The international economy is facing a global wave of inflation. Fiscal stimulus adopted by governments around the world in response to the war and pandemic in Ukraine has led to price increases not seen in decades.
In Latin America, the impact is particularly 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 increase the economic pressure currently facing vulnerable households.” .
Inflation in the five largest Latin American economies reached the highest level in the last 15 years.
But so far, one South American country has managed to escape.
This is Bolivia, where the Consumer Price Index (CPI) remains surprisingly stable. Bolivia registered a deflation of 0.1% in March this year, as inflation curves in neighboring countries and much of the world rose.
While Bolivia’s 12-month inflation was just 0.77% through March, the IMF predicts it will reach 10% for the entire region by the end of 2022, with the region’s major economies experiencing much stronger gains (annual rates):
- 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. The stratospheric numbers of Venezuela (284.4%) and Argentina (55%) set the two countries apart from the others.
“It’s very difficult to explain why Bolivia has such low inflation right now,” Roberto Laserna, director of the Center for Economic and Social Reality Studies (CERES), a La Paz-based analysis centre, told BBC Mundo.
But there are several reasons.
currency parity
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 for more than a decade by the then socialist government of Evo Morales (1 Bolivia = US$6.96).
While other countries in the region have had to implement exchange control mechanisms to support their currencies, and although there are large differences between the official exchange rate and the real street price of the American currency, in Bolivia you can buy and sell dollars freely and the exchange rate is maintained by the State’s backing by injecting dollars into the market from its reserves. .
Hugo Siles, economist and Morales Minister of Autonomy (responsible for the distribution of powers between subnational organizations such as the ministry, ministries, municipalities and autonomous indigenous communities), told BBC Mundo: Former President Morales has encouraged Bolivia to pursue a valuation policy that contributes to low inflation. allowed”.
The government of current President Luis Arce continued Morales’ policy of exchange rate parity. The relative strength of the currency compared to its neighbors such as Argentina lowers Bolivia’s cost of importing goods.
In the context of rising food and oil prices in international markets, a strong currency is particularly advantageous.
Also, as José Luis Hevia, a researcher at the Milenio Foundation, another factor supporting price stability, “solid expectations of the exchange rate made people trust the national currency”.
Brazil adopted a fixed exchange rate between 1964 and 1968, in 1986, and again during the Real Plan between 1994 and 1999. Although the model allows for better control over inflation, it can cause exports to decrease and imports to increase due to artificial valuation. coin.
For example, the increase in imports caused by the fixed exchange rate in Brazil in the 1990s caused the closure of sectors and the loss of jobs in the sector.
Since 1999, the country has adopted the floating exchange rate model, where the exchange rate changes according to market supply and demand without the direct intervention of the Central Bank. The disadvantage of this model is that excessive currency devaluation can create inflation.
Export subsidies and restrictions
Producers and consumers around the world are affected by rising fuel and food prices.
Bolivians have not felt this blow so far.
Gasoline price in Bolivia remains stable at around $0.50 per liter and staples have not increased significantly.
Experts point to generous government subsidies as the reason.
Although oil costs continue to rise in international markets, the state monopoly distributing gasoline in Bolivia has completely eliminated this effect by not changing its subsidized price.
As a result, agricultural producers did not have to reflect the increase in production costs due to the increase in fuel prices to final consumers, as in other countries.
The country also has mechanisms that help contain inflation in the food sector, such as Empresa de Apoio à Produção de Alimentos (Emapa), a state-owned company that provides financial support to agricultural producers, and the Food Security Revolving Fund. It imports food, uses public resources to keep prices low, and distributes it to the market.
In one of its latest actions, the fund injected 10,000 tons of wheat flour into the market to prevent bread prices 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 represent a large part of the overall Consumer Price Index.”
Another brake on the price increases implemented by the government is the export certificates required for all products sold abroad.
In Bolivia, when their supply is not guaranteed at a price that authorities consider fair, they can refuse export certification, thus forcing an increase in supply in the domestic market, which in turn can alleviate inflationary pressures.
Brazil adopted controlled fuel prices mainly during the Dilma Rousseff (PT) government as a way to curb inflation. However, the measure caused Petrobras to incur losses.
Since 2016, the company has adopted the so-called international parity price (PPI), with fuels varying according to the change of oil barrels in the international market and the exchange rate, which exposes the country to international fluctuations.
The country has also in recent years – especially since 2016 – abandoned Conab’s (National Supply Company) food stocks policy, a tool that helps control prices in the domestic market.
How long can price stability last in Bolivia?
The key question is how long Bolivia will continue to enjoy 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 this year “there will be an increase in inflation due to the international context, but it will be relatively modest”.
“But everything will depend on how long the current model can be sustained,” adds the expert.
Many economists are warning of the negative effects of the Bolivian government’s subsidy policy, and doubts are growing over the sustainability of public accounts.
A recent World Bank report predicts that Bolivian public debt will approach 80% of GDP (Gross Domestic Product) by the end of 2022, 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 was “below established limits as recommended” at 43.6% in February.
The executive also stated that the “explosive increase in domestic debt recorded in 2020” was due to the interim government headed by Jeanine Áñez, which took over the country after the fall of Evo Morales and is now accused of terrorism, insurgency and terrorism. complo.
Hevia notes that “fixed exchange rates are very effective in controlling inflation, but have undesirable effects on the economy as it cheapens imports, discouraging local production, and requires a large set of external resources to maintain it.”
And in this use of resources to support the national currency, there has long been a noticeable increase in the fiscal deficit and a sustained decline in the international reserves of the Bolivia Central Bank.
By 2015 Bolivia had revenues predominantly from gas exports and had up to US$15 billion in Central Bank reserves. However, this value is declining, reaching US$4.7 billion in December 2021.
With a fiscal deficit that will close the year at 8.5% of GDP according to Central Bank estimates, it is worrying that the country continues to deplete its reserves to pay for subsidies that keep prices in check and should cost the State about $4. billion per year.
There are other factors of concern. Ceres’ Roberto Laserna notes that “nationalization of hydrocarbons generates a large amount of resources in the short term, but deters foreign investment in the medium term”.
This has resulted in years of gas production falling, and Bolivia has been unable to honor some of its supply commitments with neighboring Argentina, where new deals are being negotiated.
Ex-minister Siles sees no cause for concern. Bolivia sells raw materials such as gas, electricity and soybeans or minerals on the international market, which will also rise in price and bring in more resources.”
And he predicts: “The government will not eliminate subsidies or change the exchange rate because that would mean shifting the burden to the vast majority of the population.”
Not everyone was convinced.
Lian Lin believes that “Bolivia will still have some time to lower the gas price, but in the future the exchange rate will have to be at least slightly lowered and there will be a kind of gradual devaluation and cutback in government programs.”
Time will tell which guess is correct.
Currently, the last issuance of Bolivian debt last February was at a 7% interest rate, an increase in the required yield for bonds that is often associated with lower investor confidence and highlights the greater challenge facing the State of Bolivia. now to finance yourself.
source: Noticias
