Venezuela WT/TPR/S/10
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I. THE ECONOMIC ENVIRONMENT
(1) Main Features oftheEconomy
1. Venezuela, withanareaof912,050 square kilometres andapopulation of21.3million, is
located inthenorth ofSouth America, bounded byColombia inthewest, Guyana intheeast,Brazil
inthesouth, andtheCaribbean inthenorth. Theclimate incoastal areas andalong theOrinoco is
tropical, while mountains arecooler. Thecapital, Caracas, withapopulation ofsome 3.5million,
isclose tothecoast, at1,000 metres altitude; themain portforimports isLaGuaira, which serves
Caracas. Maracaibo isthemain portfortheoilindustry.
2. Thepopulation iscurrently growing atanannual rateofsome 2.2percent; thisratehasfallen
steadily fromaround 3.4percentintheearly1970s. Theurban population, which hasincreased much
faster, iscurrently 92.3percentofthetotal. Thefertility ratehasdeclined from5.3births perwoman
in1970 to3.6in1992, andinfant mortality hasfallen from over53perthousand livebirths in1970
to33in1992; lifeexpectancy increased from 65to70years between 1970 and1992 (Table I.1).
Allchildren receive primary education, while enrolment insecondary school in1992, at34percent,
haschanged littlesince 1970.
Table I.1
Basic economic andsocial indicators, 1975-92
1970 1980 1990 1991 1992 1993 1994
1.Population
Population (thousands) 10,604 14,871 19,325 19,787 20,249 20,780 21,378
Urban population (percentoftotal) 72.4 83.3 90.5 91.0 91.5 91.9 92.3
Labour force 3,075 5,871 7,064 7,274 7,490 7,713 ...
Labor Force, female (percent) 20.7 25.8 27.6 27.8 27.9 28.0 28.1
Total fertility rate(births per
woman)5.3 ... ... 3.7 3.6 ... ...
Infant mortality rate(perthous. live
births)53.4 ... ... ... 33.0 ... ...
Lifeexpectancy atbirth (years) 65.2 ... ... 70.2 70.3 ... ...
2.GDP
GDP atmarket prices (US$ m.1987
prices)34,966 45,604 49,475 54,606 57,989 57,431 55,553
Percentage share
-Agriculture 5.0 5.2 5.8 5.4 5.2 5.1 ...
-Industry 51.6 40.2 41.7 42.5 42.5 43.3 ...
-Oil ... ... 28.2 22.2 19.0 17.6
-Manufactures 12.4 15.7 15.4 15.4 15.3 15.1 ...
-Services 43.4 54.6 52.5 52.1 52.3 51.6 ...
3.Labour force
-Agriculture (percent) 26.0 16.0 ... ... ... ... ...
-Industry (percent) 24.8 28.4 ... ... ... ... ...
-Services (percent) 49.2 55.6 ... ... ... ... ...
4.Education
School enrollment ratios (percent)
-Primary School Enrollment Ratio 94 109 97 99 ... ... ...
-Secondary School Enrollment
Ratio33 41 34 34 ... ... ...
... Notavailable
Source: World Bank, World Tables 1994/95.WT/TPR/S/10
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3. GNPpercapitawasestimatedatUS$2,840incurrentpricesin1993,butfelltoaroundUS$2,220
in1994,1andseems likely tohavefallen further in1995. Realpercapita income, which iscorrelated
tomovements inthevolume ofexports ofpetroleum, hasfluctuated substantially inthelast15years,
falling intheperiods 1980-85, 1988-89 andagain in1993-94, andincreasing intheperiods 1985-88
and1989-92 (Chart I.1).
4. Thedomestic economy isdominated bytheservices sector, which accounted for51.6percent
ofGDP in1993(Chart I.2).2Theoverall distribution ofGDP hasbeenrelatively stable overthelast
decade; however, therehasbeenaslight shiftfromagriculture andservices toindustry, andtheshare
oftheoilsector hasalsofallen. While dataarenotavailable forrecent years, figures for1970 and
1980 show thatagriculture isrelatively labour intensive andindustry relatively capital intensive
(Table I.1). Industry includes mining andpetroleum, which arehighly capital-intensive (Chapter 5).
Export trade isoverwhelmingly dominated bypetroleum andother mining products, although their
share intotalexports ofgoods andservices hasdeclined fromover93.6percentin1980to76percent
in1993 (Chart I.6).
1GNP percapita ofBs8,071.5 billion attheofficial exchange rateofBs170: US$1.00. Population from
Table I.1.
2Based onWorld Tables 1994/95, which include construction andpower generation inindustry. According
totheVenezuelan authorities, services contributed 45.2 percenttoGDP in1993.Venezuela WT/TPR/S/10
Page 3
5. Oilappears lessimportant inthedomestic economy thaninexports. Forexample, the
contribution ofoiltoGDP wasmeasured at17.6percentin1993, down from28.2percentin1990
and24.6percentin1980. However, these overall dataunderstate theheavy dependency ofthe
Venezuelan economy onpetroleum (Box I.1). Oil,priced atbelow production costs fordomestic
consumption, hasprovided anabundant source ofcheap energy forother sectors oftheeconomy
(Chapter V),albeit atsubstantial opportunity costs. According totheVenezuelan authorities, italso
provided about 60percentofgovernment revenues in1993.3Inthepast,these oilrevenues provided
theresources forextensive government involvement throughout theeconomy. Thus, evenintheabsence
ofindirect taxation, therewereimportant advances ineducation andwelfare; theeffects ofprosperity
werewidely distributed and,particularly aftertheoilprice increases inthemid-1970s, consumerism
was"spectacular" (Europa, 1994).
