Report No.5016-E Economic Memorandum On Venezuela July 15, 1985 LatinAmerica and the Cafibbean Regional Office FOR OFFICIAL USE ONLY ;u of 'the World Ban .. ' , =- nts. ' | | 0 I .; . _ ;- 4..,. _ '.",,.'._'' .' '- ~~~~~~~~~~~~~* - .,'-.)'.'- ,-:D.3., '. , 3V... . ;. r -zd Los eww..om:Wb '13ank rization.-- . ''i''''''1''2i85,''''',''' ,0 ''-DL . t a. w ,- Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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Public Disclosure Authorized Economic Memorandum On Venezuela · ALCASA Aluminio del Caroni, S.A. (Caroni Aluminum Company) BANDAGRO Banco de Desarrollo Agropecuario (Agricultural
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1/ Official rate. Certain transactions are conducted at rates of Bs 4.3and Bs 6.0 per US$. In addition, there is a legal "free market" rate,transactions on this market approximately Bs 13 per US$ in mid 1984.
2/ Official rate. Certain transactions were conducted at rates of Bs 6.0per US$, legal "free market" rates ranged between Bs 8 and Bs 17 perUS$.
FOR OMCIAL USE ONLY
ACRONYMS
ALCASA Aluminio del Caroni, S.A.(Caroni Aluminum Company)
BANDAGRO Banco de Desarrollo Agropecuario(Agricultural Development Bank)
BAP Banco Agricola y Pecuario(Agricultural and Livestock Bank)
BAUXIVEN Bauxita de Venezuela(Venezuelan Bauxite Company)
BCV Banco Central de Venezuela(Central Bank of Venezuela)
CADAFE Compania Anonima de Administracion de FomentoElectrico (Electricity Company)
CGV Corporacion Venezolana de Guayana(Venezuelan Guayana Corporation)
CMA Corporacion de Mercadeo Agricola(Agricultural Marketing Corporation)
CORDIPLAN Oficina Central de Coordinacion y Planificacion de laPresidencia de la Republica (Central Coordinating andPlanning Office of the President)
CVF Corporacion Venezolana de Fomento(Venezuelan Development Corporation)
EDELCA Electrificacion del Caroni, C.A.(Caroni Electric Company)
ELECAR C.A. La Electricidad de Caracas(Caracas Electric Company)
ENELBAR C.A. Energia Electrica de Barquisimeto(Barquisimeto Electric Company)
ENELVEN C.A. Energia Electrica de Venezuela(Venezuelan Electric Company)
FCA Fondo de Credito Agropecuario(Fund for Agricultural and Livestock Credit)
FERROMINERA CVG-Ferrominera del Orinoco(CVG-Iron Ore Company)
This documnt has a resictd distribution and may be used by recipients oly in the pefamnae of |the officid duel Its contents may not otherwi be dicosed without World DBank authoration.
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FIV Fondo de Inversiones de Venezuela(Venezuelan Investment Fund)
FONAIAP Fondo Nacional de Investigaciones Agropecuarias(National Fund for Agricultural and Livestock Research)
FONDUR Fondo para el Desarrollo Urbano(Urban Development Fund)
IAN Instituto Agrario Nacional(National Agrarian Institute)
ICAP Instituto de Credito Agropecuario(Institute for Agricultural and Livestock Credit)
IMF Fondo Monetario Internacional(International Monetary Fund)
INAVI Instituto Nacional de Vivienda(National Housing Institute)
INTERALUMINA Interamericana de Aluninio, C.A.(Inter-American Aluminum Company)
MAC Ministerio de Agricultura y Cria(Ministry of Agriculture)
MINERVEN Mineria de Venezuela(Venezuelan Mining Company)
MINORCA Mineria del Orinoco, C.A.(Orinoco Mining Company)
OCEI Oficina Central de Estadistica y Informatica(Central Office of Statistics and Information)
PDVSA Petroleos de Venezuela, S.A.(National Petroleum Company)
RECADI Regimen de Cambios Diferenciales
SIDOR Siderurgica del Orinoco, C.A.(Orinoco Steel Company)
VENALUM Venezolana de Aluminio(Venezuelan Aluminum Company)
VENORCA Venezolana de Oro, C.A.(Venezuelan Gold Company)
ABSTRACT
This report is an analysis of the economic policies andperformance of the Government of Venezuela during the 1979-84 period. Itdiscusses the evolution of the economy during the 1970's with particularfocus on the manner in which the Government responded to the oil price risein 1973-74, the subsequent stagnation of earnings in 1977-78, the secondoil price rise in 1980, the subsequent fall in 1981-82, and the response tothe international debt crisis of 1982-83.
The Government which took power in early 1979 inherited aseriously overheated economy in need of significant adjustment, and adiminished outlook for resources. It initiated a stabilization andadjustment program which did not meet expectations because: a) petroleumprices rose in 1980 eliminating the perceived necessity for adjustment,b) the program was not comprehensive, c) the private sector reactednegatively and invested its resources abroad, d) the Government was notsuccessful in maintaining the public sector discipline necessary for theprogram, and e) the international commercial banks were eager to lend thusundermining what little discipline the central Government tried to apply;this led to the buildup of what proved to be an unmanageable debt burden.
The report also examines the key productive sectors: petroleum,aluminum, steel, and agriculture. The heavy resource-based industries havesuffered from overly ambitious investment programs and from the financialburdens of the associated cost overruns, but are basically soundinvestments. Agriculture has suffered from distortionaryr pricing and fromthe burden of subsidizing urban consumers. Petroleum, which was the onlysector able to carry out a coherent investment program during 1979-84, hasnow a solid base for production and refining for the foreseeable future.
The report, which proposes a number of policy actions forstabilization and adjustment, was written in 1983 and presented to thenewly elected Government of Venezuela in early 1984. It was updated inmid-1984 to reflect the policies of the new Government, and is beingreleased, without further updating, for general information.
This report is based on the findings of a mission which visitedVenezuela under the IBRD technical assistance program during April/Hay 1983and again in July, 1984 to review the current economic situation andprospect of Venezuela. The mission consisted of Mr. Nicholas G. Carter(Chief of Mission), Mr. Carlos Elbirt (Economist), Ms. Constance Bernard(Loan Officer), Hr. Jose Antonio Guerra (Consultant), Mr. John Loyer(Consultant for the aluminum sector) Mr. C.P. Roger (Consultant for thesteel sector), Mr. Lawrence Witt (Consultant for the agricultural sector),Mr. Ricardo Halperin and Mr. Hernan Garcia (Economist and Power Analyst forthe power sector), and Ms. Joan N. Ahern (Statistician). Ms. M. Louise Fox(Consultant) contributed to the report, in particular the sections onincome distribution and social services, subsequent to the mission's returnto Washington, D.C.
The report was delivered to the Government of VenezueLa in 1984,and partially updated at that time to reflect the policies of the newgovernment. It is being released in 1985 for general information withoutfurther updating.
ECONOMIC MEMORANDUM ON VENEZUELA
Table of Contents
PageCOUNTRY DATA
SUMMARY AND CONCLUSIONS ............................ ........ i-vii
1. ECONOMIC DEVELOPMENT IN THE LAST DECADE ...............e........ 1
A. The First Half: 1974-1978 ................................ 1B. The Second Half: 1979-1983 ............................... 4C. Recent Economic Developments ............... 0............... 11
II. SECTORAL REVIEW AND ISSUES ............. 14
A. The Petroleum Sectrr 14B. The Steel Industry ........................................ 18C. The Aluminum Industry ............................ -.... 20D. The Mining Sector ...... 24E. The Power Sector ........ 27F. Agriculture ......... 35G. Social Services ........... 43H. Employment and Income Distribution ........................ 48
III. THE OUTLOOK FOR THE VENEZUELAN ECONOMY ..................... 55
A. Development Policy Issues ...................... - .**.*.*--- 55B. Macroeconomic Outlook .. *.....59
STATISTICAL APPENDIX ................... 61
MAP
COUNYR DATA - VENEZUELA Page I of 2
AREA POPULKf(N DENSITY
912.050 eq.ku. (total) 15.1 million (mld-1983) 16.6 per uq.km.307,692 .q.km. (arable) Rate of growthb 2.9X (from 1975 to 1983) 49.1 per sq.km. of arabia land
POIULATOI CHA3CrERISTIC (1980) IlENALT (1980)Cruds birth rat. (per 1,000) 35 Population per physician 833Crude death rate (per 1,000) 6 Population per hompital bed 333Infant mortalty (per 1,000 live births) 32
INE DISTRIBTIOK (1982) DISIPTRJUTON OF LAND OWMNEIIP (1971)Z of household labor incom, highest quint$le 41.4 S ownd by top 3.1Z of awoerr 76.5
lowet quintile 7.0 X owmed by smllest 42.9W of owner. 1.0
ACCrSS TO SAFE WATER (1981) ACESS TO ELECIRICITY (1981)Z of population - urban 96.5 Z of hIumcholds 84.5
- rural 66.8- total 89.5
NtTRITION EDUCATION (1981)
Caloric intake - Z of requirements (1971-74) 98 Adult Literacy rate 84.2Per capita protein intake (gram per day)(1972-74) 63 Primry chool enrollmnt ratio 93.7
CUP PER CAPITA IN 1981 1/ U$4,220
GRDuS NATIONAL PRODUCT IN 1983 2/ AMUL RATE OF CROlH (Z,Constant Prices)
Z 1970-75 1975-80 1983GNP at Market Prices 64,153 100.0 5.8 2.2 -6.3Crowe Domestic Inveatmnt 9,998 15.6 6.7 -6.2 -44.2Gross National Saving 13,704 21.4 16.7 0.8 4.2Ourrent Account Balance 3,707 5.8Exports of Grwds, NFS 17,557 27.4 -8.8 -1.7 2.8mortm of Goods, MIS 19,634 30.6 14.5 6.8 -52.7
O1UTIW. LAUCR FORCE ANDPRO-C- IVm IN 1983
Value Added Labor Farce V.A. Per WorkerUSS Min. S Th. X UsS z
1/ The per capita GNP estimte In calculated by the conversion technique in the World B3ak Atlas.Other conversion to dollars in this table are at the average exchange rate prevaling during the period covered.
