Oil & Debt Windfalls and Fiscal Dynamics in Bolivia

Abstract

During 2004-06 Bolivia experienced a five-fold increase in oil revenues due to tax/contractual innovations, higher prices and larger volumes at the same time that a multi-lateral debt reduction initiative trimmed roughly one third of the public external debt. The political economy setting of this environment entails a new hydrocarbons law that automatically decentralize expenditures to local governments and nationalization of the oil industry. We model fiscal dynamics in Bolivia in an stochastic framework and find that the new status-quo will generate double reversions of primary surplus and a public debt path that may fall short of being pleasant in the presence of unfettered fiscal spending and/or decline in international energy prices and gas demand from its neighbors. Even though it is difficult to asses the underlying fiscal policy reaction function to future developments in Bolivia, we conclude that governance of the process of allocation and distribution of the oil rent is essential to the short to medium term sustainability of the new Bolivian model.