Venezuelan economy takes historic nose dive

May 26, 2003 By <a href=www.busrep.co.za>IOL Business Report-Reuters

Caracas - Venezuela's economy had plummeted 29 percent in the first quarter, squeezed by an anti-government strike and tight exchange controls, the Central Bank of Venezuela said on Friday.

Analysts said it was the worst economic collapse ever recorded in Venezuela, the world's fifth-biggest oil exporter, and probably the steepest quarterly contraction seen in Latin America.

"It's unprecedented and reflects a destroyed economy," said independent economist Alexander Guerrero.

The central bank said Venezuela's strategic oil sector, which accounts for half of government revenues, shrank by 46.7 percent in the first quarter while the non-oil sector contracted 20.9 percent.

In December and January President Hugo Chavez toughed out a general strike aimed at forcing him out of office.

Crippling work stoppages temporarily slashed oil output by state oil firm PDVSA, choking off government revenues and triggering heavy capital flight.

This forced the government to impose foreign exchange controls, reducing imports and exports.

"Firstly, it was the effect of the PDVSA strike and secondly, the impact of the exchange controls," said Jose Cerritelli, an economist with Bear Stearns in New York.

He noted, however, that the government had since managed to restore strategic oil production.

The first-quarter gross domestic product (GDP) shrinkage followed a record decline of 16.7 percent in the last quarter of 2002. In the whole of last year, when Venezuela was rocked by months of political turmoil culminating in a short-lived failed coup against Chavez, GDP fell nearly 9 percent .

In its quarterly report, the central bank said the capital portion of the balance of payments registered a deficit of $1.5 billion in the first quarter against a $2.4 billion deficit a year ago.

The current account surplus stood at $1.9 billion compared with a $209 million surplus last year.

Although expected, the GDP collapse is a blow for Chavez, who since his election in late 1998 has struggled to implement his self-styled revolution, an antipoverty programme based on government spending and a bigger role for the state in the economy.

His foes, who include business leaders and dissident military officers, accuse him of squandering the nation's oil riches and trying to implant Cuban-style communism.

Analysts said the crucial oil production recovery could slow the economic nose dive.

The International Monetary Fund has predicted Venezuela's economy would shrink 17 percent in 2003. Finance minister Tobias Nobrega sees a decline similar to last year of around 9 percent.

Importers and exporters say the state's painfully slow allocation of dollars is strangling business activity, disrupting manufacturing and creating shortages.

Nobrega said on Thursday the government would correct faults in the currency regime.

The central bank report said the worst-hit sector in the first quarter was construction, which fell 64 percent. Manufacturing shrank 35.1 percent. - Reuters