Venezuela
Recent Economic Developments

This paper describes economic developments in Venezuela during the 1990s. Economic conditions remained difficult in 1995. Continued problems in the banking system, higher public sector interest obligations, a decline in oil revenues, and deterioration in the non-oil fiscal balance kept the public finances under stress. The stance of monetary policy continued to be accommodating and interest rates remained negative in real terms. These policies, together with an increasingly misaligned fixed exchange rate and the maintenance of exchange controls, contributed to the further deterioration of private sector confidence.

Abstract

This paper describes economic developments in Venezuela during the 1990s. Economic conditions remained difficult in 1995. Continued problems in the banking system, higher public sector interest obligations, a decline in oil revenues, and deterioration in the non-oil fiscal balance kept the public finances under stress. The stance of monetary policy continued to be accommodating and interest rates remained negative in real terms. These policies, together with an increasingly misaligned fixed exchange rate and the maintenance of exchange controls, contributed to the further deterioration of private sector confidence.

I. Overview

In the absence until recently of policies to address Venezuela’s economic difficulties and restore confidence, macroeconomic performance was weak, as evidenced by a stagnant non-oil economy, rising unemployment, falling real incomes, and high inflation.

1. Developments in 1994

The Administration that took office in early 1994 inherited a weak fiscal stance, rising inflation, declining international reserves, and a moderate economic recession. The situation was aggravated by a major banking crisis which quickly gripped a sizable segment of the banking system. 1/ The resulting uncertainties were compounded by delays in announcing a policy strategy, including measures to address the financial crisis and fiscal imbalances.

As the crisis unfolded in the form of further heavy international reserve losses, a steep depreciation of the currency, and accelerating inflation, in mid-1994 the authorities imposed strict exchange controls, broadened price controls, and fixed the exchange rate. Net international reserves recovered as the controls took hold, but heightened uncertainties associated with the continuing banking crisis led to a further weakening of non-oil activity in the second half of the year. For the year as a whole, inflation rose to 70 percent (from 46 percent during 1993), real wages dropped sharply, the external current account swung into surplus amidst a severe contraction in imports, non-oil GDP fell by 5 percent, and unemployment rose.

Despite efforts to keep public expenditure under control and to secure additional revenues from a temporary bank debits tax and from the newly introduced general sales and luxury tax (GSLT), the fiscal deficit ballooned in 1994 as government assistance to ailing banks mounted during the year. The deficit was financed through a combination of central bank credit, domestic bond placements, and arrears accumulation. In the early part of the year concerns about the condition of banks had led to the sterilization of only part of the liquidity injections associated with fiscal assistance to the banking system, and, following the imposition of exchange controls in midyear, to an easing of monetary policy which was reflected in strongly negative real interest rates.

2. Developments in 1995 and early 1996

Economic conditions remained difficult in 1995. Continued problems in the banking system, higher public sector interest obligations, a decline in oil revenues, and a deterioration in the non-oil fiscal balance kept the public finances under stress. The stance of monetary policy continued to be accommodating and interest rates remained negative in real terms. These policies, together with an increasingly misaligned fixed exchange rate and the maintenance of exchange controls, contributed to the further deterioration of private sector confidence, as evidenced by a falling demand for financial assets and private capital outflows. Excess demand pressures were reflected in high inflation (57 percent during the year), international reserve losses, and a significant depreciation of the currency in the parallel market.

Real GDP is estimated to have grown by a little over 2 percent in 1995. In the main, this reflected the vigorous expansion of the oil sector (by 6 percent) on the strength of the state oil company’s (PDVSA’s) ambitious investment program. Non-oil GDP, in contrast, grew by just 1 percent--and the measured unemployment rate rose to over 10 percent in 1995 from almost 9 percent in 1994. Growth was concentrated in the manufacturing and transport sectors, largely associated with the spill over effects of high investment levels in the oil sector. There also was a substantial rebuilding of inventories, following the large de-stocking of the previous year, stimulated by rising devaluation expectations and negative real interest rates. Domestic expenditure rose faster than GDP, as imports rebounded from their depressed 1994 levels; the increase in demand was dominated by the swing in stockbuilding, as real consumption changed little from the previous year and private fixed investment continued to decline. Real wages fell for the third year in a row, albeit at a slower rate than in the previous year.

Inflation, which slowed in the closing months of 1994, continued on a downward trend in early 1995 partly as a result of a relaxation of exchange controls. In April 1995 the Government decreed a wage bonus for private sector workers which raised the statutory minimum income by about 50 percent. Negotiations between the Government and the private sector also began on a price and wage accord. In these circumstances, inflation started to climb again because of precautionary price adjustments made by the private sector in the expectation of a pact (which in the event did not materialize), and of increases in controlled prices aimed at alleviating the worsening problem of shortages. As inflation picked up, the authorities increased the supply of foreign exchange for imports at the official exchange rate. In the context of a strongly appreciating real exchange rate and growing expectations of a currency realignment, this contributed to the surge in imports noted above.

By mid-summer, the economy appeared to have entered a period of relative calm. In particular, inflation had abated to less than 3 percent a month, the parallel exchange market was relatively stable, and there were incipient signs of a recovery in non-oil output. However, with imports rising very fast, pressures on the foreign exchange reserves intensified, and net international reserves declined by US$1 1/2 billion from March to September 1995.

Substantial open market operations which raised the Central Bank’s benchmark interest rate were insufficient to limit reserve losses, and in September the authorities moved to tighten exchange controls. The Central Bank curtailed its net sales of foreign exchange, and the exchange control board virtually ceased issuing foreign exchange authorizations for imports. The currency began to depreciate sharply in the parallel exchange market from September onward, and by late November the gap with the official exchange rate was on the order of 100 percent (compared with 35 percent in August). Net international reserves recovered strongly in the closing months of the year, but inflation also accelerated markedly, reaching 6 percent a month in December.

