Recent Economic Developments

This paper reviews economic developments in Venezuela during 1995–97. The overall public sector balance shifted from a deficit of 7 percent of GDP in 1995 to a surplus of 7¼ percent of GDP in 1996. This massive swing was owing to a major increase in the underlying oil surplus, a decline in the non-oil underlying deficit, and the fact that virtually no financial assistance was provided to the banking system, compared with the cumulative 16½ percent of GDP provided in 1994–95 in the context of the banking crisis.


This paper reviews economic developments in Venezuela during 1995–97. The overall public sector balance shifted from a deficit of 7 percent of GDP in 1995 to a surplus of 7¼ percent of GDP in 1996. This massive swing was owing to a major increase in the underlying oil surplus, a decline in the non-oil underlying deficit, and the fact that virtually no financial assistance was provided to the banking system, compared with the cumulative 16½ percent of GDP provided in 1994–95 in the context of the banking crisis.

Venezuela - Basic Data

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Includes central bank reserve liabilities.

Adjusted to account for deposits that were kept off-balance through January 1995.

In relation to liabilities to the private sector at the beginning of the period, excluding the effect of exchange rate variations.

Comprises operations of the central government (including extrabudgetary operations), the Venezuelan Investment Fund (FIV), the National Petroleum Company (PDVSA), the nonfinancial public enterprises, the Social Security Institute (IVSS), the Deposit Guarantee Fund (FOGADE), and the Exchange Differential Compensation Funds (FOCOCAM/FICAM).

Includes privatization.

Includes direct investment.

Includes valuation changes.

I. Overview of Recent Economic Developments

A. Introduction

1. During 1991–95 the Venezuelan economy was subject to declining oil prices, political instability (1992–93), and a major banking crisis (1994–95). The adverse effects of these shocks were magnified by inadequate policy responses. By early 1996 the economic situation was characterized by accelerating inflation, pressures on the net international reserves (NIR) of the Central Bank of Venezuela (BCV), declining non-oil GDP, and waning confidence.

2. In April 1996 the government began to implement a program of adjustment and reform (the Agenda Venezuela) aimed at reducing inflation, restoring confidence, and improving resource allocation, which was subsequently supported by a 12-month Stand-by Arrangement from the Fund. Under the program, the economy was liberalized substantially, and developments were generally favorable in 1996. However, following the initial stabilization effort, fiscal and incomes policies turned expansionary in 1997, and monetary policy was eased in the closing months of the year. As a result, progress in reducing inflation was limited. Economic activity recovered in 1997, fueled by an increase in expenditure. The external position was strong, but began to weaken in the second half of 1997. A steep fall in oil export prices in late 1997 and early 1998 contributed to a deterioration in market sentiment and the bolivar came under downward pressure. Although interest rates were raised in January 1998, during the first four months of the year there was substantial intervention by the central bank in the foreign exchange market, and NIR declined markedly.

3. Progress in structural reform has been significant, but less than had been originally envisaged. Privatization has resumed, the opening of the oil sector to private participation has been intensified, and labor market distortions have been reduced. Although problems still persist, conditions in the banking system have improved, and progress was made in strengthening banking supervision.

B. Macroeconomic Policies

Fiscal policy

4. The public finances strengthened markedly in 1996. The overall public sector balance shifted from a deficit of 7 percent of GDP in 1995 to a surplus of TA percent of GDP in 1996. This massive swing was due to a major increase in the underlying oil surplus,1 a decline in the non-oil underlying deficit (the main fiscal component under the control of the authorities), and the fact that virtually no financial assistance was provided to the banking system, compared to the cumulative 16½ percent of GDP provided in 1994–95 in the context of the banking crisis.

5. The performance of the oil sector in 1996 was exceptionally strong. Oil prices rose sharply to their highest level since 1991, and oil output continued to increase as a result of the investment drive initiated earlier in the decade. In early 1996 the oil sector was opened further to private participation in the form of profit-sharing agreements with PDVSA. Amidst keen investor interest, eight fields were auctioned to private oil companies, which have joined PDVSA in their exploration and development activities; the auction yielded ½ percent of GDP in revenue.

6. The underlying non-oil deficit was reduced substantially in 1996. The revenue effort centered around two measures: domestic gasoline prices at the retail level were raised significantly in April 1996,2 and the basic rate of the value-added tax was increased from 12½ percent to 16½ percent, while the tax registration threshold was lowered.3 Despite a significant increase in spending on the social safety net and higher transfers to local governments, non-oil public sector expenditure (excluding assistance to banks) fell because of lower interest obligations.4,5

7. The stance of fiscal policy became strongly expansionary in 1997, and the public finances deteriorated markedly, with the underlying public sector balance (excluding nonrecurrent operations) shifting by 8½ percentage points of GDP to a deficit of 1½ percent of GDP. The overall public sector surplus deteriorated by less (5½ percentage points of GDP), because of significant nonrecurrent revenues.

8. The underlying non-oil fiscal deficit widened by 2½ percentage points of GDP in 1997, as higher revenues and lower interest costs were not sufficient to offset a surge in primary expenditure equivalent to 5¼ percentage points of GDP. Wage awards on the order of 117 percent resulted in a rise in the central government wage bill of 1½ percentage point of GDP. The massive wage increases spawned large increases in wage-related transfers. Total transfers to local governments surged by 2¼ percentage points of GDP, while transfers to decentralized public sector agencies rose by ½ percentage point of GDP. Non-oil revenue rose mainly as a result of the full-year effect of the increase in the value-added tax rate, improvements in customs administration, and the increase in aggregate demand.

9. The underlying oil surplus dropped sharply in 1997, mostly as a result of the real appreciation of the currency. Oil exports in U.S. dollars changed little from the previous year, as a large rise in export volume was offset by weaker export prices. In midyear, PDVSA auctioned 18 marginal and inactive fields for private operation. The auction yielded 2½ percent of GDP in revenue from operating rights, surpassing the industry’s expectations.

10. Legislation approved by congress in late 1996 increased revenue earmarking. First, the new legislation established that a share of 15–20 percent of revenues from the value-added tax must be transferred every year to an extrabudgetary fund for the decentralization of investment.6 Second, beginning in 1998, a share of oil royalties should be transferred to the states to finance capital spending. The revenue-sharing coefficient was set at 20 percent in 1998, but rises to 25 percent in 1999 and 30 percent in 2000. The new legislation entails an increase in revenue earmarking equivalent to about 1½ percent of GDP a year by 2000. However, the effect of the additional revenue earmarking on central government finances could be mitigated by a reduction in central government capital expenditure.

11. The finances of the Social Security Institute (IVSS) remained under severe stress in 1996–97. In particular, there was a significant decline in the real value of revenues from social insurance contributions associated with the fact that part of earnings (including bonuses) remained outside the taxable base.7 However, in 1998 social security revenue is expected to benefit from the conversion of bonuses into taxable wages arising from the reform of the severance payments system (see below).

Credit and exchange rate policies

12. For most of the period between mid-1996 and early 1998, exchange rate policy was aimed at maintaining a relatively stable nominal exchange rate, which constrained the scope for monetary policy. Nevertheless, through September 1997 the BCV engaged in substantial sterilization operations with its stabilization bonds (TEMs) in an attempt to contain the growth of liquidity arising from the domestic operations of the public sector financed with oil revenue and from the accumulation of NIR.

