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Cablegate: Bolivian Inflation: Pressure From All Sides

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DE RUEHLP #2791/01 2902200
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P 172200Z OCT 07
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 5322
INFO RUEHAC/AMEMBASSY ASUNCION 7149
RUEHBO/AMEMBASSY BOGOTA 4524
RUEHBR/AMEMBASSY BRASILIA 8420
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RUEHCV/AMEMBASSY CARACAS 2873
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RUEHMD/AMEMBASSY MADRID 3620
RUEHMN/AMEMBASSY MONTEVIDEO 4910
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RUEHSG/AMEMBASSY SANTIAGO 0114
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHUB/USINT HAVANA 0595
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 LA PAZ 002791

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON PREL BL
SUBJECT: BOLIVIAN INFLATION: PRESSURE FROM ALL SIDES


-------
Summary
-------

1. (U) After two decades of stable prices, Bolivia is
headed toward double digit inflation. For the first nine
months of the year inflation came in at 8.3 percent; it is
likely to top 12 percent for the year. Skyrocketing
remittances, narco trafficking, Venezuelan checks, favorable
terms of trade, and expanding public spending are all
contributing to high inflation, according to experts. Central
bank responses appear inadequate and price controls will be
of little, long term help. Moreover, investment is timid at
best and unlikely to absorb much of the excess liquidity. End
Summary.

-----------
Remittances
-----------

2. (SBU) In May, the Bolivian Central Bank published a
report estimating that remittances from Bolivians living
abroad would reach $700 million this year. That figure
equates to a whopping 8% of GDP and about a 25% increase from
2006. Moreover, the figure could be even higher. The
general manager of Banco Economico, the seventh largest bank
in terms of deposits, said that their bank alone has handled
over $200 million this year and thus puts the figure at
closer to $1.2 million nationwide. Point being, remittances
are putting a lot of cash into the hands of consumers.

-------------
Narco Dollars
-------------

3. (U) Estimates clearly vary, but by all local accounts
(especially in the Santa Cruz area) narco dollars are flowing
freely into the economy. A good guess, based on coca leaf
production, indicates that approximately US$140-180 million
enters the Bolivian economy through the drug trade. While a
good remedy for altitude sickness, coca tea cannot reduce the
inflationary headache these illicit inflows create.

-----------------
Venezuelan Checks
-----------------

4. (U) In the Morales administration's version of
transparency, the President has traveled over the past three
months openly distributing checks from Venezuela. In order
to avoid any government oversight, these checks are funneled
directly through Morales as gifts from Chavez to local
government leaders and even private contractors. The amounts
are not insignificant. On October 14th, for example, Morales
delivered two million dollars worth of checks in the city of
El Alto. When he was unsure who the recipients should be, he
simply asked the crowd if he should give the checks to the
local government or the private contractor responsible for
the intended projects (the crowd voted for the contractor).

--------------
Terms of Trade
--------------

5. (U) Since last August, Bolivia has accumulated a trade
surplus of approximately $780 million dollars, or about 9% of
GDP. (Note: This surplus is strictly a result of price
increases; production from the gas (-1.5%) and mining (-12%)
sectors have fallen in the first trimester of 2007). The
result is the accumulation of over $5 billion in monetary
reserves through August. This sum is 1.2 times the quantity
of reserves held in December 2006 and double the level in
December 2005. Thus, while investment in the export sectors
is low and production is falling, earnings are high. As one
forward-looking national banker described it, Bolivia is
living "a crisis of the bonanza."

LA PAZ 00002791 002 OF 002

-------------------
Government Spending
-------------------

6. (U) Currently the fiscal situation in Bolivia is on
solid ground. Favorable exterior conditions and debt
forgiveness from international creditors have allowed the GOB
to reduce its public debt to 32% of GDP, a considerable
reduction from a high of 60% in 2004. Moreover, as of July,
the government budget showed a surplus of close to four
percent. Despite these positive fiscal numbers, the bonanza
times for Bolivian exports have also allowed the GOB to
increase public spending by about 40% through May. Quite
simply, there is a lot of cash flowing through both the
private and public sectors.

----------------------
Central Bank Responses
----------------------

7. (U) The Central Bank has responded to excess liquidity
by allowing the local currency to appreciate, taxing
remittances by 1%, and attempting to sterilize some liquidity
by selling bonds. Through 2005, the Central Bank issued 91
million in bonds. This figure rose to US$249 by December of
2006 and jumped to US$850 million by September 2007.
Clearly, inflation is on the Central Bank's agenda and their
concern is evidenced by the tripling of outstanding bonds
over the last nine months. However, these sterilization
measures contrast with a steadily increasing monetary supply.
From 2005 to 2007 (through June), the monetary supply has
grown by about 30% each year. This is not a sure indicator
of inflation to come, but it is an additional pressure.

-------
Comment
-------

8. (SBU) Bolivia is not alone in facing increasing
inflationary pressure. To the south in Argentina, inflation
has become the major issue in the presidential campaign; it
will likely only grow in importance in Bolivia as well. The
Morales Administration is facing significant challenges
across a broad spectrum of social and political issues, it
can ill afford to be seen as mismanaging the economy. While
many of the inflationary pressures that affect Bolivia are
not the result of government policy, high inflation
disproportionately impacts the poor (Morales' base) and they
are unlikely to look beyond their government for causes. The
economy matters and nothing brings that home faster than
rising prices.
GOLDBERG

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