Venezuela Country Brief

Transcription

1 Venezuela Country Brief Venezuela is rich in natural resources, but poor economic policies over the past two decades have led to disappointed economic performance. A demand-led temporary boom in growth during the rise in oil prices was followed by negative per capita growth each year from 1979 to 1985 despite a second round of oil price increases over By 1985, even after the windfall gains of the two oil price increases and with prices still high, per capita GNP was significantly below the level of Expansionary policies were followed from 1986 to 1988, leading to a temporary rise in growth, but the policies followed were unsustainable. Inflation rose, external reserves declined, and widespread shortages developed. Following a short period of economic growth during the early 1990s, Venezuela's economic conditions deteriorated considerably during due to a number of adverse shocks, such as falling oil export prices, political instability, and a major banking crisis. As a result, non-oil GDP fell, inflation accelerated, and international reserves declined. In response to these conditions, the government embarked on an economic program in early 1996 that included exchange rate unification, initially under a floating system which was later replaced by exchange rate bands; liberalizing interest rates; abolishing most price controls, and adjusting domestic fuel prices. By 1997, the economy recovered but inflation and unemployment remained high. However, the economy again deteriorated in 1998 and turned into a deep recession in The deterioration in 1998 was caused by a sharp decline in international oil prices, compounded by a worsening of the external financial environment that limited Venezuela's access to international financial markets, and by high domestic real interest rates. One of the problems during the last decade has been the economic dependence on oil and general declines in real oil prices and revenues. The share of oil-gdp in total GDP increased from about 21% in the early 1990s to about 26% in the late 1990s. At the same time, the share of agriculture in total GDP decreased from about 6% in 1990 to about 4% in 1999, the share of manufacturing decreased from about 13% to about 10%, and the share of the service sector remained around 60% of GDP. The share of non-oil exports in total exports has been on average below 25%, reflecting the lack of export diversification away from the oil sector, and the impact of currency overvaluation on external competitiveness over time. In this environment, real wages fell significantly and unemployment rose. Between 1990 and 1999, average real wages fell by about 23% despite the existence of mandatory minimum wages for most of the period. The real wage drop affected all sectors of the labor market, including the oil sector. Even so, unemployment rose, affecting particularly unskilled workers,

2 women and young people, and urban residents. Moreover, although there is no consensus on the precise level of poverty in Venezuela, there is consensus that it was unambiguously higher in the late 1990s than in the early 1980s. Both poverty and inequality have, however, remained below the average for the Latin American region. Recent Economic Developments The government of President Hugo Chavez, in office since early 1999, inherited an economy heavily dependent on the oil sector with major structural imbalances, including a growing fiscal deficit, a deficit in the external current account, and high unemployment. The scale of the crisis made it necessary to act quickly. The government adopted a set of economic policies that included: reducing the rate of public expenditures by limiting public sector wage increases to an average of 17.5% and by cutting investment outlays of the government and public enterprises; increasing public sector revenues by, among other things, reducing the sales threshold of firms subject to VAT; cutting back oil production in agreement with other oil exporters to increase the oil price in the international market; and, maintaining a strong exchange rate policy in the context of the existing exchange rate band system. On August 2, 2000, Mr. Chavez further outlined his plans for the economy going forward. The program, intended to be implemented by an "Economic Constituent Assembly" similar to the body which rewrote the nation's constitution under President Chavez's guidance last year, included measures to reactivate economic growth, promote private investment and alleviate poverty and inequality. In the year 2000, GDP grew by 2-3% year-on-year in the second quarter (following an expansion of about 0.3% in the first quarter), suggesting that an economic recovery is underway after a decline of 7.2% in Inflation slowed to 15% in August, a 14-year low and well within the government's target of 16% for the year The decline in inflation has been at the cost of an economic recession and a fall in consumption and investment, and the government estimates that unemployment reached 13.5% in July. A combination of an overvalued exchange rate and low real interest rates has created conditions for some pressure on the external sector. However, there is no immediate balance of payments constraint, capital outflows have been more than offset by the expansionary effect of high oil prices on export revenues, while imports have been kept in check by the recession. The average price of Venezuelan Oil Basket was about US$28 through mid-september, compared to about US$16 for the whole of Foreign reserves have risen to more than US$18 billion, including US$2.3 billion set aside in the macroeconomic stabilization fund, the equivalent of 16 months of imports. The exchange rate reached 690 Bolivars to the dollar by end-august and it is likely to remain stable for the rest of the year, as the Central Bank still has full control of exchange rate movements. Even after the recent monetization of the non-oil fiscal deficit, international reserves cover at least 2.1 times the monetary base and more than 75% of M2. As a result of high oil revenues, the overall public sector was in surplus in the first semester of However, key government actions early in the year, such as a 1% reduction in the VAT rate, the elimination of the bank debit tax, and increased current expenditures together with low tax collection and revenues due to low economic growth, have led to a deterioration in the non-oil fiscal deficit. Medium-Term Prospects Given the significant increase in oil export prices during 2000, the government has greater room for "jump-starting" the economic recovery through an acceleration of public expenditures. In our view, under the assumption that the government will continue to accelerate public spending during 2000 and given its dependency on the oil sector, the economic outlook for 2000 and 2001 will primarily be determined by the behavior of public sector consumption and public investment,

