MercoPress. South Atlantic News Agency

Mesa orders spending cuts for Bolivia

Carlos Mesa, Bolivia's president, has imposed severe public spending cuts and new taxes on the country's middle class and private sector, in an effort to avert a repeat of the social explosion that rocked the country last October.

Trade unions and community groups had been threatening to seize the Bolivian congress building if Mr Mesa scrapped controversial subsidies on petrol and domestic natural gas.

The subsidies are among the biggest contributors to a fiscal deficit equal to 8 per cent of gross domestic product. Rather than risk another revolt by eliminating them completely, Mr Mesa opted to ease price controls on fuel gradually.

Under agreements with the International Monetary Fund and other multilateral groups, the government is committed to reducing the deficit. Arguing that his package would yield a total of $200m in new revenues and savings, Mr Mesa said: "We cannot continue with the traditional logic, whereby when we speak about the country making sacrifices, in reality we are loading the heaviest part of the cost on to the poorest sector of the population."

Bolivia's economy, South America's poorest, has been growing at a snail's pace in recent years. Unemployment has risen especially sharply in rural areas as a result of the US-sponsored eradication of coca leaf, a traditional peasant crop and the raw material for cocaine.

The country has plentiful reserves of natural gas, but has been split by opposition to proposals to exploit these resources more effectively. A plan to build a pipeline through Chile - Bolivia's neighbour but a traditional enemy since a military defeat in the 1879 War of the Pacific - has provoked fierce popular opposition and contributed to political polarisation.

Mr Mesa, then vice-president, took over four months ago after President Gonzalo Sánchez de Lozada, a firm US ally, was forced to flee the country. Mr Mesa is proposing a wealth tax for those who own assets of more than $50,000, and a financial transactions tax of 0.3 per cent on all bank operations.

There are fears in some quarters that both measures could lead to further erosion in bank deposits, which have fallen from $3.5bn to $2.5bn in the last six years, potentially weakening the dollarised banking system. New taxes on the oil and gas sectors will basically increase the amount of tax companies pay now and decrease future obligations.

Additionally, analysts worry that money is being borrowed simply to cover current spending. "This plan leaves a lot of doubts and could create confusion and fear," said Ramiro Cavero, director of the centre-right Union of Latin American Parties.

Other analysts, however, praised the president's decision to cut his own and other ministerial wages by 10 per cent, and to prepare the state-owned mining and gas companies to play a bigger role in investment. Public investment last year amounted to only 5 per cent of gross domestic product.