Venezuelan Public Spending Steady amidst Financial Regulations, GDP Decline, Inflation Spike

Amidst a drought-induced electricity shortage and an overhaul of financial sector regulations, Venezuela saw a 5.8% drop in its GDP and an increase in inflation over the past year, while public investments, social spending and the unemployment rate have remained steady.

By James Suggett- Venezuelanalysis.com

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Mérida, May 27th 2010 (Venezuelanalysis.com) – Amidst a drought-induced electricity shortage and an overhaul of financial sector regulations, Venezuela saw a 5.8% drop in its GDP and an increase in inflation over the past year, while public investments, social spending and the unemployment rate have remained steady.

On Tuesday, the Central Bank reported a decrease of 5% in the oil sector productivity and 4.9% in the non-oil sector. It also reported a 27.9% decrease in private investment, and a 5.9% drop in private consumption compared to the first quarter of 2009.

The sectors with the most severe decrease in productivity were transportation (-15.9%), commerce (-11.6%), manufacturing (-9.9%), and financial intermediaries (-9.7%). In manufacturing, the hardest hit sectors were furniture (-46.8%), metals (-39.7%), tires and plastics (-25.9%), and vehicles (-19.2%).

Significant growth was registered in public housing construction (67.7%), as well as communications (9.7%), community, social, and personal services (2.8%), educational services (2.5%), and health services (1.6%). This is a result of the government’s maintenance of social spending in these areas even after the world financial crisis caused a decline in the price of oil, Venezuela’s principal export.

Also, non-oil sector exports grew by 12.9% “due, principally, to greater investments by public companies in the context of international accords moved forward by the national executive,” the Central Bank reported.

Since President Hugo Chavez was elected ten years ago, his government has invested nearly five times more money in social programming than the governments of the previous ten years, according to the National Statistics Institute.

Unemployment

Despite the decline in production, the unemployment rate decreased by half a percentage point to 8.2% in April. This was an increase of half a percentage point over April 2009, but unemployment is still significantly lower than the 14.6% unemployment rate when President Chavez came to power.

Also last month, the rate among youth between the ages of 15-24 is now  17.2%, while unemployment among people between the ages of 45 and 64 is 4.6%.

The unemployment rate pertains to Venezuela’s formal economy, which encompasses between 55% and 60% of the total economy. When Chavez came to power, the formal economy represented less than 50% of the overall economy, according to government statistics.

Inflation

Meanwhile, inflation spiked in April, increasing by 5.2% in that month alone, compared to 2.4% in March. This brought cumulative inflation to 11.3% for the first four months of 2010, compared to 6.7% during the first four months of last year. Cumulative inflation over the last 12 months surpassed 30%.

The highest inflation occurred in foods and non-alcoholic beverages at 11.1% for the month, while inflation decelerated in housing, health care, education, and clothing prices with respect to March.

Analysis

The Central Bank as well as private sector analysts attribute the GDP decline partially to a nation-wide electricity shortage that led to electricity rationing in late 2009.

The rationing, which has been cut back recently, was accompanied by scheduled cut backs in production in Venezuela’s heavy industries, consumer conservation incentives, a temporary reduction in the workday from eight to six hours, restrictions on imports of energy inefficient products, and investments in thermal electricity.

The Central Bank also said a “temporary restriction in access to government-issued dollars for the importation of goods and services” had contributed to the economic downturn.

An editorial in the daily newspaper El Universal this week argued that the government’s use of its oil dollars in international cooperation agreements reduced the amount of dollars available for issuance to private importers, stifling investments.

With regard to inflation, government sympathizers and opponents debate about whether it is the result of price speculation in the private sector or the government’s price controls and formal devaluation of the national currency, the bolivar, by half in January.

Food Minister Felix Osorio reported that food sellers regularly sell fruit and vegetables at ten or twenty times what they paid to producers, and food markets sell beans, rice, milk, meat, and other essential food at much higher prices than the government-controlled price.

“How is it possible that primary producers sell a kilo of tomato between one and three bolivars, depending on the season, and the commercial establishments sell them at more than 20 bolivars [per kilo]? This is greed and capitalism that is planted in their minds,” Osorio commented.

According to official figures, the food sector has no shortage of government-issued dollars. The government maintains a preferential rate of exchange with the dollar for essential sectors of the economy like food, with the goal of stimulating and diversifying national production in the oil-dependent economy. The government also continues to grant low-interest credits to small and medium sized agricultural producers.

The government has increasingly stepped up its law enforcement efforts over the past year to combat speculation in the prices of goods and services as well as in the parallel, or black market for the dollar. It has fined, temporarily closed, or nationalized hundreds of privately owned businesses of all sizes. Most recently, it opened new investigations into the country’s largest food producer, Polar, which has a history of artificially enhancing food to evade price controls on essential items.

“We are going to continue this struggle against those who think that foods are simply merchandise, and not a necessity,” said Osorio.  

Regulating the foreign currency bond market

State regulators recently set their sights on the bond market, which they say fuels overall inflation. Bond brokers purchase government-issued bonds at formal dollar rates and then buy and sell them internationally at speculative prices. Gradually, all parts of the economy adjust their prices according to the parallel currency value, according to government analysts.

To clamp down on this speculation, the government temporarily closed all bond trading and arrested the owners of several bond brokerage firms for illegal trading last week. Finance Ministry officials say the market will be reopened under a new regulatory plan next week.

“Hopefully, with the speeding up of the administration of government-issued dollars and improved environmental conditions for electricity production, the economy will recover,” the Central Bank report concluded.

The law enforcement efforts reached beyond the food sector and the parallel dollar. Last December, the government took over a handful of banks and arrested more than 30 bankers in a crackdown on banking fraud, increasing the government’s share of the nation’s banking sector to as much as a quarter by some estimates.

Private sector analysts argue that the government’s law enforcement efforts have spooked investors and thus stymied economic growth.

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