Bolivia uses Gold to prop up its finances

The Bolivian government is using gold to maintain the country's solvency.

Large amounts of dollar-denominated debt burden Bolivia, and the country owns the lowest credit rating of any Latin American country, according to S&P Global. The country’s debt is rated Ca, defined as “likely in, or very near, default.” It is the second-lowest rating on the scale.

According to the agency, the country’s abysmal credit rating is based on its “reduced reserve levels” and its “weak capacity to fully meet its debt commitments over the next six to 12 months.”

And yet somehow, the country has managed to keep up with its debt payments, even as its natural gas boom petered out, leading to a dollar shortage.

How?

By leveraging the country’s gold reserves.

The Bolivian central bank has been buying gold from local miners, having it refined abroad (in Turkey), and then liquidating the bullion for dollars to service its debt.

In effect, Bolivian miners are digging real money out of the ground, and the government is turning it into fiat currency to pay its debt obligations.

According to the most recent data reported by Bloomberg, the Bolivian central bank has bought almost 24 metric tons of locally produced metal and monetized 44 tons since May 2023. The operations have generated around $3 billion.

The central bank isn’t just turning gold into dollars to service its debt. It is also bolstering its reserves, reportedly holding 19 tonnes in overseas banks.

According to Fitch Ratings, the central bank effectively financed the entirety of the 2024 budget deficit. It had to step in because the government lacked the ability to tap international markets and raise necessary dollar-denominated funds.

Bolivia is one of a growing number of central banks buying gold from domestic sources. Most countries that source local gold use it to bolster and diversify their reserves. This strategy allows countries to grow their reserves using local currency.

Bolivia has significant gold reserves. Last year, the country produced 26.5 tonnes of gold, according to World Gold Council data.

The strategy isn’t without its problems.

In a statement, the central bank says it buys the gold exclusively using local currency. There is some speculation that the government is printing additional bolivianos to buy gold, exacerbating the already extreme inflationary pressure in the country.

There are also concerns that the government is buying gold from unscrupulous outfits that have little regard for environmental concerns or the welfare of their miners.

The head of a Bolivian organization trying to foster sustainable mining practices told Bloomberg, “The central bank is interested in buying gold and it doesn’t care where it comes from.”

However, the central bank insists it “only acquires gold in the domestic market from legally established participants, registered and authorized by the competent entities.”

In 2023, the Bolivian government passed a law requiring domestic gold producers to sell to the central bank first. In 2024, gold exports tumbled by 72 percent.

While this program has allowed Bolivia to keep up with its debts, it may not be sustainable. Inflation continues to rapidly devalue the boliviano. The growing spread in the official exchange rate and the black-market exchange rate between the U.S. dollar and the boliviano is incentivizing miners to look for buyers who will pay for the gold in dollars, even with the government offering a 12.5 percent premium.

This underscores the problem with fiat currency. Governments can create as much fiat money as they want. This leads to persistent price inflation and a steady erosion of purchasing power. Gold is real money. Its value is recognized around the world. And it serves as a lifeline when fiat systems fail.

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