The international economy faces a wave of global inflation. The war in Ukraine and the fiscal stimulus adopted by governments around the world in response to the pandemic have led to price increases not seen in decades.
In Latin America, the impact is especially painful.
According to a recent IMF (International Monetary Fund) report, “For a region with historically high levels of inequality, the erosion of real incomes due to rising food and energy costs will add to the economic pressure that vulnerable households already face.” .
Inflation in the five largest Latin American economies has reached the highest level in 15 years.
But so far, one South American country has managed to escape.
This is Bolivia, where the Consumer Price Index (CPI) has remained surprisingly stable. When the inflation curves of neighboring countries and much of the world soared, Bolivia registered a deflation of 0.1% in March this year.
While Bolivia’s 12-month inflation to March was just 0.77%, the IMF estimates it will reach around 10% for the entire region by the end of 2022, and the region’s major economies experience much stronger increases. (in rates per year):
Brazil: 11.3%Chile: 9.4%Colombia: 8.5%Mexico: 7.4%Uruguay: 9.4%
Neighboring Peru (6.8%) and Ecuador (2.6%) were also affected. And the stratospheric numbers of Venezuela (284.4%) and Argentina (55%) leave the two countries distant from all others.
“It’s very difficult to explain why Bolivia has such low inflation at the moment,” Roberto Laserna, director of the Center for the Study of Economic and Social Reality (Ceres), an analysis center based in La Paz, told BBC Mundo.
But there are several reasons.
Unlike the currencies of neighboring countries, which are sometimes subject to strong exchange rate fluctuations, Bolivia’s national currency has a fixed exchange rate against the US dollar, set by the then socialist government of Evo Morales for more than ten years (1 Bolivian = US$ 6.96).
While other countries in the region have had to implement exchange control mechanisms to support their currency and there are big differences between the official exchange rate and the real price of the American currency on the street, in Bolivia you can buy and sell dollars freely, and the exchange rate exchange rate is maintained thanks to the fact that the government supports it by injecting dollars from its reserves into the market.
Hugo Siles, economist and Minister of Autonomies of Morales (the ministry is responsible for the distribution of competences among subnational entities, such as departments, municipalities and autonomous indigenous communities), told BBC Mundo that “the immense resources obtained from the nationalization of hydrocarbons by the former -President Morales allowed to follow a policy of valorization of the Bolivian that has contributed to the low inflation”.
The government of current President Luis Arce maintained Morales’ policy of exchange rate parity. The relative strength of the currency, compared to neighbors such as Argentina, reduces the cost for Bolivia of importing goods.
In the current context of rising food and oil prices on international markets, a strong currency is particularly advantageous.
Furthermore, as José Luis Hevia, a researcher at the Milenio Foundation, says, “well-anchored expectations regarding the exchange rate made people trust the national currency”, another factor that favors price stability.
Brazil adopted a fixed exchange rate between 1964 and 1968, in 1986 and again during the Real Plan between 1994 and 1999. Despite allowing better control over inflation, the model can cause a decrease in exports and an increase in imports due to the artificial appreciation of the coin.
In Brazil in the 1990s, for example, the increase in imports caused by the fixed exchange rate contributed to the closure of industries, with loss of jobs in the sector.
Since 1999, the country has adopted the floating exchange rate model, in which the currency quotation varies according to market supply and demand, without direct intervention by the Central Bank. The disadvantage of this model is that excessive currency devaluation can generate inflation.
Export subsidies and restrictions
Producers and consumers around the world are being hit by rising fuel and food prices.
Bolivians have not felt this blow so far.
In Bolivia, the price of gasoline remains stable at around US$ 0.50 per liter and basic food items have also not increased significantly.
Experts point to generous government subsidies as the cause.
Although oil costs continue to soar in international markets, the state monopoly that distributes gasoline in Bolivia has fully absorbed this impact by not changing its subsidized price.
Consequently, agricultural producers were not pressured to pass on to final consumers the increase in their production costs resulting from the increase in fuel prices, as occurred in other countries.