In an effort to ease pressures on international reserves, the official exchange rate was devalued by 41 percent in mid-December 1995. However, in the absence of a comprehensive policy package, this measure in and of itself did little to restore confidence, and the parallel exchange rate continued to depreciate steeply during the opening months of 1996. Inflation also continued to rise to an average 7 1/2 percent a month in the first quarter of 1996.

In December 1995 the share of controlled prices in the consumer price index was reduced from 12 percent to 5 percent, and the remaining price controls (except on medicines) were phased out between April and May 1996. In March 1996 the Government raised wage bonuses, effectively increasing the minimum income for private sector workers by about 70 percent in nominal terms; the statutory minimum income (inclusive of bonuses) had declined by 40 percent in real terms since the previous increase in April 1995. Public sector salaries were raised in May by 25 percent, and the authorities also announced that six bonuses, each equivalent to one-month salary, would be paid between May and December 1996.

3. Public finances

The overall public sector deficit was reduced from 14 percent of GDP in 1994 to 8 1/2 percent of GDP in 1995. Assistance to banks amounted to 4 percent of GDP in 1995 compared with 13 percent of GDP in 1994. However, despite efforts to contain expenditure, the underlying public sector deficit (excluding assistance to banks) widened by 3 percent of GDP to 4 1/2 percent of GDP. The deterioration mainly reflected a sharp decline in revenue and larger interest obligations.

The central government deficit was reduced by 2 percent of GDP in 1995 to 4 1/2 percent of GDP, mainly on account of lower transfers to FOGADE (the deposit insurance agency). The central government deficit excluding transfers to FOGADE, at 3 1/2 percent of GDP, was little changed from the previous year. Non-oil revenue fell slightly from its level in 1994, as an increase in GSLT rates and efforts to improve administration of the tax did not compensate for the abolition of the temporary bank debits tax at end-1994 and somewhat weaker excise and customs revenues. Non-interest current expenditure fell by over 1/2 percent of GDP, largely because of a decline in the real wage bill. Current transfers increased because of higher transfers to local governments and autonomous agencies. Investment remained at a very low level.

The central government deficit was financed almost entirely from domestic sources, mainly through the net issue of bonds and treasury bills, an increase in interest arrears on domestic debt, and a drawdown of the treasury account at the Central Bank. The stock of domestic debt instruments (including central bank paper) rose from 12 percent of GDP in 1994 to close to 16 percent of GDP in 1995. Net external financing was slightly positive. In late 1995 the Government placed a three-year bond for DM 500 million on the German market. Central government external arrears (excluding public enterprise external arrears guaranteed by the Central Government) fell by some US$90 million during 1995, to about US$430 million at year-end.

The operating surplus of PDVSA fell by 2 1/2 percent of GDP in 1995 to 13 percent of GDP, and its fiscal contribution to the Central Government was reduced by over 1/2 percent of GDP. Higher export prices and a rise in export volumes were insufficient to offset the effect on revenue of the real appreciation of the bolivar and the continued freeze on the domestic prices of the most important refined products. 1/ At the same time, current expenditure of the company increased by 1 percentage point of GDP. In July 1995, Congress approved the opening of oil exploration and production to private involvement in the form of risk-sharing joint ventures with PDVSA; in early 1996 the auction of ten areas for exploration revealed keen investor interest.

The finances of FOGADE remained under severe stress throughout the year. In early 1995 four banks were closed, and the deposits held at those banks (equivalent to 3 percent of GDP) were shifted to nationalized banks. However, there were delays in supplying the recipient banks with counterpart earning assets, and FOGADE provided the banks with bonds amounting to about 80 percent of the deposits transferred only in December 1995. FOGADE settled less than half of the interest due on the transferred deposits--amounting to 1 percent of GDP--to the recipient banks. Besides the transfer of deposits, FOGADE provided financial assistance to banks equivalent to 1 percent of GDP (most of it early in the year), to recapitalize nationalized banks and to cover liabilities of closed banks. In July 1995 Congress enacted a Financial Emergency Law which set the legal basis for the disposal of assets of intervened banks, and for the privatization of nationalized banks. On the basis of this legislation, FOGADE undertook the first sales of assets in early 1996.

4. Central bank operations and developments in money and credit

The stance of monetary policy in early 1995 remained expansionary with excess bank liquidity exerting downward pressure on nominal interest rates. The stock of central bank stabilization bonds (TEMs) declined during the opening months of the year, base money expanded, and interest rates on the benchmark three-month TEMs fell from 32 percent in December 1994 to 20 percent in May 1995.

In April the Central Bank changed the mechanism for the calculation of minimum deposit and maximum lending rates for commercial banks: the minimum deposit rate was set at the level of the interest rate on three-month TEMs, and the spread between that rate and the maximum lending rate was set at 24 percentage points. In June the mechanism was changed again and the minimum deposit and maximum lending rates were set at 24 percent and 46 percent, respectively.

From June to September the interest rate on TEMs rose steadily up to 45 percent before stabilizing at the higher rate for the next few months. Base money fell during the second and third quarters as liquidity was drained through the balance of payments. As price pressures intensified during the closing months of 1995 and early 1996, interest rates on TEMs became more negative in real terms. In February 1996, in an effort to contain its quasi-fiscal losses, the Central Bank imposed an additional reserve requirement remunerated at 18 percent and the interest rate on TEMs fell temporarily to 33 percent.

