Bolivia turns to tax-and-spend model as ‘economic miracle’ fades

La Paz — Bolivia’s “economic miracle,” a boom in the 2000s and 2010s in which years of state spending lifted millions of people into the middle class, is creaking, a warning sign to the wider region battling high inflation, shrinking government coffers and tepid growth.

For years the Andean country enjoyed one of South America’s fastest economic growth rates as a boom in demand for natural resources — mainly gas — helped the former leftist government of President Evo Morales fund social programmes and cut poverty.

But over the last decade gas production has tumbled by about a third, dragging down foreign currency reserves from over $15bn in 2014 to $3.5bn in February, when the central bank abruptly stopped publishing reserves data.

The drain in hard currency sparked panic earlier this year, with Bolivians forming lines outside banks to withdraw dollars. Bond yields spiked sharply and in May the government was forced to sell half of its $2.6bn gold reserves to raise cash.

“In practical terms, Bolivia ran out of liquidity,” said economist Jose Gabriel Espinoza, a former central bank director.

Bolivia’s government points to relatively robust economic growth of 3.5% in 2022 and inflation that remains low at about 3%, partly due to costly government fuel subsidies.

“The Bolivian economy is stable, it is growing,” economy minister Marcelo Montenegro told reporters this month.

But Bolivia’s dwindling reserves and exports highlight a common vulnerability in Latin America, where most economies rely highly on commodities that are sensitive to see-sawing global prices, weather events and the political mood.

A major drought in Argentina has hammered grains output and reserves, imperilling a $44bn debt deal with the IMF. In the world’s second-largest copper producer, Peru, mining investment is set to fall 19% this year and production has plateaued amid ongoing political unrest.

Bad spender

Alberto Ramos, Latin America economist at Goldman Sachs, said governments in Brazil, Chile and Colombia are also increasingly adopting policies of high taxes and public sector spending.

“The model is now shifting towards a very big state, a tax-and-spend approach,” he said. “That is problematic given that the public sector is a very bad spender. That leads to macroeconomic underperformance … and you could eventually end up in a crisis.”

The Bolivian government has sought to diversify the economy away from its overreliance on gas by spurring production of soy and beef, while the gold sell-off will help bridge a public budget shortfall — but only for a short while.

“It has calmed people a bit … but that amount [gained from the gold reserves sale], $1.3bn, is not enough for Bolivia,” said local financial analyst Jaime Dunn. “We are in a moment of tense calm, where we have to see what will happen in the coming weeks.”

At the start of the year some banks experienced runs to withdraw deposits amid fear over sliding reserves, while black market demand for dollars spiked, putting pressure on the boliviano’s currency peg, which has been just less than seven per dollar since 2008.

In April, the government was forced to put major lender Banco Fassil into administration, though authorities said it was an isolated case due to mismanagement.

Moody’s ratings agency cut its rating on Bolivia’s sovereign debt in March, saying foreign exchange issues put “macroeconomic stability at risk for Bolivia in general”.

Sovereign bond yields soared from less than 10%, where they had been for years, to a peak of more than 40%, before settling about 25%.

Espinoza, the former central bank director, said the recent turbulence is putting at risk the big-spending “economic miracle” of Morales’ ruling socialist MAS party. The government will have to shift tactics, he said.

“Otherwise it will be very difficult for us to reach a scenario where macroeconomic accounts stabilise,” he said. “If you don’t solve this we are going to keep on just buying time. And at some point the gold is going to run out.”

Reuters