VZCZCXRO2429
PP RUEHLMC
DE RUEHLP #2791/01 2902200
ZNR UUUUU ZZH
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
RUEHBU/AMEMBASSY BUENOS AIRES 5647
RUEHCV/AMEMBASSY CARACAS 2873
RUEHPE/AMEMBASSY LIMA 3069
RUEHMD/AMEMBASSY MADRID 3620
RUEHMN/AMEMBASSY MONTEVIDEO 4910
RUEHQT/AMEMBASSY QUITO 5511
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