Crisis in Bolivia: the Central Bank no longer sells dollars, no more official statistics are published, and the Country Risk tripled

Bolivia is going through the worst economic crisis in 30 years.

The exchange rate system that ruled Bolivia for the last 15 years is going through an agonizing collapse, as many analysts predicted, due to the unsustainability of the policies of “21st-century socialism”.

Chronic and high fiscal deficits forced the Central Bank of Bolivia (BCB) to monetize a large part of the gap that could not be covered with external or domestic debt and to keep the exchange rate (and inflation expectations) fixed, constant interventions on the foreign exchange market were necessary.

But the BCB’s foreign exchange reserves reached a limit this week and are no longer sufficient to continue defending the exchange parity.

While the anchor of price stability is at risk, the Central Bank stopped publishing official statistics on reserves in February.

Likewise, given the brutal run against the Bolivian peso, the monetary authority announced the suspension of dollar sales from this Wednesday, April 12, which will be resumed next May 1, under a new system of numbered tokens.

Until then, the official entity will stop selling dollars freely, even though the president of the BCB, Edwin Rojas Ulo, had announced only two weeks ago that the institution would take charge of all the demand for foreign currency that might arise to “bring tranquility”.

The reversal of the announcements had the diametrically opposite effect and precipitated, even more, the foreign exchange run.

The Bolivian savers count as almost a fact that the exchange rate system will come to an end and that in the absence of tools to continue defending the fixed parity at 6.97 pesos per dollar, Luis Arce’s regime will be forced to validate a dramatic devaluation that would end up unanchoring inflationary expectations and the same price stability that has been preserved up to now.

The markets are discounting the same prognosis as savers. Bolivia’s sovereign bonds have been sinking systematically since January.

Securities with maturities to 2028 increased their yield to 28% when only three months ago, they averaged 6%.

The Country Risk index tripled in the first four months of 2023 and climbed to almost 2,000 basis points, when in January, it did not exceed 700 points.

The increase in the cost of foreign credit for both the public sector and private companies only exacerbates the recessive trend in the economy.

The main explanatory component in the rise of the Country Risk is the risk of devaluation, which until now was attenuated by the fixed exchange rate regime but which, after the run, is again emerging as a very real possibility.

The main pillars of the “21st-century socialism” model are falling apart amid the worst exchange rate crisis of the last decades.

The dismantling of fixed parity could lead to the return of chronic inflation to finance the fiscal deficit after years of relative stability.

With information from La Derecha Diario