Most experts forecast that the Venezuelan government would increase public spending to galvanize the domestic economy in 2010, as it faces a parliamentary vote next September 26. However, this was not case, until recently.

Official data show that money supply, after inflation, declined by 10.8 percent in July 2010 compared to July 2009. This the largest fall since 2002.

However, everything suggests that there has been a change. Now, President Hugo Chávez's government is starting to expand public spending on the eve of oncoming parliamentary elections next September 26.

The Central Bank of Venezuela reported that, between June 18 and August 13, liquidity rose 9 percent, the largest increase so far this year.

While public spending can help revive consumption, analysts estimate that low supply prevailing in Venezuela may rather lead to increased inflation.

In the second quarter, Venezuela's economy plunged into recession. Domestic industrial production tumbled 3.7 percent. Additionally, at the end of July, inflation jumped 18 percent and analysts forecast a 30-percent inflation rate at the end of the year.

Discontinuance of the unofficial USD swap market has prevented Venezuelan companies from purchasing foreign exchange required to import inputs. Meanwhile, retailers are not properly replacing stocks.

In the first half, private sector's imports amounted to USD 11.1 billion -a 33-percent drop compared to 2009, and the lowest level since 2006.

Creative sources
Note that a portion of the Venezuelan bolivars that the government is about to inject in the coming months comes from loans granted by the Central Bank of Venezuela (BCV). This strategy could only fuel inflation.

Venezuela's President Hugo Chávez said that the BCV would grant the Executive branch of government a USD 2-billion loan to finance agriculture and construction sectors.

Unlike a common financial institution, the Central Bank of Venezuela does not receive deposits from individuals and companies but has the power to print money. Under a legal reform adopted by the National Assembly this year, the BCV was authorized to use this method to finance the government.

In most countries, central banks are not allowed to fund the government because currency creation translates into increased liquidity and this leads to soaring prices.

Chávez said that by 2011 the Central Bank of Venezuela is expected to pump another USD 1 billion into the agricultural sector in the form of loans, as well as an undisclosed amount to build housing projects.
vsalmeron@eluniversal.com

Translated by Gerardo Cárdenas