Bolivia

major macro economic indicators

(e): Estimate (f): Forecast

Risk assessment

Slowing activity and currency confidence crisis

In 2023, the economy is expected to expand at a slower pace. Household consumption should drive growth amid durably moderate inflation. Consumer price pressures have been contained due to the boliviano’s peg to the USD, subsidies, and price controls on food and fuel. Nonetheless, the country´s foreign currency reserves are drying up rapidly, raising the risk of leaving monetary authorities with no other option than to abandon the peg to the USD, thereby causing significant depreciation of the BOB and, therefore, a sharp rise in consumer prices. Concomitantly, export growth would lose steam owing to weaker activity with its main trade partners (namely Brazil and Argentina) and to some softening of agriculture, mineral hydrocarbon commodity prices (respectively representing 28%, 10% and 52% of 2022 foreign sales). This situation should prevail despite the government´s efforts to boost natural gas exports through Decree No. 4794 of September 2022, which caps the use of gas to power onsite operations by industrial recipients. The decree aims to avoid a sharp deterioration of the energy foreign trade balance as domestic hydrocarbon production has slid in recent years. In addition, public investment growth will be restricted by the limited fiscal leeway, while stricter global borrowing conditions will curb private investments. While Bolivia is host to the world´s largest lithium reserves, it remains underexplored and untapped. In January 2023, the government signed a deal with a consortium, including the Chinese battery producer Contemporary Amperex Technology Co, to help tap the country’s large reserves.

Slow fiscal consolidation and an expected external shortfall

The fiscal balance will remain in deep deficit although it is expected to mildly improve in 2023. Tax revenues should observe a limited increase since the positive contribution of some economic growth will be partially watered down by relatively lower average commodity prices and faltering gas production. In addition, still high subsidies (including an estimated 3.7% of GDP in fuel subsidies) and rising borrowing costs will limit stronger fiscal consolidation. Financing the deficit largely relies on domestic sources, notably the central bank which contributes one-third of the amount, which has led to currency depreciation pressures. However, with a fixed exchange rate, the counterpart has been the slump in international reserves.
The current account should switch to a deficit in 2023, chiefly driven by the conversion of the trade surplus in 2022 into a deficit this year. This is underpinned by the fact that domestic demand is decelerating at a slower pace than the main export markets and due to relatively lower commodity prices. In addition, expatriates’ remittances (3.6% of GDP in 2021) could also fall as the job market gradually deteriorates in the main origin of resources (Spain, Chile, US). By contrast, the services deficit should narrow as freight costs curb and tourism flows continue to recover (7% of GDP before COVID-19). In addition, the primary income deficit should also improve somewhat, underpinned by lower profit repatriation by foreign companies. Regarding foreign direct investment, its inflow will remain hampered by the poor business environment. In addition, Bolivia has had significant amounts recorded as errors and omissions in its balance of payments (averaging 2.7% of GDP between 2019 and 2021). Importantly, the country has been experiencing a currency confidence crisis since March 2023, when locals began to face difficulties in acquiring the greenback in banks and exchange offices. The central bank, in response, started to sell USD directly to the public, and online appointments are required well in advance. Overall, gross foreign currency reserves have largely diminished from a peak of USD 15.5 billion in 2014 to barely USD 3.5 billion in February 2023 (covering 3.5 months of imports). Even more worrisome, net reserves (in hard currency) stood at only USD 372 million, according to the last available figure. The remaining amount consists of gold reserves (USD 2.6 billion) and USD 538 million in Special Drawing Rights (SDR) from the IMF. While the central bank has stopped releasing updated foreign currency reserves statistics since last February, end-March 2023 data from the IMF indicated that Bolivia had only USD 53 million left in SDRs. Recent steps taken by the authorities aiming to shore up reserves should only bring short-term relief. In May 2023, Congress approved the so-called “Gold-Law”, allowing monetisation of gold reserves. The law also enables the monetary authority to buy gold from mining cooperatives and convert it into gold currency or bullion to trade on international markets. Concomitantly, President Arce also expressed the willingness to use the Chinese yuan for international trade. Regarding the external debt, Bolivia’s ability to meet debt payments may come under strain despite its relatively low external public debt (30% of GDP), which is mostly long-term and owed to multilaterals (20% of GDP). External private bondholders account for only 5% of GDP and encompass debt services of USD 300 million in 2023.

Tired political environment

President Luis Arce, leader of the left-wing Movimiento al Socialismo party (MAS), holds a majority in both houses of Congress. Nevertheless, Arce is facing recurrent protests over social issues, controversial arrests of political opponents and frequent clashes between the administrative capital La Paz and the agricultural hub Santa Cruz. In addition, the MAS has also split into factions since May 2022: one aligned with former President Evo Morales (2006-2019), another with Arce, and a third linked to current Vice-President David Choquehuanca. Overall, the persistently fragile political environment is hampering governability and the passing of reforms.

Last updated: September 2023