THIS PAPER describes steps taken by the Venezuelan Government to meet the balance of payments crisis which developed from 1958 to 1960. The remedial policies were applied over a lengthy period of time and with considerable variation in the emphasis placed on them, and it was not until early in 1964 that the reform of the exchange system was virtually completed. The results achieved reflected the characteristics of Venezuela, particularly the balance of payments advantages and the strong tax base in an economy dominated by the petroleum industry. Nevertheless, the experience of the Venezuelan authorities provides a case study of the complexities and difficulties of exchange control devices and multiple exchange rates. It also illustrates the successful operation of monetary, fiscal, and exchange policies in overcoming balance of payments difficulties. In addition, examination of this experience casts some light on the economic effects of measures taken to control the balance of payments.
Origin of the Payments Difficulties
The extent of Venezuela’s balance of payments difficulties is indicated by the decreases in exchange reserves, which were $383 million in 1958, $465 million in 1959, and $309 million in 1960. The main causes of this drain on the reserves were the rapid expansion of domestic credit (beginning in 1958) to finance the budget deficit and a crisis of confidence which reduced investment and other economic activity. The expansion of domestic credit was very large in 1958 and 1959. Most of this increase was due to the use by the Government of its deposits in the Central Bank. These had accumulated in 1956 and 1957 as the bolívar counterpart of the foreign exchange proceeds from the sale of oil concessions. In 1958 and 1959, when these deposits were drawn down to meet government expenses, including large amounts due to foreign contractors for public works projects that had already been completed, there was a substantial decrease of foreign exchange reserves. Part of the credit expansion was, however, offset in 1958 by the increased bolívar holdings of the public. In 1959, the government deficit was substantially smaller, and the expansion of bank credit to the Government was not large. Expansion of credit to the private sector continued. However, the liquidity held by the public did not expand, which meant that the expansion of credit was matched almost exactly by a decrease of foreign exchange reserves. In 1960, the decrease of reserves, although smaller than in the two previous years, was still large. A major crisis of confidence forced the commercial banks to contract credit rapidly, and there was a substantial flight from both money and quasi-money.
The Venezuelan economy had grown rapidly during most of the 1950’s, being stimulated by an expanding oil sector. Tax revenue from oil permitted the Government to spend steadily increasing amounts. In addition, the Caracas metropolitan area grew because of the development of new industries, many of which were subsidiaries or branch plants of U.S. firms. The balance of payments crisis was marked by a decline in construction activity, with resulting unemployment in the metropolitan area, and by a slowing down, if not a cessation, of net foreign investments in the economy. Visible unemployment increased, mainly because the migration to metropolitan areas continued, although probably at a reduced rate.
In view of the deteriorating domestic developments and the rapid decrease of exchange reserves, the Venezuelan authorities decided late in 1960 that steps had to be taken to correct the situation. The budget deficit appeared to be the root of the problem, and various measures to correct it were examined. On the expenditure side, the decision to repay government debt as it fell due and the high rate of unemployment made substantial economies difficult. For revenues, the tax on petroleum companies had been increased shortly before, and other sources of internal taxation did not appear promising. In this situation, the Government turned to the exchange system. For many years, the Central Bank had purchased—at a rate of Bs 3.09 per U.S. dollar—more than 90 per cent of the country’s total foreign exchange earnings from the oil companies. This exchange was sold to the commercial banks for resale to the public at a rate of Bs 3.35 per U.S. dollar. Foreign exchange was available freely, as no restrictions were applied to capital or current transactions. The proposal was made by the Ministry of Finance and the Central Bank to have most exchange purchases of the Central Bank continue at the Bs 3.09 rate, but to introduce an exchange tax which would raise the effective Central Bank selling rate from Bs 3.35 to Bs 4.05 per U.S. dollar. The increased revenue from the widening of the exchange spread would be used to finance the government deficit and to permit continuation of the public works schemes. Ultimately, the Government rejected this proposal. As an alternative, the exchange rates were left unchanged, and a system of exchange controls was introduced by decree in November 1960.
Introduction of Exchange Controls
The essential feature of the November 1960 decree was that the foreign exchange sold by the Central Bank at the official rate of Bs 3.35 per U.S. dollar was to be allocated on a priority basis. It was to be limited to “normal payments needs,” i.e., payments by the Government and autonomous institutions and payments for imports and associated invisibles, technical services, expenses of students abroad, family remittances, current earnings of capital invested in Venezuela before November 8, 1960, and existing commercial debts, together with the servicing and repatriation of foreign capital invested in Venezuela after the decree, if such capital were registered with the Central Bank. The decree also permitted the Central Bank to approve any other payments, but it was expected that capital outflows would not be allowed. The decree made no mention of any exchange rate other than Bs 3.35, but one section provided that capital brought into the country and not registered with the Central Bank could be serviced and repatriated only through a free market.
The Central Bank implemented this decree by granting monthly allocations of exchange to the commercial banks, leaving the banks to distribute the exchange among their customers. The amount of exchange allocated to the commercial banks was based upon estimated exchange receipts. These quotas proved less than adequate to meet the demands on the banks, and the unofficial rationing of available exchange that developed was far from satisfactory in the light of the social priorities of the Government. The excess demand which spilled over into the free market resulted in a rapid decline in the price of the bolívar. The Central Bank intervened in the free market to keep the rate at about Bs 4.25 per U.S. dollar. This intervention, while successful for a few months in maintaining the rate, was finally stopped because of the excessive cost to the exchange reserves. When Central Bank intervention in the free market ended, the rate moved to as high as Bs 4.70 per U.S. dollar.
Reliance on the “Official Free” Market
The continued decrease of foreign exchange reserves, and the deterioration of the exchange rate on the free market, led the Government to revise the exchange system by a decree of March 17, 1961. This provided for the introduction of an “official free” market and transferred to the new market purchases of exchange for about 25 per cent of imports and associated invisibles, some capital remittances, immigrant remittances, and travel purposes. Limits on the amounts that could be purchased through this market were imposed by instructing commercial banks not to exceed specified amounts for the several purposes. In order to stabilize the selling rate in this market at Bs 4.58 per U.S. dollar the Central Bank stood ready to sell unlimited amounts of exchange to the commercial banks at this price minus a spread of Bs 0.015 per U.S. dollar.
The main exchange payments left at the Bs 3.35 rate by the March 1961 decree were those for essential imports (about three fourths of total imports), most government transactions, student allowances, registered commercial debts, and servicing of registered capital. In place of the former System of quotas of foreign exchange distributed by the commercial banks, the exchange control office licensed individually all exchange transactions at the official rate.
It became evident early in 1962 that this exchange rate structure was not adequate as a protection against a further drain on exchange reserves. The drain continued on a small scale in 1961; in addition, the recovery in the economy which was anticipated for 1962 was expected to involve an increase in imports. In view of this, a new decree was issued on April 2, 1962, modifying the relative importance of the selling rates. The major change was the transfer of all but 20 per cent of imports and of virtually all capital repatriation and servicing to the “official free” market. As a result of this reclassification, the weighted average of the exchange rates for all payments increased from about Bs 3.7 to about Bs 4.1 per U.S. dollar. A subsequent decree, issued on January 18, 1964, moved all imports to the “official free” market, but provided that certain essential commodities, amounting to perhaps 10 per cent of imports, would benefit from a subsidy of Bs 1.15 per U.S. dollar.
At the same time that the effective exchange rate for imports was depreciating, quantitative restrictions were being introduced and used to an increasing extent to provide protection for domestic industry. Significant use of quantitative restrictions began in mid-1959, when imports of a number of food products were made subject to licensing. Subsequently, imports of less essential consumer goods and a variety of locally produced manufactured goods were restricted. Other forms of incentive to local industry, such as special credit facilities, lease-purchase agreements, and exoneration from import duties, were also used more extensively.
