Fiscal squeeze hard to overcome this year if economic policy remains unchanged

<a href=www.vheadline.com>Venezuela's Electronic NewsPosted: Monday, May 12, 2003 By: Jose Gregorio Pineda & Jose Gabriel Angarita</a.

VenAmCham's Jose Gregorio Pineda (chief economist) and Jose Gabriel Angarita (economist) write: The events experienced by Venezuela from December 2002 to February 2003 made clear once again the country's enormous dependence on the oil sector and the consequences of a partial shutdown of many productive industries due to the intense political conflict prevailing in the country.

This situation depressed current revenue by more than 5 points of GDP and made it extremely difficult to continue servicing the government's internal and external debt, given the rapid buildup of short terms that prevail in the first and the heavier cost of the second because of currency depreciation.

A variety of measures were taken to cope with the fiscal crisis. On the one hand, a 4 trillion bolivar staggered cutback of public spending was announced in January. The first stage amounted to 2.8 trillion bolivares, with another 1.2 trillion bolivar reduction to be made later on, as needed.

The Finance (Hacienda) Ministry subsequently asked the banks to accept swaps that would postpone public bond maturities, and the Bank Debit Tax was extended through December 31.

All these moves reflect a strategy aimed at cutting the cost of government, increasing revenue collections, and refinancing internal public debt, in spite of the heavy outlays to import gasoline needed to meet domestic demand while the oil industry was not producing.

The authorities decided to impose strict price and exchange controls (to the point where dollars are still unavailable more than 100 days after the measure was adopted). The distorting effects of these controls quickly made themselves felt: on the one hand, the negative impact on tax collections of falling imports, and on the other, impending shortages of raw materials needed by Venezuelan producers.

The controls are clearly incompatible with improved revenue flows and falling public spending.

Government spokesmen recently announced an import plan with tariff exemption to cope with the shortages provoked by the controls, which are hurting all the economic agents. As if that were not enough, the second round of spending cuts planned for this year was also ruled out. But the actions taken seem to lack fiscal coherence, and seem out of synch with prevailing conditions in Venezuela and the world.

The foreign exchange shut-off will continue strangling industry and import duties will continue to be depressed.

At the same time, oil prices are expected to decline, resulting in less revenue from oil exports. Not to mention the problems with the Andean countries that could be provoked by the tariff exemptions.

The facts indicate that the officials responsible for Venezuelan fiscal policy should be conservative and maintain tight spending controls to improve cash flow, as well as restore the supply of foreign exchange to the private sector.

Respecting international agreements and ensuring the continuity of industrial operations are needed to prevent an excessive growth of unemployment and reduce the risk of a cessation of debt payments.

If changes are not made in the rest of economic policy, the vicious circle will continue and the fiscal problem will not be overcome.