3World Bank (1995) estimates thatthecontribution ofoiltoGovernment revenues hasbeenover90percent.WT/TPR/S/10
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BoxI.1: Petroleum andStructural Reforms intheVenezuelan Economy
Thereduced contribution ofpetroleum totheVenezuelan economy inrecent years doesnotresult simply
from theweakening ofoilprices compared tothemid-1970s: itisalsoaresult ofconscious efforts by
theVenezuelan authorities over theyears tobroaden theeconomic baseofthecountry. This ismost
marked inthetrade reforms which accompanied thefiscal reform programme in1989. These reforms
involved theelimination ofmany non-tariff restrictions ontrade andthereduction andrationalization of
tariffs (Chapter IV).
However, theGovernment, though thestate-owned oilcompany, PDVSA, alsoprovides substantial input
subsidies toindustry through low-priced petroleum, priced until recently atUS$0.034 alitre(low-grade
petrol). On7September itwasannounced byPresident Caldera that95-octane petrol would increase in
price bysome 140percent toUS$0.082 alitre and similar increases were announced for
91-octane petrol. However, 87-octane petrol, used bypublic buses (gasolina popular )decreased to
US$0.03 alitre.4
Thelackofdiversification andthedifficulties faced byattempts toexpand anddiversify exports ofthe
non-oil sector arelinked totheupward pressures ontheexchange ratebecause ofoilrevenues -the
so-called "Dutch disease". This problem wasalsoexacerbated bypast policies, such asmultiple
exchange rates which favoured agricultural imports.
Arelated issue isthefluctuation intherealexchange ratebecause export earnings arehighly dependent
ontheprice ofoil.Onesolution tobothproblems istheideaofanoilstabilization fund. Ithasbeen
suggested thatthiscould beused asabuffer toensure thatGovernment spending isused onchanges in
permanent income, while surpluses inhigh price periods areinvested, tobedraw onwhen prices are
low.5This would alsostabilize therealexchange ratesothatother industries could have aclearer
picture oftheir long-term comparative advantage.
6. Asoilprices fellintheyears following thefirstoil-price shock in1974, soalsoVenezuela 's
economicperformanceweakenedconsiderably.However,insteadofadjustingtothelowerincome-stream
fromoilrevenues,expansionistprogrammescontinued,financedbyforeignborrowing.Inthemid-1980s
thisledtoasharp deterioration intheexternal accounts andanacceleration ininflation, leading to
amajor foreign exchange crisis in1988. Inresponse tothecrisis, theGovernment launched a
macro-economic andtradereform programme in1989, since when theVenezuelan economy hasbeen
undergoing apainful process ofadjustment, asdiscussed below. There wasamajor problem ofcapital
flight inthewakeofabanking crisis in1994, andexchange controls wereintroduced onalltransactions.
7. Asaresult ofthestructural reforms, theshare oftradeingoods andservices inGDP(atconstant
prices) hasgrown slightly from around 43percentin1990 to49.7percentin1993, although this
remains lessthanthe50.8percentachieved in1982(Chart I.3).Thechange inthe1990s hasoccurred
mainly asaresult oftheincrease intheimports/GDP ratio, suggesting thatthereforms didhavea
liberalizing effect.
4TheEconomist, 16September 1995.
5World Bank (1993)Venezuela WT/TPR/S/10
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(2) Recent Economic Developments
(i) Introduction
8. Inresponse totheforeign exchange crisis of1988, thenewadministration ofPresident Perez
introduced amacro-economic andtradereform programme in1989. Thekeycomponents werefiscal
adjustments through increased fuelprices andpublic service tariffs aswellasexpenditure reductions.
Theprivatization programme waslaunched. Monetary policy wasalsotightened andcontrols onprices,
interest ratesandforeign exchange transactions werelifted. Theexchange ratewasunified andaflexible
exchange ratewasadopted.
9. Theeconomic reforms brought some visible signsofsuccess in1990-92 (helped bytherecovery
inoilprices in1990). Growth ofGDP accelerated in1990and1991reaching 10.4percentin1991,
andslowing to5.4percentin1992 (Table I.2). Inthesame period, inflation asmeasured bythe
consumer price index fellrapidly fromover84percentin1989to41percentin1990andcontinued
tofallinthenexttwoyears toreach 31percentin1992. Government finances turned fromadeficit
of7.7percentofGDPin1988toasurplus ofover4percentin1991.6Inlate1990, withthesupport
ofthemultilateral lending institutions, Venezuela wasabletocomplete arestructuring ofitsexternal
debtandgained renewed access tocommercial borrowing.