The revisions of the exchange system and the use of quantitative restrictions were accompanied by substantial changes in fiscal policy. The government deficit financed through the banking system was reduced from Bs 297 million in 1960 to Bs 219 million in 1961; and budget surpluses of Bs 333 million in 1962 and about Bs 200 million in 1963 were achieved. Following the sharp decline in 1960 in bank credit to the private sector, there was a small increase in 1961 and only moderate expansions in 1962 and 1963. The Central Bank permitted little use of rediscount facilities. The public’s holdings of liquid assets (money and quasi-money) remained almost constant over the three-year period.
It is difficult to link these changes in monetary and exchange policies directly to changes in economic activity. In 1962, after two years of stability, the gross national product rose by about 6 per cent, and in 1963 by a smaller amount—probably 3 or 4 per cent. The major factors on the demand side accounting for the increases in 1962 were larger exports, an increase in construction (which more than offset a decline in plant and equipment expenditures), and higher personal consumption. Probably the key element accounting for the resumed growth was the expanded output of petroleum. This had direct and indirect effects, the latter being particularly important in financing increased government expenditures on current operations.
Problems of Administering the Controls
When the exchange controls were introduced in November 1960, it was expected that they would be used only to limit capital payments. The forecasts of the balance of payments made at that time indicated that foreign exchange was adequate to meet current payments if the loss of capital could be stopped. In the period from November 1960 to March 1961, the technique of granting monthly allocations of exchange to the commercial banks for sale at the Bs 3.35 rate provided no way of determining the extent to which exchange sales by the commercial banks were for legitimate current payments and the extent to which they were for capital transactions. As exchange was short, the banks were under heavy pressure to provide exchange to favored customers. The inadequacy of exchange led the stock market to take the initiative in organizing a market for unofficial exchange transactions. While such a market was unofficial, it was tolerated by the authorities, who shortly began to intervene in it to prevent further depreciation of the bolívar.
After the March 1961 decree, which provided that certain transactions would pass through an “official free” market, the problem for the exchange control authorities was to separate transactions at the Bs 3.35 rate from transactions at the “official free” market rate, which was then about Bs 4.58 per U.S. dollar. No serious attempt was made to restrict capital transactions through the “official free” market. The Central Bank notified the commercial banks that exchange sales for certain purposes, e.g., support to family members living abroad, foreign travel, and capital remittances, were to be limited to specified amounts. The commercial banks were made responsible for assuring that exchange sold for imports was used for legitimate import transactions. The Central Bank, however, did not attempt to enforce these limits, and there was no effective separation of the “official free” market and the free market organized by the stock exchange. The effective exchange rates on the two markets remained virtually the same during the entire period from March 1961 until the end of 1963.
The large difference between the Bs 3.35 rate for some imports and other current transactions and the free market rate of Bs 4.58 provided a strong incentive for attempts to obtain exchange at the Bs 3.35 rate. The major difficulties for the authorities were to prevent overinvoicing of imports and the misrepresentation of other current transactions, to fix current earnings on foreign capital invested in Venezuela, and to define and administer the repayment of existing commercial debts.
With regard to the overinvoicing of imports, the exchange control authorities required the submission of regular commercial documents and obtained price information from abroad to ensure that the commercial documents presented were genuine. Great difficulties were encountered in attempting to make effective checks. For example, pricing practices in the pharmaceutical industry came under close examination. Subsidiaries of U.S. companies represented that their import prices, because they included allowances for research costs and licenses, were substantially higher than prices quoted by suppliers in Czechoslovakia and Italy. When the exchange control authorities offered to license amounts based on the lowest prices quoted abroad, suppliers complained about discrimination against imports from higher-priced markets. Also, the time that the exchange control authorities took to make decisions on these matters resulted in a number of complaints about delays in payments. It is, of course, impossible to assess accurately the effectiveness of the attempts at preventing overvaluation, but the exchange control authorities were never convinced that they were doing an adequate job.
A similar type of problem arose after the decrees of April 1962 and January 1964 with regard to imports transferred from the Bs 3.35 rate to the free market rate. The decrees provided that payment for imports already shipped or ordered could be made at the Bs 3.35 rate, even though payments for new imports would henceforth be made at the free market rate. This failure to use the normal cut-off practice (i.e., specifying that exchange sales after the date of the decree would take place at the free market rate) resulted in considerable confusion and in attempts by importers to obtain exchange at the Bs 3.35 rate for imports arriving in the country some months after the effective date of the decree. This problem was further accentuated by a decree of May 1962, which permitted certain importers of capital equipment to purchase exchange at the Bs 3.35 rate. A government commission was set up which approved sales of exchange for such imports if it was shown that the investment was being planned at the time of the April 1962 exchange decree. These sales not only gave preferential treatment to the importers involved; they also reduced the tax yield from the exchange spread between the Bs 3.09 buying rate and the “official free” market selling rate.
Up to March 1962, remittances of profits on foreign investments were permitted at the official rate, but the exchange control authorities limited such remittances to 12 per cent of invested capital. To provide a basis for restricting remittances to the prescribed amount, it was necessary to define invested capital, to distinguish it from commercial debt, and to isolate the “foreign” element. A procedure was set up for registration of foreign capital, and all firms were required to fill out a questionnaire and to provide supporting balance-sheet data. This involved a tremendous problem of documentation and interpretation for the authorities, and it was several months before the capital registry began to show signs of order. The main conceptual problem which arose in the registration procedure was the definition of foreign capital. Foreign companies argued that reinvested profits, which could in fact have been freely remitted abroad in earlier years and then returned to Venezuela, were a legitimate part of invested foreign capital and that remittances of profits on such capital should be permitted. Some of the exchange control authorities believed, however, that foreign capital should consist only of foreign exchange actually remitted to Venezuela, and that the companies should produce records certifying actual exchange transactions before becoming eligible for remittances of profits on invested capital. The difference in definition was particularly important for such companies as public utilities, which were capital intensive and which had a long history of reinvesting current earnings to finance the expansion of facilities. The debate over this issue continued for so long, and the issue proved to be so intractable, that it was one of the factors that led to remittances of profits being transferred to the free market in April 1962. Companies which had not reinvested earnings in Venezuela to any important extent, and which therefore were not involved in the argument about the definition of capital, did manage during this period to remit dividends on earnings up to the prescribed amount.
Associated with the question of the registration and servicing of invested capital was the payment of existing commercial debts. The exchange control decrees of November 1960 and March 1961 provided for the payment at the Bs 3.35 rate of legitimate commercial debts existing at the time of the decrees. When registration of commercial debt was carried out, it became evident that the dividing line between legitimate commercial debt and working capital, particularly of subsidiaries of foreign firms, was not a clear one. Companies which had been financed by parent companies overseas for such things as trade inventories argued that the financing represented ordinary commercial debt and that it should be repaid to the parent concern at the official rate. Similarly, a large number of companies tried to make the case that commercial credit lines normally available to them could no longer be arranged and that payments had to be made more rapidly than before.
Another problem that emerged for the exchange control authorities was that Venezuelan debtors and the commercial banks tended to use the exchange controls as an excuse for not remitting payments. Importers represented to foreign suppliers that exchange was not available or that the exchange control was causing inordinate delays. Some commercial banks also received the bolívar counterpart of foreign exchange from importers but delayed application to the exchange control in order to use the local currency for working capital purposes. Delays in payments caused particular difficulties since, in some cases, the export transactions were insured by the export insurance agencies of the trading partners. When the insurance claims came due, the agencies investigated the reasons for the delays in the payments. This led the exchange control authorities in some instances to urge the prompt payment of commercial arrears.
