The increase in government spending is the epicenter of the crisis
Disbursements account for 51% of GDP vs. an average 30% in the region
The earthquake has its epicenter in the fact that in 2012, Hugo Chávez' administration increased spending to exorbitant levels to grease the machinery that would guarantee that he would stay in Miraflores presidential palace and an overwhelming victory in gubernatorial election.
In an analysis, Miguel Ángel Santos, economist and professor at the IESA (Higher Business Studies Institute), points out that public spending in 2012 reached record historic levels in real terms per inhabitant. The Venezuelan State disbursed an amount equivalent to 51% of GDP, vs. an average of 30% in the rest of Latin America.
Oil revenues and tax collection were not enough to increase spending up to those proportions; therefore, the administration resorted to the central nank, which turned on its money-printing machine to finance state-run oil giant Pdvsa and indebtedness. The upshot: the amount of bolivars in the economy grew 61%.
This colossal injection of spending, which is reflected in wage increases, a higher number of pensioned workers, ministries' payrolls, grants and subsidies, took consumption up to levels far above the production capacity of companies that, amidst multiple controls, have invested very little in new machinery and equipment.
To prevent that imbalance between supply and demand from translating into a quick acceleration of inflation, the administration did not authorize adjustments in controlled prices and increased imports up to USD 56.36 billion, the highest amount over the past 16 years, which accounts for 59% of the amount of dollars that entered the country from exports.
The stability of oil price, from where 96% of the country's dollar requirements come, implies that foreign currency supply this year will not grow, whereas the rise in imports and foreign debt payments, up 48% from 2012, result in a higher demand for dollars, with this import boom being difficult to sustain.
Amidst this environment, the administration has considered devaluation to cool down imports, borrowing to obtain more foreign currency or restricting dollar allocation by Cadivi.
The latter option has prevailed so far and according to Datanálisis, scarcity index of price-controlled food products was 30% over the first 15 days of the year, a figure that had not been registered since January 2008.
To alleviate the lack of foreign currency, Pdvsa announced last week a cut in contributions to the National Development Fund (Fonden) so as to increase by USD 2.4 billion the amount of dollars to pay for imports. But this amount does not appear to be enough, and it is uncertain whether it will be available immediately or through little quarterly disbursements.
The freeze of controlled prices is also becoming unsustainable because businesses are curtailing production even as shortages are growing. The problem is that allowing cost adjustments would result in higher inflation.
The gap between income and expenses, when the entire public sector is included, amounts to 18% of GDP, the highest in Venezuelan history, according to sources from the central bank and estimates by financial entities like Barclays and Bank of America.
The possibility of cutting spending in a year when Hugo Chávez' illness could force new presidential election looks unlikely. Therefore, analysts believe that the government has the option to massively borrow, devalue to get more bolivars for oil dollars, print money at the central bank or increase taxes.
These are measures that take their toll in terms of inflation and economic growth.
Translated by Álix Hernández
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