In the midst of the fight for the presidential candidacy of the Movement Towards Socialism, President Luis Arce faces a shortage of US dollars, derived from falling exports and the need for structural reforms.

Luis Arce has a year and a half left to finish his term as president of Bolivia. Legally, he can be re-elected, although he was expelled from his party last October. For this reason, his government strives to ensure that the path to a second government is free of obstacles and this implies selling an optimistic image of the country. Against this backdrop, the Minister of Economy, Marcelo Montenegro, announced a week ago that the Bolivia registered annual inflation of 1.31% in April, the second lowest in Latin America.

These are enviable figures that seem to give a respite to the Bolivian ruling party, otherwise suffering from the fragmentation of the leftist Movement towards Socialism (MAS) between the Arce faction and the one that supports former president Evo Morales --a while ago, the incumbent president's mentor, today his staunchest rival.

But the solidity of Bolivian finances is also a concern: the shortage of dollars is pressing and the erosion of the fixed exchange rate is a fact. If left floating, inflation would reach much less friendly figures and Arce, once recognized as the architect of the “Bolivian economic miracle” for his role as Minister of Economy in the Morales government (2006-2019), could suffer the final blow in his popularity ahead of the 2025 elections.

The lack of US currency is a long-standing problem for Bolivia and everything would indicate that, although there are external factors behind it, the government would have acted negligently.

LESS EXPORTS, GREATER DEPENDENCY ABROAD

“Bolivia has a problem with dollars for two reasons. The first one has to do with the drop in its exports in a strong and accelerated way, especially after the 'dry season' that we have experienced due to the stabilization of raw material prices that Bolivia exports and also due to the drastic drop in gas exports that allowed the government and, above all, the Central Bank to accumulate reserves. This has been noticed mainly since 2021,” says José Gabriel Espinoza, economist and former director of the Central Bank of Bolivia (BCB).

In turn, Espinoza criticizes that the MAS government has consumed international reserves without taking measures to stop this decline. To such an extent that the BCB does not have sufficient liquidity to face Bolivia's obligations, according to international organizations and risk rating agencies.

For example, in February 2024, Fitch Ratings downgraded the country's rating from B- to CCC, a decision that was rejected by the Bolivian government. At the time, Montenegro accused the rating agency of reducing its analysis to the fall in international reserves instead of considering the purchase of state gold from producers and marketers.

More recently, on April 27, the Minister of Economy had a similar reaction, when Moody's lowered Bolivia's rating from Caa1 to Caa3. “The report does not show an exhaustive evaluation of all the factors that influence the Bolivian economy, limiting its analysis to liquidity pressures in foreign currency, nor does it consider the concrete actions taken by the government to agree on these issues,” Montenegro declared in a institutional note.

Meanwhile, the fall in international demand for hydrocarbons, a trend that has harmed the exports of other countries such as Peru and Colombia, has accentuated Bolivia's dependence on imports. “In fact, a large part of the trade and fiscal deficit that Bolivia faces today has to do with fuel imports. Last year they reached US$3 billion, almost US$1 billion more than total hydrocarbon exports,” Espinoza clarified.

According to Felipe Encinas, investment director of BeFX and Rodrigo Castillo, general director of the Chilean broker, the close relationship between Bolivia's economic growth and natural gas exports has influenced the crisis by lowering the prices of this resource.

“The demand from its main buyers, such as Argentina and Brazil, has not been constant either. Furthermore, we can say that international reserves have been decreasing due to a larger trade deficit and capital outflow. This goes hand in hand with insufficient investment in strategic sectors, which limits the ability to generate dollars to very few sources,” say BeFX representatives.

If we add the constant need of the Bolivian industry to import inputs, as well as the high internal demand for fuel, we obtain a situation in which all the country's economic sectors are affected by the shortage of dollars.