With growing expectations of a devaluation and negative real interest rates, the process of demonetization that got under way in 1992 accelerated in 1995. Real M2 declined by 18 percent during 1995, compared with a fall of 9 percent during the previous year, and velocity increased from 3.9 in 1994 to 4.2 in 1995. As inflation continued to climb in the opening months of 1996 without any major changes in nominal interest rates, real broad money fell steeply, and by March 1996 the fall in real M2 had reached 30 percent relative to a year earlier; measured in U.S. dollars at the parallel exchange rate, M2 had plunged to its lowest level since the late 1980s. Commercial banks’ credit to the private sector declined by 5 percent in real terms during 1995.

5. Exchange controls and external developments

In June 1994 the authorities fixed the exchange rate at Bs 170 per U.S. dollar and imposed exchange controls on all current and capital account transactions. Authorizations for the purchase of foreign exchange began to be issued by an exchange control board specifically set up for that purpose, and substantial penalties were established for black market trading in foreign exchange. 1/ With few modifications, this system remained in place through June 1996, when exchange controls were somewhat liberalized by allowing the trading of Brady bonds on the Caracas stock exchange, de facto legalizing a parallel market for foreign exchange.

Policy concerning the exchange controls went through several phases. Following the initial period of tight limitations on the supply of foreign exchange, the granting of authorizations for the purchase of foreign exchange for imports was relaxed in early 1995. Controls were tightened again in September, and in October the authorities announced that foreign exchange for imports would be provided in installments over a four-month period and shifted certain tourism-related transactions to the parallel market. In December the official exchange rate was devalued to Bs 290 per U.S. dollar, and foreign exchange for travel abroad once again was sold at the official rate. In January 1996, certain limitations were imposed on the domestic trading of Brady bonds.

The external current account surplus fell from 5 percent of GDP in 1994 to 2 1/2 percent of GDP in 1995. Exports rose by close to 20 percent on the strength of robust oil exports resulting from increases in volumes and higher oil prices. Non-oil exports rose by 15 percent, owing to favorable aluminum prices and a significant expansion in the volume of exports of chemical products. Imports rebounded by 40 percent from their depressed level the previous year. The capital account, in contrast, remained in deficit because of continued large outflows of private capital. For the year as a whole, net international reserves declined by about US$1 billion.

II. Trends in Public Finances

Venezuela’s fiscal imbalances have contributed to the disappointing performance of the economy in recent years. Underlying the difficult situation in the public finances has been a declining trend in the oil balance, together with major fiscal costs arising from the banking crisis of 1994. Efforts to broaden the non-oil revenue base and to control expenditure, while important, have been insufficient to forestall excessive fiscal imbalances, and there has been little progress in improving the efficiency of public expenditure. The financing of the deficits largely through increases in domestic debt and accumulation of arrears has affected confidence adversely.

The underlying public sector deficit (excluding assistance to banks) was reduced by 2 percent of GDP from 1991 to 1994, to just over 1 percent of GDP, before deteriorating by 3 percent of GDP in 1995. However, the overall public sector deficit (including assistance to banks) reached 14 percent of GDP in 1994 and 8 1/2 percent of GDP in 1995 (Table 1).

Table 1.

Venezuela: Summary Operations of the Oil and Non-oil Public Sectors

(In percent of GDP)

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Sources: Central Bank of Venezuela; Central Budget Office; Ministry of Finance; and Fund staff estimates.

Excluding transfers to Central Government.

Excluding domestic revenue.

Excluding assistance to banks.

Excluding transfers from the oil sector.

1. The oil public sector

The oil public sector balance 1/ fell steeply in the early 1990s, from 20 percent of GDP in 1990 to 7 1/2 percent of GDP in 1992, as oil prices dropped sharply in the aftermath of the Middle East War. The balance stabilized at about 7 1/2-8 1/2 percent of GDP in 1992-94, as a gradual rise in oil export volumes made up for a further weakening in oil prices, before declining to 6 percent of GDP in 1995 on account of the real appreciation of the currency.

The fiscal contribution of the oil sector in the form of tax and royalty payments to the Central Government has been declining steadily, falling by about 10 percentage points of GDP between 1991 and 1995. Besides reflecting the developments mentioned above, the falling trend is associated with the gradual lowering of a coefficient applied to average oil export prices for the calculation of income tax liabilities; this policy has aimed at leaving PDVSA with more resources for investment.

2. The non-oil public sector

The underlying non-oil public sector balance 2/ improved by 7 percent of GDP between 1991 and 1994 (from a deficit of 16 1/2 percent of GDP in 1991 to a deficit of 9 1/2 percent of GDP in 1994) owing to a strengthening of revenue and a decline in non-interest expenditure, but this balance deteriorated in 1995. The overall non-oil public sector deficit (including assistance to banks) soared to 22 percent of GDP in 1994 and 15 percent of GDP in 1995 because of the banking crisis.

The central government deficit excluding transfers to FOGADE remained in the range of 1 1/2 and 3 1/2 percent of GDP in 1991-1995 despite the significant reduction in transfers from the state oil company mentioned above. At the central government level there have been some efforts to broaden the non-oil revenue base. Non-oil revenues increased by 3 1/2 percent of GDP between 1991 and 1995, and in 1994-95 they exceeded oil revenues. This strengthening is attributable to the introduction of the value-added tax in late 1993 and an increase in the basic rate of the tax from 10 percent in 1994 to 12 1/2 percent in 1995. On the other hand, the base of the non-oil income tax was narrowed in 1991 and 1994. 1/ Revenues from customs duties have been declining since 1993: in 1994 imports were particularly weak, while in 1995 revenue was eroded by the strong real appreciation of the currency. Revenues from excises were adversely affected by the freeze on the domestic prices of gasoline and diesel oil since early 1992, notwithstanding the threefold increase in the price of premium gasoline in September 1995.