The difficulties discussed above were important factors in persuading the authorities to shift most transactions to the free exchange market in April 1962. As noted above (p. 340), payments at the Bs 3.35 rate were then restricted to about 20 per cent of total imports, and virtually no repatriation of capital or remittances of servicing of capital were permitted at this rate. This greatly eased the task of the exchange control authorities, but it did not eliminate difficulties arising from the overvaluation of imports. The decree authorized the exchange control authorities to introduce a system of aforos—specified values of the imported articles—and to limit issuance of exchange control licenses to the aforo values. The introduction of this device was little more than a formal elaboration of the existing practice. The April 1962 decree also resulted in increases in imports of items for which exchange could be purchased at the Bs 3.35 rate, in anticipation that subsequent unification of the exchange rates would involve higher costs for these items. The exchange control authorities made only minimal efforts to curb such imports, in the belief that the best treatment of the problem was to let market forces eliminate excessive importing. This policy was made possible by the strengthening of the balance of payments and the easing of fears of a further exchange crisis. In April 1962, also, the “official free” and parallel free exchange rates moved from Bs 4.58 to Bs 4.54.
While the exchange control authorities had difficulties in controlling the servicing and repatriation of capital at the Bs 3.35 rate up to the time of the April 1962 decree, virtually no impediments were imposed on the export of capital through either of the free markets. Purchases of exchange at the “official free” market required the completion of a form that specified the purpose of the transaction. In practice, very few of these applications were rejected, and even when a particular bank rejected them it was not difficult for the purchaser to find another bank ready to make the sale. In addition, there was the unofficial free market, where transactions took place without any supervision from the exchange control authorities and which was generally regarded as a capital market. The fact that the exchange rates in the two free markets were practically identical throughout the period is solid evidence that there were no effective barriers between the two markets. Thus, the restriction on capital movements was not the exchange licensing imposed by the authorities but rather the existence of the free market rate. The change from Bs 3.35 to Bs 4.5 in the exchange rate for capital transactions had some effect on restraining outflows of capital, both by increasing the cost of exporting capital and by reversing expectations regarding the future course of the rate. More important factors were the wearing off of the first shock of the Cuban crisis, the increasing optimism about the domestic political situation, and the greater degree of monetary stringency resulting from the previous loss of foreign exchange reserves and the stricter fiscal policy.
After the revision of the exchange System in April 1962, the balance of payments situation began to improve, and it was very strong during the initial months of 1963. By the summer of 1963, it was evident that the payments difficulties had been solved, at least temporarily. The Venezuelan authorities still believed, however, that the system of exchange rates was not adequate and that further reform was required. The various exchange rates existing at the end of 1963 are shown in Table 1.
|3.046259 (Petroleum Company Rate)|
Local currency requirements of petroleum companies in excess of the Central Bank’s foreign exchange sales during the given year.
|3.09 (Petroleum Company Rate)|
Local currency requirements of petroleum companies up to the limits of the Central Bank’s foreign exchange sales during the given year.
|3.33 (Controlled Market Rate)|
Local currency requirements of exporters of iron ore and other noncombustible minerals, and exports of coffee and cacao in a proportion depending on world prices.1 Some re-exports. Government receipts.
|3.35 (Controlled Market Rate)|
Payments for essential imports and related invisibles. Advanced students’ expenses. Essential government payments. Registered capital.
|4.525 (“Official Free” Market Rate)|
Other export receipts, including those earned by some government agencies. Some invisibles. Capital.
|4.54 (“Official Free” Market Rate)|
All other imports and related invisibles. Travel expenses, other students’ expenses, family maintenance, etc. Other capital.
|4.525 (Free Market Rate)2|
Receipts other than those classified at the Bs 3.33 and petroleum company rates.
|4.525 (Free Market Rate)2|
All payments other than those permitted at the controlled market rate.
Special rates may apply to a proportion of the proceeds of exports of cacao, coffee, and certain processed cacao and coffee products, depending on the world prices for these commodities. These rates result from mixing between the Bs 3.33 controlled market rate and special buying rates of Bs 4.25 and Bs 4.75 per U.S. dollar. Exporters of these items have the alternative of selling their proceeds in the free market.
There is no spread between the buying and selling rates, but brokers usually charge a commission of Bs 0.02 per U.S. dollar.
Special rates may apply to a proportion of the proceeds of exports of cacao, coffee, and certain processed cacao and coffee products, depending on the world prices for these commodities. These rates result from mixing between the Bs 3.33 controlled market rate and special buying rates of Bs 4.25 and Bs 4.75 per U.S. dollar. Exporters of these items have the alternative of selling their proceeds in the free market.
There is no spread between the buying and selling rates, but brokers usually charge a commission of Bs 0.02 per U.S. dollar.
Disadvantages of Multiple Exchange Rates
The exchange reform of January 18, 1964 eliminated most of the multiple currency practices. The principal reason for the reform was to create confidence, both internally and externally, in the bolívar by convincing the public that the rate would remain constant at the newly established level. It was believed that the balance of payments had been brought under control, and that this could be demonstrated by simplifying the exchange rate structure and removing the remaining restrictions on payments through the free market. In addition to this overriding consideration, the existing multiplicity of rates had had a number of undesirable effects.
The foreign-owned oil companies operated substantially free from the exchange regulations. Exchange earnings did not have to be surrendered, and import payments, remittances of profits, and repatriation of capital were not subject to licensing by the authorities. The companies were, however, required to purchase bolívares from the Central Bank at a rate of Bs 3.09 per U.S. dollar in order to meet local costs, consisting mainly of income tax and royalty payments, wages paid to local employees, and the price of goods and services purchased domestically. The petroleum companies, when making local payments, operated on the basis of the Bs 3.09 rate; but they found that the dollars freely available to them were generally valued in the Venezuelan economy at Bs 4.5 per U.S. dollar. Thus, there was a strong economic incentive to avoid bolívar expenditures and to spend as much as possible in foreign exchange.
This effect had originally been of considerable importance in causing the oil companies to import supplies rather than to purchase them from domestic sources. Up to 1959, however, when the differential was only between Bs 3.09 and Bs 3.35, the companies had made deliberate attempts to purchase locally even when imports were cheaper, in order to create good will with the Government and to reduce the need to carry inventories of both imported and domestically produced goods. Since the firms which normally supplied materials to the oil companies frequently had branch plants or local distribution agencies, the problems of maintaining inventories and regular supplies could be shifted from the oil companies to these suppliers by the practice of purchasing within Venezuela. When the exchange rate differential increased to 48 per cent, this policy of buying domestically became much more expensive. The problems were most acute in respect of purchases from local distributors of foreign-owned companies and from U.S. subsidiaries engaged in production in Venezuela. For example, the oil companies could purchase trucks in the United States with U.S. dollars valued at Bs 3.09, but the purchase of the same vehicle from the local distributor in bolívares had to be paid for at prices which included the distributor’s markup on a landed cost valued at Bs 4.5 per U.S. dollar. If, however, the oil companies shifted all purchases abroad and endangered local production facilities and employment, the Government might respond with quantitative restrictions on imports to protect the local producer. Moreover, if the companies imported products directly, the supplying firms might well go out of business, thus complicating the situation if the exchange rate for the oil companies should subsequently be moved to a level that encouraged local purchases with the advantages of inventory-maintenance by distributors. A similar type of issue arose for the oil companies with regard to paying for service contracts (e.g., for business machines, accounting services, and drilling and exploration work) in bolívares acquired at the Bs 3.09 rate, when the foreign-owned companies providing the services would accept payment abroad in U.S. dollars at an implicit rate of Bs 4.5.