13. As noted above, in April 1996 exchange controls on current and capital transactions were abolished, the exchange rate was unified under a temporary managed float, and interest rates were liberalized. Capital inflows soon emerged, and the exchange rate quickly stabilized.8 In July the BCV announced the establishment of a system of exchange rate bands around a central rate. The initial central rate was set at the then prevailing market exchange rate, and it was announced that during the rest of 1996 the central rate would be depreciated by 1½ percent a month against the U.S. dollar. The width of the bands around the central rate was set at 7½ percent each way.

14. During the remainder of 1996 there were recurrent episodes of upward pressure on the bolivar associated with capital inflows. However, the nominal exchange rate remained quite stable, as the BCV chose not to make use of the room for exchange rate flexibility afforded by the system of bands. This policy contributed to high variability in liquidity conditions and interest rates; the latter, however, although in line with interest rate parity given exchange rate expectations, remained negative in real terms. BCV sales of foreign exchange on the interbank market were for the most part quite modest.9

15. At the beginning of 1997 the BCV carried out a one-step revaluation of the central rate of the exchange rate band and reduced slightly the slope of the central rate. During the rest of the year, the BCV continued to maintain a policy aimed at exchange rate stability, and the bolivar depreciated by only 6 percent against the U.S. dollar; in real terms the currency appreciated by 37 percent to its highest level in the last ten years. Base money contracted early in the year because of the intensification of open market operations and increased sales of foreign exchange in the interbank market. However, liquidity surged in midyear due to a drawdown of treasury deposits at the BCV associated with the weakening fiscal position. In an attempt to rein in the strong growth in liquidity, in July-August the BCV increased reserve requirements by a total of 5 percentage points and resorted to additional open market sales. At the same time, the central parity of the exchange rate band was revalued again.

16. Monetary policy was eased markedly in the last few months of 1997, when growing concerns about the quasi-fiscal losses arising from sterilization prompted the BCV to start redeeming its stabilization bonds. At the same time, the BCV increased its sales of foreign exchange.

17. Monetary aggregates continued to expand at a rapid pace during 1997—base money by 55 percent (excluding the effect of the higher reserve requirements), and broad money by 62 percent. After falling by 9 percent in real terms in 1996, credit to the private sector surged during the year (by 66 percent in real terms, with particularly large increases in consumer and mortgage lending) fostered by negative real interest rates and by increased competition in the banking sector prompted by growing foreign participation.

18. Between end-1995 and September 1997, the Caracas stock exchange index rose by 200 percent in U.S. dollar terms, and Venezuela’s risk premium (as measured by the average stripped spread of discount Brady bonds over equivalent U.S. bonds) fell by about 1,600 basis points. The turbulence in international financial markets in the last few months of 1997 associated with the financial crisis in Asia initially had little impact on domestic financial markets. However, a steep fall in oil export prices at the turn of 1997–9810 prompted a deterioration in market sentiment as downside risks were perceived for the external accounts and the public finances, the bolivar came under sustained downward pressure, and the BCV increased substantially its sales in the foreign exchange market. At the same time, the stock market declined sharply, and Venezuela’s risk premium increased by about 200 basis points.

19. Faced with growing pressure in the foreign exchange market, in January 1998 the central bank raised interest rates, and allowed a somewhat greater degree of exchange rate flexibility. During the first four months of the year the bolivar depreciated at an annualized rate of 20 percent. Nevertheless, NIR declined by US$2.4 billion during the period.

C. Main Macroeconomic Developments

Output and expenditure

20. Total GDP contracted by ½ percent in 1996. Non-oil GDP fell by 3 percent, with activity being particularly weak in manufacturing and trade, which contracted by 5 percent and 9½ percent, respectively. At the same time, oil GDP grew by 7¾ percent. Unemployment rose by 1½ percentage points in 1996, to 11¾ percent of the labor force, and the share of the labor force employed in the informal sector remained high at 49 percent.11

21. Domestic demand fell in 1996, partly as a result of the adjustment measures introduced in the second quarter. Purchasing power was eroded by the fall in real incomes, resulting in a contraction in consumption. Private investment declined, but public sector capital formation held up relative to the previous year largely because of strong investment activity in the oil sector. The real external balance strengthened on account of higher oil export volume and subdued import demand.

22. Total GDP grew by 5 percent in 1997. Oil GDP continued to expand vigorously, while non-oil GDP grew by 3¾ percent. The non-oil economy emerged from recession in the early months of 1997, and the recovery in activity gathered momentum and became more broadly based in the second quarter. Growth in the nontradable sector was particularly strong, especially in activities such as construction and trade. The recovery of non-oil output was fueled by an increase in domestic expenditure associated with higher real wages, the sharp increase in credit to the private sector, the expansionary fiscal policy stance, negative real interest rates, and strong investment in the oil sector. The unemployment rate rose by 1 percentage point in the first half of 1997 relative to the same period in 1996, but it declined somewhat in the second half of the year.

Prices and incomes

23. The annualized rate of inflation increased to 135 percent during the first quarter of 1996, mainly as a result of the steep devaluation of the currency in late 1995. The monthly rate of price increase peaked in May 1996, reflecting the exchange rate adjustment in April, the lifting of price controls, major increases in fuel prices, and other corrective price adjustments. Inflation dropped during the second half of the year, but remained above the government’s objectives. Consumer prices more than doubled during 1996 as a whole.

24. Effective February 1996, the government raised the statutory minimum income (comprising salaries and bonuses) by about 65 percent by means of an increase in bonuses. However, the statutory minimum wage—last raised in 1994—was kept unchanged. The real statutory minimum income fell by about 13 percent in 1996, while the average real wage declined by 22 percent.

25. Inflation continued to decline gradually in the first half of 1997—with the annualized rate of inflation falling to 30 percent—but the downward trend came to a halt toward midyear. Inflationary pressures intensified in the second half of the year due to the expansionary stance of financial policies, and the annualized rate of inflation rose to 44 percent. For 1997 as a whole, consumer prices rose by 37½ percent. Inflation remained high at 36 percent on an annualized basis during the first four months of 1998.

26. Following the reform of the severance payments system (see below), the statutory minimum wage was raised by 400 percent in July 1997 (retroactive to May) to the equivalent of about US$150 a month. The new minimum wage subsumed all existing statutory bonuses, which were abolished, and hence the effective increase in the minimum income was about 45 percent. In early 1998 the minimum wage was raised again by 33 percent, effective May 1998.

External developments

27. Developments in the external current account in 1996 were dominated by a very large increase in oil exports and weak demand for imports. The current account surplus surged from 3½ percent of GDP in 1995 to 13½ percent of GDP in 1996. The value in U.S. dollars of oil exports reached its highest level since 1991, as oil prices drifted strongly upward during the year and oil export volume expanded vigorously. Imports fell, reflecting sluggish domestic demand and the depreciation of the bolivar. At the same time, the capital account deficit declined. Direct foreign investment rose markedly because of inflows associated with privatization and larger foreign private involvement in the oil sector, and the public sector continued to repay external debt on a net basis. Net short-term private portfolio outflows were reduced relative to previous years as a result of improved confidence and relatively high interest rates in U.S. dollar terms (given exchange rate expectations). The stock of NIR of the BCV doubled during 1996 to US$12 billion.12 The public sector settled external arrears amounting to about US$0.6 billion.

28. The external current account surplus fell markedly in 1997 (to 6¼ percent of GDP) as private demand recovered, the non-oil fiscal deficit widened, and the bolivar appreciated in real terms. The value of oil exports was broadly unchanged as lower oil export prices were offset by a strong increase in oil export volume, and imports rose by 29 percent. Direct foreign investment surged on account of strong private investment in the oil sector—including inflows associated with the sale of operating rights—and privatization. The current account surplus and long-term capital inflows were offset partly by sizable short-term private portfolio outflows, particularly in the latter part of the year, as confidence weakened and interest rates fell.13 The NIR of the BCV rose by US$3½ billion during 1997.