Recent measures to improve tax administration have involved amendments to the tax code and the creation of an autonomous revenue, agency (SENIAT) in 1994. As a result, tax administration has been strengthened, and SENIAT is carrying out a program to ensure higher professional standards and access to better facilities and equipment. Special Large Taxpayer Units have been set up, and progress is being made in the computerization of operations. So far, efforts to improve compliance have centered on the value-added tax, and it is estimated that evasion has been reduced somewhat, although it remains substantial.

Central government expenditure excluding interest, BCV losses, and transfers to FOGADE has declined since the early 1990s. Current transfers fell through 1994 mainly because of cuts in transfers to local governments associated with lower central government revenues. Direct social transfers were sharply curtailed in 1994-95. Central government investment was halved in relation to GDP between 1991 and 1995, and other capital transfers also came down on account of lower transfers to public enterprises.

Expenditure suffers from important structural rigidities. First, a sizable share of revenue is constitutionally or legally earmarked for specific expenditures. The most significant instances involve transfers to state governments (the situado, for which 20 percent of current revenue is earmarked), 1/ transfers for housing development (assigned 5 percent of current revenue net of the situado), and transfers for public sector decentralization (assigned up to 10 percent of revenue from the value-added tax). Second, under the existing severance system, payments due to employees at separation or retirement are substantial; this has hindered efforts to streamline public administration and to assign human resources more efficiently. 2/

Since 1994, the public finances have been seriously affected by the banking crisis. The direct costs stemming from the crisis and from the policy approach adopted to deal with it have been significant: total financial assistance to banks and payments to depositors amounted to 13 percent of GDP in 1994 and 4 percent of GDP in 1995. In addition, indirect costs have mounted in the form of rapidly growing interest payments and central bank losses arising from the steep increase in domestic debt issued to fund the transfers to banks. 3/ Thus, notwithstanding negative real interest rates from mid-1994, total interest costs (encompassing interest payments of the Central Government and FOGADE, and BCV losses) rose by over 3 percentage points of GDP between 1993 and 1995.

Following earlier declines, the operating surplus of public enterprises has stabilized in recent years at around 1 percent of GDP. However, this masks a high degree of differentiation in financial performance of the various enterprises. Public enterprises in the manufacturing sector (mainly aluminum, steel, and petrochemicals) have generated operating surpluses in recent years, while the financial position of the public utilities--mainly water and electricity--has been deteriorating, partly because of official pricing policy. In addition, weak financial discipline and a timid stance toward nonpaying customers have contributed to the emergence of inter-enterprise arrears and of external debt service arrears. For example, at end-1995 the arrears of the water utilities to their electricity suppliers were estimated at 1/2 percent of GDP, while external arrears of the public enterprises at end-1995 amounted to over 1/2 percent of GDP.

III. The Banking System: An Update

This chapter updates information contained in the report on the banking crisis (SM/95/39) prepared last year for the information of the Board and summarizes banking system trends. The analysis focuses on commercial banks as they accounted in 1994-95 for about 90 percent of system deposits. The monetary statistics have been seriously affected by the banking crisis with balances of closed banks excluded from the consolidated balance at various times. In addition, uncertainties remain about the quality and comprehensiveness of the data transmitted by banks to the authorities. Therefore, banking data ought to be viewed with caution.

1. Institutions affected and fiscal effects

The banking crisis that emerged in 1994 affected 17 banks and a finance company in the period through end-1995. During 1994 the authorities nationalized or closed 13 out of the 47 banks that were in operation at the beginning of the year, including three of the four largest banks in terms of deposits. These 13 banks accounted for about half of total banking system deposits at end-December 1993. During 1995 the authorities closed five banks including three that had been subject to government-monitored recapitalization plans and one that they had taken over in December 1994. 1/ In all, these 17 banks accounted for about 60 percent of total banking system deposits at end-1993.

In February 1995 the authorities transferred to certain nationalized banks the deposits of a bank closed in January 1995 and of another three that were closed in February 1995. Initially, no counterpart bonds were given to these nationalized banks, and they had to credit an account receivable with the public sector. In December 1995, the authorities provided these banks with bonds to cover about 80 percent of the transferred deposits. The authorities had agreed to compensate the nationalized banks for the interest costs of the transferred deposits. However, these costs were not fully compensated during the year and the liquidity of these banks was affected severely.

The banking crisis put considerable stress on the finances of the public sector, including the Central Bank. In 1994 expenditure to recapitalize and support ailing institutions and to pay depositors amounted to US$8.6 billion or about 13 percent of GDP. In 1995 further assistance to banks was extended for about US$3.1 billion or 4 percent of GDP. Largely as a result of the crisis, the domestic public sector debt rose from 7 percent of GDP in 1993 to 16 percent in 1995, thereby raising current and future interest obligations. An important share of the large increase in the public sector debt was contracted in 1994 by the Central Bank as it sterilized part of its net lending (9 percent of GDP) to FOGADE, which assisted distressed banks. The stock of central bank securities rose from 1 percent of GDP in 1993 to 4 1/2 percent in 1994 and to 5 percent of GDP in 1995. This weakened the financial position of the Central Bank and its losses rose from 0.2 percent of GDP in 1993 to 2 percent of GDP in 1994 and 1 percent of GDP in 1995.

2. Banking system trends

In 1995 sharply negative real interest rates, the widening spread between the official and the parallel exchange rates, and expectations of a devaluation of the official rate contributed to a further decline in the demand for bolivar-denominated assets. Broad money declined from 32 percent of GDP in 1994 to 27 percent of GDP in 1995 and commercial bank deposits fell from 26 percent of GDP in 1994 to 21 percent of GDP in 1995 (Chart 1).

