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Thursday, April 24, 2003

Venezuelan Planning Ministry's expectations seem as "excessively optimistic"

<a href=www.vheadline.com>Venezuela's Electronic News Posted: Monday, April 21, 2003 By: VenAmCham

VenAmCham's Jose Gregorio Pineda (chief economist) and Jose Gabriel Angarita (economist) write: Planning Minister Felipe Perez announced his preliminary forecasts for 2003, predicting that the Venezuelan economy will contract by 3% to 5% and inflation will come to 27%. These estimates reflect a serious underestimation in comparison with those offered by many specialists, including those of the International Monetary Fund (IMF), which forecasts a 17% plunge of economic activity and a 40% inflation rate.

The current trend in the Venezuelan economy, marked by the closing of industrial companies, a massive growth of unemployment, worsening poverty indicators, economic policies (such as price and exchange controls) detrimental to productive enterprises, barriers to foreign trade, and other distortions, could not result in anything but a deep contraction of Gross Domestic Product, to an even greater extent than in 2002.

One of the strongest explanatory factors in this highly adverse scenario for the Venezuelan economy is the systematic refusal to distribute foreign exchange to the different industries, under the exchange control system. Until the foreign exchange market is restored, even if with strict rationing, the national private will continue to be in serious difficulty, and the inevitable outcome will be higher unemployment, a deeper economic contraction, and a smaller private share in national product.

At the same time, the different components of aggregate demand contribute to the prevailing negative expectations on the course of economic activity in 2003. One of those components is a drastic decline of final household consumption, which is suffering the impact of falling real salary levels; this trend diminishes access to goods and services and undercuts well-being throughout society. Internal and external private investment have fallen considerably in recent years, and are now very skittish, given the unfavorable economic expectations and policies. Finally, public spending contracted drastically in the early months of the year (and is not expected to recover in real terms in the rest of the year) due to the fiscal crisis.

The only way to reverse the economic failure toward which we are moving, since political and social conflict have been partially limited, is a radical change of direction for economic policy. Venezuela needs policies that put in motion a plan for sustained economic growth based on a revival of national industry through the free operation of the external and internal markets, thereby stimulating the creation of new jobs, generating a favorable climate for investment of capital and maintaining price stability, among other policies designed to put the Venezuelan economy on the path toward sustained economic growth.

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