Bolivia’s economy is running aground, squeezed by higher global interest rates and policy missteps. Its foreign exchange reserves, which stood at $15.4 billion in 2014, are now estimated to be under $400 million (not counting $2.6 billion in gold reserves)—able to provide less than two weeks of import coverage. The country’s overvalued exchange rate is showing signs of strain. Bank runs are ongoing as people try to get their dollars ahead of what increasingly looks like a collapse. While the Andean country’s slide into a major balance of payments crisis is by itself bad news, it also has wider geopolitical implications, affecting the global energy transition and filtering into the new Cold War between China and the United States.
Bolivia’s Energy and Money Problems
The country’s economic plight originates in its longstanding heavily statist economic model, largely implemented following Evo Morales’ election to the presidency in 2006. While the model allowed the country to reduce poverty, improve per capita income, and kept inflation down, other problems mounted. The current government is under pressure from ongoing expansionary policies—primary subsidies for agriculture, industry, and fuel, which were all strained by the coronavirus pandemic and the Russo-Ukrainian War. Additionally, oil and gas production is declining; revenues from the energy sector have long financed state largesse.
Once called the “beating heart” of South American natural gas production, Bolivia had no major discoveries for many years and production has fallen since 2015. According to energy research firm Wood Mackenzie, based on current trends Bolivian gas production is expected to decline from 1.4 billion cubic feet per day in 2022 to almost nothing by 2030.
The nation’s natural gas sector has numerous problems. The Morales government nationalized the industry in 2006 but then failed to reinvest in exploration. Meanwhile, Bolivia’s foreign investment record is poor; other countries offer better terms for exploration and production and lower political risk. Bolivia’s energy standing is further complicated by changes in its key customers, Argentina and Brazil, which have developed their own energy resources. To avoid a painful adjustment (which means reducing subsidies), the government over the past decade has routinely tapped its foreign exchange reserves to cover any gaps in spending. Falling gas revenues are now a major headache for President Luis Arce’s government.
A Lack of Potential Solutions
Bolivia’s options are limited. Further tapping foreign exchange reserves will be difficult, given that the vast majority of what is left is in gold. Selling gold on international markets could take time—as the government requires Congressional approval to do so—and would at most serve only as a temporary measure. Moreover, it would further sap confidence in the country’s financial situation.
Alternatively, the central bank could tap the foreign exchange reserves held by the country’s commercial banks, as it did in 2018. But such action would only deepen the public’s nervousness over the country’s financial institutions. Government policies are already under intense scrutiny, including demands that the government provide an explanation as to why $918 million of retirement funds were invested in Bolivian sovereign bonds, which have suffered a severe devaluation.
Turning to the International Monetary Fund, World Bank, and/or the Inter-American Development Bank would be politically difficult. Any such assistance would surely entail conditionality measures: cutting subsidies (to improve the country’s fiscal position), changing the central bank’s monetary regime (to help boost exports and reduce the central bank’s exposure to currency swaps), introducing policies that promote a more welcoming environment for foreign investment (to help natural gas exploration and develop the nascent lithium industry), and pension reforms. Considering the populist-leaning nature of the Arce government, these measures would be painful, especially with elections in 2025. Furthermore, Bolivia, with its single B credit ratings, would be a hard sell to international bond investors—a situation not helped by rising international interest rates, which have caused some ructions in global bond markets and banks.
Complicating the situation even further Arce’s MAS (Movimiento al Socialismo) government wants to keep the country’s subsidies and overvalued foreign exchange rate in place because of Bolivia’s own personal history with inflation. There is a deep concern that the reduction or removal of subsidies on fuel would result in higher inflation, which Bolivia has suffered through before in the 1980s. At that time, inflation peaked at an astounding 23,464 percent in 1985. Any gains that have been made in the country’s standard of living could be washed away with another such bout of high inflation, and would certainly open the door to social turmoil.