29. A debt redemption fund was approved in December 1997. Its sources of financing are net privatization proceeds and excess oil revenues accruing to the central government (relative to budgeted amounts) due to higher than anticipated oil export volumes.

D. Structural Policies


30. The government sold 40 percent out of its remaining 49 percent stake in the telecommunications company (CANTV) in November 1996.14 The proceeds from the sale amounted to about US$1 billion, of which US$240 million were raised from sales to Venezuelan residents.

31. Preparatory work for the privatization of the large steel and aluminum industrial concerns in the Guayana region under the CVG holding15 was undertaken in 1996 and early 1997. Congressional approval for the sale of the state-owned steel company SIDOR16 was secured in December 1997, and the enterprise was auctioned later that month for US$1.2 billion. The government expects to sell the aluminum companies by mid-1998. Preparatory work is underway for the sale of some regional electricity distribution companies in 1998.

The banking system17

32. Although problems still persist, conditions in the banking system—as measured by solvency ratios and by indicators of portfolio quality—have improved, although some deterioration was observed in 1997 compared to 1996. Reprivatization and increased foreign participation have increased competition in the financial system, and banking supervision has improved. However, basic underlying banking problems—such as high operational costs—persist, and there is a need for further substantial strengthening of prudential regulation and supervision.

33. Financial assistance to the banking system in 1996–97 was negligible. FOGADE (the deposit insurance agency) sold all the banks nationalized in 1994–95 and auctioned a number of companies, properties, and other banking assets which had been taken over during the banking crisis.

Reform of the severance payments and social security systems

34. As consensus developed on the need to overhaul the costly and outdated severance payments system, in June 1997 congress approved a reform of the Labor Law in line with proposals on severance payments reform put forward by a commission of business, labor, and government representatives.18 The reform eliminated the double indexation features of the old system and reduced uncertainties and distortions in the labor market. However, it did not lower labor costs significantly and, under certain conditions (such as low inflation), the new system could be more costly than the old one.

35. The reform of the severance payments system has significant medium-term fiscal costs. Nonrecurrent costs arise from the need to settle the stock of severance liabilities accumulated under the old system (including capitalized interest), which in the case of the general government19 are provisionally estimated at about 8½ percent of 1997 GDP.20,21 Recurrent fiscal costs stem from the conversion of most remaining bonuses into regular salaries in 1998, (which gives rise to additional labor costs) and from the need to make annual severance payments equivalent to two months of employees’ salaries.

36. A new social security law was approved by congress in late 1997, setting out a blueprint for a new system comprising three subsystems: old-age pensions, health insurance, and unemployment insurance. The operational features of the new subsystems are still under discussion, and will be set out in separate bills. The new pension system would be mixed, involving a state-run “solidarity” fund which will provide a guaranteed minimum pension partially financed with transfers from the budget, and a privately managed defined-contributions component. Current and future benefits accruing to existing pensioners and to those who may become eligible within the next two years will be financed by the state. Health care provision will be separated from health insurance. Participants’ contributions will finance the purchase of basic insurance plans from private insurance companies; these plans will allow contributors to receive health care services from authorized service providers. During the next two years, health care facilities currently owned or administered by the IVSS will be sold or transferred to other entities, including local governments. At the same time, a new unemployment insurance fund will be created, financed by workers’ contributions supplemented by government transfers, if required.

Social safety net22

37. The resources allocated to the social safety net were significantly enlarged in 1996, rising from ½ percent of GDP in 1995 to 1½ percent of GDP. The most important initiative was the consolidation of a number of existing benefits into a new benefit, the “family subsidy,” which was doubled in April 1996. At the same time, a transportation subsidy was introduced to forestall an increase in urban and suburban transportation fares following the adjustment of fuel prices, and in May 1996 old age pensions paid by the IVSS to pensioners with no other sources of income were doubled. Spending on the social safety net declined by ¼ percentage point of GDP in 1997 as some benefits lagged behind inflation.

38. The social safety net helped mitigate the impact of the adjustment measures implemented in 1996 on a number of vulnerable social groups. Nonetheless, the safety net suffers from important shortcomings. Some programs are not well targeted; there is a need to reach poor households not covered by existing programs; a number of overlapping programs could be consolidated; and the cost effectiveness of some programs needs to be enhanced. Presently, the government is implementing initiatives to update social statistics which should allow a better targeting of social assistance.

Public sector restructuring and governance

39. Some preliminary steps have been taken toward public sector reform. In particular, a presidential committee for the restructuring of the central administration has been set up, to oversee the restructuring of public sector entities, the elimination of redundant agencies, the revision of systems and procedures, the privatization of institutions and functions, and the decentralization of activities to the states. Moreover, ministries have begun to implement restructuring plans involving downsizing and decentralization.

40. Also, some initiatives are being implemented to improve governance. In particular, congress has approved legislation reforming the Penal Code, aimed at improving the judicial security, simplifying the trial process and enhancing its transparency, and improving the enforceability of contracts. In addition, with technical assistance from the World Bank, the government is implementing a plan to improve judicial infrastructure and strengthen the training of judges. In the area of customs, measures are being taken to reduce evasion, and congress is expected to approve a new customs law that will modernize customs administration.

The electricity sector

41. Over the last few years, state-owned utilities in the electricity sector have registered deficits and have relied on transfers to finance capital expenditure and meet debt service obligations. The deficits have been due to inadequate tariff levels, excessive employment, and weak management. At the same time, investment in transmission and distribution has been insufficient, and the lack of a transparent regulatory environment has affected the efficiency of the sector and hampered privatization initiatives.

42. In the absence of adjustments since 1994, by mid-1996 electricity tariffs had fallen well behind the increase in costs, and residential tariffs (which are cross subsidized by higher commercial and industrial tariffs) appeared to be particularly out of line. To address these problems, electricity rates were raised on three occasions in 1996, with cumulative increases ranging from 60 to 135 percent depending on the utility. The last tariff increase in 1996 raised residential charges by more than other tariffs, as a first step toward reducing cross subsidies. In June 1997, following cost studies carried out by the utilities, tariffs were increased further by about 25 percent and cross subsidies were reduced. Subsequently, monthly increases averaging some 5 percent a month were implemented through end-1997. In April 1998 the government took the decision to freeze tariffs for the remainder of the year.

43. In April 1997 the government submitted a draft electricity law to congress aimed at improving the regulatory framework. The draft law seeks to establish an independent regulatory body, separating the functions of the state as owner of utilities and as regulator of the sector. It also seeks to remove obstacles for the privatization of utilities in the sector, inter alia by clarifying the division of responsibilities between the central government and the municipal authorities regarding the concession of electricity services. As part of the initial moves to restructure the sector, CADAFE23—the main electricity distribution company—has taken measures to rationalize employment and improve invoicing and collection procedures.

The domestic fuel market

44. Legislation enacted in 1973 established a state monopoly over the sale of hydrocarbon fuels in the domestic market, and granted the government authority to set domestic prices administratively. In June 1997 the government submitted to congress a draft law abolishing the state monopoly on the marketing of liquid hydrocarbon products, and allowing free competition and market determination of prices. The draft law incorporates provisions for a transition period of one year, during which private participants will be able to enter the market, but the government will still control transportation and marketing margins. Pending approval of the law, PDVSA has been authorized to give the operation of gasoline stations in concession to private operators.

