The Musicians of the Titanic

In the now-classic film Titanic (1997), directed by James Cameron, we see the story of the crew aboard the RMS Titanic, a ship famously claimed to be unsinkable. One of the most heart-wrenching scenes shows a group of first-class musicians, minutes after the ship strikes an iceberg and chaos ensues, deciding to keep playing their instruments as they await the inevitable end.

This image, in a way, serves as a metaphor for the management of the Bolivian economy and, in particular, the role played by the Central Bank of Bolivia (BCB). At the beginning of 2023, the Net International Reserves (NIR) under its management to sustain the fixed exchange rate reached alarming levels, and rumors about the unviability of the peg began to spread. These rumors were further exacerbated by the collapse of Banco Fassil in the first quarter of that year.

Thus, from the outset, 2023 was shaping up to be a negative year for Bolivia’s economy, one in which the skill of the authorities would be decisive. However, things started off poorly. As a solution to the abrupt fall in NIR, in a misreading of reality, the BCB proposed buying exporters’ dollars at a slightly higher rate than the official exchange rate. This measure was judged as another symptom of the unsustainability of the fixed exchange rate. Predictably, the public reacted, and the dollar began to vanish from the market. The logical consequence was the emergence of parallel markets. Here, the BCB—along with the government—erred again by blaming “speculators” instead of addressing the structural causes of the issue, and began arresting street money changers, sentencing them, and prosecuting them for profiteering.

The errors didn’t stop there. On March 6, 2023, the BCB announced it would sell dollars directly to the public through its own counters and those of Banco Unión. However, what the public understood from this was that the financial system had run out of dollars, and thus it was wise to hoard them “just in case.” Later, it was confirmed that banks indeed had no dollars, having handed them over to the BCB in exchange for cheap liquidity to finance subsidized social credit.

Additionally, on May 5, 2023, the BCB approved regulations allowing it to buy gold on the local market to reinforce the NIR. Yet again, the signal to the market was wrong: “We don’t have enough dollars, but we’ll prop up reserves with gold.” This was another sign of improvisation and lack of a long-term plan or vision.

At the same time, in what already seemed like a desperate move, in mid-February 2023, the BCB stopped publishing its weekly statistics, which included the level of reserves. To prevent leakage of that data, it also ceased publishing its financial statements, previously released monthly. These actions were perceived as an attempt to conceal the depth of the crisis, adding uncertainty among analysts and the general public who have since been forced to operate in opacity.

Let me digress on this last point. We went from knowing the state of NIR weekly to receiving updates with several months of delay. For example, on July 6, 2023, we learned about reserves as of late April (a delay of nearly 3 months), and in early December 2023, we saw reserves data as of August (a 4-month lag). At the start of 2024, we got data up to December 2023 (mostly up to date), but then no new updates until May 2024 (5 months delayed), which remains the last publication. How can the Central Bank be credible if it operates in secrecy? Or, more politically, how can it be credible if it only releases information once it’s no longer relevant for decision-making?

Needless to say, the general public and the financial system have both felt the dollar shortage. Early in the crisis, banks raised their wire transfer fees, which soon became a nominal anchor to estimate the dollar’s market value. This suboptimal situation at least allowed businesses willing to pay a premium to meet their obligations abroad. However, the situation deteriorated drastically when, in February 2024, ASFI imposed price caps on wire transfer fees, disregarding basic economic laws. The result: more scarcity of dollars. Markets, which don’t bend to authority’s whims, reacted with an even more expensive dollar. According to various digital platforms, it surged from Bs. 7.85 to nearly Bs. 8.70 during the week of the announcement, later stabilizing around Bs. 8.2 with a clear upward trend.

In this context, analysts began to investigate the state of the economy and its fundamentals more deeply, looking for alternative data still published regularly—such as financial system indicators from the Financial System Supervisory Authority (ASFI), inflation data, or the trade balance calculated by the National Institute of Statistics (INE)—or reconstructing some fiscal variables from information provided by the Ministry of Economy and Public Finance (MEFP). None of these sources showed—nor currently show—an optimistic picture. For example, at the end of May 2024, the BCB published its audited financial statements, revealing an increase in internal credit to the National Treasury of USD 4,392.3 million under the concept of “transitory liquidity.” Given the government’s ongoing fiscal imbalances, this “money printing” only further fueled inflation expectations and, consequently, expectations of currency devaluation. Thus, inflation—the primary mandate of the Central Bank—was relegated to a secondary concern in light of the MEFP’s financing needs.

As if this string of missteps weren’t enough, in recent days the Central Bank hosted two seminars that seemed completely disconnected from reality. On July 26, 2024, it held the 17th Monetary Conference titled “Sustainable Finance: Challenges and Opportunities for Economic Development.” What could have been an opportunity to reflect and generate new ideas to redirect economic policy became instead a vague discussion about topics far removed from Bolivia’s current economic capabilities¹. Finally—and almost comically—the BCB held a workshop on “Access to Information”, with the Vice Minister of Institutional Transparency and the Fight Against Corruption as the keynote speaker. Even more absurd were the comments on the BCB’s social media, where its management on transparency was praised.

As stated at the beginning, in economic literature one of the most valuable assets of a Central Bank is its credibility—that is, the trust that the public has in the institution’s ability and willingness to act to prevent expectations from spiraling out of control and to ensure the effectiveness of monetary and exchange policies. However, as evidenced in recent years, the BCB has not only made serious mistakes in its management but has also shown a complete disconnect from reality. Now, with the parallel exchange rate even surpassing Bs. 13 on the streets, it seems that, like the musicians of the Titanic, the BCB will keep playing a few more tunes while the value of the Bolivian peso—and the economy itself—sinks.

Appendix A: International Reserves

This appendix presents the historical data of Bolivia’s Net International Reserves (NIR) managed by the Central Bank of Bolivia (BCB) as reference:

As noted in the article and shown in the graph above, the NIR has been in free fall since 2015. Although the problem was clear, the necessary corrective measures were not taken at the appropriate time. While not all of these actions fall under the BCB’s purview (e.g., trade balance, fiscal policy), in hindsight, it appears that the institution lacks sufficient independence to make key decisions (as evidenced by the interim status of its senior leadership and its credit to the Treasury).

Appendix B: Foreign Currency Monetary Aggregates

Another relevant indicator is the foreign currency monetary aggregates published by the BCB. The following chart shows their year-over-year growth:

This graph shows a sharp year-over-year drop starting in January 2023. This reflects a surge in demand for dollars from the public from that point onward.