October 29, 2017

Summary: The Bolivian economy 2016 to 2017

Noted in prior assessments, Bolivia has profited in the past from the boom in commodity prices, especially higher prices in natural gas, Bolivia's most important natural resource. The country was able to accumulate a substantial amount of financial resources, something that has been useful to weather more recent times when those prices have declined. Currently, Bolivia has been experiencing a more delicate economic situation, where past surpluses have turned into deficits and the government having to rely more on those reserves and on credit. While Bolivia has been growing at decent rates and is forecasted to continue growing, the economic future has turned a bit more gray.

The government follows two plans in order to implement its agenda. One plan, which is more like a framework, is the so called Patriotic Agenda 2025, issued five years ago. The plan calls for the eradication of poverty and improvements in access to health and education as well as government-led economic development. A second plan, the five year Economic and Social Development Plan, emphasizes public investment to spur growth. That investment is aimed at industrializing the country through the creation of national industries, such as cement, carton or paper factories. Other aims are the subsidization of necessity goods to keep prices accessible and social transfers. 

All those efforts have been burdening the economy in several ways. To start, we take a look at GDP growth. Continuing the trend my prior analysis identified (see here and here), growth in the Bolivian economy has been slowing down. Not only several international organization such as the IMF, the World Bank and the CEPAL, but also independent think tanks within Bolivia and, to a certain extent, the Bolivian government itself, have confirmed this trend. So is, that the Fundacion Milenio (independent Bolivian think tank) reports in its latest assessment of the Bolivian economy, that growth for 2016 has been 4.3 per cent, whereas the same in 2015 was 4.9 per cent and in 2014, 5.5 per cent. For 2017, the expectations between the Bolivian government and the rest take different directions. Similarly, the government expects a 4.7 per cent growth, while the IMF and the CEPAL estimate a rate of growth of 4 per cent and the World Bank estimates a 3.5 per cent growth. 

The main factors for this slower economic development continues to be the already reported breakdown of exports, of which, the predominant cause is the fall in the volume of natural gas exports to Brazil and Argentina. The volume of natural gas sales to both countries in 2015 was 49 million cubic feet, while in 2016 this fell to 43 million cubic feet. For an economy, such as the Bolivian economy, dependent on the sale of natural resources, the fall of prices in international markets of natural gas and oil has meant a serious economic challenge. 

The most immediate effect of this decline in exports has been, the decline in public investment. The government has been feeling the pressure of having less financial resources available. As such, it has had to make difficult decisions as to which projects to continue financing, which new projects to start financing and which ones to stop financing. In 2015, public investment grew at 8.5 per cent, while in 2016 growth was registered at 2.4 per cent. This slow in growth was much more felt at the departmental level of government.

Despite of the negative trend, some sectors of the economy have experienced some relative growth. For example, the financial services sector has been growing at a 7.9 per cent and the construction sector at a 7.8 per cent in 2016. Agriculture has grown in the same year at a 3.1 per cent, in spite of the harshest drought in 25 years. Finally, the mining sector -especially small and cooperative enterprises- has been growing at a 4.7 per cent. 

Another factor in the slowing down of the economy has been the hesitant domestic consumption, which up until recently was a stabilizing factor for the economy, but since 2015 it showed a decline from 5.2 per cent in 2015 to 3.4 per cent in 2016. This reduction happened in spite of the government efforts to precisely induce more consumption through increase in salaries, subsidize prices of some goods and strengthen the value of the Boliviano against the Dollar. 

All this has had the effect of bringing back the problem of the budget deficit, a problem that Bolivia has not had for a number of years. For 2016, the fiscal deficit was 6.6 per cent and for 2017, it has been estimated to be reaching 7.8 per cent. In the last years, this deficit has been financed in the order of 70 per cent by the central bank and the rest through external credits.

The combination of policies aiming at strengthening domestic demand, keeping the Boliviano strong and a high level of public investment, has tended to keep the economy growing. However, the danger of such policies has been to increase demand for import, which are anything but supporting of the production of local goods and services and therefore of consumption. Furthermore, the pressures building on the financial side of the economy, such as the fiscal deficit, the expansion of the monetary base through large government investments, the subsidies and the unstable international environment, are still a concern for the government.