Venezuela Adjusts Exchange Rate and Reports Positive 2011 Economic Projections

Mérida, January 3^rd 2011 (Venezuelanalysis.com) – The Venezuelan government eliminated the preferential exchange rate of 2.6 bolivars per dollar on January 1 following a report by the Central Bank of Venezuela (BCV) that projected 2% growth and reductions in inflation and unemployment in 2011 as Venezuela emerges from recession.

The bolivar will now be traded at a single rate of 4.3 bolivars per dollar. Foreign currency bonds will continue to be traded in the Foreign Currency Transactions System (SITME), where their value is allowed to float to a maximum of 5.3 bolivars per dollar.

Planning and Finance Minister Jorge Giordani said the adjustment “will allow a simplification in the management of transactions. We have no doubt that this decision will have a series of consequences for the national economy and investments over the course of 2011 and 2012, however, these effects will allow us to fulfill our economic goals.”

In 2003, the government established currency controls and an exchange rate of 2.15 bolivars per dollar to stop capital flight and to control inflation following an economically devastating, management-led general strike.

In January 2010, a dual exchange rate was introduced. It consisted of a preferential rate of 2.6 bolivars per dollar for essential goods and services such as food, health care, education, the acquisition of machinery for manufacturing, and the payment of public debts; and a rate of 4.3 bolivars per dollar for non-essential items.

The two exchange rate adjustments over the past 12 months are intended to diversify Venezuela’s economy, which is dominated by the oil sector and dependent on imports. The measures are expected to stimulate domestic production by making imports more expensive and facilitating investments through the simplification of transactions and legal regulation of the financial system.

The adjustments also increase government revenue and bond yields at a time when the government has pledged to maintain its high spending on social programs such as health care, housing, food access, and education and has taken control of approximately 30% of the banking sector in order to direct investments toward domestic production.

BCV President Nelson Merentes said in a press conference on Friday that the potential upward pressure on inflation caused by the exchange rate adjustment will be offset by increased domestic production and the distribution of essential goods and services at regulated prices by state-owned companies, as well as a potential increase in the supply of government-issued dollars to importers aimed at taming the informal dollar market where the bolivar is worth half its official value.

President Hugo Chavez issued a stern warning to money launderers and price speculators in his weekly opinion column on Sunday, saying the government will take a harder line against them in 2011.

Chavez also said in mid-December that his government is considering an increase in the value-added tax, which is currently at 12%, to raise funds for flood relief following recent devastating storms that left 130,000 homeless.

Last year, the government nationalized – with indemnity – large tracts of fertile land left idle by estate owners, dozens of companies accused of speculating on food prices, and a swath of banks that did not comply with legally mandated quotas for productive sector investments.

Motivated by the devastation wrought by the world economic crisis, the National Assembly also passed a comprehensive reform of the financial sector in 2010, including a Framework Law for the Financial System and reforms to the BCV Law, Insurance law, Stock Market Law, and Banking Institutions Law.

The reforms established the principle that “well-being is a fundamental human right and the economy should be at the service of this,” according to the BCV. They strengthened the role of the government in regulating liquidity in the banking sector, moderating inflation, assuring the flow of government-issued dollars to importers, stabilizing the foreign currency bond market, and stimulating the supply of credit to the national productive sector.

Economic Outlook

The exchange rate adjustment came shortly after the BCV released its year-end report on the Venezuelan economy.

After shrinking by 3.3% in 2009, Venezuela’s Gross Domestic Product shrank by 1.9% in 2010, the BCV reported. This included a 2.2% decline in the oil sector driven by a drop in the extraction of crude, and a 1.8% decline in the non-oil sector.

Telecommunications, government services, and personal services grew by 7.8%, 2.6%, and .9% respectively over the year, while the main areas of decline were construction (-7.2%), commerce (-6.3%), and manufacturing (-4.2%). Internal demand decreased by 1.7% over the year as overall remunerations grew by 27.4% in the private sector and 9.9% in the public sector, the BCV reported.

Annual accumulated inflation was 26.9%, marking only a slight change from 2009, according to the BCV. The government also reported a current account surplus of $13.9 billion, or 7.3% of the GDP, the result of an increase in oil export revenue and a decrease of 1% in overall imports in 2010.

Natural disasters greatly affected the economy over the past two years. At the end of 2009, Venezuela was hit by a severe drought that triggered a nation-wide electricity shortage. At the end of 2010, the Caribbean nation was hit by torrential rains that caused flooding and landslides in 40% of the national territory.

Minister Giordani was quick to note that the rate of GDP decline slowed over the course of 2010, marking -5.2% in the first quarter, -1.9% in the second quarter, and close to zero percent in the third quarter. It is expected to show positive growth in the fourth quarter.

“This shows a tendency that we have no doubt is going to continue in the year 2011,” said Giordani in a press conference on Friday, highlighting that Venezuela experienced record growth for 22 consecutive quarters between 2003 and 2008.

The BCV, the Planning and Finance Ministry, and the National Statistics Institute (INE) coincided in a projection of 2% growth for the year 2011. They also project a decline of between 1% and 3% in the annual inflation rate and a decrease in unemployment from the current 7.7% to below 7% in 2011. 

“Venezuela is going out from the economic crisis. Next year the economy will grow and indicators will recover,” said the INE Director Elias Eljuri on Friday.

Social Indicators

While the recession that was sparked by the world financial meltdown in 2008 caused increased unemployment and poverty in many industrialized countries, Venezuela’s employment rate remained relatively steady at between 7% and 8%, and the poverty rate remained steady at around 26%.

Meanwhile, Venezuela’s Human Development Index, which measures health, income, and education, increased steadily through this year, finishing 2010 at .787 compared to .732 in 2000 – the sixth best among Latin American and Caribbean countries, according to the United Nations Development Program.

Planning Minister Jorge Giordani said this was the result of a total of $330 billion in social investment over the ten years of the Chavez presidency – social spending that did not abate during the recent recession despite calls for “fiscal austerity” by free trade proponents.

The policies of the current government contrast in many ways with the neo-liberal policies enacted by Venezuela’s two former ruling parties during the 1980s and 1990s, which brought an increase in poverty from 10% of the population in 1978 to 86% of the population in 1996 while monetary deregulation led to a 103% inflation rate in 1996.