1/ Co_r Prlce Index refers to Caraca metropolitan area only.2/ Net lOX BorrowlU for public aor only; private sector (net) Included In Capital n.e.i./ af the Blanig System.
4/ Of the Ctral Bak.5/ attlo of Public Debt Service to Exports of Goods and all Servies.
Not available.
SUMMARY AND CONCLUSIONS
i. Over the last decade Venezuela has experienced the enormousdifficulties of managing an economy overwhelmingly dependent on the produc-tion and export of a single product, petroleum, the performance of whichdetermines the behavior of the balance of payments, government revenues andthe levol of the country's national lncome. In the short period of adecade the country registered, In the early years, enormous increases innational lncome, foreign exchange earnings and international reserves, aswell as in public sector financial resources, all of which stimulatedgeneral economic activity--both production and investment, public andprivate--resulting ln a large expansion of productive employment and risingliving standards. The last five years have wltnessed economic stagnation,a decline ln investment, rising unemployment and accumulation of anexternal debt that places a heavy burden on the country's public financesand balance of payments.
Ii. In the early years of the decade the efforts of the Governmentwere largely successful, particularly with regard to controlling inflationdespite the enormous !-crease of resources. The rate of inflation stayedaround 8Z annually. This was achieved by setting aside a large portion ofthe additional oil revenues In the newly-established Venezuelan InvestmentFund--thus preventing its monetization; allowing a large expansion ofImports and subsidizing the Importation of basic food products. A publicInvestment program was launched largely concentrated In projects designedto develop basic industries--mainly steel and aluminum and electric powerfor all of which the country has an excellent resource base. Institutionaldevelopment included the nationalizatlon of the Central Bank--witn broaderpowers for monetary and credit management--the creation of the petroleumstate company (PDVSA), and the Fondo de Inversiones de Venezuela, an wellas maknog important changes In the banking legislation. The Industrialstrategy of the Venezuelan Government concentrating in developing basicmetal Industries, for which the country has an excellent resource base ofrich and abundant mineral deposits and cheap power, and on which furtherdevelopment of lndustrial and manufacturing productlon could be based was,without questlon, correct. But the course of events has proven that theprogram was much too ambitlous, both In terms of the financial resourcesrequired and, more importantly, of the technical and managerial demandsthey placed on the available human resources. The most basic problems andcostly inefficiencies burdening the large projects In steel and aluminumare described and discussed ln the body of this report.
iii. Despite the relative success of government policies in theinitial years of the perlod, it was soon apparent that serious problems layahead. Petroleum earnings stabilized from 1975 onwards and governmentrevenues also ceased to increase. Expenditures, however, continuedexpanding at a fast rate and thus the Central Government current surplusfell sharply. Investment expenditures continued at a high level, and therewere substantial overall fiscal deficits in 1977 and i978 compared to largesurpluses in the preceeding four years. The balance of payments alsoregistered large deficits on current account and though reserves losses
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were smeil in 1977, they were substantlal in the following year. However,since Venezuela enjoyed an excellent credit standing in external financialmarkets-based on its large foreign exchange reserves and its petroleum
export capacity-the authorities opted for maintaining a higher thanwarranted level of economic activity through external borrowing on a largescale. However, the delays and serious problems of lmplementation of thelarge projects were increasingly becoming a significant drain of theGovernment's financial resources. In fact, their difficulties are largelyresponsible for the accumulation of a substantial external debt, mostlycontracced on short term and high interest rates.
iv. ln 1978, petroleum exports values fell by some Bs 2.2 billion,government petroleum revenues dropped by nearly Bs 4 billion, and thoughtotal resources stayed about the same there was a large overall deficit.The balance of payments registered a large deficit on current account andthere was Also a significant loss of reserves. The new Government thattook office early in 1979 adopted a set of policies designed to cool offthe econoiy and to reduce the distortions that previous policies over mnnyyears had created. Real public sector capital outlays fell sharply, creditexpansion, especially to the private sector, was curtailed and interestrates were Increased. At the same time, domestic prices (other than forpublic sector goods such as petroleum products and electricity) werelargely freed from controls and customs duties on imports substantiallyreduced--though even so they remained quite high. These measures had astrong deflationary effect on economic activity, hut the liberalization ofprices resulted in a surge of inflation which had been repressed byprevious policies, and wholesale prices rose by 20Z. This led to pressureson wages, and an average 25% increase was granted in late 1979, partly onthe assumption that the new OPEC price increase would enable the country toafford such wages. The combination of the wage increases, the removal of asignificant amount of protection from imports, high interest rates abroadand the excess capacity created by the economic contraction resulted in afal' of private domestic. investment and in capital outflows. Privateinvestment, which had amounted to 25% of GDP In 1978, fell to 20Z in 1979,132 In 1980, and by 1982 had dropped to 10% of GDP. The doubling of oilprices in 1979-80 greatly increased governmetnt revenues, and public sectoragencies, which had been constrained since 1977, rapidly increased theirexpenditure, but the nature of the main projects in which investment wasincreased was such that this failed to reactivate the economy, and realnon-oll GDP was stagnant between 1978 and 1981. Real consumption, on theother hand, increased by about 72 in total over the same period.
v. The failure to reactivate general economic activity despite thelarge increase in oil revenues led the authorities In mid-1982 to abandontheir previous course, cancelling most of the early liberalization program,reestablishing and increasing price controls and import restrictions andallowing a substantial expansion of credit by the commercial banks. This
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latcer measure had the effect of accelerating private capital outflows,which reached alarming proportions in 1981 and 1982. In this latter yearpetroleum export earnings fell by about 222, the balance of payments oncurrent account registered a deficit of USS3.5 billion and the capitalaccount--including errors and omissions--a deficit of US$7.5 billion. Itwas then evident that the country was facing a serious external financialdisequilibrium which required severe and urgent corrective measures.
vi. The problems created by the continuing fall of investment and theoutflow of capital were compounded all through this period by the rapidgrowth of the external debt. Venezuela had begun using its capacity forborrowing abroad in 1976, when petroleum revenues had ceased to grow. Bythe end of 1978 the publicly guaranteed external debt was five times thelevel of 1975 and debt service had incressed by 392; the debt serviceratio, however, was still only 8.3X. By 1982, the publicly guaranteed debtwas double the level of 1978 and the debt service ratio had risen to 182.Average international interest rates had also more than doubled and theaverage maturity of Venezuela's loans had dropped from 9.8 years to 8.2years. These later averages, however, mask the very large proportion ofthe debt incurred by the state enterprises that was of short maturity.Although legislation to curb the practice of short term external borrowingby the public sector was put in place in August 1981, the Government wasunable to restructure the debt.
vii. In such circumstances, the drop in petroleum export earnings in1982 and again In 1983, triggered a financial and foreign exchangeemergency which the Government first attempted to stem by taking control ofthe reserves of PDVSA in late 1982 and then, in February 1983, after theJanuary 1983 drop in OPEC prices; through: (a) the partial devaluation ofthe bolivar, (b) the prohibition of all foreign exchange transactions whilethe exchange control machinery was put in place, (c) a total freeze onprices, and (d) a moratorium on the amortization of external debt. The ex-change rate adjustment established three different rates. The old rate ofBo 4.3 to the U.S. dollar applied to the service of the public debt, to thesale ot petroleum export proceeds to the Central Bank, to a list of importItems of popular consumption that were considered essential, and totuition and living expenses required by Venezuelan studentq. A second rateof Bs 6.0 to the dollar was to apply to non-essential imports--those notincluded in the preferential list--and to the service of registered privatecapital brought into the country. All other purchases of foreign exchangehad to be made in the free market. The policy was carried out through theestablishment of an institution, RECADI, to control all foreign exchangetransactions other than those on Che free market; through an Intensifiedprice control mechanism which required extensive documentation and longwaiting periods for any price change; through a freeze on wages andfinally, by the payment only of interest falling due on public externaldebt. The effect was to paralyze imports and force the country to use upits large inventories; imports had been some US$13 billion In 1982, in 1983they fell to US$6.8 billion and gross external reserves rose by
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US$0.7 billion. Economic stagnation was, however, accentuated with GDPfalling by 4.8%, and unemployment, which had been cushioned by the returnto Colombia of migrant workers, began to have a significant impact onVenezuelans. The free market exchange rate, which the authorities hadhoped to keep at about Bs 8/US$ and which is established by a market on theCaracas stock exchange, rose quickly above Bs 10, peaked at Bs 17 atmidyear and then fell back to Bs 13 (3 times the old rate) by the end of1983. At the same time basic foods were, and continue to be, imported atthe old Bs 4.3 rate thus reducing both the adjustment burden on the workingclass as well as some of the pressure on wages. Throughout the year, whichsaw a general election in December 1983, the issue of a permanentsettlement with the foreign commercial banks and the possibility of an IMFagreement was put off for the new Government.
