Bolivia seems immune to inflation, but for how long?

RIO DE JANEIRO, BRAZIL – While other countries are struggling with inflationary pressures that worsened with the war in Ukraine, Bolivia is an island in the continent with the lowest inflation for 14 years, thanks to a policy of subsidies and price controls. But experts urge caution and fear that the formula is at its limit.

The highest annual rate was recorded in 2008 when it reached 11.8% over the previous year. In the first quarter of this year, the accumulated rate was 0.39%, according to the state-owned National Statistics Institute (INE), and 0.77% in March compared to the same month in 2021.

According to experts, the low inflation is sustained by the fixed dollar exchange rate in place since 2011 and the subsidies on fuel and some basic foodstuffs in force since the government of Evo Morales (2006-2019), which his political heir Luis Arce has continued.

But the question is how much longer this economic policy can be maintained.

“The expiration date was 2014 when high commodity prices fell. The economic model was based on the price boom to redistribute income through bonuses and subsidies.

Those prices have been replaced by higher indebtedness and a growing fiscal deficit. The main pillar of the model has collapsed, but the government maintains it because the cost would be too high,” said financial analyst and university professor Jaime Dunn.

Those high prices and a “prudent macroeconomic policy” allowed the Bolivian economy to grow at an annual average of 4.9% between 2004 and 2014, and income redistribution reduced poverty from 59% to 39%. But now Bolivia is resorting to “high public spending and growing domestic credit that are increasing public debt and reducing the fiscal savings accumulated in the bonanza,” the World Bank said in a recent report.

Economy Minister Marcelo Montenegro assured that the policy would be maintained because it allows for a low deficit. “We have shown that the model has given concrete results in welfare issues, poverty reduction, and social inclusion,” he said in a recent report in the Legislative Assembly.

Willan Donaire, the Vice Minister of Industrialization, pointed out that the fuel subsidy “is manageable” even with current oil prices. The state subsidizes around 50% of gasoline and diesel market price. “Subsidies are not bad; people reinvest and reactivate the economy,” he said.

During the commodities boom, Bolivia accumulated more than US$15 billion in international reserves in 2014, half of its Gross Domestic Product. Now they are around US$4.8 billion, according to official reports. Meanwhile, the debt grew from US$4.9 billion in the year of Morales’ inauguration to the current US$26 billion, according to the private Fundación Jubileo.

“The limit will be until fiscal spending cannot be sustained and there are no more reserves to finance it. The government will try not to reach that limit because the political and social costs would be very high. The economy is managed with political, not economic criteria,” said Dunn.

Although many Bolivians remember the hyperinflation of the mid-1980s that plunged the country into bankruptcy, according to Dunn, the current situation is not comparable to that devastating crisis.

With information from Voz de América