The policies of keeping the exchange rate fixed and a subsidized supply of hydrocarbons are showing good results in Bolivia at the moment. However, the experts suggest that there must be an efficient use of fiscal resources, good management of public debt and coordination between the public and private sectors to avoid an economic crisis.
EDITION 108 | 2022
Elizabeth Riva Álvarez
TThe increase in interest rates to curb rising inflation is a radical measure that the US central bank has taken and that several central banks in other countries have already replicated despite the risk of inducing an economic recession that could have a global impact. In addition, this increase in rates has effects on Latin American countries’ current debt. This situation is analyzed by the economists Carlos Foronda, Dean of The Private University of Bolivia (UPB) in Santa Cruz, and Ricardo Nogales, Dean of the university’s Research in Economics department. Both professionals are authors of the recently published book, “Rise in the Interest Rate 2022 and its Impact across Latin America”. Both experts have participated in the monthly colloquium organized by ENERGÍA Bolivia magazine. The world economy is facing a long period of imbalances and turbulence caused, first, by Covid 19 pandemic, which led in its first stage, to markets closure, and the paralysis of the commercial system in general, and later, another disruption caused by the war between Russia and Ukraine, that caused an increase and speculation on the oil price, among other effects. Foronda explains that there is currently no recession, because the growth indicators are still positive, despite the falling trend. However, he points out that to avoid this threat, in the medium or long term, governments are obliged to take alternative measures.
TURBULENT SCENARIO
“In a short-term economy, almost all Latin American countries are in similar situations, with little capacity for action and with a turbulent scenario of inflation, rising interest rates, variability in the price of hydrocarbons and disruptions in supply chains. In addition, a fifth wave of COVID 19 is announced and these factors mean that the authorities in charge of the economy do not have much scope for action and have to face other factors that can affect the economies”, he said. In addition, the economist Ricardo Nogales pointed out that the increase in interest rates arises at a time when the need to reactivate the economies affected by the pandemic is still required. “The rise in interest rates is mitigating the inflationary risk, but it is only a palliative measure to more structural aspects in the world’s economy that have to do with the scarcity of supplies, mainly oil, to face the real aspect of inflation, and not just the monetary problem,” said Nogales.
PUBLIC DEBT
The analysts explain in their book that the countries most exposed to the shock of interest rates, due to their level of endowment, will have to adjust to the situation with measures that will affect their investment processes, growth, employment levels and income distribution.
“Raising rates also make public debt more expensive, that is to say, governments are in a more restricted fiscal policy, with much less room to maneuver, and public spending will have to be prioritized and reduced. This measure is giving some results to control inflation, however, the fiscal and monetary authorities must take care of the structural bases of the economy that can suffer consequences in the medium and long term”, says Ricardo Nogales.
Carlos Foronda says that one of the most critical economic variables that must be considered is public debt, and Bolivia is showing high levels of internal and external debt, so, the measures that will be taken to reactivate the economy must take into account this variable.
“In Bolivia, we have a fiscal deficit that has been dragging on since 2014, this year it is around 9%, deepened by the effects of the crisis. On the other hand, there are indicators such as public debt, that are getting into alarming levels, therefore, the government has less flexibility to apply fiscal or monetary policies. Our public debt is around 84% in comparison to our Gross Domestic Product”, he says.
…the actions of oil & gas companies and others related to the energy sector, could also be affected, despite the fact that their decisions are projected in the long term”
On the other hand, Nogales considers that the Bolivian Government’s policy of keeping the dollar exchange rate fixed, as well as subsidizing hydrocarbons prices, is giving good results because it is preventing the spread of an uncertainty feeling that is affecting other countries.
“This policy, in some ways, has given good results because we have a very low inflation in the region and it also goes through a significant expense to keep the stability and availability of energy resources. What worries us is the success of investments and other measures in the long run”, he says.
“Among the main factors that are keeping the prices stability in the country, is the anchoring of our inflation expectations correlated to the currency exchange rate; as long as the currency exchange rate is fixed as it is at the moment, people will feel that the economy is working well, that there are no major problems, and as a result, there will be no need for prices speculations, which in the end, is what generates an inflationary spiral. ”, says Carlos Foronda.
PRODUCTIVITY AND COMPETITIVENESS
According to Ricardo Nogales, a structural element that must be taken care of is the productivity and competitiveness of the economy, and that depends on many aspects. He believes that to be competitive, you must have solid, large, innovative companies and trained human capital.
“Unfortunately Bolivia does not have a productive system that complies with these characteristics, for instance, labor productivity has been stagnant for decades, and our innovation and competitiveness capabilities have not been very remarkable. Therefore, there are no conditions for our economy to grow, develop and prosper”, he says.
Among the recommendations highlighted in the book published by Foronda and Nogales, we have, the coordination between public and private actors, the efficient use of fiscal resources and the good management of public debt. The document constitutes an important academic contribution and an instrument to encourage debate to understand the situation in Latin American countries, as well as anticipating the problems and analyzing options to take care of the economy.