viii. The Government that took office in February of 1984 adoptedimmediately a new set of measures modifying or complementing those of thepreceeding administration. These measures are as follows:
(a) Exchange rate. Essential food and pharmaceuticals are stillto be imported at the old Bs 4.3 rate. Private debt and theinterest accumulated on or before January 1, 1984 will berepaid at the Bs 4.3 rate with terms of seven years, twoyears grace. Scholarships for students abroad beforeJanuary 24, 1984 will also have access to the Bs 4.3 rate.Exports of PDVSA and FERROMINERA will have to be convertedinto bolivars at a rate of Bs 6. The fundamental rate ofexchange for Venezuela will now be Bs 7.5/US$. However, allimporters who wish to use this rate must go through RECADI.Finally, the free market rate (which in the first quarter of1984 has been about Bs 13/US$) will still be available forall other transactions.
(b) Income policy measures. All private firms with 10 employeesor more are required to increase employment by 10% over theJanuary 31 level over the first half of 1984, and tomaintain such employment levels for at least two years. Allfirms not having canteens for employees must establish them,(though not necessarily free of cost to the employees). Allwages below Bs 3000/month must be increased by Bs 100,primarily to offset assumed increases in transport costs.On the other hand, government employment is to be frozen andgovernment salaries above Bs 16,000 per month will be cut by10%.
(c) Measures concerning energy. The prices of gasoline andother oil products were increased. Premium gasoline wentfrom Bs 1/liter to Bs 1.2 and regular from Bs 0.3 toBs 0.8/liter. These prices are considerably higher than
before and eliminate a significant amount of the relativeprice difference between the two grades. However, at theopportunity cost of petroleum products to PDVSA these pricesare lower than the previous prices at the old exchangerate. The prices of the other oil derivatives were alsoincreased, but still they remain well below internationalprices.
(d) Interest rate and price policy measures. Interest rateswere lowered to 8J% for agriculture and to 14Z for low andmoderate income housing. Savings deposit rates were loweredto 8% (most rates were previously around 15%). Inflation isexpected (by the Government) at 20% in 1984 and pricecontrols will be maintained in their current form.
ix. These measures should facilitate relationships with the foreigncommercial banks with whom the issue of the private sector debt is stilloutstanding. In addition to the above measures in March 1984 the Congressempowered the President of tte Republic to take actions for (a) reducingthe 1984 public sector current expenditures by not less than 10%;(b) cancelling by compensation all public sector inter-agency debts, theCentral Government absorbing the net balance; (c) restructuring the publi'csector by selling, merging or eliminating agencies; (d) closing down sevencommercial. banks at present under government stewardship, the CerntralGovernment absorbing any net losses; (e) establishing bank depositsinsurance schemes; (f) increasing alcoholic beverages and stamp taxes;(g) regulating retirement pensions for public sector employees and(h) facilitating the refinancing of farmers' debts in terms to be decidedby the Government but subject to a grace period of not less than threeyears.
x. The Government 's avowed purpose was to carry out during 1984 anadjustment program designed to prevent a further deterioration of theeconomy and to set the basis for reassumming some modest growth in 1985.Concerning public finances, the program included reducing public sectorcurrent expenditures by 10% and increasing the taxes in addition to the tax-ncrease on gasoline and other petroleum products already made. Theauthorities expect that the combination of these measures plus the exchangeprofit accruing to the Government from the devaluation, will Ne sufficientto wipe out the public sector deficit by the end of the year. An importantfeature of the program with regard to the public sector is a retitructuringaimed at reducing the number of autonomous agencies and public enterprisesthrough sales, mergers and, in several instances, their outrightliquidation. On the balance of payments side, the authorities expect thatthe new, more realistic exchange rate and the continuing control of importswill result in a US$1.5 billion current account surplus by year-end. Byquickly achieving both domestic and external equilibrium, the governmentexpects to restore private sector confidence and stimulate a revival ofprivate investment, albeit modest.
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xi. The major macroeconomic task of Venezuela in the medium term willbe to establish and maintain a program of economic diversification, and toavoid the balance of payments and external debt crises of the previous sixyears. This requires (a) some type of debt rescheduling of the currentshort- and medium-term debt over an extended period and (b) growth, incomeand expenditure policies necessary to insure that the balance of paymentsremains viable over the period of debt repayment. The degrees of freedomassociated with Venezuela's long-term growth strategy will be primarilydetermined by the international petroleum market, as petroleum remains themost important determinant of Venezuela's terms of trade and balance ofpayments position as well as fiscal revenues. Given the terms of a debtrescheduling and a long-term petroleum forecast, the balance of paymentsperformance will be essentially the result of the rate of economic growthand of expenditure patterns, which determine the level of imports. Thus,the question for Venezuela today is: What macroeconomic growth and incomespolicies are compatible with a sustainable balance of payments andreasonable debt servicing given certain levels of petroleum revenues?
xii. To address this question, an accounting projection model of theVenezuela economy was utilized to illustrate the dimensions of economicactivity over the next decade compatible with the constraints on thebalance of payments. The central assumptions are as follows:
(a) a program of repayment of all debt under a ten-yearamortization to begin in 1985;
(b) external borrowing in amounts not exceeding debt repaymentsby the country as a whole, so that the overall level ofexternal debt is reduced in absolute terms;
(c) continued constraints on imports of consumer goods and onnon-factor service outflows; and
(d) appropriate domestic pricing of petroleum products.
xiii. In the immediate future, the period which is most crucial for therecovery of the Venezuelan economy, the international petroleum market doesnot have a bright outlook. It is likely that the OPEC average price willfall slightly in nominal terms in 1984 and would probably not recover tothe 1982 average until 1987 or after. In real terms this means thatVenezuela cannot expect the return from a barrel of petroleum to go back tothe 1980-82 levels until after 1990. Thus the only sources of realincreases in export earnings available to the country earlier are non-traditional exports and increases in the volume of petroleum. Although theformer can with appropriate policies be expected to increase, it accountsfor less than 10% of export earnings, faces difficult markets (steel,aluminum) and will under the most favorable conditions take some time to bea significant source of overall growth in real export earnings. Anincrease in petroleum volume could be a strong factor in the balance ofpayments over the rest of the 1980's. Current production levels are about1.8 million barrels per day while the country has a sustainable capacity of2.5 mb/d, which would represent an increase of nearly 40%. However, theOPEC agreement places limits on production rather than exports and in view
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of current market conditions it is unlikely that Venezuela will be able toproduce any more than 1.8 mb/d during 1984. We have assumed that after1984 the country will increase its production by about 2% per annum. Therestriction, as mentioned above, is on production; Venezuela can increaseexport earnings by consuming less at home. In 1976 the country consumedabout 250,000 b/d; by 1982 this had climbed to 410,000 b/d; this increasecost the country some US$2 billion of foreign exchange in that year. Thedomestic price increases on products in 1982 are estimated to have reducedconsumption to about 350,000 b/d and it is assumed that appropriate priceincreases (such as occurred in early 1984) will keep the increases indomestic use of petroleum to about a 2% annual growth rate.
xiv. The results of the projection indicate that in order to be con-sistent with the balance of payments constraints above, the economy ofVenezuela, having declined in 1983, will not be able to grow more than 0.5%in 1984 nor more than slightly over 3% per annum in real terms over thelong run.
xv. The overriding problem for the balance of payments, and thus forthe economy during the rest of the 1980's is the external debt. At roughlyUS$35 billion, it is twice the amount of export earnings. Almost 30% ofexport earnings are currently devoted to interest on this debt. Venezuelawill have to be a net exporter of capital for some years to come in orderto get the debt down to manageable levels. If a consistent policy of debtmanagement is followed and if domestic policies conducive to theestablishment and maintainence of efficiency are adopted and maintained,the country could be considered creditworthy for limited amounts of netadditional borrowing, particularly if such borrowing is directed at highlyproductive projects and accompanied by policies to encourage efficiency.
xvi. The projection has assumed that the private capital flows remainneutral over the projection period, exhibiting neither the massive exodusof 1979-82 nor a significant inflow. If however, development and economicmanagement policies conducive to efficiency and to the encouragement of theprivate sector were set in place and maintained, a significant reflow ofsome of the capital that left the country might be possible. TheGovernment which took office in early 1984 has thus far given strongindication that it intends to pursue such a course. Under suchcircumstances, both investment and growth could be considerably higher thanis currently foreseen, and real consumption could be allowed to return tothe levels of the early 1980's albeit with some caution and restraint onthe import of consumer goods.
