Fiscal Policy

Bolivia's fiscal policies in the 1970s contributed to the hyperinflation of the early 1980s. Fiscal deficits grew as the public sector took advantage of windfalls from high commodity prices, easy access to deficit financing in international markets, and robust economic growth to increase its activities. As external financing slowed in 1978 and debt payments outgrew new financing, budget deficits began to directly influence the economy. With the onset of the international recession of 1982, the economy began an inflationary spiral both caused and accelerated in large part by fiscal mismanagement. Because Bolivia had no bond market in the early 1980s and lacked external financing, fiscal deficits could be paid for only by the highly inflationary practice of printing more money. Combined with a series of other trends in the economy, inflation and deficits fueled more of the same. As hyperinflation raged in 1984 and 1985, government revenues as a percentage of GDP dropped to as low as 1 percent. Tax rates, most of which were not indexed, became completely distorted; even worse, by the time the government received the revenues, they were virtually worthless.

NPE reforms drastically affected fiscal policy on both the expenditure and the revenue sides. In an effort to reduce government spending, the government liquidated the CBF and restructured the two largest and most costly state-owned operations, Comibol and YPFB. It also imposed spending controls on the public sector and froze its wages. On the revenue side, it unified import tariffs and hired a Swiss company to collect import receipts. The government raised the price of oil by a factor of ten, which immediately contributed badly needed revenue. In 1986 the government also adopted an aggressive policy toward tax collections, with dramatic results. The public sector deficit dropped from 28 percent of GDP in 1984 to 3.8 percent in 1986. Deficits increased to 10.5 percent in 1987 because of Argentina's failure to make its payments for natural gas but again fell to 6 percent by 1988.

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Source: U.S. Library of Congress