CHART 1
CHART 1

VENEZUELA COMMERCIAL BANK DEVELOPMENTS

Citation: IMF Staff Country Reports 1996, 087; 10.5089/9781451840070.002.A001

Source: Central Bank of Venezuela; and Fund staff estimates.1/ Money and quasi-money.2/ Excluding taxes.3/ Including transfers for provisions.

Weak non-oil activity and stricter lending practices contributed to a further decline in the demand for private sector credit in 1995, notwithstanding the markedly negative lending rates. Commercial bank credit to the private sector fell by 5 percent in real terms in 1995 and its share in bank assets fell from an average of 35 percent in 1994 to 27 percent in 1995. In contrast, the share of commercial bank credit to the public sector rose from an average of 18 percent of assets in 1994 to 25 percent in 1995 (Chart 2). The debt arising from the government-sponsored transfer of deposits from failed banks to certain nationalized banks in early 1995 contributed to the increase in commercial bank credit to the public sector.

CHART 2
CHART 2

Venezuela Commercial Banks

Citation: IMF Staff Country Reports 1996, 087; 10.5089/9781451840070.002.A001

Source: Central Bank of Venezuela; and Fund staff estimates.1/ Referes to a ratio of loans to the private sector over deposits.

Interest rate restrictions and selective credit requirements continued to affect banking operations in 1995. In particular, a minimum rate applicable to noncheckable deposits forced banks to pay the minimum interest rate on highly liquid savings deposits thereby increasing financial costs. In addition, the requirement that a minimum share of the credit portfolio be directed to agricultural loans at 85 percent of the market lending rate continued to raise the cost of banking operations.

Nevertheless, the operating result of the commercial banking system improved somewhat in 1995. Net interest revenue relative to assets increased from 8.2 percent in 1994 to 9.9 percent in 1995 due in part to the higher interest spread that emerged in the second half of 1994 in the context of exchange controls. Non-interest costs in relation to assets decreased from 12.3 percent in 1994 to 11.3 percent in 1995 in spite of an increase in provisioning mandated by the Superintendency of Banks and Financial Institutions (SBFI). Banks continued to rely on substantial non-interest revenue to generate overall profits as the intermediation index--the ratio of loans to deposits--declined further in 1995 (see Chart 2). Pre-tax profits relative to assets rose from 2.8 percent in 1994 to 3.5 percent in 1995. In relation to capital, pre-tax profits remained unchanged at about 40 percent because the capital to assets ratio improved, as noted below.

The capital asset ratio increased from an average of 3 percent in 1994 to 6 percent in 1995 (6 1/2 percent following the exclusion of the last three major banks-affected by the crisis in February 1995) and to 8 percent in the first quarter of 1996. Nonperforming loans as proportion of the loan portfolio fell from an average of 15 percent in 1994 to 7 percent in 1995 and to 5 percent in the 12 months to March 1996. In addition, the continuing shift in the composition of credit toward claims on the public sector reduced default risk. However, government debt service arrears affected the liquidity position of those nationalized banks that received deposits from failed banks in early 1995. In particular, Banco Latino experienced growing liquidity problems at end-1995 and in early 1996 had to borrow in the interbank market and from the Central Bank at relatively high interest rates.

Progress was made during 1995 in strengthening banking supervision. The SBFI made efforts to improve audits by streamlining procedures and focusing on key indicators of solvency and viability. Also, it developed an information system that helped monitor more closely and accurately the condition of banks. In addition, it introduced consolidated accounting standards for the industry and began exercising closer surveillance of the savings and loans associations. However, the SBFI continued to face financial and institutional constraints. Its technological infrastructure remained deficient and it continued to lack sufficient staff with adequate experience and training. In addition, certain supervisory actions were delayed because they had to be approved by the Financial Emergency Board.

3. Policy changes under the economic program supported by the Fund

Under the program, the Government will take action to strengthen and restructure the banking system. Key elements of the program will be the further strengthening of bank supervision, the settlement of government arrears with banks, the reprivatization of nationalized banks, the liquidation of assets of closed and intervened banks, and the strengthening of the capital base of private banks. The authorities plan to create a fund to promote bank recapitalization and help FOGADE meet any new obligations with depositors. Also, minimum portfolio requirements and subsidized interest rates to agriculture are to be abolished in 1997. The Central Government will regularize and service its debts with the Central Bank. This will help the Central Bank improve its financial position and the stock of its securities is projected to decline from 5 percent of GDP in 1995 to 2 percent of GDP in 1996 and to 1 1/2 percent of GDP in 1997.

IV. Recent Developments in Trade Policy

1. Introduction

During the 1970s and 1980s, Venezuela’s trade policies were set in the context of an effort to promote industrialization through import substitution and government control of most of the country’s industrial structure. The strategy involved sizable support in the form of direct and indirect subsidies to domestic producers and a high degree of border protection. There were up to 41 different rates, with peaks of up to 100 percent, and many exemptions. Effective rates were as high as 940 percent. Nontariff barriers (such as mandatory licenses for most imports) constituted additional elements of this regime. The anti-export bias inherent in this protective regime was offset in part by subsidized credit to exporters, and export bonuses to nontraditional exports.

Following the sharp fall of world oil prices in 1986, the Government’s capacity to provide credit and fiscal support to exporters was greatly diminished and a process of progressive market opening and rationalization of trade policy was initiated. In 1989 the authorities undertook a comprehensive trade liberalization in the context of the stabilization program adopted at that time. This involved a major restructuring of tariff rates (reducing the average tariff from 31 percent to less than 12 percent and the maximum rate to 20 percent), and the elimination of import licenses on virtually all items. As part of this policy, Venezuela joined the GATT in 1990. Subsequently, these reforms were consolidated, and regional and bilateral trade agreements were expanded. This section describes the evolution of Venezuela’s trade policies in the context of overall developments in trade, and the main features of current policies.

