Venezuela: a heavily unbalanced economy

With an increasing dose of public expenditure intended to boost salaries, subsidies and construction of dwellings, the Venezuelan economy is growing. However, it drags a series of imbalances that threaten to come to light after the October 7 presidential election.

Since the 80's, Venezuela's rent-seeking model has translated into reduced formal employment, excessive dependence on oil revenues, and the impossibility to achieve long-lasting wealth. Now, this model has strengthened.

Official figures reveal that deindustrialization continues in Venezuela. The country only exports oil and petrodollars are used to pay for large-scale imports. Consequently, the sectors that have grown most are those that do not compete with goods bought abroad.

Manufacturing, a key sector including activities machinery and equipment, chemical products, textiles, and metallurgy, has reduced its contribution to the economy. This sector slipped from 18 percent of GDP in the first semester of 1998 to 14 percent of GDP in the same period this year.

Despite price controls and a long list of regulations, Venezuela records the highest inflation levels in Latin America, while the shortage rate clearly exceeds the levels regarded as normal.

In the foreign exchange front, there is also trouble. During the past two years, the government has frozen the official exchange rate at 4.30 Venezuelan bolivars per US dollar, but the increase in public debt and the gap between expenditure and income suggest that it would be virtually impossible to keep such an exchange rate.

Public expenditure exceeds tax collection and oil revenues by 12 percent of GDP, hence, debt increases sharply. Overall, debt amounts to 50 percent of GDP.
In summary, everything suggests that in the medium-term, devaluation will be necessary in order to get more bolivars from petrodollars as a means to meet a part of the outstanding commitments.

Translated by Andreína Trujillo