Venezuela's economy: Out of stock

  • Article by: THE ECONOMIST
  • Updated: February 11, 2013 - 11:28 PM

The cost of postponing another currency devaluation is high.

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People withdrew money last week from cash machines in Caracas, with election posters supporting Venezuela’s President Hugo Chavez covering the walls nearby. An election to select Chavez’s successor is considered inevitable in the near future.

Photo: Fernando Llano • Associated Press ,

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– It is now two months since Venezuelans last saw or heard from their president, Hugo Chávez, who remains in intensive care in a high-security Havana hospital, battling what seems to be terminal cancer.

But it is an absence of a different kind that is uppermost in many people’s minds. Cooking oil, sugar, wheat flour, coffee and the all-important pre-cooked maize flour that goes into many Venezuelan dishes are among the staple items that have largely disappeared from the shelves. Both the central bank, which tracks the level of supply, and private economists reckon that shortages are at their greatest since 2008.

Temporary shortages often occur at the start of the year, thanks to higher demand, reduced output and distribution delays over the Christmas holidays. But this year they are a symptom of bigger distortions, which include a black-market dollar that trades at more than four times the official exchange rate, and chronic inflation (20 percent in 2012 and likely to rise this year).

Economists expected a big devaluation in the early months of this year. That would have made revenue from oil exports go further in local currency, bridging a fiscal deficit that reached 8.5 percent of GDP last year after an increase in spending of 26 percent in real terms in the 12 months before a presidential election in October, won by Chávez. But last Friday’s devaluation was relatively small and didn’t bring the currency anywhere near the black-market value. Analysts expect that a more severe devaluation is inevitable, but probably will be delayed until after an election is held to choose Chavez’s successor.

The underlying problem is a shortage of cash at the state oil monopoly, Petróleos de Venezuela (PDVSA), which provides 94 percent of the country’s foreign earnings. Under a plan announced in 2005, Venezuela should have produced 5.8 million barrels a day by 2012. Even by the government’s reckoning, it pumped little more than 3 million barrels; private sources suggest the number was around 2.8 million.

Local consumption has risen sharply, partly because petrol is provided almost free to Venezuelans but also because power plants have switched to fuel oil because PDVSA is unable to supply them with gas. Around 270,000 barrels per day of oil goes to China, to repay loans to the government, and almost 400,000 barrels per day at a big discount to Cuba and other allies. Refinery and production snags have even forced the company to import crude and oil products.

PDVSA also is obliged by the government to divert billions of dollars into unaudited funds that the president manages at his discretion. The biggest, known as Fonden, absorbed $15.5 billion last year, forcing PDVSA to pay part of its taxes in the form of IOUs. The central bank’s foreign reserves have been depleted, too, to $30 billion (down from $42 billion in 2008). Most of that is in gold or other nonliquid assets; liquid reserves amount to only a couple of months’ worth of imports. Importers say it is taking six months to obtain foreign currency at the official rate.

Official propaganda proclaims that Chávez’s socialist revolution has promoted sovereignty and “endogenous development.” But Venezuela is more dependent than ever on imports. Domestic production has fallen victim to an overvalued currency and government hostility to the private sector. A wave of expropriations and confiscations has left millions of acres of farmland and a swath of the food industry in government hands. The expansion of the money supply, along with redistributive policies, has raised demand for food and other basic goods, met largely by imports.

Officials blame private-sector “hoarders” and “speculators” for inflation and shortages. They have raided warehouses, seizing 8,520 tons of sugar, for example, from Pepsi-Cola, which the company says was imported with government permission. As with other staples, the state controls the price and import licenses for sugar. The state also owns most of the sugar industry.

In the case of pre-cooked maize flour, the government owns half of production capacity, but only supplies a fifth of the market, according to figures from Datanálisis, a market-research company.

Some stopgap measures have been taken to ease the flow of dollars. The government has quietly started to cut spending, and shaved PDVSA’s annual contribution to Fonden by $2.9 billion. It is looking for fresh loans, especially from China. But Fedecámaras, the main employers’ federation, says it will take three or four months to reduce food scarcity. Eventually, says Jorge Botti, the chairman of Fedecámaras, the government will have to “move toward the center and understand how the private sector works.”

But there is no sign of that yet.

 

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