Economy and Trade
Landlocked Bolivia is one of the poorest and least-developed countries in Latin America, with almost two-thirds of the population living below the poverty line, and literacy levels low in many rural areas. Following a disastrous economic crisis during the early 1980s, reforms spurred private investment, stimulated economic growth, and cut poverty rates in the 1990s. The period 2003–05 was characterized by political instability, racial tensions, and violent protests against plans—subsequently abandoned—to export Bolivia’s newly discovered natural gas reserves to large, northern hemisphere markets. In 2005, the government passed a controversial hydrocarbons law that imposed significantly higher royalties, and required foreign firms then operating under risk-sharing contracts to surrender all production to the state energy company. Increased export volumes of gas and mining and the increase in commodities prices led to a boom during 2005–08, when real GDP growth averaged 5.2%. The external and fiscal positions strengthened sharply during these years. Growth slowed significantly in 2009 but the economy still performed relatively well.
Economic Policy over 12 Months
Understanding the policies pursued by the present government of Bolivia requires some knowledge of Bolivia’s political history to give them their appropriate context. Bolivia’s political past until the mid-1980s was tumultuous, with civilian rule alternating with military coups. When the former president, Paz Estenssoro, took office in 1985 for the fourth time, the country faced hyperinflation with prices growing at 24,000%. Social unrest, chronic strikes, and drug trafficking seemed endemic to the country. His rule marked something of a turning point, and the country’s economy underwent a series of reforms that were continued by the new administration of Paz Zamora in 1989, and that of President Gonzalo Sanches de Lozada in 1993.
Relatively robust growth continued through to the mid-1990s, when the economy lost its way again under General Hugo Banzer. Sanches de Lozada returned to power, following a four-year economic recession, in the 2002 elections. Popular unrest over a decision to export Bolivia’s new-found gas reserves forced his resignation, and in 2005 Juan Evo Morales Ayma came to power on a platform pledging to nationalize the country’s hydrocarbons, and alleviate poverty and discrimination toward indigenous people. On May 1, 2006, Morales nationalized the hydrocarbons sector, and tightened the state’s grip on the country’s natural resources. In December 2009 President Morales was re-elected for a second term with more than 60% of the vote, easily defeating his opponents.
Bolivia is rich in metals, including tin, zinc, tungsten, antimony, silver, iron, lead, and gold, and has the second-largest natural gas reserves in South America. However, the nationalization program has starved the mining and hydrocarbons sectors of much-needed foreign investment, and gas production has stagnated. Bolivia is now caught in a position where it has commitments to ramp up gas exports to both Brazil and Argentina to levels that will make it impossible, at current production rates, for it to meet domestic demand (source: US State Department).
Bolivia’s trade with neighboring countries is growing, in part because of several regional preferential trade agreements. The Bolivian government is also strongly focused on developing markets through the Bolivarian Alternative for the Americas (ALBA), whose members include Venezuela, Cuba, and Nicaragua.
A bilateral investment treaty (BIT) between the United States and Bolivia came into effect in 2001. Although the Morales government has stated that it will respect all current BITs, officials have also publicly announced that they will re-open discussions, after the country’s much disputed new constitution was passed on January 25, 2009.
Economic Performance over 12 Months
The latest International Monetary Fund (IMF) report on Bolivia, dated January 21, 2010, paints a relatively favorable picture of the country’s recent economic performance, and praises the authorities for their continued sound macroeconomic management and effective policy response to mitigate the impact of the global crisis. The report points out that Bolivia’s economic growth during the crisis was among the highest in Latin America. Bolivia’s economy grew by 3.36% in 2009, according to official figures, as the construction and mining sectors expanded despite the global economic slowdown.
The central bank forecasts GDP growth of 4.5% in 2010 and inflation of 4.5%. The IMF is also bullish about Bolivia’s prospects, projecting real GDP growth of 4% in 2010, reflecting mainly a recovery of hydrocarbon exports and public investment, and still favorable terms-of-trade. The IMF anticipates that inflation will rise to around 4%. The external current account surplus is expected to narrow moderately to 2.5% of GDP, as a result of increased domestic consumption, while the overall balance of payments is projected to remain positive, leading to a further accumulation of international reserves.
In 2009, fiscal policy focused on protecting social and infrastructure spending, while the central bank allowed interest rates to decline to almost zero to support credit demand. The combined fiscal surplus narrowed by around four percentage points of GDP to an almost balanced position in 2009, largely due to lower hydrocarbon and tax revenue. Lower food prices and a slowdown in domestic demand contributed to a sharp decline in the 12-month inflation rate, which declined to 0.3% by the end of 2009. Lower commodity exports and remittances led to a sharp narrowing of the external current account surplus to about 3.5% of GDP, compared with 12% of GDP in 2008. The global crisis sharply reduced demand for natural gas from Bolivia’s main buyer, neighboring Brazil.
The financial system was barely affected by the global crisis owing to limited integration with international capital markets. With negligible foreign credit lines in banks’ balance sheets and lack of exposure to impaired foreign assets, banks have remained liquid, profitable, and well capitalized, according to the IMF.
Support for Inward Investment and Imports
Bolivia sits at the heart of Central America, making it a strategic geographic location for foreign investors, who have the same rights, guarantees, and legal framework as local investors. However, investing in Bolivia is difficult, and potential investors will need to engage local legal, market, and financial experts to assist them.
Bolivia has a populist government with wealth redistribution on its agenda. The tax regime is not particularly favorable to inward investment, and the country’s recent nationalization of its oil and gas fields will be a worry to future investors.
GDP growth: 3.36% (official, 2009)
GDP per capita: US$4,600 (2009 est.)
CPI: 0.3% (official)
Key interest rate: 13% (December 31, 2008)
Exchange rate versus US dollar: Bs7.0699 (2009)*
Unemployment: 8.5% (2009 est.)
Current account deficit/surplus: US$725 million (2009 est.)
Population: 9,947,418 (July 2010 est.)
* Bolivian boliviano
Source: CIA World Factbook except where stated