The distorting effects of the Bs 3.09 rate for all local purchases by the oil companies became critical for the Government when the iron and steel mill, a state entity, began in 1962 to produce steel pipe which was satisfactory for use by the oil companies. The steel mill quoted prices for its steel pipe in bolívares and in U.S. dollars which were equivalent at the Bs 4.5 exchange rate. The dollar price for this pipe was about equal to the cost of the imported pipe. The companies found, however, that the bolívar price, which they had to pay with bolívares obtained at the Bs 3.09 rate, was not competitive with the dollar price for the imported product. In these circumstances the Government agreed that the normal rules should not apply, and that sales by the steel mill to the oil companies could be regarded as exports by the former and imports by the latter, payable in U.S. dollars.
The Bs 3.09 rate also created difficulties when the oil companies broadened their product lines by importing plastics, synthetic rubber, fertilizers, and insecticides from their overseas affiliates. Since the companies valued their dollars at Bs 3.09, imports were sold at a price reflecting this exchange rate. Other importers of these products, however, had to pay the free market exchange rate of Bs 4.5, and thus their bolívar prices were substantially above those quoted by the oil companies. In effect, the difference in the exchange rate meant that only the oil companies could sell the products involved, and that the source of supply was determined by the location of the oil companies’ affiliates. This prompted complaints from some governments of discrimination against their exports.
Another difficulty faced by the oil companies was that their employees receiving dollar salaries could benefit substantially by evading the requirement that they meet their local living expenses by converting their dollar salaries at the rate of Bs 3.33 per U.S. dollar. Supervision by the companies of expenditures by their employees to ensure that reasonable amounts of exchange were being converted at the Bs 3.33 rate was a difficult task, and was undoubtedly uneven among the various companies. The technique used was to record the amount of exchange converted by each employee monthly, and to check these amounts against a scale of reasonable costs of living. Various exceptions were provided, to take account of such things as the liquidation of capital assets by employees and incomes earned by other family members.
Another problem which was of long-run concern was that the Corporatión Venezuelan de Petróleo (CVP), a state-owned corporation, was gradually entering into the production and distribution of petroleum. To the extent that this company was able to export and produce dollar revenues in excess of its import needs, the Bs 3.09 rate handicapped its expansion. Moreover, sales of crude oil from the state-owned company to the foreign-owned companies encountered the difficulties that the latter were bound to pay in bolívares, which cost them Bs 3.09 per U.S. dollar, while prices in such contracts were traditionally set in U.S. dollars. The same problem arose when the state-owned company wanted to enter into service contracts with the foreign companies. Nevertheless, it was difficult for the Government to provide one exchange rate for the nationalized company and another less favorable rate for the foreign-owned companies. While the operations of the CVP were small at this time, the Government’s policy was to encourage its growth. The Government had the alternative of contributing larger amounts to the capitalization of the company, but this was regarded as less satisfactory than having the company finance a good part of its growth with self-generated funds.
In addition to creating distortions in the oil companies’ operations, the exchange System caused problems because some payments were made at the Bs 3.35 rate. Controlled market exchange was made available for the following: (1) essential payments by the Government, its entities, and autonomous institutions, except for imports not included in the list of controlled market imports; (2) the f.o.b. value, port of embarkation, of essential imports as listed in decrees issued by the Minister of Finance; (3) payments of commercial and some other debts of a similar nature registered with the exchange control authorities by May 5, 1961; (4) payments for imports which were transferred to the free market by the decree of April 2, 1962, but which had entered the country by that date or were shipped prior to April 13, 1962; (5) amortization and servicing of foreign debts incurred and registered with the Central Bank between March 19, 1961 and April 2, 1962; (6) remittances of up to $250 a month to students abroad (postgraduate students, up to $350 a month) ; and (7) payments for freight and insurance within specified limits on essential imports.
The major reason for specifying that payments for some commodities would be made at this rate was the desire to give preferential treatment to certain payments. The most important of these from the Government’s point of view were payments for imports of a few foodstuffs, pharmaceuticals, industrial chemicals, and agricultural supplies and machinery. At the time of the April 1962 decree, when about 60 per cent of total imports were transferred from the Bs 3.35 rate to the “official free” market, the Government calculated carefully the possible impact on the price level and estimated that it would not amount to more than 3–4 per cent. At that time it argued that the major items important in the cost of living, particularly wheat, flour, and pharmaceuticals, were not affected by the decree. However, the use of the Bs 3.35 rate for these transactions handicapped domestic production, particularly of foodstuffs. Production of agricultural products for the metropolitan market, such as fruits, vegetables, eggs, and poultry, had been rising rapidly, and a number of U.S. pharmaceutical companies had established branch plants, but there was little chance that Venezuelan production would be able to compete with imports at the Bs 3.35 rate. An additional problem created by the classification of payments at this rate was that, to avoid domestic currency losses on exchange operations, the Central Bank had to be able to purchase exchange at Bs 3.35 or less. When plans were made to give the oil companies a more favorable buying rate, either imports had to be shifted from the Bs 3.35 rate or special funds had to be found to finance exchange sales at this rate.
Another unsatisfactory aspect of the exchange rate structure was the existence of two free exchange markets. The “official free” market was separated from the other free market by restrictions on the amounts that commercial banks could sell for certain purposes; however, these restrictions were not enforced, and in practice funds moved back and forth between the two markets quite freely. This arrangement involved few practical difficulties apart from the duplication of facilities, but it placed the Central Bank in the position of having in existence exchange controls which were not enforced and which were probably unenforceable. Another objectionable feature of these arrangements was that certain exchange transactions were forced outside of normal banking channels to the stock market.
The Revision of January 1964
The various difficulties in connection with the exchange system, which are outlined above, resulted in the introduction of new measures on January 18, 1964. The most important part of this decree was that the exchange rate for Central Bank purchases of foreign exchange from the oil companies was adjusted from Bs 3.09 (Bs 3.04 in certain circumstances) to Bs 4.40, and for purchases from exporters of iron ore, from Bs 3.33 to Bs 4.40. This adjustment involved hard decisions—first, concerning an appropriate level of the exchange rate and, second, concerning the tax treatment of oil and iron ore companies. These issues are discussed at length below. The decree also involved (1) a special subsidy exchange rate for coffee and cacao, (2) the transfer of a number of imports from the Bs 3.35 rate to a rate of Bs 4.50, (3) certain adjustments in the arrangements for making the import rate of Bs 4.50 effective, and (4) special arrangements to subsidize basic imports.
Up to the time of this decree, exporters of coffee and cacao were eligible for special subsidy arrangements, but these arrangements had little practical effect because external prices of these products had risen in the period since the legislation was originally passed. The new decree revised the subsidy and provided new arrangements designed to prevent the return in bolívares to exporters from falling below specified amounts. The support scheme called for the Central Bank to purchase exchange from the exporters at Bs 4.485 per U.S. dollar, and to pay a subsidy equal to the amount necessary to bring the local value of the export proceeds up to the minimum support prices. For coffee, the minimum prices for each bag of 46 kilos were as follows: washed fine coffee, Bs 148; standard washed coffee, Bs 138; good washed coffee, Bs 128; natural good coffee, Bs 117; and current natural coffee, Bs 111. At the time of the decree, coffee prices in New York, adjusted to an f.o.b. Venezuela basis and converted at the Central Bank buying rate of Bs 4.485 per U.S. dollar, were washed fine coffee, Bs 193; standard washed coffee, Bs 184; good washed coffee, Bs 157; natural good coffee, Bs 148; and current natural coffee, Bs 139. A comparison of these prices indicates that the New York prices would have had to fall about 20 per cent before the price support scheme would come into effect.