I. ECONOMIC DEVELOPMENT IN THE LAST DECADE
A. The First Half: 1974-1978
1. The direct effect on the Venezuelan economy of the huge increasein the value of petroleum exports was on income, as Gross National Incomeincreased roughly 50% between 1973 and 1974. Some of this income accruedto households, in the form of a terms of trade effect and subsidizedpetroleum product prices, but for the most part, the income was receiveddirectly by the Government, as income tax and royalties from oil companiesincreased Central Government revenues by 265Z in 1974. This suddenaffluence of fiscal and foreign exchange resources of the Governmentgreatly increased the role of Venezuela's public sector. The responsi-bility for maximizing Venezuelan development possibilities as well asimproving the social welfare of the population was placed squarely in itshands. The task of the Government was to manage the tradeoff betweenpublic consumption and investment, directing the inevitable pressures toaccelerate both.
2. The most important structural development of the period was therapid growth of the public sector. Through the nationalization of thepetroleum and iron ore operations, the development of the aluminum andsteel sectors, the expansion of infrastructure investments and the growthin social programs, the ratio of public sector expenditures to GDPincreased from one-third to well over one-half over the period. Most ofthis growth occured in public sector investment, which increased 2.5 timesfaster than GDP as a result of the new role of the Government in theindustrialization of Venezuela. The importance of petroleum revenues infinancing that industrialization compared to previous periods required thecharacter of the government sector to change from an administrative one toa more entreprenuerial one. For Venezuela, this transition has not beeneasy. The very magnitude of the public sector investment program was muchtoo ambitious for any government; delays and cost overruns wereinevitable. In Venezuela, the rate of growth of the program as well as itsnew character pushed existing systems and capacities beyond theirresources, placing a premium on managerial and administrative skills andpersonnel within the government as it attempted to fulfill its new role.
3. The Central Government's response to the large increase in incomewas, at first, somewhat prudent. Recognizing the importance of this trade-off, as well as the potentially destabilizing effects of completelymonetizing the windfall in the first years, in 1974 the Government setaside 35% of petroleum revenues to be used for public sector investment inthe future. This was done through the instrumentality of the Fondo deInversiones de Venezuela (FIV), a new agency created to manage theinvestment of the oil revenues accruing to the Government. Nevertheless,despite this measure, the pressures to accelerate development programs werestrong and Central Government current expenditures increased 50% while itsinvestment expenditures increased 126%. In the next year, the Governmentagain transferred substantial resources to the FIV, and current and capitalexpenditures increased about 25%. However, petroleum production was
declining because of conservation measures and imminent nationalization,and consequently oil revenues were not increasing. By 1976, the publicsector had expanded to the point that it could absorb all the currentyear's oil revenue as well as the slowly increasing non-petroleum revenue.In that year no revenue was transferred to the FIV. In 1977, although some10% of oil revenue was transferred to the FIV, Central Government currentand capital outlays had swollen to such a high level that the overallpublic sector deficit was almost 4% of GDP. In 1978, the fiscal situationworsened: oil revenues amounted to two thirds of the 1974 level, petroleumprices were falling and the rest of the public sector failed to generateexpected income. The total public sector debt reached 10% of GDP.
Table 1: ANNUAL GROWTH RATES, 1973-1978
(current prices unless noted)
1973 1974 1975 1976 1977 1978
Average Price, FOB,Venezuelan Crude 48.7 222.2 10.1 2.1 11.9 1.3
Total MerchandiseExport Earnings 50.0 135.1 -20.4 4.1 3.4 -5.0
National Income 2.0 61.4 6.6 14.8 14.3 9.1Public Sector Income 42.5 90.8 6.9 32.2 17.6 17.9Gross Domestic Product 5.9 2.3 1.2 5.8 5.4 2.3
4. The stimulus of the increasing levels of government expenditurewas swiftly transmitted throughout the economy. Real non-petroleum GDPgrew at an average annual rate of 9.5% between 1974 and 1977, withvirtually every sector of the non-petroleum GDP sharing in the boom exceptagriculture, which experienced poor weather conditions in 1976. Privateinvestment rates were high, stimulating an average 15% per annum growth inthe construction sector. Incomes grew significantly, and by 1978 realprivate per capita consumption stood some 57% higher than it had been fiveyears previously.
5. Despite strong economic growth, aggregate demand outstrippedaggregate supply throughout the period and the demand surge spilled overinto imports, especially in the public sector, where the high importcontent of large investment projects caused the value of public sectorimports to grow at an average rate of 80% during 1975-77. Although import
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growth slowed in 1978, the combination of high import demand and fallingexport revenues resulted in mounting current account deficits, whichreached US$5.3 billion in 1978, compared to a surplus of US$5.8 billion in1974. Net capital inflows were sufficient to finance the US$3 billion 1977deficit but not the larger 1978 deficit, and reserves, which had beenincreasing in the surplus years, began to flow out in mid-1978. This trendwas exacerbated by the failure of the Venezuelan authorities to raiseinterest rates to the rapidly rising international levels. Debt servicepayments were also escalating, posing an additional threat to futurebalance of payments stability. The high levels of expenditure in both thepublic and private sector, in the face of little growth in domesticsavings, brought about a need to seek foreign financing. The bulk of thisfinancing was secured by the private sector. Total domestic liabilitiesabroad are estimated to have increased by US$16 billion and 60% of this wasowned by the private sector. However, in 1977-78, as the public investmentprogram encountered cost oierrun- and profits from state owned-enterprisesfailed to materialize, the public sector increasingly resorted toshort-term external borrowing, which was easily obtainable because ofVenezuela'senhanced creditworthiness after the oil windfall.
6. The sharp expansion in domestic demand, as well as rising importprices, resulted in some inflation over the period, despite a generallycontractionary monetary policy. In late 1973, wholesale and retail pricesbegan to climb. For an economy which had experienced an average inflationrate of only 1.8% for the previous fourteen years, monthly retail priceincreases of 1-3Z, continuing for nine months, were intolerable. TheGovernment responded by imposing in late 1974 a system of price controlswhich affected in varying degrees almost 80% of the consumer basket.Prices of basic foodstuffs, gasoline, public utility services, housingrents and other basic needs commodities were fixed in absolute terms withsubsidized imports used to meet excess demand in the case of food. Otherprices were administered by the Government. The price control system wassuccessful in holding down the inflation rate to an average of 7% over theperiod, which can be viewed as moderate given the potentially inflationaryimpact of the large inflows of foreign exchange during those years.
7. The social policy of the Government concentrated on raisingincomes. Concerned with improving the living standards of large segmentsof the Venezuelan population who were unemployed, underemployed, or employ-ed at very low wages, the Government adopted several major pieces of laborlegislation in 1974. The first was the raising of the minimum wage. Thesecond was a progressive public sector salary increase, which adjustedwages by 25% at the bottom of the scale tapering off to 5% at the top ofthe scale. The public sector wage legislation carried with it the sugges-tion that the private sector implement increases at the same level, whichfor the most part followed. Severance benefits were also increased, andnew legislation provided double indemnity in cases where a worker wasdischarged without proven cause. The results of this legislation, as wellas high rates of economic growth and price controls on basic foodstuffs,were significant increases in employment and real wages over the period.
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B. The Second Half: 1979-1983
8. The Government of Luis Herrera Campins, which took office inMarch 1979, focused initially on the short-term management of the economicsituation. The stagnation of petroleum prices in 1977 and 1978 and theincreasing tendency to spend more than was being earned made it generallyfelt that the public sector had been spending too much too rapidly and thata slowdown of significant proportions throughout the economy wasnecessary. In order to cool the economy and increase its efficiency, thenew Government's 1979 policy package had three main components: (a) a cutin real public sector expenditures, (b) liberalization of the price system,and (c) an increase in interest rates. Expenditures were curtailed sharplyon the inauguration of the new administration, and public sector realexpenditure fell by almost 10% in 1979; current expenditures showing nogrowth and capital expenditures falling by over 15%. Non-petroleum realpublic sector capital investment actually fell by even more, since 1979 wasa year of buildup of investment by PDVSA. In response to the strong andcontinued rise in international interest rates, domestic interest rateswere increased in late 1979; and, despite the fact that the previousGovernment had raised rates sharply in the previous January, still remainedlower than international rates. On the price side, the Government wasconvinced that the system of price controls that had been in place since1974 was creating significant distortions in the economy, and in August1979, some 47 items covering 36% of the market basket were moved from fixedprices to controlled prices, while the number of items in the lattercategory was cut by half, so that whereas almost 80% of the market baskethad been either fixed or controlled, after the new policy had beenintroduced, only one third of the basket was still controlled, and no itemswere in the fixed price category. In addition, the Corporacion de MercadeoAgricola (CMA) which had been responsible for buying and selling domesticand imported products and thus for extending subsidies to the consumer, hadits powers sharply curtailed. This change meant that fewer items would besubsidized, that shortfalls in domestic production that occurred would becovered by direct imports of the private sector, and that the subsidiesthat the Government wished to extend to consumers would be the directresponsibility of the Government--not the CMA. In order to complement theprice liberalization program and increase the competitiveness of theeconomy, in August 1979 the Government sharply reduced the import duties ofsome 400 tariff items the domestic prices of which had previously beencontrolled; subsequently in November, it reduced duties on some 600 otheritems. The effect of this policy was that duties, which had ranged as highas 300X previously were reduced to a maximum of 100%.
