In the thin air of El Alto, just below the Andean snowline, shoppers hunt for bargains at stalls selling cheap shoes, school books, cookware or counterfeit clothing.

Signs of Bolivia’s emerging financial crisis are not hard to find on market day in the world’s highest major city, where customers are starting to feel the pinch after the nation’s currency peg to the dollar effectively collapsed, sending prices soaring.

“Everything is going up, including nationally-produced products,” said Rocio Sarmiento, as she waited for buyers at her stall selling snacks in El Alto. Business was slow.

One of Latin America’s fastest-growing economies earlier this century, Bolivia is shuddering to a halt. The nation of 12 million is being buffeted by a financial storm long in the making, which has its roots in the end of a natural-gas boom and the country’s failure so far to capitalize on its massive reserves of lithium.

That’s fanning a conflict between President Luis Arce and his presidential predecessor, Evo Morales, who is vying to make a comeback even in the face of a 2023 Constitutional Court ruling that bars him from seeking another term.

The deteriorating economic outlook poses a threat to Arce’s grip on power, as a shortage of hard currency starts to freeze up foreign trade. That’s reverberating across the country from the capital La Paz in the high-level plains to the Amazon basin, sending shockwaves through farms, mines and healthcare providers.

Jimena Ugrinovic, whose family imports fertilizers, pesticides and agricultural machinery, says she can no longer easily get dollars to pay suppliers in China, India and Israel on time. That threatens to hit the soy and beef producers who have powered much of the nation’s recent economic growth.

“We’re the first link in the chain of production,” she said, speaking from Santa Cruz province in Bolivia’s fertile tropical lowlands. “If we can’t import, there’s not going to be any agriculture. It’s as simple as that.”

Turmoil in Bolivia is a further blow to the once-dynamic Andean region, which was among the best-performing among emerging markets early in the century, but which is now mired in weak growth, legislative gridlock and popular discontent, from Colombia to Chile. Bolivian neighbor Peru’s political system is on the ropes, Argentina is in the early stages of experimental shock therapy to tackle inflation approaching 300%, while to the northeast, Ecuador is grappling with twin economic and security crises.

The trouble at home is bolstering the prospects of Morales, 64, a former llama herder who rose to become Bolivia’s first Indigenous president in 2006. His early successes made him an icon of Latin American socialism, but he was forced out in 2019 after a disputed election.

Morales is plotting a return to power after feuding with Arce, 60, a UK-educated economist who was once his protege.

The combination of economic upheaval with an acrimonious split in the ruling party creates potential for unrest in a historically turbulent nation that has had nearly 200 coups and revolutions since it won independence from Spain two centuries ago, and where coca growers, miners, teachers and other labor unions often stage disruptive protests.

“The people who are supporting Morales are going to look for a lot of pretexts to take to the streets,” warned Jerges Mercado, a member of congress loyal to Arce.

Those two strands, political and economic, coalesce in El Alto, a stronghold of the ruling socialists, and the biggest prize for both party factions as they struggle for control of revolutionary labor unions and Indigenous organizations ahead of elections next year.

The city of about a million starts at the lip of the canyon where the capital is situated and is expanding rapidly across the arid, virtually treeless highlands known as the Altiplano, 13,600 feet (4,150 meters) above sea level.

El Alto is the biggest Indigenous city in Bolivia, and much of the population is impoverished — the rich live nearly 3,000 feet down the mountain where it’s warmer. A cable car system ordered by Morales when in power links the city with the seat of government in downtown La Paz, as well as the wealthy neighborhoods.

“El Alto is going to be key for the next administration to be able to get anything done,” said Ignacio Renán Cabezas, a Morales ally who represents the area in congress.

One national poll found that Arce has about twice as much support as Morales within the ruling party as a whole. But the president’s backing is likely to wane if the government can no longer afford to heavily subsidize food and fuel, or if the dollar shortage stokes inflation.

There are already signs of that happening in El Alto’s main market, where women doing their weekly shopping were dressed in bowler hats, traditional shawls and brightly-colored pleated skirts.

Sarmiento at the snack stall said she’s now paying 30 bolivianos ($4.30 at the official exchange rate) wholesale for a packet of imported biscuits that cost 24 bolivianos a year ago. Other goods, including Coca Cola, have also soared in price, she said.

A blender now goes for 210 bolivianos whereas last year it cost about 175, according to another store holder. A kettle manufactured by Royal Philips NV has risen to 185 bolivianos from 140.

Bolivia’s subsidized supermarkets have images of the president smiling by the entrance, a symbol of the government’s benefaction for the people inside.

Subsidies of staple goods plus the fixed exchange rate have helped give Bolivia lower inflation than Germany and Japan in recent years, a major accomplishment at a time when prices were soaring across most of Latin America.

But with many importers now struggling to get hold of dollars, or having to buy them at an elevated price, Arce’s biggest achievement could be at risk.