2. Features of tariff policy

• The structure of Venezuela’s tariffs is shown in Table 2. Since 1992 Venezuela has applied the four-tier Common External Tariff (Arancel Externo Común) or CET of the Andean Group, with rates of 5, 10, 15, and 20 percent (some goods are exempt). Virtually all duties are ad valorem, levied on the c.i.f. value of imports. In the context of the industrial policy of the Andean Group--which has as a main objective the promotion of domestic value added--the tariff structure is characterized by substantial escalation, where goods at higher stages of processing are generally subject to higher tariffs relative to those at lower stages of processing.

Table 2.

Venezuela: Trade Measures Applied in Venezuela by ISIC Category

(In millions of U.S. dollars and percent)

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Source: WTO, Trade Policy Review: Venezuela, Report by the Secretariat, January 1996.

• The exemptions to this tariff structure relate mainly to the industrial policy objectives of the Andean Group, the most notable example being the motor vehicle industry. Under a unified automobile industrial policy within the Andean Pact in effect since January 1994, imports of motor vehicles are subject to a common external tariff rate which varies according to the type of vehicle assembled. The agreement prohibits the import of used and old-model vehicles. At an average 14 percent, the tariffs for the industry as a whole are higher than the average for manufactured goods (12 percent), and certain vehicles are subject to the highest rate in Venezuela’s tariff schedule (35 percent), although this maximum tariff was reduced somewhat from 40 percent in July 1995. In addition, under a regime favoring the assembly of vehicles in Andean Group countries, imports of motor vehicle components and parts that are subsequently assembled in the region are subject to a highly reduced tariff rate (3 percent). Effective protection for the domestic motor vehicle industry is thus substantially higher than is evident from nominal rates, and the scheme provides an implicit subsidy to the export of assembled motor vehicles.

• Although many of the incentives to agriculture have been reduced or eliminated, this sector continues to be characterized by a larger degree of protection than other parts of the economy, mainly in the form of tariff surcharges and variable import levies. Tariff surcharges are applied to a number of agricultural products, including salads, cheeses, yellow maize, orange juice, and certain mineral waters.

With the objective of stabilizing the domestic price of agricultural products, variable import levies have been applied to imports of certain agricultural items since 1991. In the context of the harmonization of agricultural policy within the Andean Group, in July 1995 this system was replaced by the Andean Price Band System which applies to imports of certain agricultural products originating outside the Andean Group. The system operates by adding an additional ad valorem levy to the common external tariff rate whenever a reference price falls below a floor, or subtracting from that rate if the reference price exceeds a ceiling. The floor and ceiling prices are linked both to the moving average and the spread of prices prevailing in world markets during the previous five years.

• Reduced tariffs ranging from 0 to 5 percent are applied to inputs, raw materials and capital goods not produced or available in the Andean sub-region.

3. Regional trade agreements

Since the late 1980s, the strengthening and expansion of regional and bilateral agreements have been important elements in Venezuela’s trade policy. A free trade agreement was reached with Colombia and Ecuador in 1992 under the Andean Pact which involved the elimination of nontariff and tariff barriers on bilateral trade and the introduction of the simplified CET described above; a full common market is envisaged within the next four years. In April 1993 a free trade agreement was reached with Chile that contemplates the gradual reduction and coordination of the tariff structure by 1999. In January 1995 Colombia, Mexico, and Venezuela signed an agreement under which tariffs are to be reduced by 10 percent a year with the aim of achieving a full liberalization of trade among the three countries by the year 2004. The agreement currently covers all manufactured goods excluding automotive, textiles, and clothing, as well as government procurement, investment, services (financial, telecommunications, transport, professional), and intellectual property; agriculture is currently not included.

Bilateral arrangements also exist with individual Central American Common Market (CACM) members, Latin American Integration Association (LAIA) partners, MERCOSUR countries, and Cuba. Also, Venezuela provides unilateral preferential treatment to certain imports from CACM and Caribbean Common Market (CARICOM) countries. Negotiations recently have been initiated with MERCOSUR on a free trade agreement in coordination with other Andean Group countries. In early 1995 the European Union (EU) extended generalized system of preferences tariff preferences to Venezuela, similar to those provided to several other Latin American countries. It consists of the full suspension of the common customs tariff duties on EU imports of certain industrial goods for the period 1995 to 1998.

4. Recent developments in external trade

The economic reforms initiated in 1989 have provided a strong impetus to trade in Venezuela. Since 1990 non-oil exports have risen at an average annual rate of nearly 10 percent both in volume and U.S. dollar terms, after a period of virtual stagnation during most of the 1980s. Part of the growth in nontraditional exports has likely been spurred by the steep fall in domestic demand in 1989 and early 1990 and more recently since 1993. However, the overall resiliency of the growth trend in the face of adverse factors during these years (such as the loss in competitiveness stemming from a real effective appreciation, and weak world demand during part of this period) suggest that trade reforms have played a role in the advances in this sector.

As a result of the overall buoyancy of non-oil exports in recent years, the share of this sector in total exports increased from around 15 percent in 1987 to 26 percent in 1995 (Chart 3). Growth has been particularly notable for metal products, plastics, glass, motor vehicles, and petrochemicals, although the gains have been fairly broad-based.

CHART 3
CHART 3

VENEZUELA Exports by Country of Destination 1/

(In percent of total)

Citation: IMF Staff Country Reports 1996, 087; 10.5089/9781451840070.002.A001

Sources: Central Bank of Venezuela; and Fund staff estimates.1/ Excludes oil and iron.

