The plea was dramatic: If Bolivia’s government didn’t help the aviation industry to face urgent dollar-payment demands from suppliers, the landlocked country could end up without flights and isolated.

It was the latest dismal event in the nation’s financial meltdown: an old-fashioned balance of payment crisis triggered by the lack of international reserves to defend an exchange rate fixed to the US dollar since 2011. With international reserves at about a tenth of their $15 billion peak in 2014, the government of President Luis Arce is safekeeping every dollar bill and gram of gold, depressing activity, sparking fuel shortages and stoking social unrest — all in the name of avoiding a devaluation of an untenable 6.9 boliviano-per-dollar peg.

Bolivia’s Boom & Bust

Total reserves including gold and foreign currency, 2003-2024

Annual inflation spiked to almost 8% in October, the highest since the implementation of the peg. The lack of dollars led to parallel exchange rates, feverish currency speculation and suppliers demanding payments in hard currency, amounting to the informal dollarization of the economy.

Arce has been trying to contain the collapse by reversing the damaging decline in hydrocarbon output, granting incentives for foreign oil and gas companies and liberalizing the fuel market last week in an attempt to mitigate gasoline shortages. Even if these measures are on the right track, they are too little, too late: These imbalances have been brewing in Bolivia for years, the result of policy malpractice during the golden era of Evo Morales’s socialist rule between 2006 and 2019, when Arce was his economic czar. A government with a more sensible approach would have tamed spending and invested in making sure the country’s natural gas bonanza kept paying the bills for the next decades (for a detailed chronicle of what went wrong in Bolivia, read my colleagues Peter Millard and Sergio Mendoza here.)

That gradual strategy is not possible anymore: What Bolivia desperately needs today is a huge fiscal adjustment, a devaluation of its currency and the refinancing of its foreign debt with the support of the International Monetary Fund. Doing that may be political suicide for the socialist government. But the longer Arce waits, the higher the cost these measures will impose on Bolivians.

Going Down

Bolivia’s key economic indicators and forecasts, 2022-2027

With elections in August, Arce is hoping to preserve his shot at winning a second term. He may be expecting help from geopolitical allies such as China’s Xi Jinping, whom he met this week in Rio de Janeiro. But his fratricidal war with Morales for the leadership of the ruling MAS party, complete with coups and assassination attempts real or staged, is putting the country on the ropes. Evo, who despite a court ban is determined to run for president again next year, has whipped up a frenzy among his followers, who took over military bases last month.

Bond investors have remained strangely quiet, with Bolivian notes gaining in recent months on the back of the government’s more probusiness measures. That’s just an illusion: Débora Reyna García, who covers Bolivia for Oxford Economics, says the devaluation is only a question of time and could happen in late 2025 or early 2026.

“We just don’t see it before the election because the political and social costs are too big,” she told me. “Something that keeps investors calm is that Bolivia doesn’t have much debt and its biggest maturities are scheduled for the second half of 2026.”

As unavoidable as such a fate may be, it’s a sad end to the unusual combination of populism and economic strength that characterized Bolivia during the past commodities supercycle: The continent’s poorest country grew on average 5% per year for more than a decade, erasing inflation, significantly reducing poverty and boosting income. But the days when Morales was enchanting world leaders and the press with his multi-striped sweater and folksy style are long gone.

Some would argue that the socialist roots of the former coca farmer’s project always contained the seeds of its own demise. Perhaps. I still think that the path wasn’t predetermined, and that bad policy choices matter: Morales’s addiction to power, careless spending and allergy to private investments are big reasons behind the country’s complex present.

What’s curious in Bolivia’s case is that despite the evident collapse of the socialist experiment, no opposition leader has emerged to profit from the political disarray. They are still discredited in the eyes of the country’s indigenous majority and fearful of the heavy hand with which the current regime treats opponents. But that may well change: As Javier Milei’s case in Argentina recently showed, when the economy reaches a point of no return, only an outsider can disrupt the establishment and make the drastic policy changes needed — the same leaders who created the problems are unlikely to solve them.

Having said that, a more authoritarian turn à-la-Venezuela shouldn’t be discounted, which would add to Latin America’s roster of political blackholes. Despite his unpopularity and legal cases, Morales seems determined to take power again: The accusations against him, including allegations of statutory rape and human trafficking, which he strongly denies, suggest that he doesn’t have many alternatives if he wants to avoid the risk of jail time.

As someone who lived through the collapse of Argentina’s currency peg in 2001, I can say that a chaotic devaluation batters society and politics in unpredictable and long-lasting ways. Let’s just hope that in Bolivia the consequences are for the better.