6BasedonWorldTables1994/95.AccordingtotheVenezuelanauthorities,GDPgrewat9.7and6.8percent
in1990 and1991, respectively, while inflation wasmeasured at36.5and31.9 percentinthecorresponding
periods. TheCentral Government surplus was2.7percentofGDP in1991.WT/TPR/S/10
Page 6Trade Policy Review Mechanism
10. Thestringent fiscal measures, particularly theincrease inpublic transport fares, werehighly
unpopular, leading torioting; there were alsotwocoupattempts in1992. Thepaceofadjustment
slackened, andtheCongress failed toapprove theintroduction ofavalue added taxwhich wastohave
beenanimportant element inthestrategy toreduce thedependency ofgovernment finances onoil
revenues. Taxexemptions werealsoincreased, marginal taxrateswerereduced andthenextround
ofdomestic oilpriceincreases wassuspended. Inconsequence, theGovernment accounts moved from
asurplus ofover4percenttoadeficit of3.2percentofGDP in1992 (Table I.2).7
Table I.2
Economic Performance
1988 1989 1990 1991 1992
9931994
Growth rates (percent)
1.GNP &domestic absorption
GNP atmarket prices 5.9 -10.3 8.0 11.6 4.5 -0.2 -2.8
Netfactor income from abroad 1.9 38.0 -18.3 -27.7 48.3 -6.4 -22.2
GDP atMarket prices 5.8 -8.9 6.9 10.4 5.4 -0.4 -3.3
Domestic absorbtion 10.0 -17.7 1.9 18.4 13.0 -4.4 -13.0
-Total consumption 7.7 -7.0 3.2 8.9 7.1 -0.8 -5.7
--Private consumption 7.2 -7.8 2.9 8.8 7.5 -0.1 -8.2
--General Government Consumption 11.0 -2.3 5.0 9.5 4.9 -4.6 8.8
-Gross Domestic Investment (GDI) 15.2 -52.6 -7.9 81.5 37.2 -18.4 -44.1
--Gross Domestic Fixed Investment 8.9 -25.5 -6.0 34.2 28.5 -6.0 -31.8
2.Resource Balance
Exports ofgoods &NFServ. -1.4 22.9 37.6 -13.5 -7.7 0.9
Imports ofgoods &NFServ. 29.5 -27.8 -2.6 27.7 24.6 -6.5
3.Competitiveness indicators
GDP Deflator 21.4 84.1 43.6 21.5 28.2 32.4 57.7
Consumer Price Index 29.5 84.5 40.7 34.2 31.4 38.1 60.8
RealEffective Exchange RateIndex 130.7 111.2 100.0 106.8 111.7 115.4 110.7
4.Money (growth inlocal currency) &
interest rates
Money plusquasi money (M2) 14.8 46.1 70.3 38.6 17.2 25.4 74.5
Interest: Discount Rate(End ofperiod) 8.0 45.0 43.0 43.0 52.2 71.3 48.0
Share ofGDP (percemt)
5.Government finances
Balance -Deficit (-)orsurplus -7.7 -1.6 1.1 4.4 -3.2 -2.9 ..
Revenues 19.2 20.4 23.5 24.2 18.9 17.5 ..
Expenditures 26.9 22.0 22.4 19.8 22.1 20.4 ..
Memorandum items
GDI/GDP % 26.8 13.9 12.0 19.8 25.7 21.1 12.2
GDS/GDP % 20.4 23.6 27.3 23.6 23.4 20.5 20.5
Note: Resource balance from Table I.3.
Source: World Tables 1994/95 andIMFIFS.
7World Tables 1994/95. According totheVenezuelan authorities, theCentral Government surplus of
2.7percentofGDP in1991 become adeficit of3.6percentin1992.Venezuela WT/TPR/S/10
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Table I.3
Balance ofPayments
(US$ million)
1988 1989 1990 1991 1992 1993
1.Current Account -5,662 1,348 8,562 2,085 -3,400 -1,906
-Balance oftrade -1,998 5,632 10,637 4,837 1,274 2,902
Exports f.o.b. 10,082 12,915 17,444 14,968 13,988 14,019
Imports f.o.b. -12,080 -7,283 -6,807 -10,131 -12,714 -11,117
-Services -3,664 -3,284 -2,075 -2,752 -4,674 -4,808
Other goods, services andincome
(credit)2,623 2,695 4,032 3,605 3,149 3,274
-Services (credit) 970 1,113 1,374 1,437 1,542 1,585
-Income (credit) 1,653 1,582 2,658 2,168 1,607 1,689
Other goods services andincome
(debit)-6,287 -5,979 -6,107 -6,357 -7,823 -8,082
-Private unrequited transfers -123 -171 -259 -316 -347 -310
-Official unrequited transfers -24 -16 -24 -33 -6 -7
-Services (debit) -2,863 -2,029 -2,675 -3,591 -4,466 -4,783
-Income (debit) -3,424 -3,950 -3,432 -2,766 -3,357 -3,299
2.Capital Account -1,902 -5,229 -4,556 1,541 2,331 1,208
Direct investment 21 77 96 1,769 429 -55
Portfolio investment 0 -158 13,579 192 61 731
Other long-term capital -512 -1,237 -16,834 234 2,116 1,704
Other short-term capital -1,411 -3,911 -1,397 -654 -275 -1,172
3.Errors andomissions
Neterrors andomissions 3,117 1,418 -1,742 -1,516 -295 407
4.Overall Balance
Overall balance -4,594 -1,650 1,981 1,761 -1,717 -608
Memorandum items:
Terms ofTrade Index (1987=100) 81 92 110 97 93 ...
Export Price Index, fob 87 100 127 113 111 ...
Import Price Index, cif 108 109 116 116 119 ...
Reserves asmonths ofmerchandise
imports3 7 15 13 9 7
... Notavailable.
Source: IMF, except terms oftrade index andcomponents from World Bank, World Tables 1994/95.
11. Thereform process received afurther setback in1993, withrealGDP contracting by
0.4percentoverall. Thiswaslinked toalossofconfidence resulting from thedeepening political
crisis, aswellasareduction inoilexport revenues. Following thedismissal ofthePresident bythe
Congress inJune, theinterim Government wasabletoprevent anincrease inthefiscal deficit, which
itfinanced bydomestic borrowing. Under extraordinary powers, itwas,however, abletopushthrough
Congress a10percentvalue-added taxaswellasnewbanking laws, which took effect from
January 1994 (Chapter V).Over theyear, there wasamonetary expansion, anincrease ininflationWT/TPR/S/10
Page 8Trade Policy Review Mechanism
to38percentasmeasuredbytheconsumerpriceindex,andtherewerefurtherreservelosses,amounting
tooverUS$600 million (Table I.3).8
12. Monetary policy wasaimed atlinking interest ratestoreturns associated withopen market
operations. However, market ratesrosebecause ofpolitical uncertainties, inflationary expectations
associated withthehighfiscal deficit, andperceived higher risks. Despite theincrease ininterest rates,
there wasarunonthenational currency (thebolivar) andthereserves declined, asmentioned above.
Reform ofthebanking sector, including improved supervision andprudential regulation, which had
beenproposed in1991werealsodelayed byCongress, paving thewayforthebanking crisis of1994.
