Venezuela Proceeds with Plan to Sustain Growth and Social Spending in Economic Crisis

Mérida, April 30th 2009 (Venezuelanalysis.com) — This week, the Venezuelan government increased the minimum wage by 10%, emitted 12 billion bolivars ($5.6 billion) in government bonds, and revamped its strategy to combat predatory price speculation, as part of its plan to maintain social investment and boost domestic productivity amidst the global economic downturn.  

In March, the government lowered its estimate of the average price of oil, which accounts for more than 90% of the country’s exports, from $60 to $40 per barrel for the year 2009.

To adjust to this change, the government reduced overall spending in its 2009 budget by 6.7%, and then raised the sales tax from 9% to 12% and passed a law to cut unnecessary spending in government institutions.

On Friday, the government increased the minimum wage by 10%. It plans to increase the wage by another 10% on September 1st. Overall, minimum wage workers will see their wages increase from 800 bolivars ($372) to 967 bolivars ($447) per month in 2009.

To help maintain spending on social programs, the government plans to nearly triple its internal debt this year, from 12 billion bolivars ($5.6 billion) to $34 billion bolivars ($15.8 billion). The Central Bank’s emission of 12 billion bolivars in bonds on Thursday constituted more than half of the projected increase in internal debt this year.

To control inflation, President Hugo Chávez called on his Council of Ministers on Wednesday to extend a freeze on rent prices and keep government-issued dollars, which cost a third of what they sell for on the informal market, out of the hands of price speculators.

According to Chávez, “There are people who have four or five houses and they live from exploiting entire families.” Also, people obtain dollars at the government’s exchange rate of 2.15 bolivars, use the dollars to purchase cars in Colombia, then sell those cars at triple the price in Venezuela, Chávez said.

“We should not permit rent in Venezuela to continue to be among the highest in Latin America,” Chávez said Wednesday. “We are obligated to defend our consumers, including those who are our adversaries.”

Chávez added that price speculation is a result of the economic reasoning of the “savage” model of the free market, and it also “forms parts of a political plan” to destabilize his government, along with other activities that the national Institute for the Defense of People’s Access to Goods and Services (INDEPABIS) has detected this year, such as the hoarding and altering of food to evade price regulations.

Finance Minister Alí Rodríguez said this week that an increase in the domestic price of gasoline is another possibility in order to fill budget gaps, but “it must be done in the right moment,” since the Venezuelan people’s access to their country’s oil is a hot button political issue.

Of the three million barrels of oil Venezuela produces daily, 650,000 barrels are sold on the domestic market at a greatly subsidized price that reflects only a small fraction of production and distribution costs, said Rodríguez.

Rodríguez also stated that there will certainly be a drop in the rate of growth of Venezuela’s GDP this year, but it will not be as drastic as the 2.2% decline that the International Monetary Fund recently projected for Venezuela.

In the context of the world financial crisis, Rodríguez said it would be “impressive” if any country manages to grow by 1% or 2% this year. “The great effort we must make is to avoid falling into recession,” he said.

Finally, the minister said the government remains staunchly opposed to a devaluation of the bolivar as a method of raising funds, because doing so would worsen inflation and produce money with no corresponding increase in production in Venezuela’s import-dependent economy.

Instead, said Rodríguez, the government is prioritizing stimulus to productive sectors, including the modernization of agriculture, and putting other projects on hold for this year. He declined to offer projections for next year.

Rodríguez also said the government is prioritizing its issuance of dollars to cover imports of food, medicine, public transportation vehicles, production machinery, and other basic necessities of the population, and that 95% of these basic import needs are being covered.