9. The impact of these policies on the economy was dramatic. Thepublic expenditure cuts had a strong deflationary effect. The totalcontraction in aggregate demand in real terms in i979 was four percent.The non-oil economy slowed down and private investment, which had begunto fall in 1978, fell 16% in 1979. Private capital flows abroadaccelerated rapidly. Several factors were responsible for the sharp dropin private investment; two important ones were the downturn in the economyand the attractiveness of investments with higher interest rates abroad.An equally important factor, however, was the constant concern on the partof the private sector about the policies of the Government. The import
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liberalization program with the lowering of import duties, designed to makethe economy more competitive, was Interpreted by Venezuelan entrepreneursas a threat to their comfortable, highly protected situation and was anadditional reason for sending capital abroad.
10. The liberalization of the price system brought about a burst ofinflation which, during the fall of 1979, proceeded at an annual rate ofover 30%, which could probably have levelled off at a substantially lowerlevel by the middle of 1980. However, the acceleration of prices set offpolitical pressure to have general wage increases to compensate. Althoughthe Governmnt had previously announced as part of Its expenditure cuttingprogram that there would be no general wage increases in 1979 and felt thatsuch an increase was not warranted, Congress--by that time also aware ofthe windfall that would result from the late 1979 OPEC price increase--passed a sweeping wage law which took effect in January 1980 that mandatedincreases for all workers, and doubled the minimum wage. It is estimatedthat the average increase across the economy was 25%; in the public sectorthe increases were tapered from 3OZ to 5% according to wage level. Theoverall effect of these increases on prices was probably in excess of 10%,but added to the effects of the price liberalization, inflation during 1980averaged 20%, and during the year neaked at an annual rate of over 40%.
11. By mid-1980 there were strong autonomous forces which compelledsignificant increases in the growth of public spending. The wage lawenacted in the closing days of 1979 increased the wage bill of the publicsector by over 30% in nominal terms. In addition, a buildup of debt by thepublic sector, coupled with the sharp rise of international interest rates,increased the interest bill by some 60% in that year. Given the latest oilprice increase and the consequent improvement in the current account of thebalance of payments, as well as the continued stagnation of the economythroughout the first half of 1980, the authorities eased the fiscalrestrictions in the middle of 1980. Additional appropriations amounting tomore than 35% of the original budget were approved, and for the year as awhole current expenditures grew by 7.8% in real terms while non-petroleumexpenditures increased by 10.4%.
12. Although public sector spending accelerated, the slump in theeconomy continued unabated. Private investment fell an additional 36% in1980, and despite lowered inflation and signs of recovery in the non-oileconomy in 1981, fell again by 16% in 1981. Moreover, the cash-flow short-ages and overall deficits of state-owned enterprises had begun to pushexternaL debt to alarming levels. Even though the balance of trade washighly positive and increased oil revenues had once again eliminatedCentral Government deficits, the economy was still in crisis in mid-1981because of the continued fall in private Investment and its counterpart,outflow of capital, and the high levels and difficult term structure ofpublic sector debt.
13. The problems created by the continuing fall of investment and theoutflow of capital were compounded all through this period by the rapidgrowth of the external debt. Venezuela had begun using its capacity forborrowing abroad in 1976, when petroleum revenues had ceased to grow. Bythe end of 1978 the publicly guaranteed external debt was five times the
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level of 1975 and debt service had increased by 39%; the debt serviceratio, however, was still only 8.3%. By 1982, the publicly guaranteed debtWas double the level of 1978 and the debt service ratio had risen to 18%.Average international interest rates had also more than doubled and theaverage maturity of Venezuela's loans had dropped from 9.8 years to 8.2years. These later averages, however, mask the very large proportion ofthe debt incurred by the state enterprises that was of short maturity. Al-though legislation to curb the practice of short term external borrowing bythe public sector was put in place in August 1981, the Government was un-able to restructure the debt. The problem was that these enterprises en-countered continual cost overruns and escalating current expenditures,which were due not only to over-optimism on their part, but also to theirdelays and failures that prevented them from generating the funds pro-grammed for the complete financing of the projects. Delays in the execu-tion of an investment, coupled often with a political commitment to employnew labor, led to escalating deficits. Moreover, in 1976, in an attempt toensure that the entire process was controlled by the FIV, Congress passed apublic credit law requiring that all medium- and long-term foreign debt (ofmore than two years' maturity) which was incurred, had to have the approvalof Congress, or in a few minor instances, the approval of the Council ofMinisters. Given that throughout the Herrera Government Congress was con-trolled by the opposition party, public agencies and enterprises werereluctant to try to negotiate medium- or long-term financing, fearing thatthe Congress would veto it. This meant that the mounting deficits of thestate enterprises which FIV did not finance had to be financed byshort-term borrowing--often cash overdrafts--in the expectation that theCentral Government or the FIV could be persuaded to cover the losses. Thisexpectation was understandable since the state enterprises were generallyallowed to continue their programs of expenditure. For enterprises suchas SIDOR and the aluminum compaaies, their failure to generate operatingsurpluses and the resulting overhang of unpaid debt incurred to cover thedeficits of 1977-82, are the most important factors in their poor financialposition.
a/ Excludirg DJSA.b/ Including Bpjradimtely Bs 10 blllion ewh from the FIV and tbe barking system.
14. The Government's response to the crisis on the debt front wastwo-fold. First, the external debt law was amended so as to forbid thecontracting of short term external debt by all but 15 Government agencies.The 15 agencies were chosen because of their proven responsibility, buteven these 15 had to obtain executive and congressional approval. Second,the Government instructed the Ministry of Finance to undertake negotiationswith foreign lenders to refinance the entire short-term debt--which at thattime was unknown but estimated at US$10 billion--into long term instrumentsover a five-year period.
15. With the problem of the short-term external debt apparently inthe process of being solved, the Government yet faced the problems of astill sluggish economy and large capital outflows which were weakening thebalance of payments. In addition, the Government was concerned aboutcontinuing price increases for basic need goods which were not warranted bycost increases but rather reflected, it felt, an undue concentration ofeconomic power.
16. The key event which upset the Government's plans for theremainder of its term in office was the weakening of the oil market inearly 1982. The international oil market had begun to show signs ofstrain during the latter half of 1981 and by early 1982 it had becomeobvious that it would be impossible to hold to the then current levels ofprices and production. This meant that Venezuela's earnings from petroleumwould fall short of the US$19 billion forecast for 1981 and 1982. This inturn meant that the balance of payments and the domestic fiscal situationwould not be as favorable as in 1981. Anticipating difficulties, theprivate sector began a run on the Bolivar, and managed to move abroad someUS$10 billion by the end of the year and to increase imports by almost US$1billion. The Government made no move to stem this flow, and in factabetted it by easing credit in the hopes of stimulating the domesticeconomy. In March of 1982 OPEC met and decided to keep the Saudi marker'price at US$34 per barrel (this mea-nt just under US$30 for the heavier andhigher sulphur Venezuelan crudes), but to limit production to 18 millionbarrels per day of which Venezuela's production share would be 1.5 mbd forthe rest of 1982, an annual rate some 30% below that of 1981. Subsequentnegotiations increased the Venezuelan average production to 1.9 mbd for theyear, but the realized price received by the country fell to an average ofUS$27.50. Thus final earnings from petroleum exports were some US$15.6billion, 17.5% below those of 1981; in 1983 continued weakness in themarket reduced such earnings to below US$14 billion.
17. The impact of the weakening of the petroleum market in 1982 onthe fiscal situation was significant. With revenues to the Government frompetroleum falling by 30%, the Central Government had to constrain expendi-tures and did so by cutting real wage payments in the public sector by 10%(nominal payments fell by 2%), by cutting transfer payments, and by halvingthe payment to the FIV. Even so, the Central Government overall deficitamounted to 2.6% of GDP, having been almost 2% in surplus in 1981. Thisdeficit was financed almost entirely by running down cash balances.
18. As was to be expected, the cut in public sector expenditures didnot help the continuing recession. Private fixed investment fell again in1982, this time 23% in real terms, and the non-petroleum economy in 1982
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managed to grow by only 1.4X in real terms on the strength of improvedconditions in agriculture, and in manufacturing. However, as real fixedinvestment fell by 3.7Z and real consumption only increased by 2.2%, it lsclear that a significant part of the increase in manufacturing consisted inthe buildup of inventories. As interest payments on external debtescalated while external reserves dropped, factor payments movedsignificantly negative resulting in a 6.3Z drop in real GNP in 1982.
a/ Year end.b/ With respect to US; ccparison with wholesale prie imndics.
Source: IFS, BCV.
