Venezuela's current economic situation
By Gustavo Coronel
06.11.05 | With an oil income that has fluctuated between US$30 and US$50 billion per year for the last few years and a population of only some 25 million people to take care of, the Venezuelan government should not have economic problems. No other Latin American country can count on such a huge income, obtained with so little effort. Yet, the economic situation of Venezuela is extremely fragile. Its national debt will go from US$23 billion in 1999 to US$50 billion by next year, according to the budget proposed by the Chávez regime. Much of this debt is in the hands of local banks that, paradoxically, have now become captives of a government that can utilize the concept of national sovereignty to establish the times, conditions, and ways to pay their debts. Not only the national debt will more than double but also the government of Hugo Chávez consistently keeps spending more than it receives. As a result, the national debt will continue to increase year after year.
The concept of a formal, single national budget has practically disappeared, since there are, at least, three existing parallel budgets: one is the "official" budget, approved by the National Assembly, a second one is the budget of the so called Social Fund created informally by Chávez and managed by Chávez and his close collaborators, and the third one is controlled personally by Chávez and draws its resources from Petróleos de Venezuela, the Venezuelan state-owned petroleum company. The "official" budget for 2006, approved by the Chávez controlled National Assembly without discussions or analysis of any kind, is of about US$43 billion. The second one, controlled by Chávez and some members of the Cabinet is of some $20 billion and the third one, controlled personally by Chávez, is of an unknown amount, as it depends entirely on his mood and on the orders for disbursement he issues to the president of the oil company, who is also his minister of Energy and Petroleum. The existence of these three parallel "budgets" is rapidly becoming a bureaucratic nightmare and a source of immense corruption, due to the huge amounts of money involved and the greed of the people surrounding Chávez, who already constitute a new rich class in the country.
The "official" budget is a work of fiction. Estimates of income, investments and expenses have little or no relation to real life. According to José Guerra, a former high executive of the Venezuelan Central Bank (El Universal, 11-04-2005), the estimates of income for the 2006 "official" budget are greatly under estimated by assuming an average price for the oil barrel almost half of what it could be ($26-vs.-$40 or more per barrel). By doing this, the regime can ask, as time goes by, for additional fast track disbursements, a practice that, Guerra says, lends itself to immense corruption. Not only the disbursements lack control but also, even worse, the use of the money will lack accountability, as it comes under the definition of "additional credits," not sustained by well-substantiated government programs. The "official" budget for 2006 will carry a deficit of some 3.3% of the GDP, some US$4.4 billion. Guerra adds that, since the government must pay some US$3.3 billion in debt amortization, the amount of new indebtness for 2006 will probably be close to US$7.6 billion. What we are witnessing, in fact, is a colossal waste of financial resources derived from oil, a non-renewable resource, on the one hand, and significant new indebtness on the other.
The social fund created by the Chávez government lacks legal basis while its expenses are not accounted for. These expenses are basically required to pay for the food being distributed free of charge or at very low prices in government outlets called MERCAL and to cover the expenses of the thousands of Cuban military advisers, bodyguards and members of medical and sports programs currently existing in the country. These expenses do not solve the underlying problems of poverty and ignorance among the Venezuelan population. In fact, they contribute to make them worse by creating extreme dependency of large segments of the population in government handouts.
In the 2006 "official" budget 20% of the money is earmarked to pay debt while only 5% is destined to new infrastructure and less than 1% to science and technology. The people are carrying a large share of the increasing financial burden by having to pay artificial and regressive taxes such as the Bank Tax (an amount paid by citizens to the government for every bank transaction they make).
What appears as a positive aspect of the Venezuelan financial situation, the very high level of international reserves, close to $30 billion, has been made possible by a very rigid foreign exchange control that has lasted almost four years and has no end in sight. Chávez has said that, the day he lifts these controls, "the money would be taken out of the country by unpatriotic Venezuelans." A result of these controls has been the bankruptcy of hundreds or thousands of private companies that needed foreign exchange for their imports of raw materials and did not get it in time due to bureaucratic red tape or political retaliation.
In spite of suffocating foreign exchange controls, Casto Ocando reports in El Nuevo Heraldo (November 1, 2005) that capital flight in Venezuela is "astronomical." He estimates that since Chávez arrived in power about US$45 billion have fled the country and this amount will keep increasing in the future. He adds, "By the end of this year capital flight during the Chávez presidency could be greater than US$55 billion." Ocando quotes Ernesto Medina-Smith, the greatest Venezuelan expert on capital flight, saying that this amount is more than half the total capital flight from Venezuela in the last 60 years. This flight has been the greatest, Medina-Smith adds, "when the exchange controls have been in force." He says that capital flight increased from US$4 billion during 1999 to US$11.2 billion during 2004. In the same report by Casto Ocando, Venezuelan financial expert Maxim Ross estimates that only during the first half of this year about US$5.6 billion have left the country, basing his estimate on the official figures of the Venezuelan Central Bank. This immense capital flight under a system of exchange controls is possible, he adds, through the application of legal loopholes and by the use of sophisticated fraudulent schemes with the active complicity of corrupt government officers. Ross says "Venezuelans are not waiting to see if the new socialist scheme implanted by Chávez is going to work but are simply anticipating the catastrophe by taking their money out of the country." Medina-Smith says, "The countries where capital flight are the most intense are Russia, Argentina and Venezuela. The amounts of money taken out of these countries greatly exceed their national debts."
The mid-term financial situation in Venezuela can be defined, at best, as "highly uncertain" and, at worst, "highly unstable," in spite of the high oil income enjoyed by the country. International investment is very low, except in the petroleum sector, where huge investments have already been sunk in the ground by international oil companies and cannot be taken out, in spite of the displeasure they might feel at the recent unilateral changes imposed by Chávez on their contracts. As Chávez continues to escalate his expenditures that range from buying Argentinean bonds and nuclear reactors to Chinese satellites, from Russian assault rifles to helicopters and gives away our oil to Cuba while threatening to give away our F-16's to China, his requirements for money will always be greater than his income. His mad political schemes are forcing him into a spiral of expenditures that no country can sustain for long, even if oil prices stay high. He is already putting his hands into the international reserves, a financial crime of the highest order, taking some US$6 billion from them in order to pay for crazy acquisitions, such as the ones listed above.
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