CHAVEZ 'S OFFENSIVE ON THE ECONOMY FRONT ? [1]
May 21, 2003

After the crippling strike of December-January and the even more crippling economic results of 2002 [2], Chavez needed to do something to stop the bleeding in his revenues. The simplest way was of course to establish a currency control exchange on January 22. By this stroke he forbade any Venezuelan citizen to purchase any foreign currency and he reserved the right to fix the exchange rate and the amount of foreign currency that people would be allowed to buy, eventually. A price control scheme for basic food staples was set up along, and already collapsed.

The controls were announced with an initial moratorium of 5 working days. Today, May 21, the dollars sold are a risible few millions, and only as of this week. The first authorization was announced grand style by Hernadez Behrens, who repeated in front of the cameras the incredible announcement that Cargill had been allowed to purchase 8,000 dollars. Eventually somebody must have told him how ridiculous that sum was and a few days later he tried to say that he meant 8 million. Cargill has remained mute.

It remains that from January 22 until May 16 the private sector has not exchanged a single dollar. Justification? Well, people that want dollars for business have to justify their need and prove that they owe nothing to the government. In a country of deadbeats this was OK, however what was not OK is the sheer incompetence of the government to set up the registration system. One must wonder actually if people can be so incompetent. Is there a devilish purpose behind this? The apparent incompetence of people seems a very good first hint. And there are more.

One governmental option would be to simplify their system at least for some type of imports, such as medicines. Instead, to compensate for the lack of imports in raw materials such as wheat or soy for animal feed, Chavez administration has announced plans to buy frozen chicken from Brazil and a whole assortment of substandard goods through Cuba as an intermediary! This for distribution at subsidized and controlled prices. The brandished excuse is that the private sector pretends that the fixed prices are below actual costs, so the government will show them. Of course to distribute this imports the government is setting up its own food stores, and it is not paying import taxes which the private sector is forced to pay, increasing thus its costs, while making it impossible to compete against the state. Fair?

Even a Morgan Stanley expert sent to see what was going on came with a lapidary review: “it is all Politics” (EN) [3].

CONSEQUENCES

The effect of a two months general strike followed by a three months import “strike” have had a deadly toll on an economy which needs to import 60% of its raw materials.

The Central Bank, which has a more moderate forecast due to its lack of complete independence from the government, has already quite staggering numbers. The expected decrease in the GPI for 2003 is expected to be 17 % (after the 9% decrease of 2002). Just for the first quarter the shock is 35% mainly due to the oil decrease estimated at 45-48% on its own. Its posterior recovery explains why the overall will be 17% (UN). Of course if Chavez is right and the oil industry recovers fully that means that the 17% will be mostly from the private sector.

But private banks are a little bit more pessimistic and talk of a 40-42% first quarter, and a 33.5% inflation for the 2003. Business associations point out that in 1999 there were 11 535 industrial establishments in Venezuela and that by the end of 2003 the number should be down to by 60% to more or less 4500 establishments. This would imply a loss of 800 000 thousand jobs on top of the 600 000 lost until 2002.

A significant report on the custom activities show that this sector has fired 15 000 people since January. Customs revenue has dropped 60% so far this year even though all the imports that were stopped during the strike came in after the imposition of the currency control and thus were processed (EN). The revenues are expected to drop further affecting all the activities linked to custom: transportation, custom agents, shipping, services and others.

Obviously this deepening crisis is going to severely curtail government revenue. No official audit or accounting comes from the oil industry since the take over by Chavez hacks, there is no way to know what is really inside the national treasure. This silence by itself is telling of the mounting financial problems encountered by the administration.

Yet the government tries to appear unperturbed and pretends that everything is returning to normal. One must wonder whether Chavez is looking forward the final economic collapse.


[1] This is the first installment of a series of articles on the Chavez counter-offensive.
[2] A drop of 9% in the GPI (Gross Production Index)
[3] Unfortunately due to the crisis several Venezuelan papers have started charging for Internet access. Thus my ability to put links has been curtailed. For this series of articles I will use the convention UN = el Universal (still free thus some links will appear), EN = El Nacional, for articles appeared between May 11 and today.