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 2003–2005 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. The decline in commodity prices in late 2008, the lack of foreign investment in the mining and hydrocarbon sectors, and the suspension of trade benefits with the United States will pose challenges for the Bolivian economy in 2009.
Economic Policy over 12 Months
The government of Bolivia’s present policies 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 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 towards indigenous people. On 1 May 2006, Morales nationalized the hydrocarbons sector, and tightened the state’s grip on the country’s natural resources.
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 now that the country’s much disputed new constitution was passed on January 25, 2009.
Economic Performance over 12 Months
The latest IMF Report on Bolivia, dated January 29, 2009, paints a relatively favorable picture of its recent economic performance. The last few years have seen the country experiencing an export boom, led by the hydrocarbons and mining sectors. This supported an improvement in GDP growth, and a strengthening of the external and fiscal surplus positions. On the downside, inflation accelerated to 17% by mid-2008 (source: IMF), declining to 12% by the year-end on the back of falling commodity prices, and foreign investment remains low in the context of persistent political tensions.
High hydrocarbons export prices and changes in the hydrocarbons taxation regime in 2005–2006 boosted Bolivia’s current account to record surpluses. It also boosted fiscal revenue, shifting the public-sector accounts from deficits into substantial surpluses. In response, the Bolivian central bank gradually allowed the Boliviano to appreciate, which contributed to a significant reduction in deposit dollarization.
Real GDP growth picked up in 2008 to an estimated 5.9% (from an average of 4.7% in 2006–2007), boosted in part by the start of production at a large mining project. The external current account has recorded a surplus of 11% of GDP, and central bank reserves have risen to historical highs.
In 2007, the United States exported $277 million of merchandise to Bolivia and imported $362 million. Bolivia’s major exports to the United States are tin, gold, jewelry, and wood products, with textiles playing an increasingly important role. Its major imports from the United States are electronic equipment, chemicals, vehicles, wheat, and machinery.
Agriculture accounts for roughly 14.5% of Bolivia’s GDP. The amount of land cultivated by modern farming techniques is increasing rapidly in the Santa Cruz area, where climate permits two crops a year. Soybeans are the major cash crop. The extraction of minerals and hydrocarbons accounts for another 11% of GDP, and manufacturing around 17%.
According to the IMF, Bolivia’s very limited integration with international capital markets means that the current global crisis has mainly affected Bolivia through declines in commodity prices, and remittances. Capital inflows have been negligible for many years, except for foreign direct investment (FDI) in hydrocarbons and mining, thereby largely insulating Bolivia’s financial system from the external turmoil. However, current trends in commodity prices are certain to have a major impact on export receipts and related fiscal revenue, beginning in 2009, because of the delayed response of contractual gas export prices.
The government of Bolivia remains heavily dependent on foreign assistance to finance development projects.
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.
Tax Exemptions
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.
Statistics
GDP growth: 4.8% (2008)
GDP per capita: US$4,084 (IMF estimate, source USSD)
CPI: 11.5%
Key interest rate: 12.86% (December 31, 2007)
Exchange rate versus dollar: boliviano per US dollar: 7.253 (2008)
Unemployment: 7.5% (excluding rural unemployment)
FDI: US$6.88 billion
Current account deficit/surplus: Surplus: 11% of GDP (2008, US State Department)
Population: 9,247,816
Source: CIA World Factbook except where stated
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