Bolivia’s political chaos signals an economic meltdown

Bolivia faces a confluence of political infighting, external pressures and the risk of economic collapse as the 2025 presidential election nears.

A Bolivian protester shouts slogans in front of police officers during a protest in La Paz, Bolivia.
A Bolivian protester shouts slogans against current President Luis Arce in front of police officers during a protest in support of former President Evo Morales on Jan. 13, 2025, in La Paz, Bolivia. © Getty Images
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In a nutshell

  • Bolivian political chaos is worsening as Arce and Morales fight for power
  • Currency shortages, inflation and dwindling gas sales weigh on the economy
  • Reliance on Russia and China is growing and straining relations with the U.S.
  • For comprehensive insights, tune into our AI-powered podcast here.

Bolivia is on the precipice of an economic crisis as it confronts shortages of hard currency and fuel, high inflation and dwindling natural gas production. Public anger has risen and street protests have become widespread. Yet, rather than presenting a united front against these challenges, the political elite is embroiled in chaos.

President Luis Arce (2020-present) and ex-President Evo Morales (2006-2019) are engaged in a bitter struggle for control of the leading political party, the leftist Movement for Socialism (Movimiento al Socialismo, MAS), while confronting criminal scandals.

Whoever prevails will likely be the frontrunner in the August presidential election, after which the next administration will be forced to confront the country’s myriad economic and social problems while likely doubling down on its reliance on Russia and China.

Bolivia’s ruling-party power struggle

President Arce and Mr. Morales have been locked in an intra-party feud for most of Mr. Arce’s presidency. The two were once allies: Mr. Arce was Mr. Morales’ finance minister until 2019, when then President Morales ran for an unconstitutional third consecutive term. After allegations of fraud, mass protests and pressure from the army, Mr. Morales resigned and fled into exile. When presidential elections were held the following year, he selected Mr. Arce as the party’s candidate. However, following Mr. Arce’s victory, tensions between the two leaders emerged. In late 2021, MAS split into two rival factions: the Arcistas, loyal to President Arce, and the Evistas, loyal to former President Morales.

Both politicians aspire to run for president again this year. Mr. Morales faces resistance from President Arce, who is unwilling to act as placeholder for his predecessor. The conflict has fueled accusations of treason, corruption and drug trafficking between the two camps, dominating media coverage and fostering political divisions.

Troubled Bolivian judiciary

The judicial system’s dysfunction is a key element of the conflict. Globally, Bolivia is near the bottom in rule of law rankings, and partisan interests heavily influence judicial appointments. Judicial elections scheduled for December 2023 were postponed by one year amid widespread mistrust, adding to the country’s political instability.

Mr. Morales has sought to leverage his street-level support and legislative influence to undermine President Arce’s administration and has organized protests to pressure the government and challenge judicial appointments. Meanwhile, President Arce has used Bolivia’s politicized judiciary to block Mr. Morales’ political ambitions. In December 2023, the Constitutional Court ruled that Bolivia’s constitution prohibits more than two presidential terms, barring Mr. Morales from candidacy – a decision likely to be revisited by the reconstituted court. Seven of the court’s 26 judicial members remain as incumbents, while the remaining 19 judicial positions were newly elected on December 15, 2024.

Bolivia’s tensions put presidential candidates at risk

The tensions have spilled into violent and destabilizing events. In 2024 alone, there was a failed coup attempt against President Arce, a disputed assassination attempt against Mr. Morales and allegations that the ex-president raped a minor, to say nothing of the protests and roadblocks which have continuously paralyzed many parts of the country.

In June, the commander of Bolivia’s armed forces, General Juan Jose Zuniga, told a Bolivian television channel that Mr. Morales “cannot be the president of this country again.” He added that if Mr. Morales returned to power, the military would defend the constitution “at all costs.” Reacting to this in an attempt to uphold civilian control of the military, President Arce, who doesn’t want generals getting involved in politics, removed General Zuniga.

Bolivia lacks a strong opposition to capitalize on the ruling party’s disarray.

In response, in the same month, the deposed general gathered units and equipment, stormed the Plaza Murillo in La Paz and broke into the presidential palace. Despite initially overwhelming the area, the poorly organized rebellion quickly unraveled when new military commanders ordered the units to back down. General Zuniga was soon arrested.