19. Meanwhile, Venezuela was making very little progress onrefinancing the public sector debt. A commission had been set up in August1981 which designed a program for 1982 to refinance about US$4.6 billion(about half) of the short-term debt. The plan was to have a series ofsyndicated loans of US$500 - US$600 million and a jumbo loan of US$2.5billion. In April 1982 a loan in the amount of US$600 million wasarranged, but after many months of negotiation, agreement could not bereached on the terms of the jumbo loan and by mid-year the market hadbecome very tight. Part of the problem was that following the weakening ofthe oil markets Venezuela's current balance was turning negative. Finally,the crisis in the Mexican balance of payments in July of 1982 had a highlydetrimental impact on all Latin American borrowing. For the remainder ofthe year Venezuela managed to borrow US$500 million for electricity andUS$390 million for short term restructuring. In both cases the maturitieswere shorter and the spread of LIBOR significantly higher than had been thecase early in the year. Thus the country ended 1982 with a stillsignificant overhang of short-term debt.
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20. The balance of payments deteriorated rapidly during 1982. AUS$3.4 billion fall in exports of petroleum combined with a US$1 billionincrease In imports and a US$600 million (25%) jump in travel produced ashift in the resource balance of over US$5 billion. In an attempt to slowdown imports the Government reversed its previous liberalization programand raised tariff levels for over 500 items at midyear. In November theimport of some 200 industrial and agricultural products were prohibitedoutright. The rapidly increasing debt and falling reserves produced aUS$2.1 billion increase in the negative factor income balance so that thecurrent account of the balance of payments ended the year $4.2 billion indeficit whereas it had been US$4 billion in 6urplus in 1981. This wasfinanced by a net US$2.8 billion in public medium- and long-term borrowingand some US$4.3 billion in short-term borrowing which was offset by US$4.2billion of private short-term outflow as a result of the lack of capitalcontrols--even after the situation had clearly reached a dangerous point.Errors and omissions removed another US$2.4 billion which had to befinanced by drawing down US$2.7 billion in reserves. The reserves ended1981 at close to US$20 billion, over half of which was held by the FIV andPDVSA; by the end of 1982 they had fallen to US$14 billion, US$3 billion ofwhich was obtained by revaluing gold reserves from the 1971 value ofUS$42.22 per ounce to a near market value of US$300 per ounce. Moreover,in order to alleviate a real shortage of foreign exchange in the CentralBank, the reserves of PDVSA were "centralized" by the Government. Had thisnot been done, the Central Bank would have run out of foreign exchangereserves by March 1983.
TMble 4: BALANCE CF PAIS ENDIES RFIECIIBI; RIVArESSCYGt FIDWS 1975-1982
(US$ million)
Difference79-82 andl
1975 1976 1977 1978 1979 198) 1981 1982 75-78 a/
Tourism E endixtures Abroad -383 -567 -979 -1545 -1657 -188D -2255 -2814 -5132Net Current Transfers -143 -169 -230 -407 -407 -439 -409 -639 -945Net Direct F=reIgn Ivtstmrz 418 -88 -3 -67 88 55 184 253 987Net Private >udi3n and Loig Term Capital 283 515 910 1507 658 656 419 -38 -1520Net Private Short Tema Capital -244 -768 -144 -341 -256 -1369 -2651 -4121 -6900Errors and Ouissions 408 2146 2253 1525 514 -1211 -2139 -2385 -11553Other Capital Flows (Net) -425 -102 -125 -235 -181 -854 430 693 975
a/ Sum of flows in 1979 to 1982 less sm of flows in 1975 to 197&
Source: Appendix Table 3.1.
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21. In February, 1983, the Government finally took action on thedeteriorating balance of payments siauatlon. All foreign exchange opera-tions of the financial institutions, including the Central Bank, weresuspended between February 20 and March 5. A multiple exchange rate systemwas established, and an advisory committee for the administration of thesystem (RECADI), composed of the Minlsters of Finance, Development,CORDIPLAN and Agriculture, and the President of the Central Bank and of theFIV, was formed. Three exchange markets were set up:
(a) the market of RH 4.30 per U.S. dollar, (the previousexchange rate) for all foreign exchange brought in thecountry by the petroleum and iron ore sectors and the FIV,all foreign exchange expenditures by the Government and theprivate sector for interest and amortization of existingforeign currency debt, and by the Government and PDVSA forcurrent expenditures, and all foreign exchange expendlturesfor imports of selected essential goods and services (food,raw materials, pharmaceuticals);
(b) the market of Bs 6.00 per U.S. dollar, for all exportearningsof goods and servlces other than those of thepetroleum and iron ore sectors (surrender of these earningswas mandatory if the exporter was to receive exportsubsidies), and for private sector imports of non-luxuryitems approved by RECADI; and
(c) the free market rate, for earnings from private sectorexports of goods if the exporter was willing to forego theexport subsidy, and imports of goods and services not speci-fied in the lists for Bs 4.30 and Bs 6.00 (subject toapproval by RECADI), and for interventions in the foreignexchange market by the Central Bank.
In addition, in late March some 800 tariff items, primarily luxury goodsand apparel items, were permitted to be imported only by the public sectoror not at all. At the same time it was announced that irrespective of anydebt rescheduling obtained, RECADI would only authorize payment of amorti-zation for one third of principal, starting in 1984 and subject to theavailability of foreign exchange.
22. Initially, a free foreign exchange narket was established throughthe Caracas Stock Exchange, and the Central Bank provided foreign exchangefor this market. From March to May, the Central Bank supplied reserves tothe free market in an attempt to keep the free rate at about Bs 8/USS1, butthis tactic was abandoned in early May as it became clear tiat this foreignexchange was simply funding capital flight and speculation. The freenarket rate was then allowed to rise; it reached over Bs 17/US$l inaid-summer and then drifted down to the present level of about Bs 13AJSS1.The high free market rates were successful In stemming the outflow offoreign capital and the long administrative procedures of RECADI put anextreme drag on imports. Consequently, by the end of 1983 the balance ofpayments was in a slight surplus position and net reserve levels had risensubstantially.
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23. The economy continued to libp along in 1983. The system of ad-ministered prices remained in effect after a 60 day price freeze institutedin March as part of the new exchange regime to prevent speculative pricemovements. Restrictive fiscal measures continued in 1983, as CentralGovernment expenditures were reduced another 6.4% below the previous yearlevel. Real economic growth was negative again, as petroleum productiondeclined substantially, the non-oil economy contracted slightly, and stockswere run down. Unemployment, traditionally very low in Venezuela, reached12% by the close of 1983. The provision of necessities at subsidized orcontrolled prices has, however, eased the extent of the adjustment for thepoorest segments of the population.
24. The seeds of the current crisis are found in the over-ambitiousgoals of the previous administration and the lack of discipline in thepublic sector. By 1977, the oil boom economy was slipping out of controland Venezuela was living beyond her means. The debt crisis had alreadybegun with the massive borrowing of 1977-78. This fact was recognized inVenezuela, and the Government of President Herrera attempted to bring theeconomy and society back into balance. However, the jump in petroleumearnings in 1980 appeared to signal an end to the need to act with dis-cipline, and the program of restraint was abandoned. This made the problemof once again coming to terms with resource limitations in 1982 and 1983very much more difficult.
25. Since private savings were unavailable to finance the massivedeficits of the state-owned enterprises, they too sought the services ofthe international capital market. indeed, had the capital account beenclosed to both borrowers and lenders in Venezuela, the current debt crisiswould probably not exist. But the Government allowed the state enterprisesto continue their expenditures and invest-ent programs. This inability onthe part of the Government to enforce discipline on the various parts ofGovernment, combined with the failure to stem the outflow of privatesavings, were large contributing factors both in the build-up of pressuresleading to the crisis as well as in the Government's inability to handlethe crisis until it was too late.
C. Recent Economic Developments
26. The opposition party Accion Democratica won the elections held inDecember, 1983, and a new government, headed by President Jaime Lusinchi,took office in February, 1984. Immediately after its inaguration the newGovernment adopted several measures concerning the rate of exchange of thebolivar, domestic interest rates, gasoline and other oil products pricesand salaries and employment in the private sector. It also announced thatother actions would follow concerning budgetary cuts, increases in sometaxes and measures designed to improve the efficiency of the public sectoroperations and structure.
Exchange Rate and Rates of Interest
27. A rate of Bs 7.5 per U.S. dollar now applies to all imports ofgoods and services except to essential foods of popular consumption andpharmaceutical products, for which the old rate of Bs 4.3 will be
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maintained. All imports still require authorization by RECADI. Themission was told that imports at this preferential rate will be limited toUS$1.8 billion or about 20% of all imports, but no regulation to thateffect has been issued as yet. The preferential rate has also beenmaintained for expenditures of students abroad registered with RECADI as ofFebruary 24, 1984, and for the payment-in seven years, including twoyears' grace-of private debt and the interest accumulated to February 24,1984. All foreign exchange operations of PDVSA and FERROMINERA will be atthe rate of Bs 6.0. The rate of Bs 7.5 is considered the fundamental rate,i.e. the eventual unified target rate; at present, the average rate inforce is estimated at Bs 7.0.
