“Thinking to get at once all the gold the goose could give, he killed it and opened it only to find – nothing” By Aesop, The Goose with the Golden Eggs
During the last 5 years we have experienced a spectacular oil-price boom (see Figure 1), which has been thoroughly exploited by the Bolivian government to increase public revenues. Between 2002 and 2007, government revenues from the upstream hydrocarbon sector increased by a factor of 7, lately accounting for more than a third of all government revenues (www.upf.gob.bo ).
|Figure 1: Price of West Texas Intermediate Crude (USD), January 1990 – December 2008|
The high oil-prices certainly justified a steep increase in taxes, but the nationalization in May 2007 probably amounted to badly maiming the goose with the golden eggs. Instead of sitting back and collecting billions of dollars in royalties without making any investments and without taking any risks, we are now straddled with a public oil company (YPFB) that needs to borrow a billion dollars from the poor Bolivians in order to make the investments that should have been made three years ago in order to take full advantage of the high oil prices.
Now oil prices are down to around $40 per barril and you would need a pretty good crystal ball to predict how prices are going to behave over the next decades. This means that investment in this sector is rather risky. It could give very good returns if world oil prices increase again and if the sector is well managed. It could also turn into some spectacularly expensive holes in the ground. Certainly, good returns are by no means automatic or guaranteed.
I don’t think poor country governments should be making this kind of expensive gambles with poor peoples money, but now that the nationalization has been carried out, there is no easy way back. The sector needs massive amounts of investments, and it is not going to come from private companies under the current circumstances.
The obvious solution is to undo the unfortunate Law 3058 of 2005 which created the Impuesto Directo a los Hidrocarburos (IDH) and distributed hydrocarbon revenues to pretty much everybody except YPFB (departments, municipalities, universities, police, armed forces, indigenous people, etc.), leaving the public oil company without any money to do its job and much less with billions to invest.
Instead of securing YPFB a fair share of the royalties, the government has ordered the Central Bank to lend the company a billion dollars. The Minister of Finance, Luis Arce, assures the public that the loan is not going to be financed with the International Reserves of the Central Bank (1). However, that is not a very assuring assurance, since it means that the loan would instead be financed by printing money. And 7 billion bolivianos is an awful lot of money to inject into the economy. It would increase the amount of bolivianos in circulation by almost 50% (2) causing massive inflation, devaluation, and dollarization.
However, that is not really an option. The investments YPFB needs to make consists of very sophisticated deep drilling equipment and other capital not available in Bolivia. Almost all of the billion dollar investment would therefore have to be imported, and since foreigners do not want bolivianos, this money would have to come from the International Reserves of the Central Bank. There really is no other option.
The International Reserves of the Central Bank are not savings of the government or the Bolivians. They have accumulated in the Central Bank as the country has de-dollarized (for every 7 bolivianos printed, the BCB has received 1 dollar), and they back up the value of all the bolivianos that has been injected into the economy over the last few years. As soon as the boliviano starts depreciating again – and it will if this billion dollar loan is approved – the Central Bank will have to change bolivianos into dollars, and International Reserves will fall precipitously (indeed it will fall by much more than the 1 billion dollars).
Another problem with lending YPFB money is that YPFB has no way of paying back the loan since Law 3058 gives all the hydrocarbon revenues away to departments, municipalities, universities, police, armed forces, indigenous people, etc. It would be really irresponsible to approve the loan, without at the same time changing Law 3058 and securing YPFB some income that it can use to repay the loan.
So, this billion dollar loan is a really bad idea. It will revert many years of hard work to create an independent central bank, control inflation, and de-dollarize the economy. A hyperinflation crisis does not come about just because a group of central bank directors decide to print money. It comes about because of bad ideas like this one, and central bankers who don’t have the balls to say no.
What should be done about YPFB? Leave your reply below.
Lykke Andersen is the Director of the Center for Economic and Environmental Modeling and Analysis (CEEMA) at INESAD.
(2) According to data from the BCB, there are currently about 15.5 billion bolivianos in circulation.