Bolivia: Dangers of economic instability


The consequences of the global economic and financial crisis is beginning to hit the Bolivian economy, the poorest in South America.

Bolivian authorities have announced measures to avoid an uncontrollable situation in regards to economic policy in the use of reserves and resources, according to President Evo Morales.

Morales has reiterated that "the Bolivian economy is 'shielded' against the financial and productive crisis."

The drop in oil prices, with a strong impact on natural gas (Bolivia's main export) and minerals, after a boom that reactivated mineral exploitation in recent years, have placed the Bolivian economy on red alert.

The reduction in remittances from Bolivians living in Europe and the US, as well as foreign investment, is also threatening the economy's stability.

Faced with this threat, the national banking system has adopted a series of measures, such as increasing the legal reserve, a caution on credits and the regulation of the local financial market.

A point of reference is that, in the past three years, Bolivia has had a significant level of income derived from exporting minerals, hydrocarbons, manufactured goods and soybean — as well as remittances sent by Bolivian migrants and donations and loans made by the Venezuelan government.

Also, several countries, such as Japan and others in the European Union, have forgiven bilateral debt, relieving the pressure on hard currencies and monetary reserves.

The financial crisis that has the US, and other European and Asian powers, on tenterhooks, so far has not put in check the macroeconomic equilibriums in Bolivia. The most important market for Bolivian exports are in the Latin American region.

A case in point is the gas exports to Brazil and Argentina, and soybean exports to Colombia and Venezuela.


Bolivia has also recuperated a significant portion of income from hydrocarbons since the Morales government's 2006 o nationalisation of natural gas reserves that were previously in the hands of multinational companies.

This has resulted in the flow of more than US$4 billion into the treasury, creating a "financial cushion" to external threats.

On the other hand, the relatively low integration of the Bolivian economy with large international economic and financial flows, the practically non-existent stock market and the existence of an agriculture based on small and medium producers, allows for the maintenance of the minimum conditions for food supply.

The data that the authorities show to reassure the population and respond to liberal economists and the mainstream media are the following: currency reserves reached a record of almost $8 billion (a high figure in relation to the size of the Bolivian economy), annual GDP growth was 5% in 2007 and 2008, a 2% surplus in fiscal accounts, and the maintenance of exports.

A unique situation occurred in Bolivia regarding the currency, with the revaluation of the boliviano against the US dollar.

In 2006, $1 was exchanged for 8 bolivianos; now this relationship has reached $1 for 7 bolivianos, causing savings in bolivianos to displace those made in US dollars. However, some economists have warned that a new devaluation of the boliviano could occur.

Despite the suspension of the Andean Custom Preferences and Drug Eradication Agreement by the US government, which had allowed Bolivia to export manufactured products to the US in exchange for the country pursuing policies to control and repress coca producers and cocaine traffickers, the effects have not been as dramatic as first assumed.

This is due to the governments of Brazil and Venezuela agreeing to open their markets to those products.

Coordinated actions

The coordinated actions between several Latin American countries — for instance through the announced formation of the Bank of the South (Bancosur) and the possibility of creating a common currency — have helped to reduce the impact of the crisis in Bolivia.

However, it is not ruled out that in the coming months the situation could become more difficult due to reduced demand for minerals.

On the other hand, the interest of European and Japanese companies in the exploitation of lithium from Salar de Uyuni, the most important world reserve of this strategic mineral, and the beginning of exploitation of iron in the Mutun region by the Jindal corporation from India, have opened the possibility of maintaining and even increasing foreign investment in the medium term.

Government authorities have announced measures of control over, and cautious management of, public instruments to maintain macroeconomic equilibrium. However, the Central Bank decision to deposit around $3 billion of monetary reserves in banks in the imperialist centres, where the risks are currently high, raised eyebrows.

Morales, in announcing that the maximum effort will be made to counter the crisis's social effects, has stated that the economic integration of Bolivia through the Bolivarian Alternative for the Americas (ALBA — a trade agreement initiated by Cuba and Venezuela to promote pro-people integration), the Union of South American Nations (Unasur) countries and the bilateral relationship with countries of the region, will prevent the alteration of the existing channels of the economy.

[Translated by Gonzalo Villanueva.]