The country also has mechanisms that help contain inflation in the food sector, such as the Empresa de Apoio à Produção de Alimentos (Emapa), a state-owned company that provides financial support to agricultural producers, and the Revolving Fund for Food Security, which imports food. using public resources and distributing them in the market to keep prices low.
In one of its recent actions, the Fund injected 10,000 tonnes of wheat flour into the market to prevent the price of bread from rising.
Lian Lin, an analyst with the Intelligence Unit of the British magazine The Economist, assures that “these things keep food inflation low and they represent a large part of the total Consumer Price Index”.
Another brake on price increases implemented by the government is the export certificates that are required for all products sold abroad.
When their supply in Bolivia at a price that the authorities consider fair is not guaranteed, they can deny the export certificate, thus forcing an increase in supply in the domestic market that also alleviates inflationary pressures.
Brazil adopted controlled fuel prices mainly during the government of Dilma Rousseff (PT), as a way to mitigate inflation. The measure, however, caused losses to Petrobras.
Since 2016, the company has adopted the so-called international parity price (PPI), with fuels varying according to the variation of the barrel of oil in the international market and the exchange rate, which leaves the country subject to international fluctuations.
The country has also abandoned in recent years – mainly since 2016 – its policy of food stocks by Conab (National Supply Company), an instrument that helped control prices in the domestic market.
How long can price stability in Bolivia last?
The key question is how long Bolivia will continue to benefit from exceptional price stability in a world where inflation has become the main enemy of central banks and one of the main concerns of the population.
José Luis Hevia predicts that this year there will be “a rise in inflation due to the international context, but it will be relatively moderate”.
“But everything will depend on how long the current model can be sustained”, adds the expert.
Many economists warn of the adverse effects of the Bolivian government’s subsidy policy and doubts about the sustainability of public accounts are growing.
A recent World Bank report estimates that Bolivian public debt will approach 80% of GDP (Gross Domestic Product) by the end of 2022, more than ten percentage points above the regional average.
The Ministry of Economy and Finance responded with a statement in which it assured that the debt-to-GDP ratio stood at 43.6% in February, “below the limits established as recommended”.
The Executive also stated that the “explosive increase in domestic debt recorded in 2020” was caused by the interim government presided over by Jeanine Áñez, who took over the country after the fall of Evo Morales and is currently in prison accused of terrorism, sedition and conspiracy.
Hevia indicates that “the fixed exchange rate has been very effective in controlling inflation, but it has undesired effects on the economy because it discourages local production by making imports cheaper and requires a large set of external resources to sustain it”.
And in this use of resources to support the national currency, there has been a noticeable increase in the fiscal deficit and a sustained decline in the international reserves of the Central Bank of Bolivia for a long time.
Until 2015, Bolivia accumulated revenues mainly from gas exports and there were up to US$ 15 billion in Central Bank reserves. But this value has been falling and in December 2021 it was US$ 4.7 billion.
With a fiscal deficit that, according to Central Bank projections, will end the year at 8.5% of GDP, it is worrying that the country continues to consume its reserves to pay the subsidies that keep prices under control and that should cost the State around $4 billion a year.
There are other factors of concern. Roberto Laserna, from Ceres, states that “the nationalization of hydrocarbons generated a large volume of resources in the short term, but in the medium term it discouraged foreign investment”.
This has resulted in years of falling gas production and Bolivia has failed to meet some of its supply commitments to neighboring Argentina, with which new agreements are being negotiated.
Former minister Siles sees no cause for concern. “Bolivia sells gas, electricity and raw materials such as soy or minerals, whose price on the international market is also rising, which will bring more resources.”
And he predicts: “The government will not eliminate subsidies or change the exchange rate because that would mean transferring the burden to the vast majority of the population.”
Not everyone is convinced.
Lian Lin believes that “Bolivia will still have some time to wind down the gas price, but in the future the exchange rate will have to be reduced at least a little bit and there will be some sort of gradual devaluation and cuts in government programs.”
Time will tell which prediction is correct.
At the moment, the last issue of Bolivian debt, last February, was at an interest rate of 7%, an increase in the yield required for bonds that is generally associated with lower investor confidence and that highlights the greater difficulty that the State Bolivian finds now to finance itself.