28. These new exchange rate regulations are clearly intended to serveseveral purposes. The Bs 4.3 rate for private debts and accumulatedinterest is clearly intended to facilitate the debt reschedulingnegotiations with Venezuela's foreign creditors. With regard to the newrate for non-preferential imports of goods and services, the authoritiesfelt that the 1983 devaluation was not sufficient to fully correct theovervaluation of the bolivar and that the new Bs 7.5 rate-equivalent to atotal devaluation of 74% of the old Bs 4.3 rate-is closer to anequilibrium rate. They believe the new rate is, in itself, adequate forrestraining non-essential imports and that, after a period of adaptation ofVenezuelan producers, it will be possible-perhaps in 1985-to end RECADI'scontrol of imports and prices, which are still being maintained. The rateof Bs 6.0 to the U.S. dollar for PDVSA and FERROMINERA-both for exportsand imports-seems to be primarily designed to assist the finances ofPDVSA, which now has to surrender all its foreign exchange earnings to theCentral Bank virtually on a daily basis, and also to provide some stimulusfor expanding iron ore exports. Allowing the existence of a free exchangemarket rate will provide a strong stimulus for expanding nontraditionalexports. Agricultural exports are not likely to be responsive in the shortrun, but aluminum exports are already substantial. Foreign currencyearnings of nontraditional exports have to be sold to the Central Bank atthe free markeL rate and though the Central Bank will not apply the marketrate to the imported inputs of such exports, still the incentive providedby the devaluation will be substantial. It probably will make it possiblefor the Government to eliminate the existing export subsidy and still leaveproducers a higher margin than before.
29. With the purpose to assist the reactivation of the economy andprovide special incentives to agriculture and the construction industry-particularly low-cost housing-simultaneously with the adjustment of theexchange rate, the Central Bank acted to lower the maximum rates ofinterest that commercial banks, mortgage banks and other financialintermediaries may charge for their loans. For commercial banks the newmaximum is 14.5%, compared to the previous 16.3%, except that foragricultural loans the maximum is now 8.5% and the rediscount rate 6.5%.For the mortgage banks the maximum was lowered from 17% to 14% for housingconstruction in general and to 12% for low-cost housing and from 15.7% to12% for purchases of houses already built. For the -SociedadesFinancieras the maximum was raised rather than lowered; it now stands at23% compared to the previous 21.5%. The Central Bank regulations make itclear that no surcharges, commissions, or other charges are permitted to beadded to these rates; they also, in fact, prohibit the practice ofrequiring the borrower to maintain a given level of deposits in the lendinginstitution.
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Employment and Income
30. Five years of eccomic stagnation or negative growth, coupledwith inflation, have significantly reduced real wages, while simultaneouslyunemployment had been increasing; this situation made the risk of excessivedemands from labor very real. Aware of this, the new Governmentimmediately took the following measures:
(a) All firms with ten or more employees are required toincrease employment by 10% over the January 31, 1984 levelover the next six months and maintain such employment Levelsfor at least two years.
(b) All firms not having canteens for employees must establishthem (not necessarily free of charge to the employees);
(c) All wages below Bs 3,000 per month must be increased byBs 100, allegedly to compensate assumed increased transportcosts.
Fiscal and Other Public Sector Measures
31. The prices of gasoline and other petroleum products were raised.Premium gasoline went from Bs 1 per liter to Bs 1.2 and regular from Bs 0.3to Bs 0.8 per liter. These prices are considerably higher than before andreduce significantly the price difference between the two grades. However,at the opportunity cost of petroleum products to PDVSA, they are lower thanthe previous prices at the old exchange rate. The prices of other oilderivatives were also increased, but they still remain well belowinternational prices.
32. Other important measures already taken by the Government are:(a) a reduction of OZ in current expenditures of the whole public sector;(b) freezing government salaries below Bs 16,000 per month, and reducing by10% the salaries above that level; (c) cancelling (by compensation) allpublic agencies debts with each other, the Government absorbing the netbalances; (d) restructuring the public sector by reducing the number ofagencies through sales, mergers or outright liquidation of several ofthem, as well as closing down the seven commercial banks at present undergovernment stewardship. Liquidation procedures have already started forCHA, CVF, and Inversionista de Transportes, S.A. (Caracas bus companies).Other institutional measures in the program are the establishment ofretirement schemes for public employees and of bank deposit insuranceschemes.
33. Though some of the measures already taken, such as the gasolineand other oil products price increases, are clearly insufficient for theirpurpose, and others, such as those concerning private employment andsalaries, open up more questions than they answer, the government programas a whole represents a coherent effort to address the most importantissues facing the Venezuelan economy in the short term. The cut in publiccurrent expenditures, the strict enforcement of future foreign borrowingand the substantial overhauling and improvement of the operations of publicagencies, particularly the large public enterprises, are essential and
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urgent in themselves and also for achieving the objective of restoringconfidence in the country's private sector and in Venezuela's foreigncreditors. Some of the institutional measures contemplated, though not ofan immediate effect, are essential for a future, more efficient functioningof the public sector, as for example the creation of a retirement systemfor public employees. Establishment of depositors' insurance schemes, ifcoupled with more strict monitoring of the financial conditions andoperations of commercial banks and other financial intermediaries, will goa long way in strengthening Venezuela's financial structure.
II. SECTORAL REVIEW AND ISSUES
34. The events of the past decade have demonstrated the overwhelmingdependence of the entire economy on the petroleum industry. In the pastfew years, due to the successful programs carried out by PDVSA in explora-tion and refinery modification, the production outlook for petroleum hasimproved substantially. In the medium run, however, the oil market is sub-ject to large supply and demand fluctuations and petroleum revenues areuncertain. The economy needs to be broadened both in production andexports for reasons of fiscal soundness, economic stability, and long-runviability. To this end, key sectors of the economy are analyzed in thischapter with a view to their growth prospects in the medium-term,identifying government policies which would make them more efficient and,where possible, competitive in world markets.
35. In recent years, much concern has been exhibited in Venezuelaregarding the living standards of various sectors of the population. AsVenezuela's per capita income has increased, so have demands from allgroups of the population for a share in the benefits of this income--for abetter life. In this context, the Government has increasingly emphasizedpolicies to improve access to social services and the real income of largesections of the population which remain (by Venezuelan standards), under-priviledged. This chapter concludes with an examination of past policiesand results in this area, identifying some key issues for future develop-ment policy.
A. The Petroleum Sector
36. Petroleum has in modern times been the leading sector in theVenezuelan economy. Accounting directly for over one quarter of GDP andover 95% of exports, this sector, even under the most optimistic ofscenarios for diversification, will continue to dominate the economy wellinto the next century. The fortunes of the country have followed those ofoil, and the present crisis is no exception. Although there are manyfactors which have contributed to the present economic situation, the twomost important have been the sluggish market and consequent OPEC imposedcut of 25% in Venezuelan petroleum production, and a 17% fall in theaverage realized price of exports. Thus export earnings in 1983 were about
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US$14 billion while extrapolation of the trends of a few years before hadled to an expectation that earnings would be as high as US$25 billion.This difference, equivalent to roughly 15% of GDP, has had a dramaticimpact on the Venezuelan economy.
37. Three decades ago Venezuela was producing about 1.7 millionbarrels a day of crude oil and had known reserves of some 10 billionbarrels; about 16 years' worth. In 1983, production may be about 1.7million barrels a day from reserves of roughly 24 billion barrels (40years' worth), the country having produced in the intervening period over30 billion barrels. From 1953 to 1960 intensive investment in the industrytook place with, on the average each year, over 1,000 wells being drilledand almost 2 billion barrels being added to reserves. After 1960, whenreserves stood at over 17 billion barrels, the pace slowed, with the aver-age number of wells drilled falling below 500 per year and the reservesfalling below 14 billion barrels by the early 1970s. At the same time, theindustry, largely owned by foreign interests, had increased the rate ofproduction, reaching an all-time peak of 3.7 million barrels a day in1970. The production acceleration and drilling slowdown of the late 1960sand early 1970's seems in part to have been motivated by the clear prospectof nationalization, a move undertaken by the Government in 1976, by whichtime the exhaustion of wellsl/ and the lack of maintenance investments hadled to a fall of production to just over 2 million barrels a day where itstayed until the collapse of the world market in 1982.
38. The nationalization was undertaken by forming Petroleos deVenezuela, S.A. (PDVSA) which is a holding company, whose chairman hasCabinet rank, controlling the four nationalized companies as well as threeexisting state companies. At the time of nationalization known reserves ofpetroleum were less than 20 years. Investment in the industry had fallento a low level and manpower, which had been some 45,000 people, had beenreduced by attrition to 24,000. Domestic refinery capacity of 1.5 mb/d wasskewed towards the production of heavy fractions, particularly high sulphurresidual fuel oils, and had no capacity to change or improve the input orproduct mix. Thus PDVSA developed a program a) to explore carefully thetraditional oil belt; b) to probe the potential of the vast Orinoco area;c) to continue exploration of the marine areas; d) to upgrade therefineries; and e) to bring the manpower of the industry back to strengthboth in terms of quality as well as quantity. During 1977-82 the companyinvested some Bs 53 billion (roughly one quarter of all public sectorinvestment in the period) most of which was concentrated in 1979-82.
39. The results of this program, which now has been slowed anddirected primarily towards maintenance, have been to increase the provenreserves by one-third to 24 billion barrels, from which a production levelof 2.5 mb/d can be maintained for the foreseeable future, with thepotential of pumping as much as 3 mb/d if necessary. In addition, therefineries have now been upgraded and converted so as to accept more heavycrudes and to produce more -white products," while the manpower of PDVSAhas reached a level of 44,000.
