From crisis to stability: what next for Bolivia’s economy?

Bolivia is at a decisive moment in its modern economic and political history, after nearly two decades of dominance by the Movement Toward Socialism party. Whoever ends up taking charge will need to draw up an economic stabilisation programme – though implementing it will be challenging.

The 2025 Bolivian national elections, held on 17 August, knocked the incumbent Movement Toward Socialism (MAS) party off the perch it had sat on for almost two decades. This has resulted in a presidential runoff – the first in the country's democratic history. Because no candidate secured the necessary ‘50%+1’ of the vote, former President Jorge ‘Tuto’ Quiroga of the Alianza Libre group will face Senator Rodrigo Paz of the Christian Democratic Party (PDC) in a ballotage. The winner will govern for the next five years and is expected to move the country's policies – including economic measures – in a right-leaning direction, ending a lengthy era of leftwing ideology.

The upcoming vote is not only historically unprecedented but is also taking place amid a deepening economic crisis. Failure to implement effective and timely measures could easily escalate the current situation into a major economic collapse, echoing the nation's troubled past. There currently is a severe dollar shortage in Bolivia, declining revenue from fossil fuels, and a widening fiscal deficit. This cocktail of challenges is ominously reminiscent of the late-1970s balance of payments crisis. This situation ultimately spiraled into a period of hyperinflation during the mid-1980s, with annual inflation peaking at 11,750%.

Figure 1: Bolivia’s annual inflation rate, 1950-2024

Source: National Institute of Statistics

The next government's challenge will be two-fold: first, to stabilise the economy through necessary (and likely painful) fiscal adjustments, such as cutting the extensive subsidies currently straining public finances; and second, to help those people who will be negatively affected by these necessary changes. Successfully navigating this political tightrope is essential to preserve the stability required to implement crucial, deep-seated reforms and put the economy back on a path towards sustainable long-term growth.

What is the current state of the Bolivian economy?

The Bolivian economy is experiencing a critical balance of payments crisis, as shown by the severe depletion of its Net International Reserves (NIR). This means that the country is running dangerously low on the foreign currency (dollars) it needs to conduct international trade and pay its external debt. The most visible symptom is the widening exchange rate gap – the difference between the fixed official exchange rate and the soaring parallel market rate (see Figure 2). A currency gap is bad because it means importers can no longer get hold of dollars at the price set by the government for foreign currency. Instead, they get them at a much higher price (the parallel market rate), which is the price people actually pay for it on the streets.

Figure 2: Nominal exchange rate gap, January 2024-August 2025

Source: Dolar en Bolivia

Between 2004 and 2014, the Bolivian economy expanded at an unprecedented rate. This was driven by a ‘super-cycle’ (e.g., a prolonged period of growth) in commodity prices and a natural gas export boom (primarily to Brazil). This sustained decade of high export revenues enabled both a trade surplus and a fiscal surplus. This is because the state, through its national oil company (YPFB), was the principal beneficiary of the fossil fuel glut. The resulting massive inflow of foreign currency was bought by the central bank, allowing it to accumulate a historic level of reserves, peaking at nearly $14 billion – equivalent to a record 51% of GDP in 2012 (Loza and Morales, 2018).

The massive acquisition of foreign currency through these central bank exchange operations led to a significant increase in the domestic money supply (i.e., the amount of Bolivian bolivianos circulating in the economy). This, in turn, drove up prices, with inflation peaking at 17.32% in June 2008. This inflationary surge was short-lived, however, sliding back to 0.08% by January 2010. When price pressures began to mount again later that year, the government, seeking a tool to stabilise prices, moved decisively to a de facto fixed exchange rate, setting the official parity at 6.96 Bolivian bolivianos per US dollar in November 2011.