45. In June 1997 a decree was issued setting forth a schedule of adjustments for domestic natural gas prices for existing users through end-1998. Under the scheme, gas prices—which had remained unchanged for several years—are scheduled to reach short-run marginal cost levels by end-1998. The required cumulative increase in gas prices in U.S. dollar terms is estimated at seven times the initial price. New users already face the target price.

II. An Update on the Banking System

46. This chapter summarizes banking system trends. Recent developments in the banking system are described in section A; the financial condition of the system is analyzed in section B; recent developments in banking supervision and regulation are presented in section C; the last section sets out the main outstanding issues.

A. Recent Developments in the Banking System

47. The structure of the Venezuelan banking system changed substantially in the immediate aftermath of the 1994–95 banking crisis. First, the crisis led to the intervention, closure or nationalization of 19 commercial banks accounting for about 55 percent of total deposits of the banking system at end-1993.24 Second, financial disintermediation was reflected in a decline in commercial banks’ total assets from around 35 percent of GDP in 1993 to 20 percent of GDP in 1996. Third, the asset structure of banks shifted toward public sector securities, while credit to the private sector contracted significantly due to a decline in the demand for credit (associated with uncertainties about the course of economic policies) and to a more conservative approach to lending by banks.

48. In 1997 money and credit to the private sector recovered rapidly. Broad money rose by 18 percent in real terms (Figure 1A). Narrow money currently accounts for more than 50 percent of broad money, compared to 25 percent before the banking crisis. Commercial banks’ credit to the private sector rose by 66 percent in real terms in 1997 (after falling by 9 percent in 1996), in a context of negative real interest rates, a recovery in economic activity, and changes in banks’ business strategies encouraged by stronger competition.25 The share of credit to the private sector in total assets rose from 35 percent in December 1996 to 53 percent in December 1997, while credit to the public sector (including holdings of central bank securities) fell from 30 percent to 16 percent during the same period (Figure 1B).26 The structural shift toward longer-term assets and a shorter average maturity of deposits increased the liquidity risks in the banking system. Interest rate spreads averaged 14 percentage points in the second half of 1997 (compared to 11 percentage points in the first half), partly as the result of higher reserve requirements on bank deposits27 (Figures 1C and 1D).

Figure 1.
Figure 1.

Venezuela: Interest Rates, Monetary Aggregates and Commercial Banks’ Credit

Citation: IMF Staff Country Reports 1998, 117; 10.5089/9781451840087.002.A001

Sources: Central Bank of Venezuela; and Fund staff estimates.1/ Lending minus a weighted average of time and savings deposit rates.

49. Since the implementation of the macroeconomic adjustment program in April 1996, changes in the structure of banking system have included the reprivatization of nationalized banks; increased participation of foreign banks; and the consolidation of the system through the establishment of universal banks.

50. Between December 1996 and December 1997, FOGADE completed the sale of all the banks that were nationalized during the crisis. This included Banco de Venezuela, Banco Consolidado, Banco Tequendama, Banco Popular, Banco Andino, Banco Republica, and Banco Latino. Banco Santander from Spain acquired Banco de Venezuela, the third largest bank in terms of assets; a Chilean investment group purchased Banco Consolidado, while Peruvian and Colombian investors acquired Banco Tequendama and Banco Republica.28 Foreign banks have also expanded their participation in the private banking system;29 they now control around 40 percent of the banking system’s total assets. The presence of foreign banks has fostered competition and is expected to contribute to the strengthening of the system and to the reduction of systemic risk.

51. Universal banks can perform all the operations authorized to specialized financial institutions such as commercial banks, mortgage banks, savings and loans companies, investment banks, and leasing companies. Since November 1996 the authorities have approved the establishment of 10 universal banks. These banks have arisen largely from the merger of specialized institutions belonging to the same financial group, leading to a reduction in the number of financial institutions from 124 in December 1996 to 106 in December 1997. In December 1997 universal banks accounted for around 55 percent of the total assets of the system. The advent of universal banks is expected to lead to a better allocation of resources, a larger capital base, lower operational costs, and higher productivity; and will facilitate the comprehensive supervision of financial groups.

B. The Financial Condition of the Banking System

52. According to bank reports submitted to the Superintendency of Banks and Financial Institutions (SBIF), the condition of the banking system has improved since 1995. However, there was some deterioration in 1997 compared to the previous year, partly due to a rapid expansion of credit to the private sector. The recovery of the banking system has not been even, and some banks still report capital levels that are barely above the minimum requirement of a risk-weighted capital-to-asset ratio of 8 percent and a capital-to-asset ratio of 6 percent.

53. At the onset of the macroeconomic adjustment program in April 1996, there were concerns about the impact of the liberalization of the external capital account and interest rates on the solvency and profitability of the banking system. In the event, these concerns did not materialize for a number of reasons. First, the devaluation of the bolivar increased bank profits because banks held long positions in foreign assets. Second, controls on interest rates were abolished before the liberalization of the external capital account and the unification of the exchange rate, allowing banks to increase interest rates substantially helping to avert a withdrawal of deposits and contributing to a surge in capital inflows. Third, banks took advantage of substantial net placements of BCV securities with yields higher than the remuneration offered on their deposits. Fourth, initially banks widened their interest rate spreads which allowed them to mitigate the potential costs of the maturity mismatch.30

54. Financial indicators of commercial banks show an improvement since 1995, but some deterioration in 1997. The risk-weighted capital-asset ratio rose from 13 percent in December 1995 to 18 percent in December 1996 but declined to 16 percent in December 1997 (Figure 2A), in the wake of the rapid growth of credit in 1997.31,32 The asset quality reported by banks improved significantly due to an extensive process of loan write-offs. The share of nonperforming loans33 as a proportion of the loan portfolio of commercial banks fell from 12 percent at end-1995 to 7 percent at end-1996 and to 4 percent at end-1997 (Figure 2B). However, loan-loss provisions, which were equivalent to around 100 percent of nonperforming loans in 1996 and the first half of 1997, deteriorated to around 90 percent of nonperforming loans in the second half of 1997.

Figure 2.
Figure 2.

Venezuela: Commercial Banks’ Indicators

Citation: IMF Staff Country Reports 1998, 117; 10.5089/9781451840087.002.A001

Sources: Central Bank of Venezuela; and Fund staff estimates.1/ Include operating expenses, labor costs and transfers to FOGADE/SBIF.

55. As a result of the devaluation of the bolivar in April 1996 (banks held long positions in foreign exchange) and higher interest rate spreads, profits relative to net worth rose significantly during 1996.34 Commercial banks’ net profits climbed from 54 percent of average net worth in 1995 to 94 percent in 1996 (Figure 2C). In 1997 this ratio fell to 35 percent due to a reduced incidence of extraordinary profits and lower interest rate spreads.

56. The banking system suffers from high operating costs which contribute to large interest spreads. Non-interest expenses of commercial banks have amounted to around 13 percent of average earning assets since 1994, a high level by international standards (Figure 2D).35 High non-interest expenses result from an excessive number of banks and bank branches, the contribution to FOGADE (2 percent of deposits), low levels of monetization, and overstaffing.

C. Recent Developments in Banking Supervision and Regulation

57. Bank supervision has improved (especially on-site supervision), but it needs to be strengthened further. On-site inspections are mainly focused on the preventive identification of risks with the support of preliminary inspections (which lay out the structure of financial groups and their related nonfinancial companies) and a set of comprehensive financial indicators. The SBIF is also improving off-site surveillance and analysis; a surveillance department has been set up and a new report system for banks is being developed.