The situation in regard to cacao was considerably different. The support prices were as follows: for extra fine cacao, Bs 145; for first-grade fermented cacao, Bs 133; and for second-grade current cacao, Bs 121. The New York prices at about the time of the decree, adjusted to an f.o.b. Venezuelan port basis and converted at the rate of Bs 4.485, were extra fine cacao, Bs 224; first-grade fermented cacao, Bs 99; and second-grade current cacao, Bs 94. Thus, on the basis of the export prices prevailing at the time of the decree, the Central Bank would have been required to pay a subsidy of about one third on all exchange proceeds derived from exports of first-grade fermented cacao and second-grade current cacao. Exports of these two grades amounted in 1962 to less than $9 million.
Commercial banks were permitted to purchase foreign exchange from sources other than the Central Bank, i.e., from minor exports, current invisibles, and importers of capital, at the exchange rate set by market forces (about Bs 4.48 in the first days of the decree).
Prior to the new decree, about 15 per cent of Central Bank sales were being made at the Bs 3.35 rate. The new decree made government payments, including debt service, subject to a rate of Bs 4.485, which applied also to Central Bank sales of exchange to commercial banks. In addition, a number of imports were transferred to the Bs 4.5 rate. It was estimated that the increased bolívar costs of budget expenditures would add about 4 per cent to ordinary budget expenditures. The imports and invisibles transferred from the Bs 3.35 rate amounted to about 5 per cent of total imports.
As explained above, prior to the decree there had been an “official free” market and a parallel free exchange market; in each market, the selling rate was Bs 4.54 per U.S. dollar. The new decree abolished all restrictions on commercial bank sales at the Bs 4.5 rate. This rate was to be made effective by permitting the Central Bank to sell unlimited amounts of exchange to commercial banks at the rate of Bs 4.485 per U.S. dollar and requiring the commercial banks to sell such exchange at Bs 4.5. It was expected that, as a result of the abolition of restrictions on payments through the “official free” market, the commercial banks would be able to obtain a dominant role in the sale of foreign exchange, and that the free market organized by the stock exchange would disappear. In the first few weeks after the exchange decree, the volume of transactions on the stock exchange fell sharply, and it appeared likely that this market would, at a minimum, become much less important.
The new decree provided for the subsidization of imports by permitting importers of certain products to obtain a rebate of Bs 1.15 per U.S. dollar on foreign exchange used to pay for the products. The most important of these products, together with the value of their imports in 1962, were milk powder, $37 million; wheat, $23 million; tinplate, $15 million; natural and synthetic rubber, $8 million; wood pulp, $7 million; small tractors for agriculture, $5 million; and penicillin, $4 million. In addition, some other pharmaceuticals, beans, fish meal, peanut oil, certain fungicides and insecticides, water pumps, and agricultural sprays were made eligible for subsidy. On the basis of 1961 and 1962 trade data, it appeared likely that these imports would amount to about 10 per cent of total imports, apart from those by the oil companies. The decree provided that exchange licenses had to be obtained for these products prior to their shipment to Venezuela; but the intention of the authorities was to use the licenses only for preventing overvaluation of imports, since any attempt to restrict the supply would result in frustrating the price-maintenance purpose of the provision.
The items selected for subsidy reflected a variety of interests. Such products as milk, wheat, and pharmaceuticals were left at the Bs 3.35 rate to avoid an impact on the most sensitive cost of living items. Rubber and tinplate were left at this rate because they were components of products manufactured domestically and sold at controlled prices. In addition, a deliberate attempt was made to prevent any discouragement to agriculture by avoiding price increases for a variety of materials and equipment.
The provision of exchange for these imports at an effective rate of Bs 3.35 meant a cost to the Central Bank estimated at about Bs 150 million a year. To finance this, the Central Bank had available the proceeds from the differential between its buying rate of Bs 4.40 and its selling rate to the commercial banks of Bs 4.485, which was expected to produce about Bs 80–90 million a year. The rest of the cost was uncovered, however, and its financing by the Central Bank would involve credit expansion of an equivalent amount. The Central Bank planned at the time of the decree to meet the bookkeeping problems involved in the financing by gradually revaluing the foreign exchange assets carried on its balance sheet at an exchange rate of about Bs 3.09 per U.S. dollar. Since the reserves were in excess of $700 million, the profit on this revaluation would provide financing for a number of years.
The Level of the Rate
The decree of January 18, 1964 provided for only a minimal adjustment of the exchange rate for most foreign payments, i.e., from Bs 4.54 to Bs 4.5 per U.S. dollar. The decision to establish the exchange rate at this level had been reached during several months of discussion, and it involved a number of considerations. The more general issues, particularly those related to imports, are reviewed here; those pertaining to petroleum are discussed in the next section.
The balance of payments record of Venezuela indicated that the exchange rate should be in the range from Bs 4.0 to Bs 4.5 per U.S. dollar. However, the choice within this range was difficult, and, as is typical of most exchange rate decisions, any precise rate was hard to justify. However, the range between Bs 4.0 and Bs 4.5 was large enough for meaningful discussions of the different effects of the two extremes to be possible.
The development of the balance of payments during 1962 and 1963 suggested that an exchange rate of Bs 4.0 might be appropriate. During these two years there was a considerable accumulation of foreign exchange reserves, even though the average selling rate for Central Bank exchange was between Bs 3.9 and Bs 4.1 per U.S. dollar. Reserves at the end of 1963 were equal to more than seven months of imports. They appeared to be more than sufficient by any of the usual tests of the adequacy of exchange reserves, and they permitted considerable leeway in meeting foreseeable balance of payments contingencies. In view of the development needs of the economy, there seemed little merit in a further accumulation of reserves, involving the diversion of resources from development to precautionary purposes.
Another consideration that had to be taken into account in setting the exchange rate was the significance that should be attributed to the current account surplus, per se. The traditional theory is that the current account position is what is relevant to the exchange rate, and certainly it would seem unusual in a developing country to set an exchange rate with the intention of trying to create or continue a sizable current account surplus.
Although the balance of payments in 1962 and 1963 was strong, there were good reasons for doubting that this strength could be regarded as normal. Imports had fallen by 26 per cent from 1959 to 1960 and by a further 10 per cent from 1960 to 1961. In 1962 and 1963, they remained relatively stable at the 1961 level, despite a growth in gross national product of nearly 6 per cent in the former year and of 3–4 per cent in the latter. Nevertheless, it appeared that, as production continued to rise and as the capacity in existing plants was more fully utilized, imports could be expected to be more responsive to increases in domestic activity. This was particularly true in view of the fact that the major decline in imports was concentrated in investment goods. It seemed likely that the development needs of the economy and the lack of domestic sources of supply for the more sophisticated capital goods would lead to increases in imports for investment purposes.
At the same time that imports had been depressed, exchange receipts from the petroleum industry had been exceptionally large. Placing the income tax on a pay-as-you-go basis in 1961 produced an extra year’s income tax receipts, which were spread over 1961, 1962, and 1963. Exchange receipts also benefited from the exceptionally large rise in oil exports from 1961 to 1962. The increase, which amounted to almost 10 per cent, was substantially in excess of the growth in the world demand for petroleum in that year. While Venezuelan output might be expected to expand proportionately to the rise in total world demand for petroleum products, it could not be hoped that the relative size of the increase from 1961 to 1962 would be repeated. The increase in output during 1963 was considerably smaller than the rise in world demand, suggesting that the extraordinary increase from 1961 to 1962 was having an impact on the oil companies’ decisions on allocating production among various fields. The view of the Venezuelan Government, expressed in conferences of the Organization of Petroleum Exporting Countries, that growth in output should be restrained in the interests of obtaining maximum prices for petroleum, also suggests a conservative bias in balance of payments forecasts.