Later, Mr. Morales accused President Arce of orchestrating an assassination attempt when, on October 27, Mr. Morales’ car was hit with multiple bullets, wounding his driver but leaving the former president unharmed. Former President Morales claimed he had been ambushed at a police checkpoint. Following the episode, his Evistas supporters took over several military barracks and increased their roadblocks across the country.

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Additionally, allegations of sexual impropriety have surfaced against both leaders, further inflaming public distrust. President Arce faces allegations of impregnating a job applicant. Both deny the claims, attributing them to politically motivated smears.

Despite these divisions, Bolivia lacks a strong opposition to capitalize on the ruling party’s disarray. The opposition, comprised of center-right Comunidad Ciudadana of ex-President Carlos Mesa (2003-2005) and Luis Fernando Camacho’s far-right Creemos coalition, is fragmented and discredited among the indigenous majority. The Arce government has held Mr. Camacho, the governor of Santa Cruz state, in custody since December 2022 on charges of bribery and “seduction of troops” for his supposed role in the 2019 forced resignation of Mr. Morales.

This vacuum leaves Bolivia’s political landscape polarized with no resolution in sight. As the August 17 election approaches, the power struggle threatens to deepen the country’s political and social instability. It underscores a broader governance crisis, with Bolivia’s weak institutions and politicized judiciary unable to mediate the escalating tensions.

Deteriorating economic conditions

A profound economic crisis has exacerbated Bolivia’s already tumultuous political landscape. The root of the financial meltdown lies in a severe balance of payment crisis. Since 2011, Bolivia has maintained a fixed exchange rate of 6.9 bolivianos to the United States dollar, but international reserves have since plummeted to $1.7 billion, one-tenth of their $15 billion peak of 2014. The Arce government is struggling to uphold the peg. Only $166 million in foreign currencies remain – the rest is in gold. Despite legislative changes allowing Bolivia to sell part of its gold reserves, further sales are constrained by a legal minimum reserve limit. This shortage of reserves – primarily driven by the government subsidizing fuel imports − has led the state to hoard dollars and gold, depressing economic activity. The fuel shortages that it triggers are further stoking social unrest.

International financial institutions have warned about the gravity of Bolivia’s fiscal challenges. Fitch Ratings downgraded the country’s default rating to CCC from B-, citing dwindling international reserves and the absence of a tangible fiscal consolidation plan.

With the foreign exchange reserve nearly depleted and economic risks mounting, a debt crisis looks imminent.

Bolivia faces mounting debt obligations as well. In 2026, La Paz must begin repaying the principal on its $1.85 billion of dollar bonds. With the foreign exchange reserve nearly depleted and economic risks mounting, a debt crisis looks imminent. This highlights the unsustainable nature of Bolivia’s current fiscal and monetary policies, which rely heavily on borrowing from the central bank to finance deficits.

Bolivia’s dollar shortage has had widespread ripple effects. The black market exchange rate is now over 50 percent higher than the official rate, and restrictions on dollar withdrawals have fueled de facto dollarization, which may send Bolivia on a similar monetary trajectory as neighboring Argentina. These factors, along with high inflation, compound the economic strain. Many experts argue that Bolivia urgently needs a currency devaluation, a comprehensive fiscal adjustment and foreign debt refinancing. However, such measures would be politically unpalatable for the entrenched socialist government, which continues to resist these steps.

Bolivia’s struggling resource extraction and reliance on Moscow and Beijing

The economic crisis has been exacerbated by declining oil and natural gas production, which has been a cornerstone of Bolivia’s economy. In 2023, oil revenues fell to $2 billion, a stark drop from $3 billion a year earlier. Similarly, natural gas exports to Argentina and Brazil decreased significantly, leading to a further reduction in hard currency inflows. Bolivia now imports more than half of its gasoline and 86 percent of its diesel. Although the government announced the discovery of a significant natural gas well in Alto Beni in 2024 and plans to invest $400 million in exploration, these developments are unlikely to provide immediate relief.

A view of the first industrial-scale lithium carbonate plant in Uyuni, Bolivia, on Dec. 15, 2023.
A view of the first industrial-scale lithium carbonate plant in the Uyuni Salt Flats, Bolivia, on Dec. 15, 2023. The area is thought to have the world’s largest reserves of lithium, a key component for production of batteries for electric vehicles. © Getty Images

The Arce government has already been reliant on China and Russia and now, with its economic troubles mounting, seeks an economic lifeline. To help monetize its untapped lithium reserves and develop lithium extraction and production facilities, La Paz has moved forward on controversial international partnerships that are raising potential security and economic concerns.

