Navigating Bolivia's Dollar Crisis: Challenges, Responses, and Prospects for 2024

Since March 2023, Bolivia has been facing a dollar crisis due to a drop in foreign reserves and fears over the devaluation of the Boliviano, the national currency.?

Bolivia has a fixed exchange rate, so in response to devaluation pressure, its Central Bank sells foreign currency to defend the value of the Boliviano. The central bank has been forced to defend its peg of just under seven bolivianos (at the time of writing, 6,91) per US dollar by selling foreign currency. However, with reserves now so low, concerns are growing that its peg to the US dollar must be abandoned, which would trigger a substantial devaluation.?

Bolivia's balance-of-payments problem is mainly due to the erosion of natural gas production and exports over the past twenty years. Bolivia's Central Bank had about $15 billion in international reserves; it is down to $1.7 billion.?

The wave of uncertainty triggered the Bolivians to withdraw their dollar deposits and buy more US currency, which led to a shortage of dollars in the banks. In June 2023, the Central Bank stopped selling dollars to the general public and controlled the use, withdrawal, and purchase of dollars.

While 2023?was marked?by constant excess demand for dollars, the banking system managed to cover needs by maintaining a level of commissions on dollar transfers abroad in the area of 8 to 10%. Yet thus far this quarter, the challenges faced by financial entities in responding to demand triggered a significant increase in those commissions, which now are as much as 20 to 25%. This has brought commercial difficulties for local companies in meeting payments abroad, primarily to their suppliers.?

Signs of the ¨dollar crisis¨ are everywhere. The lack of dollars has led to a scarcity of medications, medical supplies, and equipment for farming and mining.

Meanwhile, little attention is?being?paid to the situation outside Bolivia, perhaps because of the more significant problems in Bolivia's larger neighbor, Argentina, and the other challenges facing the region.

IA Insights

Due to?shortage of dollars, most of the debtors have been unable to make any payments. Since we did not?only?want to rely?on the media output regarding?the dollar issue, we?have?visited La Paz and Santa Cruz ourselves?in?the beginning of May 2024.

We have met with a dozen companies, and they all confirmed that they are defaulting on payments to their international suppliers due to the need for more dollars. Some of them showed us plastic bags filled with dollars. "I prefer to have them at home, as I fear they won't let me withdraw them later," a debtor said.?

Companies, especially in the agriculture sector, are trying to receive their dollars (from exported goods) in foreign bank accounts,?so that they?are able to?spend them again.

Another short-term solution (also handed out by the Bolivian Government) is making payments in currencies like the Euro or Yuan. However, as the Government is still obtaining these currencies, commissions are still very high (10 to 25%). Also, debtors are afraid to make payments in other currencies as their unpaid invoices are in dollars, and they don't want to get involved in disputes with the tax authorities.?

Others are?looking for?more radical solutions,?like leaving the?Bolivian territory or illegally smuggling dollars out of the country.

Expectations for the rest of 2024

The National Government and a group of business organizations representing diverse industries?agreed on measures to counteract or mitigate Bolivia's current exchange difficulties. The Government has decided on ten measures, and the business organizations mentioned as a first sign of response. Please find the ten measures below:?

1. Eliminate much of the bureaucracy surrounding export activity.?

2. Immediate return of Tax Return Certificates (CEDEIMs) upon delivery of foreign exchange for exports.

3. Issuance of Central Bank of Bolivia bonds in dollars.

4. Big-volume buyer diesel auctions.

5. Expediting diesel imports by private companies for their use.

6. Promotion of private investment in biodiesel plants.

7. Fostering investments to improve yield in the farm sector.

8. Increasing maximum tonnage and length of cargo transport vehicles (implementing a cargo transport modernization law in Bolivia).

9. Establishing tax incentives for purchases of flex and electric vehicles.

10. We are establishing a band to collect commissions for transfers abroad.

The?above-mentioned measures?will require an administrative effort by the Government, which the market hopes will be urgent and pragmatic. In this connection, the ten measures that could materialize most rapidly are speeding up the administrative process for grain exports (soy, sorghum, wheat, and derivatives) and returning CEDEIMs or establishing a band for commission collection.

We don't expect the dollar issue to be solved in the short term. As long as the Dollar crisis continues, we don't expect many payments in Bolivia.

We continuously communicate with debtors, local agents, law firms, and banks to proactively explore alternatives, leveraging IA's extensive global experience with currency restrictions.

Written by: Mark Dee & Wilber Hurtado

*This article is informative and is not to be used as legal, economic, or commercial advice.

Sources: The Banker, Wilson Center, Reuters, AP News, Ferrere