13. Thenewadministration ofPresident Caldera thustookoffice inFebruary 1994 against a
background ofafiscal deficit, rising inflation, reserve losses andfurther contraction. Thiswas
compounded bythebanking crisis which emerged earlyintheyearwiththecollapse oftheBanco Latino,
thecountry 'ssecond largest bank, andseveral smaller banks (Chapter V).Delays inannouncing a
package toaddress thebanking crisis andwidening deficit contributed toalackofconfidence inthe
economy, which wasnotallayed bythemeasures which wereeventually adopted inMarch 1994. Over
theyear, realGDP declined bysome 3.3percent.
14. Government assistance toailing banks isreported tohaveamounted to12.5percentofGDP,
financed initially withcentral bankcredit, butinthesecond halfoftheyear, asthecrisis continued
todeepen, additional assistance wasfinanced bydomestic government bond sales. Thisincrease in
liquidity(M2grewbyalmost54.8percent)aswellaspressurestoreduceinterestrates(e.g.thediscount
ratefellfrom71.3percentin1993to48percentin1994) fuelled inflation, prompting theGovernment
toextend price controls overbasic goods andservices (Chapter IV).Nevertheless, inflation reached
over70.8percentfortheyear.
15. International reserves fellbysome US$3.8 billion during thefirstsixmonths oftheyearand
on27Junetheauthorities imposed exchange controls andfixedtheexchange rateatBs170totheU.S.
dollar (since devalued toBs290 totheU.S.dollar inDecember 1995). Itisunderstood thatreserves
made apartial recovery bytheendoftheyearsothatthenetlossamounted tosome US$1.1 billion
(IMF).
16. Thesituation in1995 appears tohavechanged little. According totheauthorities, realGDP
registered anincrease of1.1percentinthefirstsixmonths of1995; however, some estimates have
suggested thatrealGDP would decline fortheyearasawhole.9While non-oil revenues haverisen,
government revenue islikely tofallshort ofexpenditures. Onthepositive side,theGovernment 's
recent increase intheretail price ofpetroleum (through higher consumption taxes) should provide a
boost togovernment finances, oftheorder of0.7percentofGDP. However, thegains from
privatization arelikely tobelower thanestimated. Oilprices haverisen, butthishasbeenoffset by
afallincrude oiloutput. Ontheexpenditure side,overone-third ofgovernment finance istaken up
withdebtservice payments, investment hasalready beenreduced, andpayments forpublic sector
employment andsocial services remain high. Inconsequence, thefiscal deficit fortheyearseems
likely tobeoftheorder of10percentofGDP andinflation around 60percent.
8IMF. According totheVenezuelan authorities, inflation roseto45.9 percentin1994, while reserve losses
amounted toUS$345 million.
9EIU, 2ndquarter 1995.Venezuela WT/TPR/S/10
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(ii) Supply anddemand
17. Apart from 1988-89, when services dominated thegrowth oftheeconomy, theservices and
industrial sectors havegenerally combined toleadeconomic growth inVenezuela inthelastdecade
(Chart I.4). Onthedemand side,consumption andinvestment grew substantially in1991 and1992,
while netexports werenegative. However, thissituation reversed itself in1993, withtheslump in
investment, inparticular, driving down demand.
(iii) Savings andinvestment
18. Investment hasbeenhighly erratic inVenezuela inrecent years, withtheGDI/GDP ratiofalling
from26.8in1988to12percentin1990, rising again to25.7percentagain in1993before slumping
again to12.2percentin1994(Chart I.4,Table I.2).10While thesavings ratiohasbeenonthewhole
higher thantheinvestment ratio, thistoohasfallen from thehighlevels oftheearly 1980s (over
30percentin1980, 1981, 1984 and1985) toamore modest 20.5percentin1993 and1994. The
surplus ofsavings overinvestment appears tohavebeenusedtopurchase Government bonds tofinance
thefiscal deficit.
(iv) Prices
19. During theearly 1980s consumer price inflation washeldatmoderate levels, butincreased
substantially in1987 and1988, peaking at84.5percentin1989 (Table I.2). Following thereforms
of1989 prices fellprogressively 31.4percentin1992, andhavesince risen sharply.11Inthefirst
fourmonths of1995 inflation wasrunning atanannual rateof71.8percent.
20. Atthebeginning of1994, theinterim Government introduced pricecontrols onarange ofbasic
goods andservices, andthese were extended bythenewGovernment inthesecond halfof1994 to
cover anestimated 10percentoftheCPIbasket (Chapter IV). However, there appear tohavebeen
slippages,or,wherethecontrolshaveheld,shortagesofsomeitemshavedeveloped.Therecentincrease
inpetrol prices should haveaone-time upwards effect onconsumer prices, buttheycould alsofeed
through toother sectors.
21. InJune1995,theGovernmentagreedonthegenerallinesofaMexican-stylepactwithemployers
andlabour totrytoreduce inflationary expectations byco-ordinating theplans ofthethree groups
ofeconomic actors; however, noformal agreement hasbeensigned.12
10World Tables 1994/95. According totheVenezuelan authorities, theGDI/GDP ratiofor1988, 1990, 1993
and1994 were 27.9, 9.6,16.9and9.9percent, respectively. TheGDS/GDP ratios for1993 and1994 were
15.0 and18.1 percent, respectively.
11World Tables 1994/95. According totheVenezuelan authorities, inflation fallto31.9 percentin1992.
12SeeGATT (1993).Venezuela WT/TPR/S/10
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(v) Public finances
22. Asnoted intheintroduction, oneofthemainproblems ofeconomic management inVenezuela
hasbeenthelimited adjustment tolower oilrevenues thanprevailed inthe1970s. When oilrevenues
started tofall,particularly inthe1980s, theGovernment resorted toforeign borrowing tocontinue
tofinance social programmes andsupport theextensive statesector. Thishasledtoincreasing foreign
debt, withalarge portion ofgovernment revenues dedicated todebtservicing.
