In Bolivia, the economic model financed by gas is under severe test


LA PAZ, Bolivia—Over the past 15 years, the size of the Bolivian economy has tripled and poverty has been halved, achievements based largely on state spending fueled by export revenues from natural gas. But since 2013, these exports have declined, leaving a hole in Bolivia’s public finances that calls into question the sustainability of its economic model.

On May 1, 2006, then-President Evo Morales sent troops to the Bolivian gas fields declaring, “The looting is over. He had recently led the Movement to Socialism, or MAS, to power, campaigning on a platform to wrest control of the country’s resources from foreign interests and spread the wealth they generated among the people. Although presented as the nationalization of the country’s resources, Morales’ approach amounted to renegotiating existing contracts with foreign companies. It then used the tax windfall from the ongoing commodity supercycle to fund social programs and build financial reserves.

But Bolivia’s gas exports peaked in 2013, at more than $6 billion for the year, at a time when the country’s GDP was $31 billion. Three years later, after the end of the commodity boom of the previous decade, exports had fallen to around $2 billion. They have recovered a little since then, but never released 3 billion dollars. In 2021, they amounted to $2.2 billion.

The global gas market played a role in lower revenues, with Bolivian gas prices falling by two-thirds in 2016 from their 2012 peak, before recovering somewhat. But if volatile commodity prices are beyond government control, the government has more of a say in production. Yet Bolivia’s gas production also peaked in 2014, at 22.2 billion cubic meters, or bcm, per year. Since then, it has continued to decline, standing at 16.4 billion cubic meters per year.

Falling production means lower sales and less revenue for the state. But it also jeopardizes future exports to Bolivia’s two main markets: Brazil and Argentina. In both cases, Bolivia failed to meet its contractual demands, forcing it to negotiate to avoid fines. Dwindling gas supply from Bolivia, particularly in the context of droughts that have hit the hydroelectric power sectors in Argentina and Brazil, has forced both countries to rely more on relatively expensive liquid nitrogen imports. Today, both are striving to develop their own natural gas resources, in part to reduce their dependence on Bolivian imports which have proven unreliable.

According to Raul Velasquez, hydrocarbon expert at Fundacion Jubileo, a research organization based in La Paz, Bolivia, the main reason for the drop in production is that there has not been enough investment in the exploration. “If we look at the investments in recent years, they have mainly gone into exploiting existing gas fields,” he says, adding that most of the exploration that has been done has been done by YPFB, the state gas company, and its subsidiaries. — not private companies. “And that’s because in Bolivia, the current legal and economic framework is not attractive for investments in the hydrocarbon sector. Not even for YPFB itself.

As state revenues from gas exports decline and no alternative is available in the short term, the Bolivian economic model is under severe strain.

Velasquez points to the country’s tax regime as the main factor that has prevented Bolivia from maintaining or even increasing its gas production. When all the different taxes are added together, the state can collect almost three quarters of the value of the hydrocarbons extracted in Bolivia. This allowed the state to extract much of the existing gas fields, but it discouraged the exploration of new fields. To change that, Velasquez believes a new tax regime is needed to balance revenue between the state and private businesses. In practice, however, such a change would be politically difficult for a government that has relied so heavily on sovereign control over natural resources.

This means that, at least in the short term, gas production should fall further and the hole in public finances will widen. Recognizing this, the government has tried to develop economic alternatives – and in a country with a large informal economy and little industry, this has meant more extractive activity.

Foremost among them is lithium, the metal essential to the batteries that will power the green energy transition. Bolivia has more lithium reserves than any other country, and it announced its intention to develop them in 2008. But even after nearly a billion dollars of investment by YLB, the state-owned lithium company, no one knows still not sure if extraction is feasible, or when it might happen. . “We are talking about 14 years, and there has been almost no progress,” said Alfredo Zaconeta, a mining expert at CEDLA, a Bolivian research organization. “In reality, it is still very far from materializing.”

If the manna of lithium remains a distant dream, it would seem that the other Bolivian metals could replace the rent of hydrocarbons. In 2021, for example, gold, not gas, was Bolivia’s main export. But almost all Bolivian gold is produced by small producers known as cooperatives, which are exempt from most taxes and pay less than 3% in royalties to the state. “Gold production for 2020, estimated at 23 tonnes, was over $1.2 billion in value,” Zaconeta said. “But when it comes to royalty collection, the state barely got $34 million.”

This situation extends to Bolivia’s other mineral exports, such as zinc, silver and lead. Even though soaring commodity prices after the pandemic helped give Bolivia its first trade surplus in six years, the state itself didn’t get much of the money. “As with gold, so with all minerals,” Zaconeta said. “The ceilings that have been set for the royalties do not allow the State to really benefit from the good prices. Prices soared, but it didn’t generate revenue. »

To increase mining royalties, the Bolivian mining law would need to be amended. This is unlikely to happen, partly because the cooperative sector, which is a pillar of support for the government, would resist it. As Zaconeta explained, over the past 15 years, cooperatives have not only coalesced into a movement that generates massive jobs. “They have consolidated themselves as a political power with a tremendous capacity for mobilization,” he said. “If the cooperatives decide to march, be sure that they will stop the country.”

As state revenues from gas exports decline and no alternatives are available in the short term, Bolivia’s economic model under MAS is under strain. Jose Gabriel Espinoza, Bolivian economist and former director of the country’s central bank, points to 2013 as a turning point. Before this year, about half of the state’s revenue came from gas. Subsequently, faced with a growing budget deficit, the state began to rely first on external debt and then, since 2018, on domestic debt, with an average budget deficit of 7% since 2014.

“It’s a vicious circle,” Espinoza said. “The government needs to invest more to try to revive the economy, but at the same time this increased investment increases the budget deficit, which is financed by the internal market – and this creates problems for the Bolivian financial system in terms of access . credit and liquidity.

Meanwhile, financial reserves – which gas exports helped lift to a peak of $15.1 billion in 2014 – have fallen to $4.5 billion, only a minority of which is in foreign currency. This threatens a pillar of the economic model under MAS: a fixed exchange rate between the country’s currency, the boliviano, and the dollar, which has kept the boliviano stronger than it otherwise would be, making imports cheaper for Bolivian consumers. When the dollar strengthens, or when there is pressure for the boliviano to weaken, the government must use reserves to keep the rate fixed. Should it run out of reserves and be forced to abandon the peg, the boliviano could plummet in value. This would make servicing its growing external debt more expensive, among other things. “At the moment, there is no volatility in the foreign exchange market. People seem relatively calm,” Espinoza said. “But the situation could change very quickly if they don’t strengthen the reserves.”

Overall, however, Espinoza does not see a clear strategy from the Bolivian government to address these challenges, and he expects 2022 and 2023 to be tough years. Bolivian President Luis Arce was Morales’ well-regarded finance minister during the first decade the MAS was in power, earning a reputation as a pragmatist in a government often filled with ideologues. He was elected in October 2020, says Espinoza, in the hope that he would adapt the country’s economic model to the new conditions. “Unfortunately, he continued with the model as if we were still in the situation of 2010”, he adds. “And imbalances in the economy are reaching levels that are difficult to manage.”

Thomas Graham is a freelance journalist based in Bolivia, who has reported from Europe, South America and North Africa for The Economist, The Guardian and the BBC, among other publications. Follow him on Twitter at @Tajg92.


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