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Bolivarian Republic of Venezuela

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Bolivarian Republic of Venezuela Economic Survey of Latin America and the Caribbean • 2008-2009 107 Bolivarian Republic of Venezuela 1. General trends The Venezuelan economy exhibited less buoyant growth in 2008 than in previous years: GDP increased 4.8% compared with average annual growth of 9.7% in 2004-2007. The economy slowed down even further in the first quarter of 2009, with GDP increasing just 0.3% with respect to the same period in 2008, and economic activity is projected to stagnate in 2009, with GDP growth at around 0%. Plunging international oil prices have slashed foreign exchange earnings (which are largely dependent on petroleum exports), and heavier restrictions and longer waiting times have been established for the purchase of foreign exchange at the official exchange rate.1 The government’s purchasing power has meanwhile diminished because the exchange rate was kept constant and inflation remained notably high. In March 2009, the government announced a set of oil prices and oil production (average price estimates for measures to mitigate the effect of the international crisis the Venezuelan oil basket were revised downwards from and the drop in oil prices on the domestic economy. The US$ 60 to US$ 40 per barrel, and production volumes main measures include: an increase in the VAT rate from from 3.5 million to 3.1 million barrels per day); and the 9% to 12% as of 1 April 2009); salary cuts for senior expansion of the public debt by 28 billion bolivar fuertes. government officials; a reduction in what is designated Despite the public spending cuts, the government announced sumptuous or superfluous spending; a 20% increase in that there would be no reductions in social expenditure. the national minimum wage; the reformulation of the The official exchange rate remained unchanged at 2.15 basic premises of the national budget that are linked to bolivar fuertes per dollar. 2. Economic policy In April 2008, in the framework of the special powers metallurgy firm and of the cement companies operating granted to the President under the enabling law, the in the country.2 On 31 July, the President announced the government announced the nationalization of a large nationalization of Banco de Venezuela (previously owned by Grupo Santander) and issued 26 decrees with the force 1 Despite the plunge in oil prices as of September 2008, the average of law in the following areas: labour, food production price for the Venezuelan crude oil basket in 2008 was US$ 86.81 per barrel (up 34.1% from the previous year). Between January and May 2009, the average price slumped 51.4%, compared with 2 This law was enacted in January 2007 and remained in force until the same period in 2008, to US$ 41.4 per barrel. 31 July 2008. 108 Economic Commission for Latin America and the Caribbean (CEPAL) and supply, defence, economic planning, loans to the Tax revenue growth fell sharply, however, owing to the agricultural and tourism sectors, and development of steep decline of oil prices in the last months of the year, what is termed the “popular economy”. In May 2009, an the reduction in the VAT rate implemented in 2007 and agreement was reached whereby the government bought the elimination of the tax on bank withdrawals in June Banco de Venezuela for US$ 1.05 billion. 2008. Fiscal income therefore shrank considerably in Measures to stimulate national production were also real terms despite the increase in the tax on cigarettes adopted, including the continuation of the farm subsidies and alcoholic beverages. As a percentage of GDP, policy. The organic law for the reordering of the domestic income fell from 28.9% in 2007 to 24.7% in 2008, liquid fuels market was passed in October. Intermediation while spending came in at 25.8% of GDP. The central in the supply and transportation of liquid fuels was made government therefore posted a primary surplus of 0.1% the State’s prerogative under this law and subsequently of GDP and a fiscal deficit of 1.2% of GDP. Results entrusted to Petróleos de Venezuela S.A. (PDVSA), its for the first quarter of 2009 show a 14% fall in current affiliates and the corresponding service stations. revenue, owing to a 35.9% drop in oil revenue. Total On 14 March 2009, a law was passed to ban dragnet spending continued to rise (12.2%). fishing, and the government confiscated all fishing boats that In May, a joint Chinese-Venezuelan fund was had not been modified by that date. In that same month, the established with US$ 4 billion from the Government of National Assembly passed a bill to reform the organic law China and US$ 2 billion from the Government of the on decentralization, delimitation and the transfer of public- Bolivarian Republic of Venezuela. In February 