The Venezuelan government has confirmed that it is planning a series of macroeconomic reforms to confront ongoing problems, provoking diverse reactions over the country’s economic direction.
For the past eighteen months the South American OPEC nation has faced high inflation, product shortages, and pressures on the currency control system, where the dollar is worth ten times more on the black market than on the official exchange rate.
In response, the administration of Nicolas Maduro is planning a series of reforms which are intended create macroeconomic stability and be “permanent” rather than “transitory” solutions.
Measures currently under consideration include reforming currency controls, raising international reserves and domestic dollar availability, reducing domestic subsidies on petrol, and increasing petroleum production and exports. It is hoped this will stabilise the bolivar currency, streamline imports and ensure internal market stability for production and investment.
In a speech last week about the performance of state oil company PDVSA during the previous year, Vice President for the Economy Rafael Ramirez said that a new currency exchange system could be introduced by the end of 2014.
“Obviously we need to create a new currency exchange system…I can’t say [what the exchange rate would be], but it will be a new system. The one that we’ve had has not resulted as adequate for the economy,” he stated.
Currency controls were introduced in 2003 to prevent capital flight. They have become a central pillar of the economy, and have also been used to control inflation, regulate prices and plan spending.
However last year the value of the bolivar plummeted on the black market against the dollar, creating a series of distortions based around the lucrative activity where those with access to official-rate dollars could sell these on the black market for a large profit.
To address the situation authorities have introduced a three-tiered exchange rate system, where goods and services are either exchanged at 6.3, 11 or just under 50 bolivars to the dollar, depending on their importance for the economy. Nevertheless this system has been criticised as too complex and as hindering imports and other economic activities.
The proposed reform is expected to re-unify the rates, which will likely involve a devaluation of the bolivar, as products imported at the 6.3 rate are moved to the higher rates.
Rafael Ramirez also announced that PDVSA’s net profit last year was a threefold increase on 2012, with earnings at US$15.835 billion in 2013 compared with US$4.335 billion the previous year. The increase was due to the currency devaluation in February 2013, sale of assets, and reduced funding for social programs, which were financed from other sources.
Oil production was 2.9 million barrels per day (bpd), about the same as 2012. PDVSA is currently investing to increase production and exports, and aims to produce 6 million bpd by 2019. Output has still not recovered from the opposition’s shutdown of the oil industry Dec. 2002 – Feb. 2003, before which it was over 3 million bpd.
According to Ramirez, increased exportation and revenues from oil production are central to the government’s fiscal policies and social aims. “Venezuela can never renounce the recovery of fiscal petroleum income, of the capture of oil income on the world stage: our objective is the distribution of this income to the people,” he said.
The minister continued by arguing, “Maintaining and maximising the fiscal petroleum regime guarantees the necessary income for stability in our economy”.
As a result of the economic problems currently being experienced, the ECLAC and IMF estimate that GDP will contract by 0.5% this year. GDP growth slowed to 1.3% in 2013, from 5.6% in 2012.
Some analysts have argued that in order to address current “distortions” and achieve stability, the government needs to go further than proposed measures and introduce a series of market reforms. They claim that currency exchange reform alone would result in more inflation and “economic confusion and uncertainty”.
According to Luis Vicente Leon, the president of consultancy firm Datanalisis and a critic of the Bolivarian project, reforms to currency controls should be taken in conjunction with eight other measures. These are: devaluation, increasing market fluidity, adjusting price controls, eliminating the fiscal deficit, stopping the growth of monetary liquidity, increasing the domestic gasoline price, reducing preferential oil sales to allies, and stimulating local production.
Critics have also said that economic reform should come with further changes to the executive cabinet, following the controversial exit of Jorge Giordani from the planning ministry.
Victor Alvarez, a former minister of basic industries and mining, advocated that what he called the “concentration of power” in certain individuals should be reduced by ensuring that ministers cannot hold more than more post. The comments appear directed at Rafael Ramirez, the government’s key economic figure and holder of both a ministerial post, the presidency of PDVSA, and the title of vice president of the economy.
Meanwhile, pro-revolution economist Nelson Ford has argued that the government’s policies seek to “confront powerful economic agents” with inspections and regulation. Officials have claimed that local and international business groups are trying to undermine the Bolivarian economic model and contribute to current problems through speculation, hoarding and contraband, in what authorities have described as an “economic war”.
Speaking on state channel VTV, Ford argued that the Maduro administration “seeks a peaceful solution [to the situation] by structuring a policy of fiscal stimuli and social inclusion with companies that…support the supply of special economic zones and that contribute to re-orientating the productive apparatus to the economic reality, to allow a win-win for all Venezuelans”.
The economist also said that the government’s approach to address economic problems was different from what the right-wing offered. “The right-wing always proposes privatisation and social exclusion, but we aren’t going in that direction,” he said.
The Maduro administration has also received criticism from some leftwing groups over its economic policies. Socialist Tide, a current operating within the governing United Socialist Party of Venezuela (PSUV), has warned against any policies which would “cede” power to foreign capital, and has argued for a radical socialist response to the economic situation.