Another factor which suggested that the balance of payments was abnormally strong in 1962 and 1963 was the deflationary impact of the large budget surpluses. In part, these surpluses were due to extraordinary income tax receipts, which were not likely to be repeated. Moreover, budget expenditures seemed likely to expand, both to meet social needs and to finance capital investment in infrastructure and industry. The main curb on development expenditures in 1962 and 1963 appeared to be imposed by administrative difficulties. It seemed reasonable to expect that development planning would improve and that projects acceptable to all parts of the Government would begin to be agreed more rapidly. The financial conservatism that stimulated budgetary surpluses in order to repay government debt, especially that owed abroad, also appeared likely to be less dominant as the foreign debt burden was reduced to minimal amounts.
Assessment of an appropriate rate was also complicated by the fact that the nature of the capital outflow from Venezuela was not clear. The balance of payments statistics for 1960 contained a large item for “errors and omissions,” with the comment that this might be substantially of a capital nature, while the statistics for 1961 and 1962 showed large outflows of capital. Immigrants’ remittances were undoubtedly an important part of the total, and there can be no doubt that any increase in the assets of Venezuelans in the upper income groups or of the sizable immigrant population was used in part to increase dollar balances abroad. In these circumstances, it appeared only reasonable for the exchange rate to be set on the basis of financing a considerable outflow of funds, whether these funds were, in fact, “errors and omissions” on current account items, immigrants’ remittances, or normal transfers of assets abroad by Venezuelan residents. Experience with attempts to enforce capital controls from 1961 to 1963 indicated that direct restrictions were not likely to stop the payments involved.
In view of the factors outlined above, the Government concluded that the strength in the balance of payments was exceptional during 1962 and 1963, and that an exchange rate of Bs 4.4 or Bs 4.5 per U.S. dollar would not be more than adequate to meet the foreign exchange needs of the economy. It seems probable that this decision was conservative and that some margin for expansion in the economy was provided. The Government was anxious, however, to ensure that there would be no early resumption of exchange rate instability.
In addition to balance of payments considerations, a number of factors associated with the development policies of the Government were taken into account in establishing the exchange rate. The decree of March 1961 provided that all exports other than petroleum and iron ore were to receive the benefit of converting exchange proceeds at the free market rate. This very substantial improvement in the exchange rate for exporters—from Bs 3.33 per U.S. dollar to Bs 4.52—opened up some possibility of exporting manufactured products, and in the subsequent two years there were some small exports of manufactured products. The development plan called for substantial investments in other industries using Venezuelan natural resources, such as a steel mill, a fertilizer plant, a petrochemical complex, and an aluminum industry. It was hoped that, with an exchange rate near Bs 4.5, exports of these products would be possible. Exports of iron ore had been decreasing sharply for a number of years. Although the exchange rate was only of limited significance in the total operations of the iron ore companies, a substantial adjustment of the rate was expected to stimulate increased production from resources situated in Venezuela. As far as the oil industry was concerned, it was assumed that the exchange rate had little real effect on output or on the volume of sales abroad, since its effect was limited mainly to local costs of operations, which were not a large proportion of the total. Nevertheless, simplification of the exchange arrangements could not fail to be a favorable factor in influencing oil companies’ decisions about investments in Venezuela.
No recent systematic data are available to permit comparisons of actual prices in Venezuela and abroad. Casual comparisons, as well as the experience of U.S. firms in Venezuela, indicate that prices in Venezuela, even converted at the Bs 4.5 rate, are close to those prevailing in the United States. The high degree of protection for industry and agriculture provided by the Venezuelan authorities in the form of quantitative restrictions, tax incentives, special credits, and tariff exonerations also suggest that Venezuelan costs were clearly out of line with those abroad as long as the exchange rate was Bs 3.35. The need to align Venezuelan prices with those prevailing abroad was rendered particularly important by the consideration being given by the Venezuelan authorities to entry into the Latin American Free Trade Association.
The Venezuelan authorities also placed some emphasis on the need for a rate of Bs 4.5 in order to reduce the pressure for quantitative restrictions. The policy with regard to those restrictions was formulated and implemented chiefly by the Ministry of Commerce and Industry, and was designed to encourage domestic production and to solve the unemployment problem, especially in Caracas. As industries began to develop behind the protection, the effects of those measures, particularly on prices, began to become evident. Most of the new industries were confined to the assembly of imported components, so that little foreign exchange was conserved. Prices, however, were marked up substantially, and the Government found difficulty in devising some technique for limiting profit margins in industries protected by the quantitative restrictions. The Government worked out informal price agreements with a number of firms, and the income tax successfully recaptured a substantial amount of the profits earned by those firms. Nevertheless, by the end of 1963 there was a growing concern that the protection granted had been excessive, and some means were being sought to reduce it.
Another factor influencing the choice of the Bs 4.5 rate was that it was close to the rate in the free market, and most of the economy had already adjusted to it. There was a general belief that the exchange rate system had been modified too frequently from 1960 to 1963, and that there were positive virtues in making any further modifications as small as possible. The selection of the rate of Bs 4.5 instead of Bs 4.0 meant that importers, domestic producers, and exporters did not have to make another adjustment to a change in the rate, and that the serious strains always involved in moving to a lower price level could be avoided.
Considerations Regarding the Petroleum Industry
As noted above, petroleum exports have long played a dominant role in the balance of payments of Venezuela, accounting for more than 90 per cent of export earnings. The operations of the oil companies also have important direct and indirect effects on employment and business activity. More than half of government tax receipts come from income taxes and royalties paid by the oil companies. Moreover, the exchange spread between the Bs 3.09 rate for purchases of exchange from the oil companies and the Central Bank selling rate produced in 1963 an exchange profit which amounted to about 15 per cent of total tax revenues. Consequently, the possible effects of a change in the exchange rate for the oil industry were assessed very carefully by the Government. As part of his annual report for 1961, the Minister of Finance published a review of the possible impact of such a change, and the Ministers of Finance and of Mines and Hydrocarbons, together with the Central Bank, reviewed these studies during 1962 and again at the end of 1963. In the preparation of these studies, the companies were asked for data on their earnings and costs divided between their dollar and bolívar components. From these data, estimates could be made of the effects of a change in the exchange rate.
A number of points became evident as these studies progressed. First, a large number of companies were involved, and they varied considerably in size and type of operation. Since it was difficult and time consuming to obtain a division of company operations between dollar and bolívar expenditures, the most practical course appeared to be to concentrate on a few of the larger companies and to inflate the data to arrive at estimates for the industry as a whole. On the other hand, the position of the individual oil companies varied quite widely with regard to such procedures as local refining and marketing, the importance of exploration, and the size of capital budgets. This meant that the effect of a change in the exchange rate would vary for the different companies. Second, the year selected as the base for the study made some difference; therefore the results would be of only limited use for predictions, especially if it were assumed that a change in the exchange rate would itself have effects on the operating practices and investment policies of the companies. Third, the issues involved were complex, thus making difficult the public relations aspect of the politically sensitive question of relations with large foreign companies. Fourth, the effect of changing the exchange rate might well be offset or substantially modified by major changes in the international market for petroleum or by decisions by the international companies operating in Venezuela to alter the relative emphasis they put on various sources of supply.
