CNN Newsroom: Global View

home *** CD-ROM | disk | FTP | other *** search

/ CNN Newsroom: Global View / CNN Newsroom: Global View.iso / sam / ven / ven.ec3 < prev next >

Wrap

Text File | 1994-05-02 | 24KB | 475 lines

<text> <title> Venezuela: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Venezuela </hdr> <body> 1. General Policy Framework Venezuela, a multi-party electoral democracy with a bicameral legislature, is a major oil producer/exporter and a founding member of OPEC. After nearly three decades of relative economic and political stability, the country has a moderately well-established economic infrastructure, and an impressive potential for economic growth. Major economic resources include petroleum, natural gas, hydro-electric power, iron ore, coal, bauxite and gold. Venezuela is in the process of modifying its macro-economic model and economic policies to diversify from dependence on petroleum exports (although the petroleum sector still dominates the economy) and to develop non-traditional basic export industries such as petro-chemicals, aluminum, steel, cement, forestry, and manufactured consumer products and mining (gold, iron ore, bauxite, and coal). Venezuela encourages foreign investment in most sectors, but foreigners are still largely excluded from the petroleum sector. The bulk of foreign investment is from the United States. The United States is Venezuela's chief trading partner, accounting for 55 percent of Venezuelan exports and 48 percent of its imports in 1990. The Venezuelan economy has recovered from the 1989 recession. According to preliminary figures, real GDP grew 5.3 percent in 1990, principally driven by a 13.6 percent increase in the oil sector, and is expected to expand by over nine percent in 1991. The Government recorded a small fiscal surplus of about one percent for the consolidated public sector in 1990. That performance was due to the Iraq war oil revenue windfall and not fiscal restraint. The Government hopes to achieve a surplus equal to 1.3 percent of GDP in 1991. Monetary policy continues to reflect the fundamental objectives fixed by the Government at the beginning of 1989, which are to reduce inflation rates, maintain positive interest rates, and ensure a competitive exchange rate. Monetary liquidity (M2), however, grew 61 percent in nominal terms in 1990 as a result of sharply increased public spending and a rise in international reserves, mainly during the last four months of 1990. The component of the money supply which increased the most was quasimoney because prevailing high interest rates encouraged the public to put its liquidity into savings and time deposits. The expansion of liquidity continued into 1991. For the first six months of the year, M2 grew by 21 percent. At mid-year, however, the Central Bank undertook a more aggressive program to control liquidity. The Central Bank increased its sale of short term bills (zero coupon bonds) and announced a gradual increase in the bank reserve requirements, and consequently, M2 grew by only 2 percent in the third quarter. The Government has made much progress in reducing inflation. Prices increased 41 percent in 1990--a sharp decline from the 85 percent jump recorded in 1989. The downward trend is continuing and 1991 inflation is estimated at 31 percent. The Caracas Stock Exchange has continued its recent gains. As the economy recovered, the stock market index soared by 546 percent in 1990 compared to 1989. The market index recorded a gain of about 70 percent in the first ten and a half months of 1991. 2. Exchange Rate Policies The Venezuelan Government unified the exchange rate on March 13, 1989. The Central Bank of Venezuela intervenes in the exchange market to correct abrupt fluctuations, but its stated policy is that the exchange rate will remain competitive and be set by market forces. In 1990, the bolivar fell by 17.4 percent against the dollar to close the year at 50.6 bolivars to the dollar. During the January-October 1991 period, the bolivar depreciated 18.9 percent and closed at Bs60.15/US$1.0. (Inflation was 25 percent over the same period.) The Central Bank's foreign exchange reserves have grown substantially in the past few years. They climbed from $7.4 billion at the end of 1989 to $11.6 billion at the end of 1990 and totalled about $12.5 billion at the end of October 1991. With the advent of exchange unification, prior exchange authorizations and pre-shipment inspections have been eliminated. 3. Structural Policies The Perez Administration eliminated price controls on most goods and services early in 1989. Price controls remain in effect on a "basic basket" of goods and services considered of primary necessity. Government producer subsidies have also been reduced. A major income tax reform designed to lower tax rates and ultimately increase revenues by reducing widespread tax evasion entered into force on September 1, 1991. The maximum tax rate for individuals and corporations fell to 30 percent. Joint ventures with the state oil company, PDVSA, for the development and refining of heavy and extra-heavy crudes and the development and processing of unassociated natural gas are excluded from the special tax of 67.7 percent and, therefore, are subject to the 30 percent rate; however, these two categories are still subject to the export reference value of 20 percent. Foreign corporations operating in Venezuela receive the same tax treatment as Venezuelan firms. In order to stimulate the formation of a "maquiladora" export industry, the government has eliminated taxes and duties on imported goods used in the production of exports. Non-residents pay a 10 percent tax on hotel rooms and lodging. The government intends (with Congressional approval) to introduce a value-added tax. In June 1989, the government initiated a multi-year trade liberalization program. Maximum tariff rates were reduced in 1989 from 130 to 80 percent, to 50 percent in 1990, and to 40 percent in 1991. Maximum tariffs are scheduled to be reduced to 30 percent in 1992, and 20 percent in 1993. Customs duty collections are expected to increase because of virtual elimination of tariff exemptions and exonerations. Venezuela acceded to the General Agreement on Trade and Tariffs (GATT) on September 1, 1990. The government's regime for managing imports through licenses changed dramatically in 1989 and 1990. Overall the entry of imports has been freed considerably; virtually all manufactured products can enter Venezuela without quantitative restrictions. Import licenses are still required on some agricultural items, and a few import prohibitions still exist. Preshipment inspection is no longer required for imported items. 4. Debt Management Policies In December 1990, the Government and the commercial banks closed a deal which reduced the debt and debt service obligations on $19.8 billion within the context of the Brady Plan. The most popular option (32 percent) was a 30-year par bond with a fixed interest rate of 6.75 percent whose principal is backed by U.S. Treasury "zero-coupon" bonds. The second most popular option (31 percent) was a 17-year, new-money bond. The deal enabled the Government to reduce principal by $2 billion, reduce interest payments by approximately $470 million per year, raise $1.2 billion in new money and obtain more favorable repayment terms on the remaining debt. As of December 1990, Venezuela's public sector external debt totaled $27.1 billion. Medium-term registered private sector debt totaled an additional $3.8 billion. External debt represents almost 70 percent of GDP. Roughly 90 percent of the external debt is owed to commercial banks. In 1990, Venezuela's debt service payments totaled $4.1 billion, or 23.5 percent of total exports. The government has entered the third year of a three-year Extended Fund Facility with the International Monetary Fund. The World Bank and Inter-American Development Bank are providing multi-year sectoral loans to assist the economic restructuring