Then there is the country’s internal political dynamics, which only further frustrate the policymaking environment. There are tensions inside MAS between supporters of former President Evo Morales (2006–2019), who is thought to seek reelection, and the incumbent Arce. There is also animosity between the Arce administration and the country’s strongest economic region, Santa Cruz province. This more conservative province has often clashed with both the leftist Morales and then Arce governments on economic policy. Tensions escalated in December 2022, when the province’s conservative governor (and a leader of the opposition), Luis Fernando Camacho, was arrested for his alleged role in the 2019 turmoil that led to the forced removal of then-President Morales.
The Lithium Issue
Bolivia’s troubles begin to take on an international dimension when one adds the country’s lithium to the equation. According to the U.S. Geological Survey, Bolivia has the largest amount of lithium resources in the world at 21 million tons. Achieving the Biden administration’s ambitious plans to make half of all cars sold in the United States electric vehicles (EVs) by 2030 means lithium batteries for each—something that is beyond the small amount extracted in the United States itself. America currently imports most of its lithium from the Lithium Triangle countries of Argentina (51 percent of lithium imports) and Chile (40 percent). Bolivia is the third country in the triangle.
Yet at the same time, China has made important inroads into Bolivia. While the United States has lacked an ambassador to the country since 2008 and relations have generally been poor over the past few years (partly due to the Morales administration’s anti-U.S. stance), China has developed a formidable diplomatic representation. Chinese diplomats are an integral part of Beijing’s economic statecraft, which is geared toward securing access to critical metals like lithium. Bolivia joined the Bridge and Road Initiative in 2018 and China has lent it $3.2 billion, mainly for infrastructure construction. It was no surprise that in January of this year Bolivia selected a Chinese consortium led by CATL, the world’s largest battery maker, to mine lithium and help the Andean country develop a battery plant. The deal came with an announcement that the Chinese consortium would invest over $1 billion in the project’s first phase, boosting infrastructure, roads, and conditions needed to create plants to produce lithium cathodes and batteries.
Questions for Washington
Bolivia’s economic troubles raise some important geopolitical questions. Is China willing to provide bridge financing or stretch out its repayments? Does the United States have an interest in helping Bolivia by facilitating a path through the IMF, World Bank, and Inter-American Development Bank? China has demonstrated a reluctance to help troubled debtors find an easy exit ramp by adding new capital resources, though it did eventually help Ecuador with a debt restructuring. But it has had a difficult path with two countries Pakistan ($24.7 billion of external debt to China) and Venezuela ($60 billion). Does Bolivia have the option to play the China card? Most likely China will probably seek to sidestep another troubled debtor situation, but China does want Bolivia’s lithium.
In any case, Bolivia is certainly facing a major economic crisis. It is time for the Bolivian government to overhaul its economic model and move toward policies that are less reliant on the state, which is running out of money in the face of declining natural gas production. In neighboring Argentina, a more liberal investment regime helped increase the country’s lithium exports by 234 percent in 2022, pushing up the country’s total mining exports (a fifth of which were lithium) to $3.86 billion. Argentina expects to see mining revenues of around $6 billion in 2023, pushed along by a rush of foreign company investment from the United States, China, Japan, South Korea, Canada, and the United Kingdom.
As more countries shift to EVs and use batteries to store more power in national electricity grids, Bolivia risks restricting foreign investment flows and developing a dependency on one market, China. Bolivia should consider a more open foreign investment policy. However, that may be attained only after an economic crisis, which might have been averted. It has been said that no crisis should go to waste, maybe that is the lesson to be learned in La Paz and something that is going to be closely watched in Beijing and Washington.
Dr. Scott B. MacDonald is the Chief Economist for Smith’s Research & Gradings, a Fellow with the Caribbean Policy Consortium, and a Research fellow with Global Americans. Prior to those positions, he worked for the Office of the Comptroller of the Currency, Credit Suisse, Donaldson, Lufkin and Jenrette, KWR International, and Mitsubishi Corporation. His most recent book is The New Cold War, China and the Caribbean (Palgrave Macmillan 2022).