Bolivia's Central Bank Acts to Bolster Boliviano After 22% Plunge

The central bank of Bolivia declared it would step into currency markets to stabilize the currency, buying and selling dollars directly, which has dropped 22% since the nation moved to a flexible exchange rate one month ago.

Central Bank's Intervention

The bank's president, David Espinoza, stated that the monetary authority would purchase and sell U.S. dollars to prevent what he called "overreactions," though he did not specify any rate bounds. He added that "the details of the planned auctions will be announced later," and that the bank will restrict new money creation to control inflation.

Economic Context

Bolivia implemented a flexible exchange-rate system on June 29 amid persistent dollar scarcities. When the flexible regime began, the exchange rate was set at 9.73 bolivianos to the dollar, but by Thursday it had fallen to 11.89. The shift to a flexible regime was a major policy change for the country, which had long maintained a fixed peg that led to chronic dollar shortages and a thriving black market.

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These shortages hampered imports and created economic uncertainty, prompting the government to adopt the more market-driven approach. The dollar shortage had led to long queues at banks and a black market rate far higher than the official peg.

By moving to a flexible rate, the government aims to eliminate the parallel market and unify the exchange rate.

The central bank's intervention aims to smooth the transition and restore confidence in the currency, while also controlling inflation by limiting new money issuance. Inflation has been a key concern, and the central bank's commitment to restrict money creation is intended to prevent price spikes. Officials say the IMF deal and roughly $5 billion in multilateral funds scheduled for delivery by early 2027 will provide sufficient support for the central bank's policy. Espinoza said, "IMF disbursements remain subject to negotiations and final approval by the fund's executive board," and he ruled out the necessity of issuing additional sovereign bonds in the second half of 2026.

Market Reaction and Outlook

The central bank's direct intervention in the forex market marks a departure from its previous hands-off approach since the flexible regime began. By buying and selling dollars directly to financial institutions, the bank aims to provide immediate liquidity and reduce excessive volatility. The monetary authority's actions are closely watched by investors, as the boliviano's 22% decline has raised concerns about inflation and economic stability.

With reserves of $630 million and expected multilateral loans, the central bank has some firepower, but the continued depreciation underscores the challenges facing Bolivia's economy. The boliviano's slide reflects underlying economic strains, including a widening trade deficit and low foreign exchange reserves. The government hopes that the IMF program and multilateral loans will provide the necessary breathing room to stabilize the currency and restore investor confidence.

However, the pace of depreciation in just one month indicates the scale of the challenge.

The central bank will conduct direct dollar purchases and sales alongside financial institutions, intervening to curb excessive volatility.

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