Venezuela’s Economy Grew 9.4% in 2005

According to a Year-End report just released by Venezuela's Central Bank President Gaston Parra, the Venezuelan economy grew by 9.4% in 2005, the highest in Latin America. this is the ninth consecutive quarter in which the economy has grown.

Caracas, Venezuela, December 29, 2005—Preliminary figures indicate that Venezuela’s economy grew by 9.4% in 2005, relative to the previous year, according to the end of year statement of Central Bank President Gaston Parra. “With this result, one can observe, for the ninth consecutive quarter, a sustained growth. The increase in economic activity is linked to the dynamism of internal aggregate demand in a context of lower unemployment, de-acceleration of inflation, and a surplus in the balance of payments,” says Parra.

Most of this growth occurred in the non-oil sector, which increased by 10.3%, while the oil sector grew by only 1.2%. In the non-oil sector, the strongest growth was measured in the construction industry, which increased by 20.1% relative to the previous year, followed by commerce and repair services (19.9%), and communication (15.9%).

According to Parra, “the lower dynamism of the petroleum activities is related to the maintenance of a price defense strategy.”

The balance of payments surplus reached 3.6% of GDP, or just under $5 billion, which provided a significant boost to the country’s foreign currency reserves. These reserves are currently at $28.9 billion. The reserves would be even higher, if the Central Bank had not transferred $6 billion to a newly established National Development Fund (Fonden).

Inflation for 2005 is expected to reach 15.3%, one of the lowest rates in recent years. For 2004 inflation was 19.2% and the annual average between 1995 and 2004 was 35.1%. Venezuela thus still has the highest inflation rates in Latin America, which is a problem it has been struggling with ever since the banking crisis of 1984.

“The de-acceleration of inflation is connected to the absorption of excess liquidity on the part of the Central Bank and the government’s sales of foreign currency bonds that are placed in bolivares [local currency] in the national market, the increase of production in the country, the greater volume of imports, the stability of the nominal currency exchange rate, and the effect of the adequate level of foreign currency reserves on the formation of expectations of lower inflation,” says Parra in the end of year statement.

Both imports and exports jumped significantly in 2005. Imports increased by 45%, from $17.3 billion in 2004 to $25.2 billion in 2005. Exports, largely thanks to the high price of oil, also jumped significantly, by 43%, from $38.7 billion in 2004 to $55.6 billion in 2005.

Venezuela’s economic growth in 2005, according to the Latin American research group CEPAL, is the highest in Latin America, followed by Argentina (8.6%), Uruguay, Peru, and Chile (6% each).

Last year, Venezuela’s economy expanded by 17%, relative to 2003, one of the highest growth rates in the world. This growth, though, came after two years of significant economic contraction, when, in the wake of the 2002 coup attempt and the shutdown of the country’s oil industry, the economy shrank by 8.9% in 2002 and another 7.7% in 2003.

Venezuela’s Minister of Planning and Development, Jorge Giordani, said in a recent TV interview, “we do envisage sustained growth at five, six or seven percent. At those levels, (Gross Domestic) Product may double in almost 10 years.”