(Dec 18): Bolivia’s new government declared an economic emergency and issued a series of radical measures, including scrapping fuel subsidies and loosening the exchange rate regime.
The move triggered an 86% jump in the price of gasoline and more than 160% for diesel, the most abrupt energy price adjustments in the nation’s recent history.
The reforms announced on Wednesday night by President Rodrigo Paz represent a decisive break from two decades of socialist economic policy and aim to rein in one of the world’s largest fiscal deficits and an inflation rate of 21%.
“Eliminating poorly-designed subsidies does not mean abandonment, but order, justice and real, transparent redistribution,” Paz said in a broadcast with his cabinet. “This will allow the generation of additional fiscal resources to be shared between the central and regional governments.”
Some fuel stations La Paz suspended sales as drivers rushed to fill their tanks ahead of the price rises, according to local media reports. The new prices will remain in place for six months before being reassessed.
Some of the region’s most-heavily subsidised fuel, as well as declining natural gas output, has drained Bolivia’s foreign reserves, causing shortages of both fuel and dollars and creating a drag on the economy.
See also: ECB holds rates with growth firmer and inflation near target
Secretary of State Marco Rubio expressed US support for the policies, and said in a statement that US officials are currently in Bolivia seeking to facilitate investments.
The cuts were accompanied by social protection measures, Paz said, including a 20% increase in the minimum wage next year to 3,300 bolivianos.
Renta Dignidad — a benefit for elderly citizens without a pension — will rise by 150 bolivianos, while a school bonus for students in public schools will increase by 100 bolivianos. Both are increases of 50%.
See also: Germany boosts debt sales to record €512 bil in spending push
The government, which took office last month, also announced an extraordinary cash-transfer programme for the most vulnerable families.
“From a political standpoint, we expect some pushback down the road because the new measures will lead to a large pickup in inflation,” said Ramiro Blazquez, a strategist at StoneX Securities, in response to written questions. “On the positive side polls show that President Paz remains one of the most popular politicians in the region. Hence, we think that the government, at least at this stage, has the political capital to carry out the reforms.”
The decree also authorises the central bank to secure liquidity financing lines, amend internal regulations, issue external financial instruments, conduct foreign-exchange hedging operations, and carry out currency swaps to stabilise the balance of payments — an option recently discussed with US officials in Washington.
Paz also announced a programme to promote and protect domestic and foreign investments to ensure legal and tax stability for up to 15 years. That includes guarantees that future regulatory changes will not apply to protected investments without explicit investor consent.
The decree further instructs the central bank to transition to a “new exchange-rate regime”, potentially ending the fixed exchange rate in place since 2011, which set the boliviano at 6.96 per dollar, compared with nearly 10 bolivianos in the parallel market.
Uploaded by Felyx Teoh
