FOCUS THE BOLIVIAN HYPERINFLATION OF THE 1980s

FOCUS THE BOLIVIAN HYPERINFLATION OF THE 1980s


In the 1970s, Bolivia achieved strong output growth, in large part because of high world prices for its exports—tin, silver, coca, oil and natural gas. But by the end of the decade the economic situation started deteriorating.The price of tin declined. Foreign borrowing, which had financed a large part of Bolivian spending in the 1970s, was sharply curtailed as foreign lenders started worrying about repayment. Partly as a result, and partly because of long-running social conflicts, political chaos ensued. From 1979 to 1982 the country had twelve presidents, nine military and three civilian.
When the first freely elected president in eighteen years came to power in 1982, he faced a nearly impossible task. US commercial banks and other foreign lenders were running scared. They certainly didn't want to make new loans to Bolivia, and they wanted previous loans to be repaid. Net private (medium-term and long-term) foreign lending to the Bolivian government had decreased from 3.5 per cent of GDP in 1980 to 20.3 per cent in 1982,and to 21.0 psr cent in 1983. Because the government had no other choice, it turned to money creation to finance the budget deficit
Inflation and budget deficits
The next three years were characterised by the interaction of steadily higher inflation and budget deficits.
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Table I gives the budget numbers for the period 1981 -86. Because of the lags in tax collection, the effect of rising inflation was to sharply reduce real tax revenues. And the government's attempt to maintain low prices for public services was the source of large deficits for state-run firms. As these deficits were financed by subsidies from the state, the result was a further increase in the budget deficit. In 1984 the budget deficit reached a staggering 31.6 per cent of GDP.
The result of higher budget deficits and the need for higher seignorage was to increase nominal money growth and inflation. Inflation, which had run at an average of 2.5 per cent a month in 1981, increased to 7 per cent in 1982 and to 11 per cent in 1983. As shown in Figure I. which gives Bolivia's monthly inflation rate from January 1984 to April 1986 (the vertical line indicates the beginning of stabilisation), inflation kept increasing in 1984 and 1985, reaching 182 per cent in February 1985.