Venezuelan economy between a rock and a hard place
If more bills are printed to tackle the fiscal deficit, liquidity is to increase by 70%, according to experts
In the first six months, inflation skyrocketed by 25%. This should lead authorities to cut public spending in order to curb both demand and prices.
In parallel, however, this move could hit consumption and public investment –the two major engines in a weakening economy that grew only 0.7 percent in the first quarter as the private sector continues to fade out.
Since oil and tax revenues fall short to cover public expenses, fiscal deficit stands at 15% of GDP. Consequently, the only way not to cut spending is to let the central bank continue printing money. However, the combination of inorganic money and unchanged supply of goods and services would translate into higher inflation.
Economist Miguel Ángel Santos explains that if the government keeps public spending unchanged ahead of the local election to be held in December, the move will spur inflation.
"The government has a deficit of 15% of GDP and is pondering on the possibility to issue debt amounting to 8.6% of GDP and print money in order to bridge the fiscal gap. The issue of money could result in liquidity increasing by 70%. At this rate, and amidst a stagnant economy, one can only expect higher inflation. Should food prices soar in the second half the same way they did in January-June, their annual inflation is to hit 83%."
In few words, Santos believes that the government has two choices: "either cutting spending to reduce the deficit, which would knock down production and employment, but curb inflation, or printing money indiscriminately, which would bring GDP down to virtually zero and boost inflation to higher levels."
José Guerra, an economist and professor at the Central University of Venezuela, shares the idea that even if public spending is kept unchanged, the economic growth will be low.
"Fiscal expansion through the issue of money fuels demand but also leads to increased imports, which in turn are encouraged by an artificially low exchange rate. Therefore, an important part of spending is made abroad."
He added that "when the rise in imports and the debt incurred to preserve spending are unsustainable there is no alternative but to devalue the currency. It is a vicious circle."
In a scenario where surveys like that conducted by the Venezuelan Institute of Data Analysis (IVAD) show that people's perception of the economy is negative and ahead of the local election in December, it seems that the Government will choose to keep spending unchanged.
Cristian Fonseca, a businessman in La Candelaria district downtown Caracas, was doing the accounts in his small shop office on Sunday December 21, 2008. The Christmas shopping season kept him working late hours into the night. It was around 11 p.m. and his phone rang. A friend broke the bad news to him over the telephone.