Daily Archives: April 15, 2012

Threatened Bolivian macroeconomic stability

Today I will share Alberto Bonadona’s interesting and worrying article published in El Deber:

Bolivia stood in a past that still many remember as an economy of great instability. It reached the second rate of higher inflation in Latin America with more than 11,000% of growth of their prices in 1984.

But not only inflation became prey to the Bolivian economy in the 80s of last century. The periodic devaluations of the Bolivian peso also affected the tranquility of all citizens. Aired the so-called economic ‘packages’ [supreme decrees rising prices of some goods/commodities sharply and/or changing the exchange rate of local currency with the American dollar]. Of course that promoted black markets and prices were driven higher.

Stabilization measures that were needed to curb the Bolivian hyperinflation had to be the toughest, only comparable with the situation who managed to modify it. The purchasing power of wages was depreciated by accelerated steps and people had to buy anything to preserve their purchasing power. What people most wanted, of course, were the American currency and the economy was dollarized.

We have come a long way since then. Bolivia has managed to establish macro-economic policies that, today, are solid. You have an active monetary policy previously unforeseen. Open market operations are used to sterilize the liquidity excesses that threaten the price increase and it would seem that inflations as the 1980s will not return.

However, a new reform threatens the independence of the Central Bank of Bolivia (BCB), that will subordinate it to the Executive branch. Although this independence was never absolute, when handling the net credit Government BCB should be able say no, especially when it threatens stability. Now, it only works one side; to appreciate the Bolivian currency [Bs] and at some point will require a more flexible exchange rate.

BCB already gives millionaire credits to the State for the financing of major State-owned enterprises, situation that is achieved by expanding the monetary base. It also wants to finance new industrial ventures of dubious viability. The independence of the BCB is threatened and stability will be affected.

To ensure that BCB’s loans granted and new ones, will exert inflationary pressures. A situation which requires devaluing the Bs, which, albeit few cents, unleash a great demand for dollars. It is true that those  demands may be confronted, as the amount of reserves allows it, but with a major setback in the dedollarization. But it would be so handy if instead of weakening to BCB it strengthens its independence and leave the cynicism aside.

http://www.eldeber.com.bo/vernotacolumnistas.php?id=120413231143

Savvy words, all the effort to build up the BCB could be lost by current government’s impulse or in-efficiency?