By Antonio Saravia, Vision 360:

The IMF rescue will generate an enormous debt for us. It is also the last rope thrown to us, and if we do not take advantage of it, we will have to turn off the lights.

I have already been in Nepal for seven days and will be here for another ten days. I first settled in Biratnagar, on the border with India, and now I am in the capital, Kathmandu, a city almost as chaotic as it is fascinating. I had planned, therefore, to dedicate this column to discussing the challenges of the Nepalese economy, which is what I have been thinking about intensely these days, but in our country the agreement with the International Monetary Fund has been announced with great fanfare. It is undoubtedly an extremely important agreement for Bolivia, so it is worth commenting on. Nepal can wait.

I have listened to economists and politicians celebrate the agreement with the IMF and describe it as something very positive. I have seen the president and his ministers proudly stand tall, considering it an important achievement not only for their administration but for the country. I do not share that enthusiasm. There is nothing here to feel proud of. What we should feel is shame. After all, this is a financial rescue program. It is the rope someone throws you when you are already out of breath and about to drown. It is the last opportunity a rehabilitation center gives to an alcoholic who has destroyed his life, is on the street, and has nowhere else to turn. You reach an IMF rescue after having been irresponsible and self-destructive for a long time. Far from framing the agreement and displaying it in the living room of our house, we should seriously reflect on how we fell so low and how we can avoid repeating our mistakes.

Let us also say that $1.9 billion is much less than what had been announced. The amount represents about six times Bolivia’s quota at the IMF, but we were all expecting a rescue package equal to eight times that quota or even more (remember that Argentina’s agreement in 2018, for example, was made for an amount greater than 12 times its quota). In the end, of course, money is money and it is received, but it shows that the IMF is not fully betting on the country because it probably continues to see significant clouds on Bolivia’s future. Even so, this agreement can be a master key that unlocks funds from other multilateral organizations, potentially reaching $5 billion.

What should be done with this money?

Well, exactly the opposite of what we have been doing. This money should be the anesthesia that makes it easier to overcome our addictions, or the aspirin that allows us to get through the hangover of the next day and avoid the temptation of continuing to drink. And among all our problems, of course, our worst addiction is the enormous fiscal spending. The government’s uncontrollable spending spree has produced 12 consecutive years of fiscal deficits, squandered international reserves, generated a banking freeze, caused the Central Bank to print money recklessly, creating inflation and devaluation, and has seriously compromised macroeconomic stability. Without spending reductions there is no macroeconomic stability, and without it there will be no investment or revival of the productive sector. Either we stop spending or there is no future, with or without the IMF rescue.

But stopping spending hurts, creates strong social resistance, and is therefore very difficult to implement politically. To begin with, and only as a starting point, the government should close public companies (all of them), reduce the state bureaucracy by 30%, and finally eliminate fuel subsidies by freeing gasoline and diesel prices (transferring the import business to private companies). Ideally, all of this should be done at once through a shock policy. This is what in the 1990s we would have called a “package” of adjustment measures. The IMF money should be used to counteract the social effects of the slowdown.

Last year, a few months before the elections, I visited the famous economist Arthur Laffer at his offices in Nashville, and we spent a couple of hours talking about Bolivia and some of my proposals. I presented to him exactly the adjustment plan described above, and he asked me how I intended to deal with the social protests that would arise after dismissing so many people. My answer was that the government should create a program with the IDB or the World Bank to offer every worker dismissed from public companies or the bureaucracy a full year of salary as compensation. This would make the transition to the private sector easier and reduce incentives to protest. Laffer looked at me very seriously and told me that one year of salary would not be enough and that they should be offered two. His logic was that it was not only necessary to avoid protests, but also to make the adjustment program welcomed, embraced, and even promoted by the working class. Two years of salary without working would do the trick.

Something similar could be considered to avoid social protests caused by the complete liberalization of gasoline and diesel prices (and the complete transfer of fuel importation to private companies). Details could be refined and it could be decided whether it should be one or two years of salary, but the point is that the rescue money should be used to do what is truly important: reduce public spending.

Another significant portion of the amount received should be used to repay the $2 billion debt owed to the financial system and thus leave behind the banking freeze. This would restore confidence, and people would have incentives to leave their dollars in the banking system and even bring them back from abroad.

What should not be done with these dollars is to use them to continue importing subsidized fuels, to continue covering fiscal deficits, or as a fund to stabilize the exchange rate by selling them or getting rid of them in order to achieve some target. We must remember that these dollars are only a loan and that we did not generate them productively. We should therefore behave as if we did not have them. To generate exchange-rate stability, the Central Bank should reduce the supply of bolivianos, not sell dollars.

The IMF rescue will generate an enormous debt for us. It is also the last rope thrown to us, and if we do not take advantage of it, we will have to turn off the lights. Let us use this money, therefore, with the greatest possible responsibility. That means significantly reducing public spending and laying the institutional foundations (starting with a reform of the Constitution) to reactivate the productive sector. If we do not do so, we will have escaped the hole only temporarily and very soon we will find ourselves facing the same difficulties, but now heavily indebted as well.