2009, sector competencies, whereby the management of national the fund’s resources were doubled to US$ 12 billion ports and airports is transferred to government control. In with each country contributing the same amount as on May 2009, the government decreed the nationalization the first occasion. of several metallurgy companies and firms engaged in petroleum-related activities. An edict issued by the central (b) Monetary policy bank established that 70% of national gold production must be sold on the domestic market, and that 60% must One of the main concerns of monetary authorities was be offered to the central bank. to curb the high rate of inflation, and monetary policy was The government continued to supply oil at below-market therefore essentially restrictive until the international crisis prices to several countries within the framework of the unfolded in September 2008. Under this policy, interest Bolivarian Alternative for Latin America and the Caribbean, rates were kept high, the reserve ratio regarding marginal the Petrocaribe energy cooperation agreement, Petrosur, and balances in banks was raised, and the central bank carried bilateral agreements signed with a number of countries. out various operations to absorb liquidity from the system. In February 2009, a proposed amendment of the In the fourth quarter of the year, the authorities reversed constitution to allow the indefinite re-election of the some of these measures in order to stimulate domestic president was submitted to a popular referendum and demand, which had decelerated sharply. approved with 54.3% of the valid votes cast. On 1 January 2008, a redenomination of the bolivar took place. Three zeros were cut from the currency unit, which (a) Fiscal policy was renamed the “bolivar fuerte” (Bs.F.). The minimum interest rates for savings and time deposits were raised Fiscal policy continued to be expansive in 2008. as of 1 May 2008, to 15% and 17%, respectively, and a In nominal terms, the central government’s total ceiling of 33% was imposed on credit card interest rates. In spending rose 37.7% owing to increases in both 2008, lending rates averaged 22.77%, and borrowing rates current expenditure (especially operational spending) averaged 17.13% for time deposits and 15% for savings. and capital expenditure. Current income grew 17.5%, At the end of March 2007, the central bank announced a driven by the increase in receipts from oil royalties and reduction in interest rates. The ceiling for lending rates the application of the law on the special contribution was lowered from 33% to 31% (for credit card rates as derived from extraordinary prices in the international well), and for borrowing, from 15% to 14% in the case of hydrocarbon market that was issued in April 2008.3 savings and from 17% to 16% in the case of time deposits. Between January and April 2009, lending rates averaged 3 This law stipulates that oil companies must pay a special tax to the 22.2% and borrowing rates averaged 16.6% in the case State when oil prices rise above US$ 70 per barrel of Brent crude, of time deposits and 14.6% in the case of savings. At the as follows: 50% of the price difference per barrel of crude when the beginning of 2009, the borrowing rates were lowered to price is above US$ 70 and 60% when the price is above US$ 100 per barrel. This tax must be paid in foreign exchange, and the proceeds 8% and 9% (from 11% and 12%) and as of April, to 6% are deposited in the National Development Fund (FONDEN). and 7%, respectively. Economic Survey of Latin America and the Caribbean • 2008-2009 109 The expansion of the monetary aggregates also slowed March 2008 and US$ 12.543 billion in January 2009. These considerably in 2008. In nominal terms, M2 and M1 increased transfers and the liquidation of foreign exchange holdings 26.8% and 26.5%, respectively, between December 2007 by the Foreign Exchange Administration Commission and December 2008. Domestic lending to the private sector (CADIVI) meant that the central bank’s international followed a similar pattern, expanding 26.2% (compared with reserves stood at US$ 28.819 billion in April 2009 (compared 73.5% in 2007) as a result of the contraction of commercial with US$ 42.299 billion in December 2008).5 credit (by 16.5%) and of consumer credit (by 30%). In March 2009, M2 and M1 rose 2.1% and 2.3%, respectively, (c) Exchange-rate policy in relation to December 2008 (in relation to March 2008, they had risen 31% and 32.5%). Also in March 2009 and in The exchange rate was kept at 2,150 bolivars per relation to December 2008, domestic lending to the private United States dollar in 2008, and the foreign exchange sector fell by 0.5% (commercial lending shrank by 3.6% and regime and the restrictions on capital outflows in place consumer loans increased by barely 3.3%).
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