The main questions for which answers were sought were the impact of a change in the exchange rate on the balance of payments, on the budgetary receipts of the Government, and on the net earnings of the oil companies. Table 2, which is based on the two largest oil companies’ financial records for 1963, inflated to provide an indication of the oil sector as a whole, provides tentative answers to these questions. Columns (1) and (2) show the effects of the Bs 3.09 rate and the Bs 4.40 rate on the data expressed in dollars, while columns (3) and (4) show the same receipt and expenditure items expressed in bolívares at the two exchange rates.
|Million Dollars||Million Bolívares|
|Other indirect taxes||9||6||28||28|
|Other bolívar costs||126||89||390||390|
|Other dollar costs||245||245||757||1,078|
|Other bolívar costs||61||42||187||187|
|Other dollar costs||75||75||232||330|
|Dollar Sales to Central Bank||1,332||1,320||4,115||5,811|
|Tax Receipts by Government||1,030||1,109||3,182||4,878|
The revenues from petroleum exports remain the same in dollar terms; thus, as a result of the exchange rate change, they increase by about 40 per cent in bolívar terms. In the table, however, it is assumed that prices of petroleum products for the domestic market remain unchanged and that total sales remain constant in bolívares. Consequently, the dollar equivalent of these sales declines by about 30 per cent. Since local sales are responsible for only about 6 per cent of the companies’ total proceeds, the companies could absorb substantially reduced profit margins on these sales without serious consequences for their over-all financial position. Nevertheless, the petroleum companies, if free to establish prices without being influenced by the Government’s attitude, would presumably increase the local price of petroleum products to take account of the lower value of bolívar earnings and the higher bolívar counterpart of costs incurred in dollars.
Among costs, royalties accrue to the Venezuelan Government in the form of barrels of petroleum valued at Gulf Coast posted prices and converted into bolívares at the rate applicable to the oil companies. In the table, these are shown as remaining constant in dollar terms and as rising by more than 40 per cent in bolívares. The same assumption is made for dollar salaries and for other dollar costs. After the exchange rate adjustment, most of the companies reduced dollar salaries on the ground that the equivalence between dollar and bolívar salaries (the former for foreign and the latter for local employees) could be maintained only if dollar salaries were reduced to compensate for the larger number of bolívares that could be purchased with the dollars after the exchange rate change. Salaries were reduced, however, by less than 10 per cent, because the companies applied the adjustment to only that proportion of salaries spent domestically, and they also provided an allowance for the higher income taxes arising because dollar salaries being converted into bolívares at the new rate were subject to higher marginal rates of taxation.
The costs shown in the table which are expected to remain constant in bolívar terms, and thus to fall by about 30 per cent in dollars, are indirect taxes, bolívar salaries, and other bolívar costs. Most of the indirect taxes are taxes on imports which are specific taxes fixed in bolívar terms. Bolívar salaries for local employees are not expected to change because of a three-year labor contract agreed in mid-1963, and of the maintenance of equivalence between bolívar and dollar salaries by the reduction of the latter. It is assumed that the domestic price level would not change significantly as a result of the exchange rate adjustment, and therefore that the cost of items purchased in bolívares would remain constant. No attempt is made to adjust these items to take account of the probability that the oil companies would purchase more in bolívares and less in dollars as a result of the adjustment in the exchange rate. Even if substantial allowance is made for this type of substitution, the final results of the calculation are not modified greatly.
Depreciation allowances, which include depletion and the charging off of concession costs, are shown separately and are adjusted differently from the other cost items in the table. Depreciation allowances in Venezuela are calculated on the basis of historical costs, and at least the larger companies keep separate records in dollars and in bolívares, the exchange rate being the one in existence at the time the investment was made. For the purpose of calculating the earnings of the companies included in the table, it is assumed that depreciation remains constant in dollar terms. The depreciation allowances shown in bolívares are those accepted for income tax purposes by the Venezuelan tax authorities; as these are based on historical costs, they are not adjusted for the exchange rate change. Since the depreciation allowances remain constant in dollars and in bolívares, the implicit exchange rate between the two has obviously not been adjusted to the new level.
The gross earnings of the companies are shown as the difference between costs and total income. Since the income tax is graduated and a number of the smaller companies were being taxed at less than the maximum rates, the higher revenue figures in bolívares resulting from the exchange rate change produce a slightly higher effective tax rate. The income tax estimate in the table is made on the basis of the bolívar figures, and the resulting tax is converted into dollars at the Bs 4.4 rate. (If the tax rate is applied to gross earnings as shown in the dollar column, the results are not the same because the depreciation allowances shown in dollars are considerably higher at the Bs 4.4 rate than the depreciation allowances permitted for tax purposes.) Net earnings in dollars as well as cash flow (defined here as net earnings plus depreciation) are expected to remain virtually constant. Net earnings in bolívares rise about 63 per cent, but cash flow, if calculated in bolívares and then converted at the two exchange rates, remains about constant.
Capital investment is also shown in the table in order to obtain some idea of the impact of all activities carried out by the oil companies. No change in the investment level is assumed, the table showing constant amounts of either dollar or bolívar expenditures, as the case may be, before and after the change in the exchange rate.
The final line of the table shows the tax payments made by the companies to the Government. (Taxes paid personally by employées are not included.) The increase of almost $80 million (about 7 per cent) is due to the increase in income tax payments, resulting partly from the smaller companies being subject to higher marginal tax rates and partly from the fact that the value for tax purposes of depreciation allowances fixed in bolívares declines quite sharply. Tax receipts in bolívares increase by 53 per cent. Royalties change proportionately to the exchange rate change. Receipts from indirect taxes remain constant in bolívares, while those from income tax rise more than proportionately to the exchange rate change, again because of the slightly higher tax rate and the reduced significance of depreciation allowances for tax purposes.
The increase of about Bs 1.7 billion in bolívar receipts shown in the table is not, of course, a net gain for the budget. The exchange profit produced by the previous System amounted to about Bs 1.1 billion, so that the rise in revenues is about Bs 600 million. Increased costs for the budget arising from debt service payments and imports may also amount to about Bs 150 million. Consequently, the net increase in government proceeds for the budget is of the order of magnitude of Bs 450 million. If the cost to the Central Bank of subsidizing imports at the Bs 3.35 rate (about Bs 150 million, of which Bs 80–90 million is financed from the exchange spread) as well as the higher costs of the imports by government agencies were taken into account, the net gain for the government sector of the economy would be further reduced. Nevertheless, the improvement of Bs 450 million in the budget position should permit some increase in development expenditures without involving government borrowing from the banking System.
The penultimate line in the table, “Dollar Sales to the Central Bank,” is an attempt to estimate the balance of payments impact of the new measure. This item is an estimate of sales of dollars by the petroleum companies to the Central Bank to obtain bolívares mainly for tax purposes but also to meet bolívar expenditure (the sum of royalties, other direct taxes, bolívar salaries, and other bolívar costs for current and capital expenditures, plus income tax). It shows that the exchange rate change is expected to have a minimal impact on the balance of payments, dollar sales to the Central Bank declining by a negligible amount. The calculation does not, however, take account of the effect of the change in the relative prices of dollars and bolívares. To the extent that the new exchange rate has the effect of reducing or increasing economic activity, the impact on the balance of payments will change. For such items as dollar salaries, it is to be expected that fewer dollars will be converted, i.e., that bolívar expenditures will not increase by an amount proportionate to the change in the exchange rate. On the other hand, since purchases in Venezuela are now cheaper in dollar terms, the companies in procuring supplies may divert expenditures from imports to the domestic economy. Moreover, since the exchange rate is one factor taken into account by oil companies when making decisions about investment, the level of investment expenditures in Venezuela may be expected to rise.
Further Steps to Unification of the Exchange Rate
Although the decree of January 18, 1964 involved considerable progress toward the ultimate unification of the exchange rate, a number of further steps are necessary. These are (1) elimination of the subsidy arrangements for coffee and cacao; (2) removal of the subsidies on the 10 per cent of imports now receiving the Bs 3.35 rate; (3) narrowing of the spread between the buying rate of the Central Bank and the commercial banks’ selling rate to the public so that the rates are within the limits, permitted under the Articles of Agreement of the International Monetary Fund, of 1 per cent on either side of a par value; and (4) legislation which changes the legal definition of the gold content of the bolívar and provides a basis for agreement with the Fund on a par value.