Figure 3: Bolivia’s net international reserves, 2008-2025

Source: Banco Central de Bolivia

At first this decision to fix the exchange rate was highly successful, with inflation declining steadily to an annual rate of 0.18% by August 2021. But a fixed exchange rate policy requires continuous intervention by the central bank. When the commodity price super-cycle ended in 2014, Bolivia’s trade balance shifted into deficit. To defend the peg and maintain the fixed exchange rate, the central bank began drawing down its international reserves. This defense mechanism proved unsustainable: as the portion of the NIR held in cash approached depletion, the central bank lost the capacity to supply the foreign exchange market. Consequently, in March 2023 the parallel nominal exchange rate began to increase, signaling the policy's failure.

Nobel-prize winning economist, Paul Krugman, established that while the immediate trigger for a balance of payments crisis is the depletion of reserves used to defend a fixed exchange rate, the underlying cause is an excessive fiscal deficit. In the Bolivian case, this is evident: once the commodity super-cycle ended and gas revenues plummeted, government income fell significantly, resulting in fiscal deficits that continuously widened over time (see Figure 4).

Figure 4: Bolivia’s fiscal position, 1980-2023

Source: Banco Central de Bolivia

This persistent fiscal deficit, driven by both general government spending and state-owned public enterprises, is financed primarily through domestic debt and direct borrowing from the Bolivian Central Bank (BCB). The BCB's financing of the non-financial public sector (NFPS) is therefore a direct cause of a drop in the NIR. According to the BCB's balance sheet, this means that if the central bank increases their credit to the government, it must reduce its international reserves (NIR) to balance the books.

This process, however, has a limit. As the NIR plunged to critically low levels in March 2023, the BCB could no longer offset NIR expansion with reserve losses. The only remaining path to finance the deficit was to increase the monetary base – that is, through ‘printing’ money. This triggered a new surge in inflation.

Figure 5: Bolivian inflation versus official and parallel exchange rates, 2000-2025

Source: Banco Central de Bolivia

Annual inflation has since surged to 25.15% (as of August 2025). While this number includes components of imported inflation, as the de facto currency depreciation makes imports more costly, the primary driver is the government's reliance on increasing the monetary base to finance its chronic fiscal deficit. This unsustainable monetary financing highlights the urgent need for a comprehensive stabilisation programme.

An additional critical factor is Bolivia's structural shift to becoming a net importer of fossil fuels (petrol and diesel) since 2022. During the commodity super-cycle, gas export revenues were sufficient to finance these imports. But as those revenues fell and foreign reserves dwindled, covering these necessary fuel imports has become increasingly untenable. Consequently, severe fuel shortages have become a recurring problem, forcing people living in Bolivia to endure long lines to resupply – often waiting several hours for petrol and even days for diesel.

What should a stabilisation programme for the Bolivian economy include?

Based on the preceding diagnosis, the next government’s top priority must be to implement a stabilisation programme to stop inflation. This requires eliminating the ‘inflation tax’ – namely the central bank’s financing of the NFPS. Achieving this, in turn, demands a significant reduction in the fiscal deficit – the primary driver of the crisis. The greatest challenge lies here: for the past two decades the economy has operated under strong state dominance, with the government serving as the principal employer, business owner and client. Dismantling such an entrenched structure will call for a carefully designed and rigorously executed reform programme.

Much of the debate now centres on whether the necessary adjustment should be abrupt or gradual. The lessons highlighted in the book ‘A Monetary and Fiscal History of Latin America’ (Kehoe and Nicolini, 2021) suggest that the choice is not strictly binary. What matters is adopting policies capable of delivering tangible benefits to the population within a reasonably short timeframe, while carefully managing the potential social costs of the adjustment.

Undoubtedly, the government will face difficult trade-offs. Eliminating central bank financing of the NFPS will remove the inflation tax and help contain price growth, but it will also require a sharp cut in fiscal spending – most likely current expenditures – leading to significant layoffs. At the same time, the fiscal adjustment will necessitate phasing out the hydrocarbon subsidy, a step that would put upward pressure on prices. Deciding which measure to implement first, and how to sequence them to keep inflation under control, will be one of the next government’s greatest challenges.