23. Under thereform programme begun in1989, theprivatization programme wasintended to
reduce expenditure insupport ofstate-owned enterprises (aswellastoearnone-time revenues from
their sale). However, thisprogramme islimited byconstitutional constraints which reserve the
exploitation ofoilandmineral totheState, which isalsoheavily involved intheirprocessing. Some
modifications arebeing made inthisregard, particularly bymeans ofjointventures. Nevertheless,
theprivatization programme islimited bythese constraints, andtherecent political andbanking crises
havecreated some uncertainties among investors, which deepened intheaftermath oftheMexican
financial crisis (December 1994).
24. Theincrease inthedeficit in1994, which hasbeenestimated at14.4percentofGDP, including
losses oftheCentral Bank, wasadirect result oftheassistance provided tothebanking system during
thebanking crisis, asdiscussed later. Direct fiscal expenditures (excluding interest onthepublic debt)
wereestimated atsome Bs1,000 billion or15.1percentofGDP in1994. Quasi-fiscal losses ofthe
Central Bank reached 2.1percentofGDP, incurred asinterest onthe"zero-coupon" bonds usedto
trytosterilize partoftheliquidity associated withthefinancing ofthefiscal deficit. However, there
canbelittledoubt thatthisincrease inthefiscal deficit wasoneofthekeyfactors indriving upinflation
inthelasttwoyears.
25. TheforeignexchangecontrolsintroducedbytheGovernmentinmid-1994totackletheimmediate
problem ofcapital flight inthewake ofthebanking crisis reflected thefailure offiscal andmonetary
policies, toensure domestic andexternal stability. Thelosses incurred bytheCentral Bank inbailing
outthebanking system alsoseriously weakened itscapacity tomanage monetary policy, placing an
evengreater burden onfiscal policy torectify thecurrent situation.
26. Ontherevenue side, thegains from theincrease intheretail price ofpetrol should bea
significant help, asdiscussed earlier. While theGovernment alsorelies onprivatization togenerate
funds, thismaybeunrealistic intheshort term, particularly intheaftermath ofthebanking crisis and
inviewoftheconstitutional andlegalrestrictions onextending privatization inthepetroleum andmining
sectors. Ontaxation, theGovernment hasbeenplanning anincrease inthewholesale andconsumption
tax(Chapter IV),which replaced theVATon1stAugust 1994, andanewtaxonfinancial transactions,
butthesehavenotyetbeenapproved bytheCongress (November 1995), (Impuesto alasTransferencias
Bancarias) .Therecession isalsolikely toreduce collections fromexisting taxes. Although petroleum
prices haveimproved in1995, output hasdeclined sothatitisdifficult toseeanyincrease inreceipts
fromthissource. TheGovernment isalsomaking aneffort toimprove theefficiency oftaxcollection
through theoperations ofthenewrevenue service, SENIAT.
27. Government expenditure isexpected tobecuttoadegree thisyear, mainly because oflower
outlays inconnection withthebanking crisis. Inother areas, thereareanumber ofconstraints. These
include debtservice requirements, thefactthatinvestment wasalready cutin1994(theGDI/GDP ratio
fellto12.2percent,asnoted earlier), andtheGovernment isreluctant tocutsocial services because
ofthenegative impact onthepoor. Consideration isbeing given tocutting backonredundancy payments
todismissed public sector employees, which would reduce thecosts ofcutbacks.WT/TPR/S/10
Page 12Trade Policy Review Mechanism
28. Overall, itseems likely thatthefiscal deficit willriseto10percentofGDPin1995. Earlier
government forecasts ofadeficit ofsome 4percentofGDP were predicated onthepassing ofan
increase inthewholesale andconsumption taxesfrom12.5to15percent,butthishasnottaken place.
Apart from itshopes forincreased privatization funds, consideration isalsobeing given toraising
funds through theissueofU.S.dollar denominated bonds onthedomestic market aswellastheissue
ontheinternational market ofbonds backed byrights tofuture oilroyalties.
(vi) Money andfinance
29. Thestructure ofthefinancial system inVenezuela isdiscussed inChapter Vofthisreport.
Until thebanking crisis of1994 ithadchanged little, withminimal participation byforeign banks,
financial weaknesses andinadequate supervision. Reforms, including tightened supervisory regulations
andprudential control hadbeenproposed in1991, butthesewereheldupbytheCongress. Eventually,
anewCentral Bank lawwasapproved inDecember 1992, following thepolitical andeconomic crises
ofthatyear. Greater autonomy wasgranted totheCentral Bank which wasalsoexplicitly forbidden
togrant direct credit totheGovernment. Thesupervisory andprudential reforms continued tobeheld
upuntilpushed through under theextraordinary powers oftheinterim administration inlate1993.
30. Legal restrictions oninterest rates hadbeen removed inearly 1989, butthismove was
subsequently ruled unconstitutional bytheSupreme Court, andtheCentral Bank hadtore-introduce
alegalmaximum lending rateandaminimum deposit rate. Since thentheCentral Bank hastriedto
influence thelevel ofinterest ratesbyopenmarket operations. Itwasabletomaintain arelatively
tightcredit policy in1990-91, butnotenough tohaltadeterioration inpublic sector finances, andin
1992 thesituation worsened. Intheperiod March-September 1992, theCentral Bank, inattempt to
dampen price pressures, increased foreign exchange sales, resulting inalossofsome US$1 billion.
Thistriggered aspeculative attack onthecurrency andpaved thewayforpolitical unrest.