The subsidy for coffee and cacao is a particular instance of a general problem. Even at the new exchange rate for exports, the extent to which exports other than petroleum and iron ore will develop is open to serious question. These two products have great natural advantages, and for long periods in the past an exchange rate appropriate for substantial sales of these products and for balance of payments equilibrium has been inconsistent with the development of most other exports. The exchange rate of Bs 4.48 obtainable for proceeds of exports is, of course, much better than the rate of Bs 3.33 existing up to 1960, but many Venezuelan producers still regard it as inadequate and suggest that rates of Bs 7.00 or Bs 8.00 per U.S. dollar would be necessary to develop exports. It is difficult to see any rationale for the provision of such rates to obtain marginal export earnings.
In the particular case of coffee and cacao, in addition to the question of the need for any type of subsidy, there is the further issue of the form that the subsidy should take. Payment of a subsidy through the exchange System is not particularly convenient, since no exchange controls apply to transactions in commodities other than these two exports and the subsidized imports. Payment of the subsidy at the time that the goods cleared customs and payment on the basis of weight rather than the value of exports would produce simpler administration. Moreover, the subsidies should probably be devised to fit in with plans for the more rational allocation of agricultural land in Venezuela and with the improvement of the quality of the coffee and cacao exported.
A removal of the subsidies on the 10 per cent of imports now receiving the Bs 3.35 exchange rate would involve difficult political decisions. It is unlikely that changing the exchange rate for these items from Bs 3.35 to Bs 4.5 would have any significant effect on the cost of living as a whole. The Central Bank has calculated that the effect on the price level would be less than 2 per cent. Similarly, higher prices for the particular agricultural materials and capital goods included in the list of basic imports could not be expected to have any substantial effect on the use of such materials. The present arrangements have the disadvantage of providing an incentive for the over-valuation of imports, and the cost of the subsidies to the Central Bank involve a certain expansionary effect which will have to be taken into account in the formulation of over-all monetary policy. One of the possibilities is that the authorities, in determining subsidies, could find some technique which did not involve the exchange System and which was exposed to less risk of benefiting the distributor rather than the consumer. Another possibility would be to adopt programs to promote domestic substitutes for these imports. Opportunities appear to exist in this direction, even though some of them might involve the need for at least temporary subsidies.
To avoid multiple currencies as defined by the Fund, the Venezuelan authorities will have to narrow the spread between the buying and selling rates to within 1 per cent on either side of a par value. This could be achieved by a minor adjustment of either the buying or the selling rate. The only effect of any importance would be some loss of the exchange spread, but this would not be important, especially if the step were taken at the time that the consumer subsidies were eliminated.
Although the legal situation is not altogether clear, it appears that the Venezuelan authorities will need to revise the statute which defines the gold content of the Venezuelan bolívar at an amount which gives an exchange rate of Bs 3.0463 per U.S. dollar. Such a revision could be the occasion for making the provisions of the law defining the gold content for domestic purposes consistent with the provisions of the Fund’s Articles of Agreement and Venezuela’s membership in the Fund. This would clear up the last obstacle to the introduction of a new par value by Venezuela.
Mesures de change au Venezuela
De 1958 à 1960, le Venezuela a dû faire face à une crise sérieuse de la balance des paiements, qui a eu son origine dans une expansion rapide du crédit intérieur pour financer le déficit budgétaire et dans une crise de confiance associée à révolution de la situation politique, tant sur le plan national que sur le plan extérieur. La politique du gouvernement a passé par divers stades dans la recherche d’une solution à ces difficultés. Tout d’abord, les contrôles de change ont été utilisés principalement pour arrêter les fuites de capitaux, mais devant l’échec de ces mesures, le gouvernement procéda à un ajustement progressif du taux de change des importations et à un resserrement de la politique financière et de la politique de crédit. Les dispositions prises réussirent à améliorer la position de la balance des paiements, et en janvier 1964, les restrictions des paiements ont été éliminées et le régime des taux de change a été considérablement simplifié.
L’expérience vénézuélienne illustre les difficultés de mise en œuvre des contrôles de change. Les contrôles de capitaux ne réussirent pas à freiner notablement les fuites de capitaux, et l’utilisation de contrôles pour faire observer les taux de change multiples a exigé de nombreuses decisions administratives spéciales et a amené des instances de fraude. Les taux multiples ont créé des distorsions économiques et entravé l’élaboration des plans de développement du gouvernement.
Le succès obtenu par les autorités vénézuéliennes tient aux mesures monétaires et financières et à l’ajustement progressif du taux de change à un niveau réaliste. Les decisions de mise en œuvre de ces politiques étaient complexes. Diverses solutions possibles ont été sérieusement étudiées à plusieurs reprises. Une decision particulièrement difficile portait sur le choix d’un taux de change approprié, dans une situation où des considérations relatives à la balance des paiements et au développement économique conseillaient des taux de change differents. Une autre decision difficile à prendre était de deprecier les taux de change applicables aux transactions de change avec les compagnies pétrolières étrangères. Les calculs effectués par le gouvernement ont cependant indiqué qu’en raison des dispositions spéciales de la loi régissant l’impôt sur le revenu, le taux de change pouvait être modifié sans effet notable sur la contribution des compagnies pétrolières à l’économie vénézuélienne.
Medidas cambiarias en Venezuela
Venezuela atravesó por una grave crisis en su balanza de pagos desde 1958 hasta 1960, originada por la acelerada expansion del crédito interno para financiar el déficit presupuestario y por una crisis de la confianza como resultado de los sucesos politicos tanto internos como externos. La política gubernamental ante estos problemas fue adquiriendo forma en varias etapas. Al principio, recurrióse primor-dialmente a los controles cambiarios para detener la fuga de capitales, pero al resultar infructuosos el Gobierno emprendió un reajuste graduai del tipo cambiario que regía para las importaciones, a la vez que imprimió mayor rigidez a su politica fiscal y crediticia. Las medidas adoptadas lograron mejorar la balanza de pagos, y en enero de 1964 las restricciones sobre los pagos quedaron suprimidas y el sistema del tipo cambiario fue simplificado substancialmente.
La experiencia de Venezuela demuestra las dificultades en el funcionamiento de los controles de cambio. Las medidas de control sobre el capital no impidieron mayormente la fuga de capital, y el empleo de medidas de control para imponer la observancia de tipos de cambio múltiples requirió muchas decisiones de orden administrativo sobre una base ad hoc y dió lugar a evasiones. Los tipos múltiples crearon distorsiones en la economia y obstaculizaron la planificació;n del desarrollo por parte del Gobierno.
La clave del éxito alcanzado por las autoridades venezolanas estriba en las medidas monetarias y fiscales así como en el graduai reajuste del tipo cambiario a un nivel acorde con la realidad. Las decisiones que se adoptaron para imponer el cumplimiento de estas politicas fueron de índole complicada. En varias oportunidades se estudió seriamente la posibilidad de adoptar medidas alternativas. Una decisión dificil fue la selección del tipo de cambio que resultara adecuado en medio de una situación en la que razones atinentes a la balanza de pagos y a la economia parecian aconsejar la adopción de tipos distintos. Otra resolución difícil fue la de depreciar el tipo de cambio aplicable a las transacciones cambiarias efectuadas con las compañias petroleras extranjeras. Los cálculos hechos por el Gobierno indicaron, sin embargo, que en virtud de las disposiciones concretas contenidas en la ley del impuesto a la renta, el tipo cambiario podía ser alterado sin ocasionar ningún efecto notable en el aporte hecho por las compañias petroleras a la economía venezolana.
Mr. Woodley, Assistant Director of the Exchange Restrictions Department, is a graduate of the University of Saskatchewan, the University of Toronto, and Cornell University. He has been a member of the Fund staff since 1948, except for the years 1953 to 1955, when he was a member of the Secretariat of the North Atlantic Treaty Organization.