[A-List] Bolivia: fiscal tightening, political crisis

["Michael Keaney" <michael.keaney@xxxxxx>]

Mesa orders spending cuts for Bolivia
By Richard Lapper and Mark Mulligan
Financial Times: February 3 2004

Carlos Mesa, Bolivia's president, has imposed severe public spending cuts
and new taxes on the country's middle class and private sector, in an effort
to avert a repeat of the social explosion that rocked the country last
October.

Trade unions and community groups had been threatening to seize the Bolivian
congress building if Mr Mesa scrapped controversial subsidies on petrol and
domestic natural gas.

The subsidies are among the biggest contributors to a fiscal deficit equal
to 8 per cent of gross domestic product. Rather than risk another revolt by
eliminating them completely, Mr Mesa opted to ease price controls on fuel
gradually.

Under agreements with the International Monetary Fund and other multilateral
groups, the government is committed to reducing the deficit. Arguing that
his package would yield a total of $200m in new revenues and savings, Mr
Mesa said: "We cannot continue with the traditional logic, whereby when we
speak about the country making sacrifices, in reality we are loading the
heaviest part of the cost on to the poorest sector of the population."

Bolivia's economy, South America's poorest, has been growing at a snail's
pace in recent years. Unemployment has risen especially sharply in rural
areas as a result of the US-sponsored eradication of coca leaf, a
traditional peasant crop and the raw material for cocaine.

The country has plentiful reserves of natural gas, but has been split by
opposition to proposals to exploit these resources more effectively. A plan
to build a pipeline through Chile - Bolivia's neighbour but a traditional
enemy since a military defeat in the 1879 War of the Pacific - has provoked
fierce popular opposition and contributed to political polarisation.

Mr Mesa, then vice-president, took over four months ago after President
Gonzalo Sánchez de Lozada, a firm US ally, was forced to flee the country.

Mr Mesa is proposing a wealth tax for those who own assets of more than
$50,000, and a financial transactions tax of 0.3 per cent on all bank
operations.

There are fears in some quarters that both measures could lead to a further
erosion in bank deposits, which have fallen from $3.5bn to $2.5bn in the
last six years, potentially weakening the dollarised banking system. New
taxes on the oil and gas sectors will basically increase the amount of tax
companies pay now and decrease future obligations.

Additionally, analysts worry that money is being borrowed simply to cover
current spending. "This plan leaves a lot of doubts and could create
confusion and fear," said Ramiro Cavero, director of the centre-right Union
of Latin American Parties.

Other analysts, however, praised the president's decision to cut his own and
other ministerial wages by 10 per cent, and to prepare the state-owned
mining and gas companies to play a bigger role in investment. Public
investment last year amounted to only 5 per cent of gross domestic product.