31. In1993, inthefaceofapersistent weak fiscal policy stance andcontinuing political problems,
there wasarecurrence offinancial andexchange rateinstability. Asnoted earlier, theCentral Bank
allowed interest ratestoriseinlinewiththereturns implied from open market operations, butthis
didnotstemfurther reserve losses; inthesecond halfoftheyeartheCentral Bank allowed interest
ratestodecline because ofconcerns about non-performing loans.
32. Thefirsthalfof1994wasdominated bythebanking crisis. Toprevent further closures after
thefailure oftheBanco Latino, theDeposit Insurance Agency, FOGADE, usedCentral Bank funds
toprovide financial assistance toother banks andafinance company. However, thiswasinsufficient
tostopfurther runsandtheauthorities wereforced tointervene inseveral cases. Bytheendofthe
year, theauthorities hadtaken overorclosed 15banks outof47prior tothecrisis. Afurther four
financial institutions were intervened in1995.
33. TheCentral Bank, concerned about theeffects ofhigher interest ratesonthebanks aswell
aseconomic activity, onlysterilized partoftheliquidity increase associated withtheissueofzero-coupon
bonds. Asinterest ratesdeclined, reserve losses accumulated andmonetary policy wastightened, but
thiswaseased again following theintroduction ofexchange controls inJune1994. Inconsequence
interest ratesfell,becoming negative inrealterms.
34. InJanuary 1995 theCentral Bank replaced itszero-coupon bonds with theTítulos de
Estabilización Monetaria (TEMs), withinterest ratesbeing setbytheCentral Bank instead ofbeing
determined bythemarket. Initially these hadnegative realinterest ratesandthevolume fellshort
ofthematuring zero-coupon bonds, increasing thereserves ofthecommercial banks heldwiththeVenezuela WT/TPR/S/10
Page 13
CentralBank.Theconsequentincreaseinthemoneysupplyisanotherfactorinexpectationsofincreased
inflation inthecurrent year.
(vii) Balance ofpayments
35. Themarketopeningmeasuresundertakensince1989haveachievedsomesuccessinstrengthening
Venezuela 'sintegration intheworld economy, andthere hasbeensome expansion ofnon-traditional
exports. Nevertheless, Venezuela 'sbalance ofpayments continues tobestrongly affected by
developments intheworld oilmarket andrelated movements intheterms oftrade. Traditionally, the
balance ofmerchandise tradehasbeenstrongly positive, anditwasshock ofthestrong negative result
ofUS$2 billion inthetradeaccount tradein1988thatledtotheserious tradepolicy reforms initiated
in1989(Table I.3).Thepositive traderesult for1991waslargely aresult oftheincrease inoilprices
atthetimeoftheGulfWar. Since thenthefallinoilprices, from around US$26 attheendof1990
abarrel toUS$14 in1993 forVenezuelan exports, hascaused anadverse trend intheterms oftrade
andcontinued weaknesses inthebalance ofpayments asawhole.13Theimprovement inoilprices
tosome US$15.05 abarrel inApril 1995 should helpthesituation, except thatoutput hasbeenheld
backtotheOPEC quota levelwhich Venezuela hadexceeded in1994 (Chapter V).14
36. Theoverall performance hasalsobeen adversely affected byalossininternational
competitiveness inthelastfewyears. Inthe1980s, therealeffective exchange ratedepreciated strongly
through to1987, increased sharply in1988, before bottoming outin1989 (Table I.2,Chart I.5).
However, since 1990 themovement hasbeenupward, except foraslight fallin1994, indicating a
lossintheinternational competitiveness ofVenezuelan exports inthelastfewyears. Theexpectation
isthat,following thefixing ofthenominal exchange rateinJune1994, therewould havebeenafurther
appreciation oftherealexchange rate.
37. Before 1989, there hadbeenasystem ofexchange controls. In1989, theauthorities allowed
theexchange ratetobelargely setbymarket forces, except thattheCentral Bank played animportant
rolebecause ofthecontinued surrender requirements fortheearnings ofthestatepetroleum company,
PDVSA, anditsaffiliates. Inearly 1992, during thepolitical unrest, theCentral Bank became more
actively involved inthemanagement oftheexchange rate,selling large amounts offoreign currency
tocounter pressure onthebolivar. Thiscontinued untilOctober 1992 when theCentral Bank began
toimplement acrawling pegexchange ratepolicy, allowing thebolivar todepreciate atanaverage
daily rateofBs0.15against theU.S.dollar.
13Theterms oftrade moved strongly against Venezuela formuch the1980s, falling almost constantly from
1981 to1988, withaslight improvement onlyin1987 (Table I.3). Thismovement iscomposed onthesteady
increases inimport prices and,more importantly, theserious decline inexport prices.
14EIU 2ndQuarter 1995.WT/TPR/S/10
Page 14Trade Policy Review Mechanism
38. Despite these changes, foreign exchange losses continued andinApril 1994asystem ofdaily
foreign exchange auctions wasintroduced inwhich thecommercial banks andforeign exchange bureaux
bidfortheforeign exchange offered bytheCentral Bank. Thissystem hadcertain constraints onthe
resale rateandaparallel market developed. Inresponse theauthorities eliminated restrictions onthe
sizeofthebidsandinstituted aDutch auction system under which foreign exchange could bepurchased
attheratebid. While these changes eliminated theparallel market, thebolivar depreciated further
toBs200totheU.S.dollar andreserves continued tofall.Finally, foreign exchange controls were
re-introduced on27June1994 (Box I.2)andtheofficial ratewasfixed atBs170totheU.S.dollar.
