Venezuela’s 2010 Budget Maintains Social Spending Despite Global Economic Crisis

Caracas, October 20, 2009 (venezuelanalysis.com) – Venezuela’s Minister for Finances and the Economy, Alí Rodríguez Araque, presented the national budget proposal for the year 2010 on Tuesday with more than 45% of the total directed towards social spending.

The 2010 budget is based on an average oil price of $40 a barrel, estimated economic growth of 0.5 percent and inflation of 20 to 22 percent for the year.

“Despite the crisis of world capitalism,” Rodriguez said during the presentation, an important aspect is to maintain social investment. “We act not only for our own fate but for the people and humanity as a whole, we must overcome the legacy of many years of setbacks.”

The total budget for 2010 is 159.41 billion Bolivars (US $73.9 billion). Of this, 45.73% would be directed towards social spending aimed at poverty reduction and improving the quality of life for Venezuelans, Rodriguez announced.

Of this, 18% will go to the education sector, 12% towards social development and participation and 8.7% to the health sector, as well as a $5 billion fund for social missions that benefit over 60% of the Venezuelan population according to figures from the National Statistics Institute (INE).  

“Our vision is to focus on the solution to the problems while at the same time focus on efforts to recover our economy,” he declared, but stressed that Venezuela remains well positioned and has suffered no major effects from the crisis.

In March this year, Venezuela, the biggest net oil exporter in Latin America, reduced the overall 2009 budget by 6.7% after world oil prices fell to almost half the budgetary estimate of $60 per barrel.

After five years of consecutive economic growth, Venezuela’s economy shrank 2.4 percent in the second quarter due to the drop in oil revenues related to the international economic climate as well as problems in some non-oil sectors. While the Central Bank predicts zero growth for the year, some analysts are forecasting a 1-2% contraction.

Therefore, Venezuelan economist Jesus Farias argued, the calculations made by the National Executive to develop the 2010 budget based on $40 a barrel are in line with the new global economic realities.

“It is preferable to set a budget with a $40 price per barrel of oil, allowing the possibility of a very high probability of compliance, rather than speculate with prices that are very likely to be achieved, but that have a degree of higher uncertainty,” he said.

Farias also argued that the budget forecast of 0.5% growth for 2010 announced by Rodriguez was a modest and achievable estimate that avoids creating false expectations for growth, which could be disrupted by the growing crisis of the capitalist system.

In addition to social spending Rodriguez said the budget would focus on five strategic objectives in order to boost growth: increase food production in order to move towards food sovereignty, address the housing shortage, develop and improve the country’s infrastructure, boost energy production and distribution, and finally, to realign the domestic financial sector to ensure momentum for productive sectors.

As part of this plan the government will invest in the $4.3 billion Manuel Piar Hydroelectric Project in Tacoma, Bolivar state, $1.75 billion of which will be financed by the Inter-American Development Bank and the rest by the Venezuelan state.

“In the last few years the demand for electricity has registered an accelerated increase, an indication of this is that in the last year, the increase is located at above 7%,” a situation “that demands major investment from the government in order to guarantee the necessary supply for industrial and economic development,” Rodriguez commented.

Despite slowing growth, unmet consumer demand combined with an over-valued currency – the Bolivar has been fixed at 2.15 to the US dollar since 2005 – has meant that inflationary pressures remain high.

Accumulated inflation from January to September was 18.5 % and the Central Bank expects it to rise above 26 percent by December.  However, the budget predicts that inflation for 2010 will be between 20-22%.

Although the Bolivar is trading at more than double the official rate on the parallel black market, the minister ruled out a devaluation of the currency.

Since Venezuela is heavily reliant on imports, the country’s foreign exchange rate is intimately linked to inflation. In order to keep the Bolivar cost of goods bought abroad low, importers’ demand for dollars at the official exchange rate is high.

In recent months the Venezuelan government has come under pressure from the private sector, particularly the automotive sector, to increase access to dollars at the official rate, with some companies threatening to close plants and lay off workers.

Rodriguez announced that the foreign exchange budget for 2010, which is an annex of the fiscal budget and is prepared by CADIVI, the government commission that handles foreign currency requests, would have private sector participation in its preparation.

“Complaints about CADIVI have ceased, we have learned our lesson this year,” he said.

Specifically, Jesse Chacón, Minister of Science, Technology and Industry said that access to approximately $4 billion at the official rate would be approved for the automotive sector next year, with the aim of increasing up to 200,000 the number of vehicles assembled in Venezuela.

Other sectors, such as “the chemical, textile and agro-industries” would also have no have problems obtaining resources to import primary materials Chacón said.

Rodriguez said that tax revenues would finance 53% of the budget, oil revenues will account for 24.7%, while the incursion of foreign debt makes up the rest, “in order not to affect education and food items for our people.”

Total debt is $52.25 billion, which represents 15.76% of GDP for this year, Rodriguez said – a level of debt, which the minister considered to be sustainable.

At the same time, Rodriguez said the country’s 2010 goal for oil production will be about 3.1 million barrels a day. Venezuela’s economy is dependent on oil sales, which make up 90% of export earnings.