When President Rodrigo Paz declared an “economic, financial, energy, and social emergency” in December, there was little doubt about his diagnosis of Bolivia’s problems. After nearly two decades of economic mismanagement, the country’s international reserves were depleted, and the fiscal deficit was rising. The country faced not just a downturn, but a full-fledged debt crisis and balance-of-payments crisis that merited exceptional measures.
Five months later, however, the response has fallen short.
The administration pledged a three-part stabilization strategy: fiscal consolidation, exchange-rate flexibility, and a new growth agenda. After Paz took office, the administration also began negotiating an IMF program. To date, only partial progress has been made—and not nearly at the pace required. Fiscal adjustment has been limited, the exchange rate remains rigid, and the future of Bolivia’s growth remains elusive. While negotiations with the IMF are well underway for a $3.3 billion program, talks are stalling.
Sounding the alarm may seem strange as Bolivia was able to meet a $388 million interest payment just last month, and its two bonds — the 2028 and 2030 — trade near par. Yet it has stayed current on its debt service not through structural reform, but through stopgap measures. Bond prices do not necessarily reflect the country’s strength: They reflect the likelihood that more stopgap measures may materialize, even if they cost Bolivia in the long run.
The stopgap measures are multiple. Multilateral lenders have frontloaded financing to help the government meet near-term obligations. While the central bank discontinued the gold derivative operations of the prior government, it still relies on purchasing gold from local miners in local currency to sell for foreign currency. This fuels smuggling and is not a sustainable alternative to building reserves the old-fashioned way, running trade surpluses. In addition, the government executed a debt swap that shifted the central bank and pension fund out of the country’s foreign-currency bonds and into new local-currency bonds. This relieved pressure on the country’s reserves but also strained the balance sheets of key Bolivian institutions: Good assets have been replaced by assets in a currency soon to be devalued.
These do not rebuild the country’s reserves or its capacity to generate foreign exchange. The stark gap between Bolivia’s external obligations — $1.6 billion in debt service through 2026, $12 billion due through 2030 — and its capacity to meet those obligations will only continue to grow.
The fiscal factor
Paz got off to a promising start. A month after taking office, he stared down nationwide protests to remove fuel subsidies. That hard-fought accomplishment will improve the energy sector and create fiscal space. Yet it only cut spending by 10%. Paz had another 20% to go to meet his pledge of reducing the deficit from 10% to 7% of GDP.
Rather than fulfill the rest of the fiscal adjustment, Paz’s new budget lowers the deficit to just 9%, implying very modest spending cuts. This is a problem because the only other lever to reduce the deficit — raise revenues — does not appear viable. The country’s primary revenue source, hydrocarbons, has been in nearly continuous decline since the commodity collapse of 2014. The IMF projects it to fall to just 0.6% of GDP over the next five years.
If budget cuts had to hit sensitive policies like pensions and cash transfers — an austerity package that could drive Bolivians onto the streets again — avoiding the fiscal adjustment would be understandable. However, the cuts do not have to touch essential spending. Instead, Paz can look to Bolivia’s bloated state-owned enterprises, as 64 of 67 Bolivian state-owned enterprises (SOEs) operate at a loss and 14 are insolvent. This is where the fiscal fat lies.
By failing to cut the budget sufficiently, Bolivia is left on a risky debt path. In addition to issuing more domestic debt, the government is expected to turn to more monetary financing. This could ratchet up inflation to 14%, the government acknowledged. It may also compound Bolivia’s monetary problems.
Trouble with the Boliviano and the BCB
Bolivia long had a habit of monetary financing. Under the Movement Toward Socialism (MAS), the central bank lent $23 billion to the public sector and $5.2 billion to SOEs. As Bolivia has depleted its reserves, these loans now account for 77% of central bank assets. A markdown of loans to unprofitable and insolvent SOEs will be necessary, but it could make the central bank appear insolvent.
Central bank insolvency is a recipe for inflation and a loss of confidence in the currency. If a central bank’s assets cannot service its liabilities (the interest it owes on bank deposits), the bank may turn to money-printing. This is what the Bolivian Central Bank appears to be doing. Money creation has increased by nearly 130% since 2020 and has accelerated since 2023, when the country ran out of reserves. Inflation has followed, rising from 2.1% in 2023 to 10% in 2024, then to 20.4% in 2025.
When people began fleeing the boliviano for dollars in earnest in 2023, a parallel market opened. That market now reflects the official rate to be 38% overvalued. An overvalued currency makes exports artificially expensive and imports artificially cheap.
The Paz government made an early promise to embrace exchange-rate flexibility and thus devalue, but it has not. There are many policies that make sense to tout yet delay, but a devaluation is not one of them. Talking about a devaluation, rather than implementing it, only creates pressure on the currency. Indeed, Bolivia’s exchange-rate gap has widened in recent months.
To restart Bolivia’s exports and align its currency with fundamentals, a devaluation is needed. To rebuild monetary credibility, a fiscal recapitalization as part of an IMF program will likely be needed, too.
Talking to the IMF
IMF programs take time to emerge, but Bolivia’s seems to have gotten stuck in the mud. Given Bolivia’s depleted reserves and persistent deficits, the standard IMF approach is to require devaluation as a “prior action” in a program. Bolivia appears unwilling to do this. Until this emerges, an IMF program should not be reached.
Nevertheless, Bolivia may find clever ways to play Washington’s politics. The foreign minister has led economic engagement with the Trump administration, and Paz has generated goodwill as a member of President Donald Trump’s “Shield of the Americas.” This may incline some in the Trump administration to deal with Bolivia on diplomatic rather than technocratic terms.
Bolivia may request that the U.S. lean on the IMF to allow a program to proceed without action on the exchange rate. Alternatively, the U.S. may encourage the IMF to look the other way when Bolivia fails to meet a program condition, as it did with Argentina.
As IMF negotiations progress, one fact should become clear: Bolivia’s external debt is unsustainable. It simply does not have the U.S. dollars or the capacity to generate the U.S. dollars needed to stay current on foreign-currency liabilities through 2030. Though Paz’s reforms will eventually bear fruit, they will not do so on a timeline compatible with the country’s repayment schedule. Reprofiling Bolivia’s bilateral and private external debt is essential.
Paz has his work cut out for him. He compellingly identified Bolivia’s problems, correctly defined the solutions, and was elected with a strong mandate to deliver real reform. To get Bolivia back on track, Paz should act quickly.
ABOUT THE AUTHORS
Stephen Paduano
Reading Time: 4 minutesPaduano is a postdoctoral fellow at the Blavatnik School of Government at the University of Oxford, an economist at the Finance for Development Lab, and a former U.S. Treasury official.
Jules Devie
Reading Time: 4 minutesDevie is a researcher at the Finance for Development Lab and a graduate of the London School of Economics. His work focuses on sovereign finance in emerging economies.
Jean Courtial
Reading Time: 4 minutesCourtial is a research analyst at the Finance for Development Lab and graduate student at HEC Paris. His work focuses on sovereign finance in emerging and frontier markets.
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