seems)

The world economy is shaken by the wave of global inflation.

The war in Ukraine and the stimuli with which governments responded to the blow of the pandemic have pushed the increase in prices to levels not seen for decades.

In Latin America, the impact of the rise it’s especially painful.

According to a recent report by the International Monetary Fund (IMF), “for a region with historically high levels of inequality, the erosion of real incomes due to rising food and energy costs will add to the economic pressure that vulnerable households are already coping.”

The problem is such that inflation in the five largest Latin American economies has reached to his record of the last 15 years.

But one South American country has so far been able to escape.

This is Bolivia, where the Consumer Price Index (CPI) has remained surprisingly stable. When the curves of its neighbors and of half the world shot up, Bolivia even reached record a drop of the prices of 0.1% from February to March of this year.

While year-on-year inflation in Bolivia stood at a meager 0.77% in March, the IMF estimates that it will be around 10% for the entire region at the end of the year and the main economies of the region suffer from much more pronounced increases:

• Brazil 11.3%
• Chile 9.4%
• Columbia 8.5%
• Mexico 7.4%
• Uruguay 9.4%

Neighboring Peru (6.8%) and Ecuador (2.6%) were also affected to a greater extent. And the stratospheric figures for Venezuela (284.4%) and Argentina (55%) are far from those of Bolivia.

“It is very difficult to explain that Bolivia has such low inflation at this time,” Roberto Laserna, director of the Center for the Study of Economic and Social Reality (Ceres), an analysis center based in La Paz, told BBC Mundo. .

But there are several causes.

A strong Bolivian

Contrary to what happens with the currencies of neighboring countries, which are sometimes subject to strong variations in the exchange rate, the national currency of Bolivia thas a fixed exchange rate with respect to the dollar set by the socialist government of Evo Morales more than 10 years ago (US$1 = 6.96 bolivianos).

While other countries in the region had to implement exchange control mechanisms to support their currency and there were large discrepancies between the official exchange rate and the true price of the US currency on the street, in Bolivia you can buy and sell dollars freely, and the exchange rate has been maintained thanks to the fact that the government maintains it by injecting dollars from its reserves into the market.

Hugo Siles, economist and Minister of Autonomies with Morales, told BBC Mundo that “the immense resources obtained from the nationalization of hydrocarbons by former President Morales made it possible to follow a policy of appreciation of the Bolivian that has contributed to low inflation.”

The government of current President Luis Arce has maintained Morales’ policies to strengthen the boliviano, whose relative strength against the currencies of neighbors such as Argentina reduces the cost for Bolivia to import goods.

In the current context of booming food and oil prices in international markets a strong currency is especially advantageous.

In addition, as José Luis Hevia, a researcher at the Fundación Milenio, points out, “well-anchored expectations regarding the exchange rate have made people trust the national currency”, another factor that favors price stability.

Export subsidies and restrictions

Producers and consumers around the world are being hit by rising fuel and food prices.

Bolivians have not felt that blow so far.

In his country, the price of gasoline remains stable at around US$0.50 per liter and items in the basic basket have not experienced large increases either.

Experts point to generous subsidies of the government as a cause.

Despite the fact that oil costs continue to skyrocket in international markets, the state monopoly that distributes gasoline in Bolivia has fully absorbed this impact by not altering its subsidized price.

Consequently, agricultural producers have not been pushed to pass on to final consumers the increase in their production costs derived from the rise in fuel prices, as has happened in other countries.

The country also has mechanisms that help contain inflation in the food sector, such as the Food Production Support Company (Emapa), a state company that provides financial support to agricultural producers, and the Food Security Revolving Fund. , that imports food charged to public accounts and distributes them on the market to keep prices down.

In one of its latest actions, the Fund injected 10,000 tons of wheat flour into the market to prevent a rise in the price of bread.

Lian Lin, an analyst with the Intelligence Unit of the weekly “The Economist”, assures that “these things keep food inflation low and that means a large part of the total of the Consumer Price Index”.

Another brake on the rise in prices implemented by the government are the export certificates required for all products sold abroad.

When their supply in Bolivia at a price that the authorities consider fair is not guaranteed, they can deny the certificate to export, thus forcing an increase in supply in the domestic market that also alleviates inflationary pressures.

how long can it last

The key question is how long Bolivia will continue to benefit from exceptional price stability in a world in which inflation has become the main enemy of central banks and one of the main concerns of the population.

José Luis Hevia predicts that this year will feel “a rise in inflation because of what is happening in the international context, but it will be relatively moderate”.

“But everything will depend on how long the current model can be sustained,” adds the expert.

And it is that many economists warn of the adverse effects of the Bolivian government’s subsidy policy and doubts grow about the sustainability of public accounts.

A recent World Bank report estimates that Bolivian public debt will approach at 80% of the Gross Domestic Product (GDP) at the end of 2022, more than ten percentage points above the regional average.

The Ministry of Economy and Finance responded with a statement in which it assured that the ratio of public debt to GDP stood at 43.6% in February, “below the limits established as recommended.”

The Executive also accused the “explosive increase in the internal debt registered in 2020” to the interim government presided over by Jeanine Áñez, the leader who assumed power after the fall of Evo Morales and today is in prison accused of terrorism, sedition and conspiracy.

Hevia indicates that “the fixed exchange rate has been very effective in controlling inflation, but it has unwanted effects on the economy because discourages local production by making imports cheaper and requires a large cushion of external resources to sustain it”.

And that use of resources to support the national currency has long been seen in a notable increase in the fiscal deficit and a sustained decline in the international reserves of the Central Bank of Bolivia.

Until 2015, Bolivia accumulated income mainly from gas exports and there were up to $15 billion in the reserves of the Central Bank. But that figure has been falling and in December 2021 it was US$4,752 million.

With a fiscal deficit that, according to Central Bank projections, will close the year at 8.5% of GDP, it is worrying that the country will continue to consume its reserves to pay for the subsidies that keep prices under control and that are estimated to cost to the State around US$4,000 million each year.

There are other factors of concern. Roberto Laserna, from Ceres, affirms that “the nationalization of hydrocarbons generated a large volume of resources in the short term, but in the medium term it discouraged foreign investment”.

This has resulted in years of falling gas production and Bolivia has been unable to meet some of the supply commitments made with neighboring Argentina, with which new agreements are being negotiated.

Former Minister Siles sees no reason for concern. “Bolivia sells gas, electricity and raw materials such as soybeans or minerals, whose price on the international market is also rising, which will bring in more foreign exchange.”

And he predicts: “The government will not eliminate subsidies nor alter the exchange rate because that would mean transferring the burden to the vast majority of the population”.

Not everyone is convinced.

Lian Lin believes that “Bolivia will still enjoy some tailwind time from the price of gas but in the future the exchange rate will have to be lowered a bit at least and there will be some kind of gradual devaluation and cuts in government programs.”

Time will tell which forecast is correct.

At the moment, the last issue of Bolivian debt last February was placed at an interest rate of 7%, an increase in the required return on bonds that is usually associated with lower investor confidence and that highlights the greater difficulty that the Bolivian State now finds to finance itself.