Bolivia will be the only South American economy to contract both this year and next, the International Monetary Fund said, underscoring the depth of a crisis that President Rodrigo Paz is trying to arrest with the country’s first multi-year IMF programme in two decades.

Output will shrink 3% in 2026 and 1.5% in 2027, the fund said in its World Economic Outlook released on October 12. That would extend the slump into a third straight year after gross domestic product fell 1.6% in 2025, according to the National Statistics Institute. Inflation ended last year at 20.4%, according to IMF data.

The downturn is rooted in the collapse of the hydrocarbons industry that once bankrolled the state. Natural gas production has roughly halved since 2014, turning Bolivia into a net importer of diesel and petrol. Proven gas reserves stood at 104.8bn cubic metres in 2025, less than half the 253.4bn certified in December 2018, according to state energy company YPFB. Gas exports fell a further 12.9% to $498.1mn in the first half of this year, the statistics institute reported, after Argentina ended contracted purchases and Brazil cut its volumes.

Dwindling export earnings drained foreign reserves and left the country short of the dollars it needs to pay for fuel imports, producing chronic shortages since 2023. Paz, a centrist who took office in November 2025 and ended almost 20 years of socialist rule, has responded by dismantling the pillars of the old model. On June 29, the central bank scrapped the boliviano’s 15-year peg to the dollar, and the currency weakened almost 10% in the first two weeks of trading. Net international reserves have since recovered to $4.26bn as of mid-August, but gold accounts for almost 80% of that total, limiting the cash available to meet demand for dollars.

Fitch Ratings welcomed the shift to a more flexible currency, saying it had corrected long-standing distortions between the official and parallel rates and helped open the way to the IMF deal. The rating company cautioned, however, that the reform would not by itself rebuild reserves. Bolivia’s challenge now lies less in how the dollar is priced than in securing enough of them, which will depend on sustained inflows from exports, investment and external financing. IMF money, Fitch said, would ease the country’s vulnerabilities only if used to stabilise external accounts rather than as a temporary liquidity patch.

The IMF’s executive board approved the three-year, $1.9bn arrangement on October 2. It released about $214mn immediately and tied further tranches to programme reviews. The fund expects its backing to unlock about $4bn from other lenders and projects gross reserves will rise to $5.7bn by the end of this year and $7.3bn in 2027. The programme hinges on a front-loaded fiscal squeeze, including phasing out the remaining fuel subsidies through an automatic pricing mechanism. Paz ended diesel subsidies within hours of Congress approving the loan in September and plans to abolish petrol subsidies by January.

The cuts have set him against the country’s main union federation, which says they will raise living costs. They also follow road blockades in May and June that paralysed much of the country and prompted a state of emergency, which lawmakers extended for another 90 days in September.

Looming over the unrest is Evo Morales, the former hard-left president who governed from 2006 to 2019 and has remained among coca-growing loyalists in the Cochabamba tropics since late 2024. Prosecutors have identified him as a leader of the blockades, which lasted more than 50 days, left at least 16 people dead and caused an estimated $3bn in losses. They have ordered his arrest on charges including terrorism and armed uprising. Morales denies the accusations, and police have so far been unable to detain him in his stronghold. He and his supporters have threatened fresh protests from October 13 against Paz’s economic measures, including the removal of diesel subsidies.

The external backdrop is also turning against Bolivia. The IMF said war in the Middle East had pushed up energy prices and inflation risks, a windfall for commodity exporters but a burden for fuel importers such as Bolivia. It also warned that El Niño could bring floods and droughts that disrupt commodity and food prices.

The fund trimmed its broader outlook for Latin America and the Caribbean, forecasting growth of 2.3% in 2026, down from 2.4% in July, and 2.5% in 2027, 0.2 percentage point lower than before.