In 2024, Bolivia signed agreements with Russia’s Uranium One Group as well as the Chinese firm CBC Investments Limited to construct plants on the Uyuni salt flats. However, Bolivia has to finance the lithium exploration activities itself, and these projects face delays as they require legislative approval. Their long-term benefits remain uncertain. These developments follow China’s move into Bolivia and neighboring countries, which is challenging regional powers.

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Scenarios

Bolivia’s multiple crises reflect a confluence of poor policy decisions, falling hydrocarbon production, inadequate fiscal management and external shocks. The next government will face a precarious balancing act: addressing immediate fiscal shortfalls without triggering political instability while implementing long-term structural reforms necessary to stabilize the economy.

The Arce-Morales rivalry has deepened Bolivia’s troubles, delaying essential reforms and undermining public trust in political and judicial institutions. The outcome of this power struggle will likely shape Bolivia’s political landscape and determine its ability to address pressing economic issues in the years to come.

Most likely: Anti-American political polarization and a currency devaluation

The most likely short-term outcome for Bolivia is the persistence of its polarized and unstable political environment, with the primary fault line running between MAS’s Arcistas and Evistas. In a race between Mr. Arce and Mr. Morales, the winner will exercise control over the judiciary while the loser will likely face imprisonment.

On the economic front, the devaluation of the country’s currency, the boliviano, is only a matter of time. Given the political sensitivity of this issue and the costs it would incur, President Arce will postpone this until after the election. Whoever wins, though, will have to confront the issue, so a devaluation is likely in late 2025 or early 2026. La Paz may also be forced to reduce subsidies and raise gasoline prices, which will likely provoke mass protests.

Continued economic stagnation, coupled with the depletion of Bolivia’s natural gas reserves, will further strain public trust in government. Social discontent among urban middle classes, indigenous communities and the youth could intensify, leading to periodic eruptions of civil unrest.

Any MAS government – with either Mr. Arce or Mr. Morales at the helm – will seek closer economic and diplomatic relations with both Moscow and Beijing while viewing the U.S. with suspicion, if not outright hostility. That will continue Bolivia’s current policy, as Russia and China are already key sources of investment for the country’s lithium industry, while Bolivia, like Cuba, recently gained “partner country” status in BRICS.

Moreover, the Bolivian ruling party has long railed against U.S. influence in Latin America. The second Trump administration will view a socialist Bolivian government aligned with Russia and China as an ideological and strategic foe, as it does other left-wing governments in Latin America.

Unlikely: Relative economic recovery

A far less likely but still possible scenario is one in which the current and subsequent administrations impose some economic stabilization measures and leverage the country’s lithium deposits and gas fields to fight the dollar shortage and fuel scarcity. This could delay or mitigate the need for a currency devaluation.

To quickly monetize the country’s lithium, YLB, Bolivia’s state lithium company, needs more international bids to develop lithium plants, and the government will have to attract international partnerships. Most likely, China and Russia would step in to pay down Bolivia’s deficit and restore its hard currency reserves, making La Paz still more subservient to the two foreign powers.

Any economic recovery in Bolivia is contingent on political stability in which the socialist government would have to initiate dialogue with the opposition, civil society and business leaders while standing down in the internal party fighting. So far, neither President Arce nor Mr. Morales have indicated their willingness to do so.

The dark horse: A pivot to the right

An increasingly plausible scenario is an electoral shift toward the political right amid the ongoing economic crisis and a broader disgust with the Arce-Morales brinkmanship. If this were to occur, the country would still have to face its economic woes. However, it would pivot in its growth strategy and governance. Depending on which figure on the right wins the nomination, such a pivot could lead Bolivia closer to a worldview akin to that of Argentina’s President Javier Milei.

A centrist or right-wing government would be much more likely to welcome foreign direct investment from the U.S. and the European Union, giving La Paz a short honeymoon period. Yet, this is still an uphill climb: MAS is by far the largest, most deeply rooted and well-articulated political party in the country, and no opposition candidate poses a significant challenge to President Arce or Mr. Morales. The opposition’s best chance at defeating the incumbent party is with a broad coalition that is able to appeal to disaffected MAS voters. To this end, ex-President Mesa, ex-President Jorge Quiroga (2001-2002), imprisoned leader Camacho and cement magnate Samuel Doria have all joined an informal alliance. However, the grouping will still need to choose its candidate, and it is up to the voters to determine whether this becomes a viable electoral bloc.

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