58. As regards prudential regulation, the introduction of a new chart of accounts in July 1996 represented a major advance in the area of accounting standards. The chart meets international standards in terms of the definition of relevant concepts and accounting practices, and reduces the scope for ambiguous interpretations. It also requires financial institutions to “mark to market” temporary and permanent investments, including holdings of public securities, and to make provisions for differences between face value and market value in the balance sheet. In addition, the SBIF has imposed a generic 2 percent provision on banks’ investment portfolio to help them cover market risks.

59. Against the background of the large increase in credit operations registered in 1997, in January 1998 the SBIF issued minimum guidelines to financial institutions for the approval, management, and surveillance of consumer credit operations. New regulations to strengthen the classification of the loan portfolio by making loan categories dependent on the creditworthiness of borrowers, rather than on their collaterals were issued in April 1998. The SBIF also plans to operate the credit-risk bureau starting in 1998 to monitor the solvency of borrowers, classify loans consistently across banks, and provide banks with additional information on the creditworthiness of prospective borrowers.

60. Also, effective November 1997 the SBIF issued new norms to combat money laundering operations in the Venezuelan financial system. The new norms require financial institutions to establish internal control mechanisms and to report to the SBIF transactions above Bs 4.5 million (US$8,400).

61. Effective August 1997, the BCV reduced the limit on banks’ net open foreign exchange positions from 30 percent to 25 percent of net worth. However, this regulation does not cover the net foreign exchange position of banks’ foreign branches, potentially enabling them to circumvent the prudential limit set by the central bank.

D. Main Outstanding Issues

62. Recurrent macroeconomic shocks (currently lower oil export prices and higher interest rates) call for the strengthening of the banking system to avoid potential liquidity and solvency problems. As noted above, currently deposits are concentrated at the short-term end of the maturity range, credit to the private sector represents more than 50 percent of commercial banks’ total assets, and there is no deep interbank market or a developed secondary market for government and BCV bills.

63. Monetary instruments need to be improved. In particular, the BCV needs to introduce short-term repurchase and reverse-repurchase agreements between banks and the BCV, as well as an electronic book-entry system in order to facilitate the use of government securities in repos, reverse repos, and as collateral in the interbank market.

64. Higher interest rates and slower growth in economic activity could lead to increases in the nonperforming loan portfolio. The quality of credit, especially mortgage and consumer credit, can deteriorate rapidly when its expansion has taken place in the context of negative real interest rates and excess liquidity in the system, and subsequently market conditions deteriorate. As mentioned above, the SBIF has already taken some measures to strengthen the management and monitoring of credit risk. However, recurrent macroeconomic shocks in Venezuela call for capital adequacy ratios above international standards.

65. The banking system needs to reduce its operating costs and increase efficiency. There has been some progress in this area with the advent of universal banks and investments by larger banks in technology and information systems. However, further consolidation in the banking system is needed to improve efficiency and streamline employment.

66. Recent improvements in banking supervision notwithstanding, a number of weaknesses need to be addressed. Currently, there are no established procedures for the consolidated supervision of financial groups and of the offshore operations of Venezuelan banks, and for the monitoring of connected lending and credit cn. In addition, the SBIF suffers from institutional weaknesses that hamper its supervisory effectiveness. Currently, the SBIF is implementing a three-year institutional development program with assistance from multilateral institutions. Main tasks include specifying a supervisory model in line with the Basle Core Principles for effective bank supervision, finalizing and implementing a new inspection manual, developing the surveillance function, introducing accounting norms based on international standards, updating the regulation on external auditors to reinforce their role as a complement of the SBIF, and strengthening the training of staff.

67. Banking legislation needs to be updated so that the financial emergency legislation, in place since 1994, can be lifted. The conditions for the efficient entry and exit of financial institutions, including powers to deal with banking institutions in distress, should be strengthened. Unregulated banking operations (trust funds, money market funds, and other off-balance sheet items) should be brought under the prudential regulatory framework. The various functions and responsibilities of the different bodies and agencies undertaking banking supervision tasks should be clarified.

68. There also is a need to establish an appropriate deposit insurance fund and to recapitalize and restructure FOGADE for this purpose. Following the provision of financial assistance during the banking crisis, FOGADE was assigned the tasks of privatizing nationalized banks and valuing and selling the assets of closed and intervened banks. FOGADE has made progress in those areas, but its sizable financial liabilities to the BCV compromise its financial position and do not allow for the constitution of a deposit insurance fund and for a gradual reduction in the deposit insurance fee to international levels (around ½ percent).

69. Looking ahead, the reform of the social security system and the introduction of private pension funds will have a major bearing on the financial system. The reform, which is expected to foster the development of the capital market in Venezuela, will entail setting up an appropriate regulatory and supervisory framework to promote the proper functioning of pension funds.

III. Reform of the Severance Payments System

70. In October 1996 a Tripartite Commission composed of representatives of business, labor, and the government was established with the purpose of seeking a consensus on a possible reform of Venezuela’s severance payments and social security systems. The Commission reached broad agreements in March 1997, and the first legal reform to emerge was that of the severance payments system, which went into effect in June 1997.

A. The Old System of Severance Payments

71. The old severance payments system was established in 1974 after the first oil export boom. Under this system, the benefit payable to a worker upon termination of employment was the product of the number of years he had been with his current employer and his last monthly salary. Employers were required to maintain reserves equal to these amounts (they could be held in the form of debit entries in the employer’s books). Because these reserves—the “severance accounts”—had to cover accrued benefits equal to one monthly salary per year of service, they were effectively indexed to the worker’s nominal salary. This form of indexation was called the recalculo. In addition, the balances of the severance accounts earned interest at a rate set by the central bank taking into account the nominal rates paid by the banking system (employees had the right to receive the interest earned by their severance accounts in cash once a year, but could choose to have it capitalized). Thus, the accrued severance rights embodied in the severance accounts were compensated for inflation twice: first, via the recálculo based on nominal wage increases, and a second time via the requirement that they earn interest at a nominal rate. This was described as the “double indexation” of severance benefits.

72. Workers were allowed to pledge the resources accumulated in their severance accounts as collateral when borrowing to finance certain housing and educational expenses. The funds could be borrowed from employers or from a financial institution, in which case the employer would extend guarantees regarding the severance rights being pledged as collateral. Upon termination of employment, a worker was entitled to the unused part of his severance benefits.

73. The law gives workers the right to additional benefits in cases of “unjustified” firing (in particular, economic restructuring is not grounds for justified dismissal). Before the reform, the additional indemnification for unjustified dismissal was equal to the normal severance payment. Although the law did not require it, two monthly salaries per year of service were often paid at the time of normal retirement too.

B. Some Shortcomings of the Old System of Severance Payments

74. Under the old system, accrued severance rights—the reserves held in severance accounts—were revalued following nominal wage increases, and were remunerated at a nominal rate similar to that offered by the commercial banks. Under this “double indexation” mechanism, an important component of the real cost of labor could increase with inflation, and the effect became more pronounced the longer an employee had been with a firm (Box 1). Therefore, double indexation could raise the cost of labor, and made it difficult to estimate and control the effective wage bill.