InJune1995 theGovernment introduced adegree offlexibility intotheforeign exchange market,
permitting thetrading ofBrady bonds onthestock markets. Trade inthese bonds hadbeensuspended
inMarch 1995 because oftheoperation ofaparallel currency market, which has
developedat aroundBs 200-210 totheU.S.dollar andevenasmuch asBs235inColombia andBs265
inMiami (mid-1995).15
15Latin American Economy andBusiness, June 1995.Venezuela WT/TPR/S/10
Page 15
BoxI.2: Foreign Exchange Controls inVenezuela
Foreign exchange transactions aremanaged bytheExchange Administration Board (Junta de
Administración Cambiaria )andtheTechnical Administrative Office (Oficina Técnica Administrativa de
Cambio ).Requests forforeign exchange must originate withacommercial bank andbeapproved bythe
Exchange Administration Board inaccordance withthequarterly target forinternational reserves. Two
rounds ofprocessing aredesigned toprevent fraud.
Thesalient features oftherégime introduced inJune 1994 are(i)asurrender requirement forforeign
exchange receipts, covering goods andservices aswellascapital movements, (ii)approval ofpayments
forimports ofgoods andservices, (iii)limits onforeign exchange forforeign travel, student andfamily
remittances andonremittances ofprofits from debtequity conversion schemes, (iv)restrictions onthe
servicing ofprivate sector foreign debt, including registration and approval procedures, and
(v)regulations ontherepatriation offoreign capital invested inthestock market. Priorities are
established fortheallocation offoreign exchange forimports ofgoods andservices; these favour
exporters whorequire more thanthe10percentthattheyarenormally allowed toretain inorder topay
forimported materials ortoservice their foreign debt. Itappears thatforeign exchange forthepurchase
ofluxury goods, such asvehicles, alcoholic beverages, etc., isvery limited. PDVSA isexcluded from
theforeign exchange controls. Imports ofgoods andservices under central bank clearing arrangements
suchasthose withtheLatin American Integration Association (LAIA) areexcluded from therequirement
ofapproval bytheExchange Administration Board.
39. Until the1980s Venezuela didnothaveanexternal debtproblem. However, asnoted earlier,
Government expenditure wasnotadjusted tothelower oilrevenues ofthelate1970s and1980s and
theGovernment financed itscurrent expenditures from foreign borrowing. Since therescheduling
ofcommercial bank debtin1990, long-term debthasagain risen, reaching US$37 billion in1993
(Table I.4). Theratiooftotalexternal debttoGNP rosefrom10.7percentin1970to44.8percent
in1980, rising toapeakof65.3percentin1989 andremaining over63percentsince. Theratio
ofexternal debttoexports ofgoods andservices, which hadbeenonly50.2percentin1970, rose
toreach apeakofover300percentin1986, ayearinwhich oilprices fellsharply. Similarly, the
ratioofreserves tototalexternal debtfellfrom 44.8percentin1970 toalowofonly8.9percent
in1988. Theneedtoservice thesedebts, withlong-term interest payments amounting toUS$1.8 billion
in1993(albeitreducedfromapeakofUS$3billionin1990),posessevereconstraintsontheGovernment
intherestructuring ofpublic finances.WT/TPR/S/10
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Table I.4
External debt
(US$ million andpercent)
1988 1989 1990 1991 1992 1993 1994
Flows
Long-Term Interest Payments 2,665 2,452 2,993 1,980 1,626 1,761 ...
Long-Term Loans, net -702 523 478 983 1,484 622 ...
-Disbursements ofL-TLoans 1,727 1,267 2,226 1,774 2,497 2,137 ...
-Repayments onL-TLoans 2,429 744 1,747 791 1,013 1,515 ...
Debt bycategories
External Debt, total (EDT) 34,738 32,377 33,170 34,122 37,774 37,465 ...
-Long-Term External Debt (by
debtor)29,464 30,087 31,170 31,838 32,499 32,782 ...
--Central Bank Ext.Debt, incl.IMF
credit9 1,003 3,014 3,251 2,948 2,681 ...
--Central Government 22,416 21,949 21,986 22,664 23,266 23,899 ...
--Non-financial Pub.Enterprises Ext.
Debt2,755 3,212 2,520 2,272 2,256 2,211 ...
--Priv. Sector Ext.Debt, incl.
non-guarant.4,284 3,924 3,650 3,650 4,029 3,992 ...
-Short-Term External Debt 5,274 2,290 2,000 2,284 5,275 4,682 ...
Memorandum items:
EDT/XGS 273.4 207.4 154.5 183.7 220.4 216.6 ...
EDT/GNP 54.5 65.3 64.2 63.1 64.3 63.1 ...
Reserves/EDT 8.9 12.7 25.1 31.3 25.3 24.6 ...
... Notavailable
Source: World Bank, World Tables 1994/95.
40. Asnoted inChapter III,theobjective ofattracting foreign investment isoneofthefeatures
ofthereforms begun in1989. However, theresults haveonlybeenmoderately successful. There
wasasubstantial inflow ofUS$13.6 billion inforeign direct investment in1990 (more thanoffset by
outward long-term capital movements) aswellasabout US$1.8 inportfolio investment in1991, but
themaininflows in1992and1993appear tohavebeenlong-term borrowing. Thepolitical problems
in1992and1993werenodoubt themainfactors inthelackofinterest byforeign borrowers. Moreover,
asnoted earlier, interest rateshavebeenkeptlowbecause ofconcerns about thelevel ofeconomic
activity.Venezuela WT/TPR/S/10
Page 17
41. Inattempt towooinvestors backtotheVenezuelan market, conditions forrepatriation of
investment, dividends capital gains interest, royalties andcertain other investment-related transfers
weremade easier thanforother forms offoreign exchange. However, apart fromuncertainties about
Venezuela, investor interest inLatin American markets ingeneral hascooled inthewakeoftheMexican
financial crisis ofDecember 1994.
42. Netexternal reserves, excluding gold, havefluctuated between 3and15months ofmerchandise
imports since 1988 (Table I.3). Attheendof1993, theywere estimated atsome US$8.3 billion,
equivalent toseven months ofmerchandise imports.