The next Bolivian government will eventually need to close the exchange rate gap by ending the fixed rate still applied to government and financial transactions. Such a move could fuel inflation by raising the local-currency cost of dollar-priced imports. To avoid a disruptive shock, the central bank must hold sufficient international reserves to manage a gradual, orderly depreciation.

Given current conditions, replenishing those reserves is likely to require borrowing from the International Monetary Fund (IMF) and/or regional institutions such as Latin-American Fund of Reserves (FLAR). Because this process will increase external debt – both through new borrowing and the higher local-currency value of existing obligations – the next government will also need a short- and medium-term strategy for managing both external and domestic debt.

The need for adequate liquid reserves goes beyond cushioning a potential official devaluation: it is also essential for restoring normal dollar operations in the financial system. Since the 1980s crisis – and especially after the introduction of Bolivia’s New Economic Policy in 1985/86 – the country has remained a ‘partially dollarised economy’. This means that local people and firms often rely on the US dollar for important financial activities, with dollars used extensively alongside bolivianos. Although the export boom encouraged de-dollarisation, US dollar deposits have continued to represent about 15% of total deposits.

To secure dollar liquidity, the central bank seized the legal reserves on banks' dollar deposits by offering them loans in bolivianos at a zero interest rate in exchange for those currencies. The banks expected that by repaying these loans to the central bank, they would receive their dollars back – but that didn't happen. This way the central bank appropriated roughly £2.9 billion that banks held as legal reserves. Deprived of these largely cash reserves, banks have since imposed restrictions on dollar transactions, including domestic transfers, foreign payments, credit and debit card use and withdrawals. Replenishing these resources and normalising operations must be a top priority for the next government to protect the public, particularly depositors.

Perhaps the only notable difference from the balance of payments crisis of the 1980s is that the earlier crisis was primarily about debt. At that time, Bolivia, like many other countries, had borrowed heavily from commercial banks on a short-term basis and at high interest rates. The current situation is quite different: external debt now stands at roughly 30% of GDP, providing substantial room for negotiation with international institutions. But this figure is calculated at the official exchange rate, which reinforces the case for not adopting a flexible exchange rate as the first policy measure.

Finally, the success of any stabilisation plan depends not only on political will but also on broad political support. Stabilisation programmes tend to succeed when there is consensus across the entire political spectrum, not just within the governing party or coalition (Kehoe and Nicolini, 2021). Achieving such consensus in Bolivia may be particularly difficult due to deep political polarisation. Although the MAS party has lost its position in power, a faction known as Evismo – aligned with Evo Morales (the former president) – appears to command nearly 15% of the vote, according to first-round results adjusted for spoiled ballots. This political faction could mobilise significant influence on the streets, adding an additional layer of complexity to implementing reforms.

Conclusion

Bolivia recently celebrated 200 years of independence on 6 August. Yet today the country faces the urgent need for a shift in economic management – from a predominantly state-led model towards a more market-oriented approach. As the discussion above illustrates, this transition will be far from easy. Bolivia is not new to stabilisation programmes: the first was implemented in 1956 (the Eder Plan), and the second in 1986 (the New Economic Policy). Both experiences offer valuable lessons that could inform the design and implementation of the next necessary programme (see Kehoe, Machicado and Peres-Cajías, 2021).

Both previous stabilisation programmes were implemented during periods of severe economic crisis, with already high social costs. This is unlikely to be the case today. Inflation exists but remains moderate, and the parallel exchange rate has depreciated gradually, aided by the economy’s informal dollarisation. Some automatic stabilisers are already functioning, and the real exchange rate now appears to support exports – indeed, Bolivia has recorded a current account surplus in the past two months.

This mixed situation makes it uncertain whether the next government will be able to implement the necessary adjustments. While the crisis is not severe enough for the population to accept any measure indiscriminately, there is broad awareness that reform is needed. In any case, what is undeniable is that the adjustment, and the accompanying fiscal and monetary measures, must be credible – a challenge that extends beyond purely economic considerations.