The strengthening of bilateral trade agreements also has spurred strong export growth in the non-oil sector. Exports to Colombia and other Andean Pact countries have risen substantially in recent years. The share of these countries in Venezuela’s total non-oil exports has nearly tripled since 1990 to over 35 percent in 1995, and Colombia has surpassed the United States as the most important country for Venezuela’s non-oil exports (see Chart 3).

5. Policy issues

Under the reforms initiated in 1989, important efforts were made to reduce the anti-export bias of previous policies. However, a number of measures and characteristics of the current regime result in preferred treatment for certain manufacturing industries and in the maintenance of intersectoral distortions, which likely hamper resource allocation compared with a more neutral structure of trade and industrial policies. These special policies relate to motor vehicles and agriculture (discussed above), and the bias toward production of final demand goods resulting from tariff escalation. In the nontrade area, certain industries benefitted from the implicit subsidies resulting from energy pricing policy; for example the steel industry benefitted from low-cost natural gas and electricity, while aluminum benefitted from relatively inexpensive electricity and bauxite.

It is difficult to estimate the welfare implications of Venezuela’s increasing reliance on regional trade agreements. These agreements could result in trade diversion; for example, in the automobile industry, as a result of the tightening of domestic component requirements. However, it is likely that these agreements will reduce or even eliminate monopoly power in the region, allow for a better exploitation of economies of scale, increase investment opportunities, and contribute to the diversification of domestic production.

V. Social Indicators

1. Introduction

During the last three decades, Venezuela has registered a remarkable improvement in social conditions as measured by the standard indicators of social development. Between 1967 and 1994, the infant mortality rate was halved, from 60 to 32 per thousand live births, while life expectancy at birth increased from 64 to 71 years. In 1975 there was 1 physician for every 1,100 persons and 1 hospital bed for every 3,000 persons--by 1990 these numbers had been reduced to 635 and 370, respectively. The percentage of children aged less than 5 years old suffering from malnutrition declined from 10 in 1982 to 6 in 1990; and the percentage of population having access to safe water rose from 75 in 1970 to 90 in 1991 (for the population in rural areas, the increase was especially dramatic--from 40 to 90 percent). Improvements were also made in education, as evidenced by the fall of the illiteracy rate from 24 percent in 1971 to 9 percent in 1994; between 1970 and 1991, the primary school enrollment rate rose from 94 percent to 99 percent, while the secondary school enrollment rate remained roughly constant at about 33 percent.

Two important qualifications need to be added. First, as pointed out by the World Bank, 1/ at the end of the 1980s many of the above-mentioned social indicators showed Venezuela still lagging behind other upper-middle-income Latin American countries. 2/ Second, the improvement in social indicators masks a worrisome increase in poverty levels and the exacerbation of inequalities in income distribution.

2. Incidence of poverty

The deterioration in income levels which began in the early 1980s in conjunction with the decline in oil prices stands in sharp contrast to the positive trend in social indicators. The proportion of households below the poverty line, which stood at 25 percent in 1970, dropped slightly to 22 percent in 1981 but then rose to 33 percent in 1992. As poor households have on average a higher number of members, the proportion of individuals below the poverty line was even higher, rising from 18 percent in 1980 to 38 percent in 1992 and an estimated 48 percent in 1995.

This increase was driven mainly by a rising incidence of poverty in urban areas, following the rapid urbanization--the proportion of the population classified as urban dwellers rose from 70 percent in 1965 to 92 percent in 1994. The increase in migration to large cities in every part of the country outpaced the capacity of the Government to provide services, and the newcomers settled in crowded settlements with precarious sanitary conditions. While the share of rural households below the poverty line remained roughly constant at 36 percent between 1970 and 1992, that of urban households increased from 20 percent to 32 percent over the same period. The difference between poverty trends in urban and rural areas can be seen even more clearly from the proportion of households below the indigence line, which fell from 19 percent in 1970 to 10 percent in 1992 in rural areas, but increased from 6 percent to 10 percent over the same period in urban areas.

There were two main factors behind the increase in poverty levels: first, a reduction in employment opportunities; the unemployment rate, which averaged 5-6 percent in the second half of the 1970s rose to 13 percent in 1984-85, and thereafter oscillated between 8 percent and 10 percent. Second, a sharp fall in average real wages and incomes. Between 1990 and 1995, the minimum wage 1/ in the urban sector dropped in real terms by 30 percent for public employees and by 5 percent for private employees. Both average income per worker and average income per household suffered a cumulative fall in real terms of about 60 percent between 1984 and 1995. This fall in incomes brought the average Venezuelan closer to poverty: as a multiple of the per capita poverty line income, average household income fell from 2.90 in 1981 to 2.30 in 1992 in the urban sector and from 2.00 to 1.93 in the rural sector.

The drop in average wages and incomes was accompanied by increasing inequality in income distribution. Between 1979 and 1990 the income share of the richest 20 percent of households rose from 48 percent to 58 percent, while the share of the poorest 40 percent of households dropped from 15 percent to 11 percent and that of the poorest 20 percent of households from 5 percent to 4 percent.

3. Trends in social expenditures

The level of social expenditure in Venezuela has traditionally been relatively high. During the 1950s and 1960s, the Government increased steadily outlays on health and education, laying the basis for the improvement in the social indicators discussed above. The share of spending on education in the central government budget increased from 6 percent in 1950 to 7.8 percent in 1961 and 14.8 percent in 1971; the share of the health rose from 6.3 percent in 1950 to 6.6 percent in 1961 and 7.4 percent in 1971.