(3) Composition andDirection ofTrade inGoods andServices
(i) Composition ofoverall trade
43. Chart I.6andTables AI.1andAI.2shows thechanges thathavetaken place inthecomposition
ofVenezuela 'strade ingoods andservices since 1980. Theshare ofmanufactures inoverall imports
grew slightly from56.8to58.6percentandthatofmining products remained stable at2.7percent,
between 1980 and1993. Agricultural imports havefallen from 12.5to9.8percent. Transport has
increased slightly from 9.7to11.5percent, while tourism declined marginally from 13.4 to
13.1percent. Themainitems imported areautomotive products andnon-electrical machinery which
represented 13.5percentand13.3percent, respectively, oftotalmerchandise imports in1993.16
44. Exports aredominated bymining products, including fuels; together thesemade up76percent
ofexports ofgoods andservices in1993, down from 93.6percentin1980 (Chart I.6). Theshare
ofmanufactures intotalexports ofgoods andservices rosefrom1.6percentin1980 (notshown on
thechart) to12.3percentin1993. Apart fromcrude andrefined petroleum andpetroleum products,
significant exports were aluminium (3.7percentofmerchandise exports in1993), motor vehicles
(3.7percent) -mainly exported toother Andean Group countries, ironandsteelproducts, coaland
coke, andcanned andsimply preserved fish.17
16UNSTAT Comtrade database.
17UNSTAT Comtrade database.WT/TPR/S/10
Page 18Trade Policy Review Mechanism
Venezuela WT/TPR/S/10
Page 19
(ii) Direction ofmerchandise trade
45. TheUnited States isVenezuela 'smost important trade partner (Charts I.7andI.8,Annex
Tables AI.3 andAI.4). While itsshare ofimports isestimated tohave decreased slightly from
48.1percentin1980to46.2percentin1992, exports increased from27.3to56.4percentbetween
1980and1993(Tables AI.3andAI.4).18TheEuropean Union isthesecond largest source ofimports,
which alsogrew rapidly toreach 31.7percentin1993, while exports remained relatively stable
(22percentin1993).
18UNSTAT data. Figures provided bytheauthorities show theU.S. share ofimports andexports rising
from 33to45percentbetween 1980 and1992.WT/TPR/S/10
Page 20Trade Policy Review Mechanism
46. Imports from other Latin American countries asagroup have alsogrown inimportance,
increasing from15.3percentin1980to18.4percentin1993. However, exports tothese countries
fellfrom 46.9percentto31.7percentinthesame period.
47. Theseoverallnumbersconcealsomeimportantvariationswithintheregion(seealsoChapterII).
Forexample, within theAndean Group merchandise exports toColombia haveincreased theirshare
inthetotalfrom1.5percentto6.1percentbetween 1980 and1993, while imports fromColombia
increased theirshare inVenezuela 'stotalimports from1.6to4.2percentinthesame period. Imports
from Brazil havealsoincreased theirshare inthetotalfrom 2.1to3.5percent, buttheshare of
Venezuela 'sexports toBrazil declined from 3.5percentto2.5percentinthesame period.
(4) Outlook
48. While some significant progress hasbeenachieved intherestructuring oftheVenezuelan
economy, theachievements havebeenatrisksincetheGovernment hasappeared unable tomake much
headway inreducing thefiscal deficit, which liesattherootoftheproblems ofeconomic management.
Theuseofdomestic price andforeign exchange controls canonlybeashort-term solution untilthe
Government addresses thefundamental issue ofpublic finance. Theannouncement ofpetrol price
increases inSeptember 1995willbetaken asapositive signthattheGovernment hasbegun toaddressVenezuela WT/TPR/S/10
Page 21
thisissue seriously. However, theGovernment hasbegun talkswiththeIMFandtheWorld Bank
toobtain financial support forastabilization andeconomic reform programme. Inthemeantime, the
economyisinastateof"stagflation"-economicdepression,increasedunemploymentandrisinginflation.
49. External conditions arealsoofsome importance. Forexample, therecent increase inoilprices
mayhelprelieve thecurrent economic situation. Negative realinterest ratesandthecontinued existence
offoreign exchange controls willdolittletoincrease theattractiveness oftheVenezuelan capital market.
Alifting offoreign exchange controls oncurrent account transactions, which isunder consideration,
would beawelcome firststeptowards normalization, avoiding distortions intheallocation ofresources
associatedwithprolongeduseofsuchmeasures.Similarly,thereisaneedformoretransparentexchange
rules forthetreatment offoreign investment.
50. Membership oftheAndean Group, aswellasdeeper tieswithColombia andMexico, should
leadtoafurther intensification ofregional integration (Chapters IVandV).Such integration could
wellbedeepened byproposals tolinktheAndean Group with theSouthern Common Market
(MERCOSUR), butthiswillonly beofrealbenefit toVenezuela ifthese agreements are
outward-oriented.Inthisrespect,Venezuelamightbeexpectedtobenefitinthelongerfromtheproposed
FreeTrade AreafortheAmericas (FTAA) which should reinforce itsautonomous reforms toagreater
extent thanthemore limited regional agreements.
51. Thepost-UruguayRounderaaswellastheFTAAproposalshouldbringaboutimportantchanges
intheexternal conditions facing Venezuela, implying aneedforgreater adaptability initsdomestic
economy. Thiscanbeachieved bycontinuing theprocess ofliberalization offoreign trade aswell
astheforeign investment régime, enhancing theresults ofboththrough implementation ofpublic sector
reforms. Improved management ofoilrevenues isalsocritical, notonlytothepublic sector; atpresent,
thecombination ofcross-sectoral subsidies through lowoilprices, fluctuating realexchange ratesrelated
totherepatriation ofoilprice revenues, andexchange andprice controls cause mixed signals toother
sectors.