In the state supermarkets, the authorities have so far managed to keep a lid on the price of locally produced goods such as rice, pasta and fruit. Consumer prices rose just 2.1% last year.

“The inflation basket tracks goods largely subsidized by the government, which keeps the official inflation measurement quite low,” said Christopher Dychala, who covers Bolivia for Fitch Ratings.

Officially, the currency peg still exists. But last year, a black market in dollars sprang up, as the central bank almost entirely ran out of greenbacks to supply at the official rate. In recent months, growing financial stress has been reflected in soaring commissions charged by banks for sending money abroad.

These rose to nearly 30% in February from about 2% a year earlier, according to Marcelo Olguin, head of the National Chamber of Exporters in La Paz. Banks buy dollars at a rate set by supply and demand, but are forced to sell them at the level set by the central bank. They managed to square that circle by hiking commissions — until the government capped them at 10%, effectively closing a loophole that had allowed the market to function.

In practice, this means that at its current parallel market rate of about 8.3 per dollar, it’s impossible to sell greenbacks except at a loss. Banks have found another workaround, of charging a commission to oversee direct deals between importers and exporters, though that, too, may not last since the government has been determined in shutting down attempts to circumvent its rules. Some importers have also studied the feasibility of buying currency directly from exporters via banks in Panama or the US.

“It’s likely that the market will move outside the system,” Olguin said.

Finance Minister Marcelo Montenegro said that he expects the exchange rate to return over time to the level set by the central bank as the economy overcomes its temporary shortage of liquidity.

“Everyone agrees that this is a problem of liquidity, and not one of solvency,” he said in a March interview in La Paz.

Much of Bolivia’s strong economic performance under Morales was due to a boom in natural gas exports, which are now in steep decline. In 2022, the country became a net importer of energy for the first time in decades.

Bolivia’s policymakers have for years failed to rein in the fiscal deficit or invest enough in gas exploration, hoping that sooner or later the nation’s vast lithium deposits would generate a tsunami of money that would bail them out. But now the long-anticipated crisis has arrived and the country still isn’t producing the battery metal in significant quantities — even if its price hadn’t collapsed. Australia, Chile and Argentina are meanwhile cashing in on the electric-vehicle boom.

Bolivia International Reserves Hit 20-Year Low at End of 2023

Foreign reserves have been on a downward trend since peaking in 2014

The government doesn’t want to cut subsidies the year before an election, but with a fiscal deficit of more than 7% of gross domestic product it’s running low on ways to finance itself.

Bolivia’s sovereign dollar bonds are trading at distressed levels, with a yield above 20%, effectively cutting the country off from global credit markets. The government can no longer easily borrow from multilateral lenders either, since the split with Morales has effectively deprived Arce of the congressional majority needed to approve loans from abroad.

Several central bank officials involved in external operations and reserve management have quit recently as the institution resorted to one desperate-looking measure after another. When it had spent the cash pile built up during the 2005-2014 natural gas bonanza, the bank sold its special drawing rights at the International Monetary Fund, and nearly all the gold it legally could. It also started offering dollar bonds locally, in the hope of getting savers to part with dollars stashed at home.

As of Dec. 31, the last date for which it has published figures, the bank had $166 million in cash — enough to pay for just a few days of imports. With this it has to make payments on Bolivia’s debt and also pay for fuel imports.

The country narrowly avoided a financial crisis in 2023 by passing a law to allow the central bank to sell about half of its gold reserves. Six months later, that had nearly all been spent: The bank had just 23.5 tons of gold left at the end of the year, and the law says this figure can’t drop below 22 tons.

Until now, the financial crisis has mainly affected businesses involved in foreign trade. But when ordinary people feel large and sustained rises in consumer prices they’ll start protesting, said Jaime Dunn, a financial consultant based in La Paz.

“The economy is what’s going to create very strong social and political pressure,” Dunn said. The Arce administration is determined to keep costly subsidies in place, and is concentrating all its efforts on trying to keep a lid on prices. That’s because, politically, inflation, is “a weapon of mass destruction,” he said.

Heading into next year’s election, one possible scenario is a three-way fight between between two socialists — Morales and Arce — and a conservative. Whatever the line-up of contenders, now is the worst time to add political instability to economic uncertainty.

Yet in January, thousands of protesting Morales supporters left their farms in the coca-growing region of Chapare and other areas, blocked highways with rocks and clashed with police. They accused Arce of conspiring with Constitutional Court justices to bar Morales from running for election. The disturbances cost the economy $1 billion, according to the Finance Ministry.

That could just be the beginning, since it remains unclear whether legal obstacles will prevent Morales from seeking another term.

“Millions of us will mobilize if they try to exclude our brother Evo from the elections,” said Cabezas, the El Alto congressman. “They’re going to see us in the streets.”