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InterviewsJuly 1 2016

Bolivia’s economy minister pledges to industrialise economy

Luis Alberto Arce, Bolivia’s economy minister, tells Jane Monahan how the country's government is attempting to diversify its economy away from its dependence on raw materials. 
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Luis Alberto Arce embedded

Luis Alberto Arce has been Bolivia’s economy minister for 10 years, ever since president Evo Morales – now serving his third term – took office for the first time. In an exclusive interview with The Banker in his 19th-floor office in the capital, La Paz, Mr Arce says: “Right from the start, the government adopted a different economic approach.”

First, he says the state took control of a number of the country’s utilities and key commodities industries, including oil and natural gas. Second, through redistributive policies, it targeted the country’s poorest citizens with investments in health and education and basic infrastructure, as well as large conditional cash transfer programmes. As a result, over the past decade the government has reduced the poverty rate by 20 percentage points to 17%, a big social gain.

Third, the government is investing heavily in industries in 'productive' sectors that add value and/or jobs to the economy. The aim of this, in conjunction with increased domestic consumption, is to create new momentum for economic growth so the country does not rely so much on raw materials exports. “We don’t want to export just raw materials any more. We want to industrialise and diversify our economy,” says Mr Arce. “A more diversified economy will give us more potential to grow.”

After the boom

Buoyed by a commodity boom – Bolivia’s hydrocarbon exports (mainly natural gas) and mining account for more than 80% of its exports – and a favourable external environment, up until recently these policies appeared to work. Bolivia’s gross domestic product (GDP) has tripled over the past decade to $33.2bn at the end of 2015, and annual economic growth averaged an impressive 5%.

Indeed, it was not until lower international oil prices started to feed into gas export prices in the first half of 2015 (export prices were down 34.2% year-on-year), while imports of raw materials and capital goods to promote domestic industrialisation stayed strong, that Bolivia registered a trade deficit – of $885m – in 2015 and the country’s current account balance swung to a deficit equivalent to 3.5% of GDP. Meanwhile, Mr Arce forecasts a 6% deficit in the overall public sector budget in 2016 (covering national and local government and public enterprises’ debt), up from 3.5% in 2015.

But even with this more challenging environment, Bolivia has come out of the commodity boom in a much stronger position than most of its Latin American neighbours. Prudent macroeconomic management ensured important cushions were accumulated during the boom, giving the government the leeway to take a gradual approach to adjusting to less favourable external conditions.

Just how big these cushions are is illustrated by the country’s international reserves which, though they decreased by $2.1bn in 2015, remain high at $13bn, and the highest in the region in GDP terms (equivalent to 39%). On top of that, Bolivia’s fiscal savings are approximately 24% of GDP and the total public debt is less than 40% of GDP, according to Mr Arce.

Meanwhile, inflation has never got out of control, but has remained low and stable in the last few years, anchored by a stable exchange rate. In 2015, annual inflation was the lowest in the region, at 2.9%.

So what now?

But where will the economy go from here? Mr Arce says the government aims to maintain growth at an average rate of 5% for the next four years and reduce extreme poverty from 17% to 10% by means of a national 2016-20 economic and social development plan, which was approved in January.

The gist of this massive $48.5bn plan is that the government believes it will be possible to sustain internal demand and growth (and compensate for the decline in external sources of revenue) with extensive public investment representing 55% of all the investments and partly funded by savings accumulated during the economic boom, as well as with new external financing. Key investment areas include: infrastructure, hydrocarbon exploration, mining (iron ore and lithium), thermal and hydroelectric energy generation, inputs and machinery for agriculture, and food industries.

However, bankers and commentators say investing in oil and gas exploration and production, and new mining ventures when commodity prices are still low, is not an attractive business right now.

Argentina and Brazil are Bolivia’s two principal foreign markets. But while Mr Arce intends to change Bolivia’s natural gas contracts with them (the gas contract with Brazil is due for renewal in 2019) so they purchase not only the raw material – natural gas – but also electricity generated in Bolivia, it is far from certain these countries will accept the new terms. 

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