Given this scene, Espinoza believes that although the sectors try to deal with the impasse by reducing dependence on imports, a productive reconversion is not feasible in the short term because it raises the prices paid by the final consumer. The impact is worsened if we consider that Bolivia is still facing the consequences of the COVID-19 pandemic, such as increased unemployment and a reduction in the income of the average citizen.

For Encinas and Castillo, US currency could return strongly if incentives are given to exports through mechanisms such as tax benefits. "On the other hand, bilateral agreements such as free trade agreements could be generated so that Bolivian producers can easily access other markets," they add.

In recent months, Arce's government has chosen to meet with some business sectors to establish agreements that limit the cost of currency for importers. From Espinoza's perspective, these meetings neglect the reality that this decreased cost reflects the lower availability of foreign currency.

This way, the Bolivian executive tries to limit the effects of the crisis, but the two real problems are not attacked: the scarcity of dollar sources and the unsustainability of the fixed exchange rate, which increases the demand for foreign currency. “The contraction of foreign exchange in Bolivia is not temporary, but rather structural,” states the economist.

The consequences are not long in coming: parallel currency markets emerge that cause some importers to acquire foreign currency at relatively low exchange rates and others to obtain much more expensive dollars. This is a very similar scenario already seen in other protectionist economies, ranging from Alberto Fernández's Argentina to Chavista Venezuela.

To remedy this problem, the former director of the BCB recommends that meetings between the government and the Bolivian business community focus on lifting restrictions on key exports such as gold and agroindustrial industries. This would facilitate the development of business activities that can substitute imports in the Bolivia.

TOWARDS A FLOATING EXCHANGE RATE?

Both Espinoza and the directors of BeFX agree on a way out of the Bolivian crisis: the current exchange rate must be abandoned. Encinas and Castillo are in favor of a transition to a floating exchange rate or raising the price of the fixed exchange rate, as long as precautions are taken.

“By releasing the currency, it will find its natural balance and more dollars should arrive in the country. If we add this to more pro-market measures, it could be seen that free trading after a period of initial volatility should find a balance many times lower than what is happening in Argentina. Now, if the release is carried out without pro-market measures, it could be a double-edged sword,” warn the members of the Chilean broker.

On the other hand, the former director of the BCB is more blunt with his forecast: “If the Central Bank decided to change the exchange rate regime, we would probably have to go to a floating one, since there is not enough foreign currency to adopt another exchange rate, which be it a different contribution or some mixed regime,” admits Espinoza.

This dead end would lead the Arce government to face an imminent rise in prices, which have been long repressed both by the exchange rate and by the hydrocarbon subsidy itself. Even if a free exchange rate of the dollar is adopted, fuel subsidies would have their days numbered.

“It is practically impossible for the government to sustain a fixed hydrocarbon price regime and, therefore, this would completely undermine the possibility of maintaining low prices in the economy. So, although it is necessary to review the exchange rate regime in Bolivia, the government's late response in accepting this crisis has led us to a very difficult point. Any measure taken will be complex for the market and we could have high costs for the economy in general,” laments Espinoza.

In the long term, BeFX experts assure that Bolivia is obliged to abandon dependence on hydrocarbons and diversify its economy. Following the example of neighboring Chile, a mining power that has boosted its agro-exports and sales of salmon in recent years, is an option.

On the other hand, in the political arena, Espinoza recognizes that the Arce administration is trying to “gain time” by minimizing the impact of the crisis and maneuvering to eliminate strong rivals like Morales. But the economist is skeptical about the possibility that the incongruence between the discourse and economic reality will not manifest before the elections.

“They also want to divide the opposition to try to gather the largest number of votes in their favor and thus force a second round. Although in any case, the electoral cost for the government is already being felt to the extent that the crisis is worsening among the population and it will be very difficult for the government to mitigate the impact if it does not want to undertake the structural changes that it is not very willing to do,” says Espinoza. Thus, the following months will be key to discover whether the creator of the “Bolivian economic miracle” will also be its executioner.