Venezuela: Effects of the Double Indexation of Severance Benefits

The following table illustrates the costs of the double indexation of accrued severance benefits under the assumption of a constant real salary. For simplicity, it is assumed that a severance account has been opened in a bank. Each entry in the table indicates how much an employer would have to deposit into his worker’s severance account at the end of a given year, measured in months of salary, based on the worker’s years of service as of the start of the year and on the inflation rate, assumed to be reflected in the nominal salary increase granted during the year. For example, the bottom-right entry indicates that an employer would have to deposit 5.3 monthly salaries into the account of a worker who had been with his firm for 15 years at the beginning of the year, if inflation reached 40 percent and this were reflected in the salary increase. This is explained as follows. Assuming a starting salary of Bs 100, the opening balance of the severance account would be Bs 1,500; with constant real wages and 40 percent inflation during the year, at the end of the year the salary would be Bs 140. Thus, the ending balance of the account should be Bs 2,240 (16 times Bs 140). The law required that the interest paid by the bank on the initial balance be given to the worker in cash, and so it could not be used to increase the balance of the account. Thus, in order to meet the target balance for the end of the year, the employer must deposit Bs 740 into the account, an amount equal to 5.3 times the new salary of Bs 140. The rest of the table is computed in the same way.

Venezuela: Severance Rights Accrued During One Year: Various Tenures and Inflation Rates

(In multiples of a monthly salary)

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The correlation between inflation and real labor costs—understood as the sum of the constant real salary and the real cost of the deposits into the severance account made during the year—can be seen by reading down any column. This effect becomes stronger with longer service histories, as can be noted by reading across any row. Employers would like to move up and to the left on the table to reduce their labor costs. They move up by letting salaries lag behind inflation, and they move left by increasing labor turnover.

75. The efforts of employers to reduce the effects of the double indexation of severance benefits could be seen in the patterns of labor turnover and in changes in the composition of workers’ remuneration. High turnover was encouraged, with some firms firing (and then recontracting or replacing) workers every year, thus avoiding the increase in a worker’s length of service. However, firms involved in activities requiring the development of human capital on the job could not adopt this practice. Unskilled workers were easily fired and then rehired or substituted, while medium- and high-level managers and specialized professionals tended to accumulate longer service histories, skewing the distribution of benefits in favor of the latter groups.

76. Because the recálculo revalued the severance account at the rate of nominal salary increases, the old severance payment system encouraged the containment of nominal salaries. In the high inflation environment of recent years, this contributed to the reduction of the real salary component of payments to workers, and to the proliferation of bonuses and other non-salary payments. By early 1997 the statutory minimum salary was Bs 15,000 (equivalent to US$32); but the minimum remuneration package, including all mandatory bonuses, had reached a total of Bs 53,000.36 The deterioration of the real salary contributed to the collapse of the social security system, as contributions are calculated only on the salary component of remuneration.

C. Severance Payments and Labor Liabilities of the Public Sector

77. The system of severance benefits had some special features in the public sector. Interest on the accrued severance benefits of most public sector workers was not paid in cash (i.e., the interest was in fact capitalized). Moreover, the accrued severance benefits of government employees did not have to be funded (some public enterprises had established trust funds, though). The severance rights which had been accrued by general government employees at the time of the reform (June 1997) are estimated by the staff at some 4½ percent of 1997 GDP;37 the total implicit severance debt of the general government, including capitalized interest and a “transfer compensation” explained in the following section, are estimated at about 8½ percent of 1997 GDP (Table 1).

Table 1.

Venezuela: Implicit Severance Liabilities of the General Government as of June 19971/

(In percent of 1997 GDP)

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

Estimates gross of any advances or loans that may have been made to employees.

78. The data reported above have been estimated on the basis of aggregate employment, salary, and tenure figures. At present, no precise information exists regarding the benefits accrued by individual employees, or the loans or advances received against those benefits. The Central Office of Personnel is conducting a census of labor histories of general government employees, and expects to be able to provide personal account statements to individual employees in the second half of 1998.

79. Accumulated severance rights became a heavy separation cost to the government, hampering the rationalization of employment. Personnel transfers sometimes give rise to the need to pay severance benefits too. Thus, the inability of central government entities to pay severance hindered the decentralization of responsibilities to local governments.

D. The New System of Severance Payments

80. Under the new severance payments system, employers must make monthly deposits into their employees’ severance accounts equal to five days of salary, for a total of two monthly salaries per year (Box 2). Starting in 1998, the size of these deposits will begin to increase with time of service under the reformed system, until their annual sum reaches the equivalent of three monthly salaries for workers with 15 years of service or more under the new system (that is, the maximum payment of three monthly salaries per year will not be made until the year 2012). As before, interest earned on the account accrues to the employee. Upon retirement or separation, workers receive the amounts accumulated in their accounts. Except in those cases considered “justifiable” by the law, involuntary separations also give rise to an additional compensation package consisting of two components: (i) an indemnification equal to one monthly salary per year of service up to a limit of five monthly salaries, and (ii) a special payment of up to three monthly salaries which substitutes for the obligation to give notice (the “forewarning” payment).

Venezuela: Key Features of the Old and New Systems of Severance Benefits

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81. The circumstances in which workers may borrow from their severance accounts were extended to include certain medical expenses. Although firms are still allowed to keep severance accounts in their books, the new law gives employees the right to demand that their severance benefits be deposited in financial institutions.

82. In addition to modifying the severance system, the reform of the labor law introduced some restrictions on the composition of labor earnings. Before the reform, the concept of “salary” was defined in somewhat imprecise terms, and this permitted the reduction of the share of salaries in total remuneration packages. Under the reformed law, no less than 80 percent of an employee’s remuneration must be counted as “salary.”38

83. The law requires the settlement, over a period of five years, of the severance rights accrued under the old system through June 1997, including capitalized unpaid interest. In addition, workers will receive a special bonus payment equal, for most employees, to the nominal severance benefits they would have been entitled to receive as of December 1996 (this payment is called the “transfer compensation”).39 No estimate exists for the implicit severance liabilities of private sector employers. However, a survey40 carried out by a private consulting group shortly after the enactment of the reform found that, on average, 80 percent of the employees of the firms surveyed had borrowed (or used as collateral) 70 percent of their accrued benefits, and had received interest payments on the rest in cash. As a consequence, the transfer compensation accounts for a large part of the outstanding net severance debt of the firms surveyed.41

84. In order to limit the impact on liquidity of the accelerated payment of old severance rights, the government intends to settle its severance debt in part by issuing nonnegotiable bonds of various maturities to its employees. While the issue of the bonds will take place within the five-year period required by law, the schedule for the redemption of these bonds extends beyond that period, and is consistent with keeping the cash payment of severance liabilities (including the amortization of the nonnegotiable bonds) at less than 1 percent of GDP per year.

E. Preliminary Assessment of the Reform

85. The reform has positive elements as well as some significant costs. First, the elimination of the double indexation of severance benefits removes the incentive to lay off workers and then rehire them, and thus the bias against sectors where the accumulation of firm-specific human capital is important. Also, by eliminating the link between the real value of severance entitlements and inflation, the reform reduces the uncertainty surrounding future labor costs. Second, the reform places a limit on the additional indemnification due in cases of “unjustified” firing. Third, the reform will help remove obstacles to the restructuring of the public sector. Fourth, the reform increases the share of salaries in total remuneration, which should in principle contribute to an improvement in the financial condition of the social security system.

86. Nevertheless, the reform has considerable up-front and recurrent costs. In the public sector, it reduces the maturity of implicit severance debt accumulated under the old system and it increases its current stock by the amount of the transfer compensation. The recurrent costs of the new system are large (two-three monthly wages a year), and if other components of labor compensation are rigid downward, they could increase labor costs, particularly under conditions of low inflation. In a high inflation scenario double indexation under the old system would have been costly, and the reform is likely to reduce the cost of labor. However, in a low inflation scenario only those firms with a relatively large proportion of workers with long service histories would save significant amounts. By contrast, labor costs for firms with a relatively large proportion of recently hired workers could be higher under the new system.

