Political Risk Latin America Blog @PolRiskLatam

Bolivia politics: A botched fuel price rise

Posted in News and Articles, Political Risk by politicalrisklatam on January 6, 2011

by The Economist Intelligent Unit, January 4th, 2011.

The announcement by Bolivia’s vice-president, Alvaro García, of a massive 73% rise in the price of petrol and 83% for diesel on December 26th shocked the nation. Over the following days it became clear that the government would be unable to contain a massive protest backlash. This forced the president, Evo Morales, to rescind the measure in an embarrassing climb down on December 31st. The reversal also prompted the resignation of the presidential spokesperson, Ivan Canelas. In the wake of this misstep, the government’s popularity has taken a hit.

Although the measure had been presaged in the days before the announcement by government propaganda outlining the need for fuel prices to rise, the scale of the increase caused widespread panic. This was made worse by the absence of the president, who was on a holiday visit to Venezuela. In the subsequent days prices for transport services were doubled in many cases, and goods prices rose sharply as panic buying led to shortages.

A run on bank deposits estimated at US$200m also ensued as the uncertainty led to rumours that the government intended to impose a surprise freeze on bank deposits held in US dollars. The fuel price increase sparked fears that the public finances were in poor shape and that the government intended to grab foreign-currency deposits cheaply through a sharp appreciation of the currency (the boliviano). The government strenuously denied any such intentions but said the fuel price measure was necessary to reduce the discrepancy between heavily subsidised domestic fuel prices and those of neighbouring countries. This discrepancy has led to a growing contraband trade and unsustainable losses for state-oil company Yacimientos Petrolíferos Fiscales Bolivianos (YPFB).

On his return to Bolivia, Mr Morales sought to soften the blow by promising huge 20% pay rises for four main groups of public-sector workers—the military, police, teachers and health workers—as well as an extra month’s salary for other public employees. Other measures to assist farmers and aid agricultural output were also announced. However, given that over 70% of Bolivians are thought to be self-employed and would be unlikely to benefit from any of the palliatives, the offer failed to dent the antagonistic public mood. Mass demonstrations by all sectors (even those due to receive salary hikes) were announced for January 3rd, and this convinced the government to abandon its plans. (continue reading… )



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