Bolivia

Modest growth driven by domestic demand

Economic activity is expected to grow modestly in 2024. Household consumption will continue to drive economic growth, supported by public spending, but it may face challenges due to rising inflationary pressures. The stricter exchange controls leading to import compression could contribute to increased consumer price inflation. Additionally, the chronic shortage of foreign currency may force authorities to abandon the dollar peg, resulting in the depreciation of the Bolivian boliviano (a 10% loss of its value in the unofficial exchange market in October 2023) and putting further pressure on national inflation levels. However, many households engaged in artisanal gold extraction will benefit from the high price of this metal. Simultaneously, limited access to external financing and a concerning decrease in foreign exchange reserves will dampen public spending. Private investment will also be affected, slowing down due to still high borrowing costs and the government's substantial need for funds, directing credit opportunities toward financing the public deficit and prioritized sectors. Meanwhile, foreign trade is expected to have a negative impact on growth. Economic activity is likely to weaken in the two main neighboring and customer countries (Brazil, Argentina), which are increasingly turning to alternative sources of gas, potentially leading to a halt in gas sales to Argentina with the arrival of the new Argentine president. However, the lithium sector remains attractive to both national and foreign investors. In January 2023, the state-owned company YLB (Yacimientos de Litio Bolivianos), the sole local lithium producer, signed agreements with a Sino-Russian consortium for the construction of two lithium production plants, expected to be operational by 2025. The slowdown in global agricultural commodity prices (10% of exports in 2022) and gas prices (52%), the gold purchases by the central bank, and the stockpiling of more soybeans for domestic consumption will also weigh on exports. Additionally, the climatic phenomenon El Niño could disrupt crops, negatively impacting income from exports.

Significant twin deficits and low foreign exchange reserves

The current account turned into deficit from the second half of 2022 due to the decrease in the trade surplus. This surplus turned into deficit in 2023, driven by export underperformance caused by economic slowdowns in neighboring countries and China, as well as the decline in natural gas production. However, imports were contained by the Substitution by Industrialisation (SI) policy implemented in 2021 and the scarcity of foreign currency. In 2024, the negative trend is expected to continue. Gas production and sales are projected to further decrease (a 20% decline in annual export volume in 2023), while import constraints persist. On the other hand, the services deficit has reduced due to a recovery in tourist activity (137,000 more tourists in the first quarter of 2023 compared to the previous year) and a drastic reduction in maritime freight costs. Additionally, remittances from expatriate Bolivian workers are expected to remain dynamic, given the favorable employment market in Spain, Chile, and the United States. These remittances balance repatriations of profits by foreign investors. In 2023, the amount recorded under "errors and omissions" remained particularly high (3.7% of GDP in 2023), mainly due to gold smuggling, representing an average of 2.7% of GDP between 2019 and 2021.The distrust of foreign investors has been weighing on Foreign Direct Investment (FDI) and portfolio investments for several years, and their weakness does not cover the new current account deficit. Therefore, there is a need to dip into foreign exchange reserves, which were also tapped in March 2023 due to a currency flight. Since people had difficulties to obtain dollars from banks and exchange offices, the Central Bank of Bolivia (BCB) had to sell them directly to the public. Overall, the BCB's net reserves have continuously decreased, dropping from USD 15.5 billion in 2014 to only USD 1.7 billion in December 2023 (covering less than one month of imports). Reserves consist of gold (USD 1.6 billion), currencies (USD 166 million), and 41 million International Monetary Fund (IMF) Special Drawing Rights (SDRs). Given the historically low level of reserves, the domestic demand for dollars, and the need for external financing, monetary authorities revised the "Ley de Oro" (Gold Law) in May 2023 to increase short-term dollar availability. The monetisation of the BCB's gold reserves was authorized, including the direct purchase of this precious metal from mining cooperatives, to be transformed into ingots sold for currencies on international markets. President Arce also adopted another drastic measure and expressed the desire to use the Chinese Yuan for international trade. Multilateral, primarily regional, and bilateral loans, potentially collateralized with gold, should enable the government to maintain the peg to the dollar and continue its expansionary fiscal policy in 2024.

On the budgetary front, the public deficit has remained substantial. While the level of public spending remains high (fuel and food subsidies estimated at 3.7% of GDP) in anticipation of the 2025 general elections, gas revenues, on the other hand, have continued to decline. For 2024, the public deficit is expected to widen further. The government, as outlined in its General State Budget (PGE) that came into effect in early January 2024, plans to rely even more on public spending to support growth and limit inflation. The recurring public deficit has had repercussions on the central bank, a significant contributor to its financing in 2023 (one-third). Finally, the public debt, which significantly increased in 2020 due to the fight against Covid-19, is mostly denominated in foreign currencies (92% in dollars, 5% in euros, and 2% in yen). A depreciation of the Bolivian boliviano would increase the risk of the country defaulting. The external component of the debt (30% of GDP in June 2023), representing 37% of the total, is primarily long-term and owed to multilateral organisations (70%).

Strong political instability

The stability of President Luis Arce's government, from the left-wing party Movimiento al Socialismo (MAS), is likely to be compromised until the end of his term of office in October 2025. Since May 2022, MAS has been divided into two factions: on one side, the "arcistas," moderates who support President Arce, and on the other, the "evistas," radicals who back former President Evo Morales. Tensions escalated further in October 2023 when Morales and his supporters voted to exclude 30 members of MAS, including President Arce himself, with the aim to designate Morales as the party's leader and sole candidate for the upcoming 2025 general elections. The Supreme Court overturned this decision, as the evistas prevented President Arce and his supporters from participating in the vote, leading to anger and protests from pro-Morales factions. In the end, Morales is unable to run for a fourth term in the next presidential elections, as the Constitutional Court reinstated the limitation to a maximum of two successive or non-successive terms in December 2023. Nevertheless, Arce plans to organise new internal elections in 2024, but the process could lead to a split within MAS. The question remains as to which faction will retain control of the party and its infrastructure. Given that neither faction holds a majority in both chambers of Congress, the legislative agenda may be slowed down until 2025, unless they secure circumstantial support from the centrist opposition. Until the end of his term in 2025, to avoid widespread discontent, the president will make an effort to maintain public spending at a high level and peg the currency to the dollar with the help of multilateral and bilateral loans.

On the international front, Bolivia is strengthening its relationship with China. The plans for the exploitation of Bolivian lithium exemplify this diplomatic rapprochement. Similarly, relations with Brazil, under the leadership of its left-wing president Lula, are expected to remain extremely close. In November 2023, the Brazilian Congress approved Bolivia's accession to MERCOSUR

Last updated: February 2024