IV. Poverty, Inequality, and Social Expenditure

A. Poverty and Inequality

87. During the last three decades, social conditions in Venezuela have improved considerably: between 1965 and 1995, life expectancy at birth increased from 65 to 75 years for females and from 61 to 70 for males, while infant mortality rates fell from 65 to 31 per thousand live births. The percentage of children aged less than 5 years old suffering from malnutrition declined from 10 in 1982 to 6 in 1995; and the percentage of population having access to safe water rose from 75 in 1970 to 89 in 1993. 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. Improvements were also made in education, as evidenced by the fall of the illiteracy rate from 24 percent in 1971 to 9 percent in 1995. However, the long-term improvement in social conditions notwithstanding, income distribution continues to be very unequal and, during the last several years, poverty seems to have increased.

88. Venezuela’s income distribution is very skewed.42 According to staff estimates based on official household survey data for 1996, while the top 20 percent of all households received just over half of total household income in 1996, the bottom 40 percent received less than 15 percent of total income (Figure 3). About one-third of all households reported monthly incomes of less than Bs 50,000 per month (about US$106), and another third reported incomes of between Bs 50,000 and Bs 100,000. By contrast, about 1 percent of all households reported incomes above Bs 600,000 (about US$1,275). Although there is evidence to suggest that income inequality increased during the 1980s, it would seem that income distribution has not changed much between 1987 and 1996.43

Figure 3.
Figure 3.

Venezuela: Lorenz Curve for the Distribution of Household Income

Citation: IMF Staff Country Reports 1998, 117; 10.5089/9781451840087.002.A001

Sources: Central Statistical Office; and Fund staff estimates.

89. Poverty indicators show a worsening trend during the last 10 years. IESA, an independent research institute, has produced a consistent series of the proportion of households living in poverty, on the basis of data generated by the Central Statistical Office. These data show a gradual increase in the overall poverty rate from 39 percent in 1986 to 48 percent in 1995. The Central Statistical Office itself estimated that the proportion of the population living in poverty increased from 61 to 75 percent between mid-1995 and mid-1996; the percentage of households in extreme poverty is reported to have risen from 33 percent to 48 percent in the same period. According to estimates produced by Datanálisis, a private consulting firm, the proportion of the population living in poverty rose from 70 percent to 78 percent of the population between 1986 and 1996.44

90. The increase in poverty in recent years seems to be mainly associated with a sharp fall in average real wages and incomes and an expansion of informal employment.45 Following a deterioration in real income levels in the 1980s associated with the decline in oil prices, real wages are estimated to have fallen cumulatively by about 45 percent between 1990 and 1996. The share of the labor force employed in the informal sector was estimated at 49 percent in 1996.

91. Poverty is unevenly distributed geographically. According to the Ministry of the Family, poverty rates are lowest in the Federal District (34 percent) and its surrounding states. The highest incidence of poverty is found in regions bordering with Brazil, Colombia, and Guyana, where poverty ratios are as high as 60 percent. Access to basic services also varies among regions.

B. Social Safety Net

92. To improve the efficiency of social spending and to deal with the impact of its structural reform program, in 1989 the Perez administration introduced its “Plan Against Poverty” (Plan de Enfrentamiento a la Pobreza, PEP) aimed at gradually phasing out most indirect subsidies and replacing them with 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 direct cash or in-kind subsidies. After 1992 the funding for these programs declined. In 1996 the launch of the Agenda Venezuela included a social safety net component consisting of 14 social programs. Though some of these programs were newly created, the most important ones were strengthened versions of some of the existing programs of the PEP. The 14 social programs of the Agenda Venezuela vary greatly in their nature, including cash transfers, school lunches, neighborhood day-care centers, and a public transportation subsidy. Resources channeled through these programs rose from ½ percent of GDP in 1995 to about 1½ percent of GDP a year in 1996–97.

93. The most important of the social programs of the Agenda Venezuela is the “family subsidy,” a cash benefit delivered through the network of public grammar schools. Under this program, the families of some 3 million children attending public schools located in poor neighborhoods received a bi-monthly grant. At the end of 1996, the amount of the grant was Bs 9,600 per qualifying child (around US$20); this amount is indexed to the consumer price index. This program represented close to half of the combined resources spent on social safety net programs in 1996, and almost 40 percent of the resources spent through October 1997. Though smaller, other programs considered important because of their focus on children and mothers are those which provide meals to school-children and day-care for the children of working mothers.

94. The social programs of the Agenda Venezuela are administered by a number of different government agencies, which gives rise to some degree of duplication, particularly in the case of food aid programs.46 There have been repeated plans to consolidate overlapping programs, but progress has been slow because of political, legal, and financial difficulties. In addition, some programs suffer from high administrative costs.

95. A National Commission was created when the social safety net programs were launched to evaluate their performance measured against their own objectives. According to the Commission, the most effective programs are the family subsidy and the program to distribute uniforms and school supplies to children in public schools.47 Among the least effective is the training program for the young unemployed, which only reaches about 10 percent of its target population. In general, programs administered through the network of public schools are more effective than those delivered through other channels, such as the network of public clinics.

96. From a recent study commissioned by the Ministry of the Family, it is possible to estimate the coverage and targeting of selected social programs.48 Although it is difficult to draw general conclusions regarding the programs of the Agenda Venezuela from the surveys in the study, it would seem that in a number of cases the programs have difficulty in reaching the intended beneficiaries. For example, in the Caracas survey only 42 percent of the respondents classified as poor reported receiving the family subsidy; the corresponding figures for the main school children nutritional program and for the day-care program were 7 percent and 4 percent, respectively. On the other hand, the data on leakage (the proportion of resources going to the nonpoor) suggest that the majority of the resources go to the poor. For instance, the share of the family subsidy going to the nonpoor in the three cities ranged from 13 to 21 percent; for the schools nutrition program, leakage ranged from 17 to 23 percent. Self-targeted programs seem to reach a larger proportion of the poor; for example, 45 percent of the poor benefit from the subsidy to public transportation in Caracas; however, a relatively large proportion of the subsidy (34 percent) goes to the non-poor.

97. The scarcity of relevant statistical information prevents a better quantitative assessment of the effectiveness of social assistance, measured not just against the programs’ own goals, but against a measure of social needs. This makes it difficult to refine the criteria for targeting social programs. The Ministry of the Family has started work on a Social Survey for Venezuela, specifically designed to gauge the impact of social programs; final results from this survey are expected by November 1998. In the meantime, the Central Statistical Office and the BCV were planning to include in their household budget survey (carried out to update the basket for the consumer price index) some questions related to social assistance programs.

C. Spending on Education and Health

98. Budgetary allocations to the Ministry of Education (excluding those directed to provide social services) have fluctuated between 3¾ and 4 percent of GDP in recent years. This includes expenditure on education programs and administrative costs.

99. The central government devotes a large share of its education budget to the support of higher education. Central government resources assigned to higher education exceeded the amounts budgeted for pre-school, basic, secondary, technical, special and adult education taken together in each of the years 1993–96. The average expenditure per pupil in higher education budgeted for the 1995–96 school year was 6 times as much as the average budgeted for each basic education student; in 1996–97, the corresponding figure was 7.2.

100. Central government health expenditure rose from 1 percent of GDP a year in 1995–96 to 1½ percent in 1997. This increase reflects, among other things, an exceptionally high wage increase in the sector (physicians’ remunerations were raised by 200 percent). It is expected that, as a result of the reform of the social security system currently administered by the IVSS, health expenditure of the central government will increase further, as the IVSS ceases to provide free services to non-contributors.