3 including PDVSA's investment in the oil sector (it is expected that public sector expenditure including that of state-owned enterprises will increase significantly). The projected scenario is based on an average oil export price of about US$28-29 per barrel for 2000 (the average oil price through mid-2000 was already about US$26), and about US$25-26 per barrel in This scenario assumes a slow recovery of private investment and of non-oil output, resulting from the large real appreciation of the exchange rate, and implementation of some structural reforms, such as the privatization of state companies. During 2000, real GDP growth is projected to recover to about 2.5-3%, while inflation would decelerate to about 16%. Total investment is projected to increase as a proportion of GDP over the projection period, mainly as a result of public sector investment increases led by the acceleration of both public sector and PDVSA's investment expenditure. This will be complemented by an acceleration of public sector consumption. At the same time, domestic saving would increase as the public sector balance will change from a deficit of about 1.2% of GDP in 1999, to surpluses of about 1.5% in 2000, and 1 to 2% in The external current account would also show an improvement with a surplus of about 9% of GDP in 2000 and of about 6-7% of GDP in The main risk of this scenario is that the non-oil fiscal deficit is large that additional domestic financing may be needed, putting pressure on the Central Bank to monetize the deficit (or on domestic interest rates). Stimulating output growth by increasing public spending may widen macroeconomic imbalances and weaken confidence, delaying private sector investment and sustainable growth. The World Bank and Venezuela In August 2000, the World Bank's portfolio in Venezuela totaled $530 million in 13 ongoing projects, focusing on improving the quality of life of the Venezuelan people, particularly the poor, and ranging from health, education, science, the environment to public sector modernization. In April 2000, the Bank extended a $5 million loan for the Millennium Science Initiative Project so that Venezuela can gain access to global knowledge and improve it in areas that are key to its economic and social development, revitalizing the country's science and technology system. The Project will improve the quality and efficiency of scientific research and training, and will promote integration and partnership with more scientifically advanced countries as well as with Venezuela's regional partners. Other area of Bank's work in Venezuela is the support of the urban poor. The Caracas Slum-Upgrading Project, for instance, is improving the quality of life of the inhabitants of the informal settlements (barrios) in Caracas through public services investments based on local demand and generated through a participatory planning process. September, 2000

4 Venezuela, RB Data Profile Click on the indicator to view a definition People Population, total 21.8 million 23.2 million 23.7 million Population density (people per sq km) Population growth (annual %) Life expectancy at birth, total (years) Fertility rate, total (births per woman) Mortality rate, infant (per 1,000 live births) Mortality rate, under-5 (per 1,000 live births) Malnutrition prevalence (% of children under 5) Urban population (% of total) Population density, rural (people per sq km) Illiteracy rate, adult male (% of males 15+) Illiteracy rate, adult female (% of females 15+) School enrollment, primary (% net) School enrollment, secondary (% net) School enrollment, primary, female (% net) School enrollment, secondary, female (% net) Environment Surface area (sq km) Forest area (sq. km) Annual deforestation (% of change) Freshwater resources per capita (cubic meters) CO2 emissions, industrial (metric tons per capita) Improved water source, urban (% of urban population with access) Improved sanitation facilities, urban (% of urban population with access) Commercial energy use (kg of oil equivalent per capita) 2, , Electric power consumption per capita (kwh) 2, , Economy GDP at market prices (current US$) 77.4 billion 95.8 billion billion GDP growth (annual %) GNI, Atlas method (current US$) 66.8 billion 82.3 billion 88.5 billion GNI per capita, Atlas method (current US$) 3, , ,730.0 Inflation, GDP deflator (annual %) Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Exports of goods and services (% of GDP) Imports of goods and services (% of GDP) Gross capital formation (% of GDP) Current revenue, excluding grants (% of GDP) Overall budget deficit, including grants (% of GDP) Money and quasi money growth (annual %) Technology and infrastructure Telephone mainlines (per 1,000 people) Telephone average cost of local call (US$ per three minutes)

5 Personal computers (per 1,000 people) Internet hosts (per 10,000 people) Roads, paved (%) Aircraft departures Trade and finance Trade in goods (% of PPP GDP) Trade in goods as a share of goods GDP (%) High-technology exports (% of manufactured exports) Net barter terms of trade (1995=100) Foreign direct investment, net inflows in reporting country (WDI, current US$) million 4.5 billion 3.2 billion Present value of debt (current US$) billion 37.8 billion Total debt service (TDS, current US$) 4.9 billion 5.9 billion 5.6 billion Short-term debt outstanding (DOD, current US$) 3.1 billion 2.4 billion 2.3 billion Aid per capita (current US$) Source: World Development Indicators database, July 2000 Click here to query the database.