Social spending remained high during the following two decades, but its effectiveness was impaired by high administrative costs and the predominance of generalized--rather than focused--subsidy programs. Total social expenditure, which stood at around 8 percent of GDP during 1985-88, fell below 7 percent in 1989, but then recovered to 9 1/2 percent of GDP in 1991-92 before declining to about 8 percent of GDP in 1993-95 (Table 3).

Table 3.

Venezuela: Social Expenditure, 1984-95 1/

(In percent of GDP)

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Source: Central Budget Office.

On accrual basis.

4. Social safety net

To improve the efficiency of social spending and to deal effectively with the impact of its structural reforms program, in 1989 the Perez administration introduced its “Plan Against Poverty” (Plan de Enfrentamiento de la Pobreza, PEP) aimed at gradually phasing out most indirect subsidies and replacing them with well-targeted direct subsidies. Between 1989 and 1992, a number of programs related to health, nutrition, and education were developed within the context of the PEP. Some of these programs were in fact direct cash or in-kind subsidies, such as a cash subsidy to poor families with children (the beca alimentaria), the free distribution of school clothing and supplies in poor school districts, and a preventive and curative health program including a nutritional assistance component (the Plan Alimentario Materno-Infantil, PAMI)

Overall, the PEP played a very important and positive role by putting in place a number of social safety net mechanisms that did not exist before 1989, and that can now act as rapid intervention devices. Nevertheless, the Venezuelan social safety net continued to suffer from several shortcomings. First, it was fragmented in a large number of overlapping programs managed by different government agencies--with little coordination. Second, there are structural weaknesses in some crucial components of the social safety net, such as long delays in the granting of pensions to eligible retirees and limited unemployment compensation. Finally, indirect subsidies such as controlled prices, very low gasoline prices, and low utility rates continued to play a significant role and to generate allocative distortions.

5. Current reform efforts

In the context of the new economic adjustment program, the Government is implementing measures aimed at strengthening the social safety net and eliminating distortions. These include: (i) increased timely support to the poorest social groups through higher budgetary allocations to existing programs; (ii) reforms of the social security and unemployment compensation systems; (iii) the gradual increase of domestic fuel prices to international levels; and, (iv) the gradual elimination of remaining price controls.

Priority is being given to improving and extending existing programs, to reach the targeted groups as quickly as possible. The short-term objectives are to soften the impact of the adjustment on the poorer families, and to contain social tensions so as to create a climate conducive to a rapid economic recovery. Targeted groups include the poorest strata of the population, women (during the pregnancy and the nursing period), children, and the unemployed.

The most important program is the family subsidy (subsidio familiar, created by consolidating the beca alimentaria with two in-kind benefits). The family subsidy is a cash transfer to poor families with children, administered through the school system. Benefits are distributed in public schools located in marginal areas, and are paid only to families whose children are enrolled and regularly attend classes--which creates an important side benefit by stimulating school attendance. The program covers about 2 million families, and the Government intends to increase outlays by about 300 percent over 1995 (by a combination of increased budgetary allocation and clearance of arrears on payments). This program constitutes the Government’s main instrument to provide immediate relief to the most vulnerable households. In order to provide support to the elderly, many of whom do not have any connection to the school system, the Government doubled old age pensions in April 1996.

Three programs are designed to provide nutritional support to children. The most important one arises from the consolidation of two previously existing programs (school meal and glass of milk for schoolchildren), and will be immediately effective, targeting 700,000 children aged between 2 and 14 years.

Schemes for the care of children are another important component of the social program. Under the first scheme (hogares de cuidado diario, of which there are currently 21,000), one mother baby-sits full-time eight children in her own house, while under a second scheme (multihogares de cuidado diario) three mothers jointly baby-sit 30 children in a space provided by the Government. The programs target children aged 0 to 6 years whose mothers are single or whose fathers are unemployed, and play an important role in facilitating the mothers’ entrance into the labor force.

Programs in the area of health include subsidized basic medicines to the poor, improvements in the supply of medicines and surgical equipment to hospitals, and the strengthening of the PAMI, which combines educational support for the mothers with nutritional support for the children.

Three new programs will be aimed at stimulating employment: a program of public works, a program aimed at facilitating the re-entry into the labor market of those becoming unemployed because of restructuring in the public sector, and a program which will aim at facilitating the entry into the labor market of young people (15 to 27 years old).

STATISTICAL APPENDIX

Table 4.

Venezuela: Selected Macroeconomic Indicators

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Sources: Statistical Appendix Tables 7, 10, 23, 24, 25, 32, 43, and 46.

Excluding revenue from privatization (treated as a financing item).

Table 5.

Venezuela: Aggregate Demand and Supply at Current Prices

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Source: Statistical Appendix Table 8.
Table 6.

Venezuela: Sources and Uses of National Savings

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Sources: Central Bank of Venezuela; and Fund staff estimates.

On an accrual basis; includes nonfinancial public enterprises and local governments.

Includes net capital transfers.

Table 7.

Venezuela: Real Gross Domestic Product by Sector

(Annual percentage change)

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Sources: Statistical Appendix Table 9; and Fund staff estimates.
Table 8.

Venezuela: Gross Domestic Product by Final Expenditure

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Sources: Central Bank of Venezuela; and Fund staff estimates.

On an accrual basis; includes nonfinancial public enterprises, local governments, capital transfers, and net lending.

Table 9.

Venezuela: Gross Domestic Product by Sector of Origin

(In billions of bolivares)

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Source: Central Bank of Venezuela.

Adjustment reflecting the unified rate.

Table 10.

Venezuela: Gross Domestic Product: Shares by Sector of Origin

(In percent)

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Source: Central Bank of Venezuela.

Includes the shares of the subsectors and the adjustments for exchange rate unification and import taxation.