101. Over the last several years, the composition of spending on health by the central government has been changing, with transfers to the states making up an increasing share. This is due to the fact that, according to the decentralization law, the central government must in certain cases continue to finance decentralized activities. State governments also spend some fraction of their own income from shared revenues in health programs. The Central Budget Office estimated that the states spent ¾ percent of GDP from their own resources on these programs in 1997. Besides the central administration and the state governments, the IVSS has traditionally been an important provider of health services, not just for its 2.3 million contributors and their families, but for the population at large. But the finances of the IVSS deteriorated significantly over the last few years, hampering the institution’s ability to provide health services. Currently, and as part of the effort to restructure the social security system, there are plans to transfer the health service facilities owned by the IVSS to other public entities.

V. Recent Developments in Trade Policy

102. In 1989 the authorities undertook a comprehensive trade reform that involved the elimination of import prohibitions and licences on virtually all items (except for health or security reasons) and a major rationalization of tariffs, which reduced substantially the number of tariff bands and the average and maximum tariff rates.49 In recent years, Venezuela has stepped up efforts to liberalize and simplify its trade regime mainly in the context of bilateral and regional trading arrangements such as the Andean Pact, the regional common market with Bolivia, Colombia, Ecuador, and Peru. This section describes the main features of Venezuela’s current trade regime, including regional integration.

A. Import Tariffs

103. Since 1992 Venezuela, along with Colombia and Ecuador, has applied the Andean Pact’s four-tier common external tariff (CET) with rates of 5, 10, 15, and 20 percent for most products; the (unweighted) average rate was estimated at around 10 percent.50 However, exceptions to the CET apply to imports of automobiles and automotive parts (subject to a harmonized automotive policy with Colombia and Ecuador) and some agricultural products (subject to both fixed and variable import levies). Also, reduced or zero tariffs apply to imported inputs and capital goods not produced in the Andean Pact region. In April 1998 the authorities introduced a temporary surcharge of 15 percent over import duties on about 800 products and doubled the customs handling fee (from 1 percent to 2 percent). As a result, the maximum import tariff rate (including the surcharge) was increased to 23 percent and the (unweighted) average rate is currently estimated at around 11½ percent.

104. Harmonized automotive policy. Under the Andean Pact’s harmonized automotive policy, assembly plants complying with minimum regional content requirements enjoy high effective protection levels.51 This is mainly the result of a very low tariff rate (3 percent) on completely knocked-down (CKD) kits and substantially higher rates (up to 35 percent) on imported vehicles.52 In addition, the regional automobile industry benefits from import prohibitions on used vehicles and spare parts, as well as (new) old model vehicles (i.e., vehicles built prior to 1994).

105. Variable import levies. Since July 1995 Venezuela and other Andean Pact members have applied a complex system of variable levies to imports of some 150 agricultural products from nonmembers,53 namely the Andean Price Band system. This consists of adding (subtracting) an additional ad valorem levy to the CET whenever a reference price falls below (exceeds) a certain price floor (ceiling). Generally, floor and ceiling prices are calculated based on the moving average (and volatility) of prices in world markets during the previous five years. While the system’s stated objective is to stabilize the domestic price of certain agricultural products, in practice in some cases it has provided for considerable additional tariff protection.

B. Export Promotion

106. Since 1994 Venezuela’s export promotion policies have relied mainly on its duty-drawback system and export financing scheme; currently, there are no explicit export subsidies.54 Exporters are entitled to the reimbursement of customs duties and indirect taxes paid on imported inputs that are used in the production of exports. They take the form of tax reimbursement certificates (CERTs) issued by the Ministry of Finance. In addition, the BCV runs the so-called Export Financing Fund (FINEXPO) which provides export credit under either market or (slightly) concessional conditions for market and feasibility studies, export promotion expenditure, working capital, fixed investment for agro-industrial firms, and finance to importers of Venezuelan products.

107. To cope with the financial resource limitations on FINEXPO’s activities and promote nontraditional exports further, congress approved in 1996 the creation of the Bank of Foreign Trade. The bank, with an initial capital of US$200 million, held its first shareholders’ meeting in April 1997 and began operations in September 1997.

C. Regional Integration

108. Venezuela has continued to pursue closer ties with other Western Hemisphere countries.55 It currently extends preferential tariffs and duty-free treatment on a limited number of products to members of the Latin American Integration Association (LAIA), the Caribbean Common Market (CARICOM), and the Central American Common Market (CACM). Also, Venezuela has free trade agreements with Colombia, Chile, and Mexico. In March 1996, together with its Andean Pact partners, Venezuela ratified the creation of the Andean Community (AC) that would make the regional grouping a political alliance similar to the European Union. Although the AC is still far from achieving the free movement of capital and labor across national borders, detailed proposals at the presidential summit last year in Peru, included plans to hold elections for an Andean Parliament within five years and the formation of an Andean Consultative Group to coordinate multilateral projects in the region. In addition, the AC is negotiating a free trade agreement with the Southern Cone Common Market (MERCOSUR) countries that is expected to be similar to the accords that Bolivia and Chile have already signed with MERCOSUR. So far there has been some progress in designing the exemption lists of products that will require additional tariff protection once the free trade agreement goes into effect, including products of the steel, glass, aluminum, and petrochemical industries; free trade in agriculture is planned for a later stage.

109. Venezuela is participating also in the Free Trade Area of the Americas (FTAA) discussions which aim at establishing the world’s largest free trade area by 2005. So far 12 working groups have been formed on topics such as market access, customs procedures and rules of origin, government procurement, subsidies, anti-dumping and countervailing duties, dispute settlement, and smaller economies.

D. Venezuela and the World Trade Organization

110. Venezuela became a formal participant in the Uruguay Round following its accession to the GATT in 1990 and a founder of the World Trade Organization (WTO) in late 1994. As of end-1996, most of its tariff bindings in the WTO were at rates of 35–40 percent, but substantially higher tariff bindings (up to 135 percent) applied to some agricultural products.

Table 2:

Venezuela: Selected Regional Trading Agreements (RTAs) 1/2/

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Sources: Ministry of Industry and Trade; Organization of American States; and World Trade Organization.

Excludes RTAs covering trade on a very limited range of products and/or with a clear expiration date.

Since 1990 Venezuela’s customs tariff structure has been the Andean Pact’s NANDINA (Nomenclatura Arancelaria de los Paises Miembros del Acuerdo de Cartagena) with approximately 6,750 eight-digit tariff lines.

The Caribbean Common Market (CARICOM) membership is comprised by Antigua and Barbuda, The Bahamas, Barbados, Belize, San Cristobal, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago.

The Central American Common Market (CACM) membership is comprised by Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.


Table 3.

Venezuela: Aggregate Demand and Supply at Current Prices

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Source: Statistical Appendix Table 6.
Table 4.

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 5.

Venezuela: Real Gross Domestic Product by Sector

(Annual percentage change)

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Sources: Statistical Appendix Table 7; and Fund staff estimates.
Table 6

Venezuela: Gross Domestic Product by Final Expenditure

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Source: Central Bank of Venezuela.

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

Table 7.

Venezuela: Gross Domestic Product by Sector of Origin

(In billions of bolivares)

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Source: Central Bank of Venezuela.
Table 8.

Venezuela: Gross Domestic Product: Shares by Sector of Origin

(In percent of GDP)

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Source: Statistical Appendix Table 7.
Table 9.

Venezuela: Composition of Gross Domestic Fixed Investment

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Source: Central Bank of Venezuela.
Table 10.

Venezuela: Selected Petroleum Sector Indicators

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Sources: Statistical Appendix Tables 7, 32, and 45; and Fund staff estimates.

Data derived from the fiscal accounts on a cash basis.