Mérida, 16th June 2014 (Venezuelanalysis.com) – Venezuela’s Vice President for the Economy, Rafael Ramirez, has outlined planned changes to the exchange rate system, oil exports and gasoline subsidies as part of a strategy to achieve macroeconomic stability and overcome current economic problems.
The announcements were made in a speech to international investors in London, UK, where Ramirez explained the government’s efforts to stabilise the Venezuelan economy.
Over the past 18 months the country has been affected by the falling value of the bolivar on the black market, shortages in several basic products, and a high annual inflation rate which is currently running at 60.9%.
One of the key policies revealed by Ramirez was the planned “convergence” of Venezuela’s official currency exchange rates “into a new exchange rate system in the short term”.
The government has maintained controls on currency exchange since 2003, partly to protect the economy against capital flight. Individuals and businesses who want to buy foreign currency for travel or imports beyond assigned limits recur to the parallel or “black” market, where dollars can cost over ten times the official rate of 6.3 BsF to US $1.
In response to the falling value of the bolivar on the black market last year, which created various economic distortions, the government of President Nicolas Maduro introduced a more flexible three-tiered exchange rate system through which goods can be imported at 6.3, 11, or almost 50 bolivars to the dollar. Priority items like food and medicines are imported at the 6.3 rate.
However Ramirez’s comments indicate that the government is considering how to simplify the system by unifying the rates again. This could involve folding the 6.3 rate into one of the weaker rates, which would save the government dollars and help protect international reserves.
Such a move would also confirm what critics have referred to as a “de facto” or “stealth” devaluation, by gradually moving more economic sectors from the 6.3 rate to the weaker official rates.
Investors were informed on Saturday that reforms to the currency exchange system would help Venezuela tackle the black market dollar and return to growth, while confidence in the economy would be boosted by raising international reserves via moving existing off-budget funds to the central bank.
According to Reuters, some economic analysts have said that a weaker bolivar would help overcome shortages, but could also provoke further inflation. Ramirez meanwhile said that levels of social spending would be “maintained” in any decision taken.
Changes to petroleum policy
Recent economic announcements indicate the government’s intention to ensure financial liquidity and the sufficient supply of dollars for domestic importation and demand by contracting new loans in the short term and increasing oil exports and revenue in the medium to long term.
On Saturday Ramirez said that Venezuela is working on securing a new $4 billion loan from China, which would be re-paid in oil sales. According to the official, who is also the petroleum minister and the president of state oil company PDVSA, Venezuela has already re-paid $24 billion of the $41 billion it has borrowed from China in recent years.
Ramirez informed investors that this means outstanding Venezuelan debt to China is only $17 billion, and not the $40 billion that markets had been estimating. He also described relations with Beijing as “perfect”.
During the presidency of Hugo Chavez (1999 – 2013) Venezuela diversified oil exports from the United States to new partners. It currently exports 640,000 barrels per day (bpd) to China and 400,000 to India, as well as the continued export of 1.2 million bpd to the United States.
Venezuela slipped from being the United States’ top oil exporter in the late 1990s to 4th currently, behind Canada, Saudi Arabia and Mexico.
However the South American OPEC member, which holds the world’s largest oil reserves, is also seeking to increase oil exports to the United States. Ramirez stated that Venezuela sees an opportunity in the U.S. shale boom because the light oil produced by shale extraction needs to be blended with extra heavy crude, which is what Venezuela pumps.
“We expect to maintain our current exports to the U.S., and even increase them,” said the economic official.
Finally, Ramirez affirmed that the Venezuelan government is planning to reduce the $12 billion annual subsidy it provides to the domestic gasoline price. The dirt-cheap price at the pump costs between 5 cents and one penny a gallon, depending on the exchange rate used, and authorities argue that this must increase for sustainability.
“The discussion [on the proposal] has already begun and it’s been good,” he said.
A recent research paper by the Council on Hemispheric Affairs noted that a range of analysts agree that current policies will help Venezuela achieve economic stability, but differ on the wider effects of the proposed reforms.