Bolivian central bank wants to become sole buyer of gold

The Central Bank of Bolivia (BCB) has proposed a law that would effectively make it the sole purchaser of gold produced within the country.

The central bank’s proposal would also allow it to use gold reserves as collateral or swap them for foreign currency, local newspaper El Deber has reported.

It would oblige domestic gold producers to sell their output to the central bank. Only once the BCB had filled its quota would miners and brokers be able to sell on the international market.

Under the current central bank law, the central bank can pledge the international reserves as collateral. However, “in the case of pledging gold, it must obtain legislative approval”. The proposed law would eliminate this requirement.

The central bank’s proposal would give the BCB the power to exchange and collateralise reserve assets. It would also allow gold reserves to be used for “conversion into foreign exchange, with the goal of improving the liquidity provision” of Bolivia’s net international reserves.

The proposal states that gold producers “must offer their whole production or holding of gold-bearing minerals destined for export”. Once the central bank has purchased its quota, it will issue permits allowing the sale of the rest of the gold on international markets. The proposal says the BCB will pay a price based on international quoted gold prices.

The central bank reported having just under $4.7 billion in net international reserves as of May 24. The BCB said it had added $300 million to the reserves during the most recent quarter (Q1 2022).

As of June 10, the net international reserves stood at around $4.61 billion, according to the weekly statistical bulletin. The reserves included about $2.56 billion in gold.

Juan Antonio Morales, governor of the Central Bank of Bolivia between 1996 and 2006, tells Central Banking it is not unusual for central banks to collateralise their gold reserves. However, the central bank’s lawyers have long concluded that Congress must authorise such an operation under the current statute, he says.

Morales adds the central bank’s gold holdings “have, at the moment, only a cosmetic effect, serving to embellish the balance sheet”. The new measures could “augment the BCB’s liquidity”, but Morales believes “it is doubtful whether it would improve access to the international capital markets”.

Fabiano Borsato, chief operating officer of New York-based investment bank and broker-dealer Torino Capital, says Bolivia’s current economic policy relies on heavy deficit spending. He notes the fiscal deficit had reached 9.7% of GDP in 2020.

Though the country’s external debt is relatively low, Borsato says the country has limited access to foreign exchange. “Financing the fiscal deficit by selling gold could translate into a greater risk of fiscal unsustainability,” Borsato says. He adds that the move also “could damage [the central bank’s] reputation and credibility as the institution responsible for guaranteeing … the integrity of international reserves”.

Morales says selling gold, or using it as collateral, might shake domestic confidence in the government. “There is a kind of fetishism of gold in the country,” he says.

The central bank signed a contract with a state-owned mining company, Comibol, in May 2021, to buy domestically mined gold. This was partly designed to divert gold from informal markets, through which it was being smuggled out of the country.

Bolivia has extensive gold-mining operations, often the domain of small-scale mining enterprises and co-operatives. One result is mercury pollution in Bolivian waterways.

According to International Monetary Fund figures, the country saw a steady rise in public debt over the previous decade. Non-financial public-sector debt reached 59% of GDP at the end of 2019.

Net international reserves have fallen precipitously from a level of more than $15.1 billion in 2014. The three major rating agencies have assigned Bolivia ratings in the lower B range, describing its bonds as “speculative”.

After the 2020 elections, the Movement for Socialism party regained power in Bolivia under president Luis Arce, after a year under a conservative interim government under Jeanine Áñez. Arce appointed new leadership to the central bank, replacing interim directors chosen by Áñez. Edwin Rojas Ulo has been acting governor since November 2020.

Áñez and the acting governor she appointed, Guillermo Aponte, are currently on trial on charges of securing an unconstitutional loan from the IMF. In a separate case, on June 10, a court convicted Áñez for mounting a coup in 2019, sentencing her to 10 years in prison.