Via World Politics Review, commentary on how Bolivia’s hydrocarbon-led economic model is running out of gas:

In the past 15 years, the Bolivian economy tripled in size and poverty was cut in half, achievements built in large part on state spending fueled by the income from natural gas exports. But since 2013 those exports have dwindled, leaving a hole in Bolivia’s public finances that challenges the sustainability of its economic model.

On May 1, 2006, then-President Evo Morales marched troops into Bolivia’s gas fields, declaring, “The plunder has ended.” He had recently led the Movement Toward Socialism, or MAS, to power, campaigning on a platform to wrest control of the country’s resources from foreign interests and to spread the wealth they generated among the people. Though framed as the nationalization of the country’s resources, Morales’ approach amounted to renegotiating existing contracts with foreign companies. He then used the tax windfall from the ongoing commodities supercycle to fund social programs and build up financial reserves.

But Bolivia’s gas exports peaked in 2013, at more than $6 billion for the year, at a time when the country’s GDP was $31 billion. Three years later, after the end of the commodities boom of the preceding decade, exports had slumped to around $2 billion. They have recovered a little since, but without ever clearing $3 billion. In 2021, they came in at $2.2 billion.

The global gas market played a role in the declining revenues, with Bolivian gas prices crashing by two-thirds in 2016 from their 2012 peak, before rallying somewhat. But if volatile commodity prices remain beyond the government’s control, it has more say over production. Yet Bolivia’s gas production also peaked in 2014, at 22.2 billion cubic meters, or bcm, per year. Since then, it has fallen steadily, standing at 16.4 bcm per year.

Falling production means lower sales and less income for the state. But it also jeopardizes future exports in Bolivia’s two main markets: Brazil and Argentina. In both cases, Bolivia has failed to meet its contractual requirements, forcing it to negotiate to avoid fines. Less Bolivian gas—particularly in the context of droughts that have hit Argentina’s and Brazil’s hydroelectric energy sectors—has forced both countries to rely more on relatively expensive liquid nitrogen gas imports. Now, both are moving to develop their own natural gas resources, in part to reduce their dependence on Bolivian imports that have proved unreliable.

According to Raul Velasquez, a hydrocarbons expert at Fundacion Jubileo, a research organization based in La Paz, Bolivia, the main reason for the decline in production is that there has not been sufficient investment in exploration. “If we look at investment in recent years, it has mostly gone to exploitation of existing gas fields,” he says, adding that most of the exploration that has been done has been carried out by YPFB, the state gas company, and its subsidiaries—not private companies. “And this is because in Bolivia, the current legal and economic framework is not attractive for investment in the hydrocarbon sector. Not even for YPFB itself.”

With state income from gas exports in decline and no alternatives available in the short term, Bolivia’s economic model is coming under strain.
Velasquez points to the country’s fiscal regime as the main factor that has prevented Bolivia from maintaining or even expanding its gas production. When all the various taxes are added together, the state can receive almost three-quarters of the value of hydrocarbons extracted in Bolivia. This allowed the state to squeeze a lot out of existing gas fields—but it disincentivized exploration for new ones. To change that, Velasquez thinks a new fiscal regime is necessary to balance earnings between the state and private companies. In practice, though, such a change would be politically difficult for a government that has staked so much on the sovereign control of natural resources.

That means that, at least in the short term, gas production is likely to fall further and the hole in public finances will grow larger. Aware of this, the government has tried to develop economic alternatives—and in a country with a vast informal economy and little in the way of industry, this has meant more extractive activities.

Foremost among them is lithium, the metal vital to the batteries that will power the green energy transition. Bolivia has more lithium reserves than any other country, and it announced its intentions to develop them in 2008. But even after almost $1 billion of investment by YLB, the state lithium company, it remains unclear whether extraction is feasible, or when it might happen. “We’re talking about 14 years, and there has been almost no advance,” said Alfredo Zaconeta, a mining expert at CEDLA, a Bolivian research organization. “In reality, it is still very far from materializing.”

If the windfall from lithium remains a distant dream, it might seem that Bolivia’s other metals could replace the rent from hydrocarbons. In 2021, for example, gold, not gas, was Bolivia’s top export. But almost all of Bolivia’s gold is produced by small-scale producers known as cooperatives, which are exempt from most taxes, paying less than 3 percent in royalties to the state. “Gold production for 2020, estimated at 23 tons, represented more than $1.2 billion in value,” said Zaconeta. “But when it came to collecting royalties, the state barely received $34 million.”

This situation extends to Bolivia’s other mineral exports, such as zinc, silver and lead. Even as the post-pandemic surge in commodity prices helped give Bolivia its first trade surplus in six years, the state itself has not seen much of the money. “As with gold, so with all the minerals,” said Zaconeta. “The ceilings that were fixed for royalties are not allowing the state to really make the most of the good prices. The prices have shot up incredibly, but this hasn’t resulted in revenues.”

To raise royalties on mining, Bolivia’s Mining Law would need to be changed. This is unlikely to happen, partly because the cooperative sector, which is a pillar of support for the government, would resist it. As Zaconeta explained, over the past 15 years, the cooperatives have not only coalesced as a movement that generates massive employment. “They have consolidated as a political power with a tremendous capacity for mobilization,” he said. “If the cooperatives decide to march, take it for certain that they will stop the country.”

With state income from gas exports in decline and no alternatives available in the short term, Bolivia’s economic model under the MAS is coming under strain. Jose Gabriel Espinoza, a Bolivian economist and former director of the country’s Central Bank, points to 2013 as the turning point. Prior to that year, about half the state’s income came from gas. Afterward, facing a growing fiscal deficit, the state began to rely first on external debt and then, since 2018, on internal debt, with its fiscal deficit averaging 7 percent since 2014.

“It’s a vicious circle,” said Espinoza. “The government needs to invest more to try to reactivate the economy, but at the same time this greater investment is increasing the fiscal deficit, which is being financed by the internal market—and this creates problems for the Bolivian financial system in terms of access to credit and liquidity.”

Meanwhile, financial reserves—which gas exports helped take to a peak of $15.1 billion in 2014—are down to $4.5 billion of which only a minority is foreign exchange. This threatens a pillar of the economic model under the MAS: a fixed exchange rate between the country’s currency, the boliviano, and the dollar, which has kept the boliviano stronger than it otherwise would be, making imports cheaper for Bolivian consumers. When the dollar strengthens, or when there is pressure for the boliviano to weaken, the government must use reserves to maintain the fixed rate. Should it run out of reserves and be forced to abandon the peg, the boliviano could crash in value. That in turn would make its growing external debt more expensive to service, among other things. “For now, there isn’t volatility in the exchange market. People seem relatively calm,” said Espinoza. “But the situation could change very quickly if they don’t strengthen the reserves.”

Overall, though, Espinoza doesn’t see a clear strategy from the Bolivian government to address these challenges, and he expects 2022 and 2023 to be difficult years. Bolivia’s president, Luis Arce, was Morales’ well-regarded finance minister for the first decade the MAS was in power, gaining a reputation for being a pragmatist in a government often filled with ideologues. He was elected in October 2020, Espinoza says, in the hope that he would adjust the country’s economic model to the new conditions. “Unfortunately, he has continued with the model as if we were still in the situation of 2010,” he adds. “And the imbalances in the economy are reaching levels that are difficult to manage.”