1/ An increase in reserves of 5.8 billion barrels in 1974 resulted fromworld prices making certain deposits economically extractable bysecondary recovery techniques.
40. The marine exploration program has ascertained the existence of avast area of natural gas stretching along the coast from the boundary withTrinidad to the Gulf of Venezuela. As there is sufficient associatednatural gas in the main, onshore, oil belt, for the country's presentneeds, the marine gas will not be exploited in the near future. Finally,the investment in the Orinoco belt (a vast area lying south and east of theriver) has indicated that there are approximately one trillion barrels ofvery heavy crude in place at relatively shallow depths ranging from 50 to3,000 feet. Of this crude, approximately 40 billion barrels are recover-able with existing technology: it had previously been believed that thisoil was mostly in solid form and thus would have to be extracted withcostly liquification or solid mining techniques, it now appears as thoughmost of the oil is in the form of hot, heavy liquid which will require atmost steam injection to extract, and heated pipelines and/or diluents totransport. Alternately, the establishment of refineries at the oil fieldswith subsequent transport of the products is being considered. The invest-ment in proving up the Orinoco field was undertaken out of a concern thatthe traditional oil belt had been exhausted. Now that this has proven notto be the case, the Orinoco field will be left for the time being with asmall amount of production, possibly as little as 300 thousand b/d, beingreached by the end of the 1980s. In any instance, however, if one assumesa production rate of 2.5 mb/d, Venezuela's known reserves will last 70years; at the 1983 level of production the reserves are available for overa century.
41. When looking at the future, therefore, the production outlookseems to be bright. Moreovcr, for the longer term there is generalagreement that real international energy prices will rise fairlysignificantly before the end of the century. Thus Venezuela's potentialfor continued, meaningful export earnings seems to be significant. Thereare, however, two issues of concern. The first is the question of domesticpricing of products and its effect on domest'c demand and the second is theissue of the independence and autonomy of PDVSA. Domestic demand forpetroleum products has grown from less than 100,000 b/d in 1953 to over400,000 in 1982. Given natural production limitations and the more recentmarket limits expressed as production constraints, every barrel that isconsumed locally has a foregone foreign exchange cost, and equallyimportant, in view of the still significant subsidies, a fiscal cost.Uatil May of 1982 gasoline sold domestically for 13 U.S. cents per gallonregular and 31 U.S. cents premium. Not only did this encourage a very
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rapid growth of consumption, but at 1981 prices, a loss of over Bs 80 tothe Government for each barrel sold in the domestic market, a total ofBs 20 billion just for gasoline sales. Since that time prices have beenset at 27 U.S. cents for regular and 88 U.S. cents for premium. While thelatter price, taking distribution margins into consideration, is onlyslightly less than the price obtainable for exports, the former is clearlyonly a small fraction. The large differential has caused a massive shiftby consumers from premium to regular resulting in an average retail pricethat does not even cover the costs of extraction, refining anddistribution. Gasoline sales are roughly half of domestic demand, otherimportant products such as LPG, diesel, and residual also have similarpricing problems. In the case of residual fuel, it is cheaper for someelectricity entities to purchase fuel oil from PDVSA than it is to purchaseelectric power from the Guri dam. More important than the fiscal cost oflow petroleum prices is the volume of consumption. In 1982 some 150million barrels of oil, worth US$4 billion, were consumed locally. Atrecent rates of growth, domestic demand in 20 years will be equal to thepresent entire production capacity of the country. This is clearly anunsatisfactory situation, not only for the long run, but also in thepresent when OPEC quotas are set on production, not exports, and thus everybarrel consumed at home means lost foreign exchange.
42. A rational energy policy could keep the volume of domestic demandfor petroleum below 400 mb/d regardless of the pace of expansion of theeconomy. This policy would include the pricing of all liquid fuels at theopportunity cost, the utilization of alternate energy sources such as theabundant natural gas and the large quantities of low cost power from theGuri dam wherever possible, and the introduction of energy conservationmeasures.
43. The other issue of importance in the petroleum sector concernsPDVSA. The Government, upon nationalization of the foreign oil companies,had the foresight to give the company a high degree of autonomy and toallow it financial independence. PDVSA was thus permitted to run as anenclave but staffed by Venezuelans. Payments to the nation were madethrough taxes and profits were retained by the company for futureinvestment. This enabled the company to undertake the necessary investmentin new oil reserves and to operate with a fairly high degree ofefficiency. This arrangement, however, was changed in the fall of 1982when the Government, in need of foreign exchange, took control of most ofthe foreign exchange reserves, leaving it with enough for current operatingneeds. The new Government that took office last February, established asystem whereby PDVSA a) must sell to the Central Bank all foreign exchangeearnings on a monthly basis, but at a rate of Bs 6.0 per U.S. dollarinstead of the previous Bs 4.3; b) could keep an agreed amount (probablyabout US$200 million) to cover its foreign exchange expenses (and thatcould be invested abroad), this amount being in the nature of a revolvingfund to be replenished each year as needed up to the agreed limit; and c)its imports are also paid for at the same rate of Bs 6.0 to the U.S.dollar.
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B. The Steel Industry
44. Encouraged by abundant natural resources (iron, energy) andrapidly expanding domestic demand, the Government in 1974 selected steel asan area for industrial development requiring significant public sectorcapital investment. A major expansion plan was developed to be funded byset aside oil revenues. Although the main focus of the investment programwas the domestic market, the steel sector was also identified as a vehiclefor export diversification. Unfortunately, slack world demand resulting inworldwide excess steel capacity, declining domestic demand because of therecession of the past three years, and severe technical difficulties in theprojects leave the Government's expected return on this investment as yethighly uncertain.
45. The major steel company in Venezuela, supplying over 85Z ofdomestically manufactured steel in 1982 and virtually 100% of domesticallyproduced flat steel products is Siderurgica del Orinoco (SIDOR), a publicenterprise wholly owned by the FIV and Corporacion Venezolana de Guayana(CGV), the government agency in charge of the development of the Guayanaregion. In 1982, SIDOR's three steel plants produced an estimated1,991 thousand metric tons of steel, a doubling of production since 1975,when the major expansion program began. However, actual production in 1982was only 55% of forecast production at the time of the expansion, andcurrent projections suggest that the previous production target for 1982will not be realized by SIDOR until the end of the decade because of lowdomestic demand and technological and management problems which haveaffected the expansion program from its inception. The combination of lowproduction and technical bottlenecks and high financial charges has led toinefficiencies and consequent high unit costs, resulting in substantial netlosses for the company in three out of the past four years. A devaluatedbolivar has allowed the company to register an improved profit and lossstatement for 1983 through increased exports. Nevertheless, previousyears' losses, which have had to be financed, combined with the inadequatefinancing of the new equipment over the expansion phase, place SIDOR in anextremely critical financial situation. At the close of 1982, short-termdebt amounted to Bs 5.5 billion, long term debt Bs 4.9 billion, and workingcapital was negative by about Bs 4.8 billion. In order to avoid furtherlosses and restore the company to a more viable financial position,financial restructuring and improved management need to be undertaken atSIDOR without delay.
46. In general, most of SIDOR's problems can be characterized as onesof indigestion rather than fatal disorders, although some of the latterexist as well. SIDOR's 1975 expansion plan was far too ambitious, giventhe following constraints.
(a) The technology employed of direct reduction steel pro-cesses was, at the time of the plan, virtually untested onthe scale at which it was implemented in Venezuela.
(b) The expansion occurred in a remote area of the country,where skilled labor was in short supply and incentives forhigh labor turnover on the supply side were great.Furthermore, SIDOR did not have the management capacity to
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both continue current operations and launch the expansion;thus current operations suffered in the first years of theexpansion.
(c) The existing operations at the time of the expansion wereopen hearth processes, which were inefficient and obsoleteby that time, and remain so to date, compounding rather thancounterbalancing the start-up inefficiencies of the newplant.
47. In the short run, the technical problems associated with SIDOR'snewer plants can be solved or accommodated with better engineering. Forefficient operations in the future, however, substantial management pro-blems related to high wastage, poor maintenance and low labor productivitymust be resolved in order for existing capital to produce near its capacityat an efficiency level at all comparable to similiar operations in othercountries. SIDOR seems willing to address these problems, through improvedadministration and production control techniques, and steps to lower laborturnover. Technical assistance in the form of management consulting shouldbe sought by SIDOR to aid It in expeditiously implementing these managementimprovements. In addition, SIDOR needs to examine closely again--as it hasdone in the past--all operations with the view of eliminating thoseproducts for which demand is limited and production is not profitable atthis point.
48. Even when SIDOR solves its technical and productivity problems inthe modern plants, however, long run profitability requires furtherrationalization of operations. This rationalization would entail:(a) restructuring the finances of the company to reduce the heavy chargesassociated with the current short-term debt structure, and (b) the closureof the older open hearth operations which are technologicallyinefficient.2/ Unfortunately, the latter step would also entail asubstantial reduction of the labor force and thus is only politicallyfeasible when the economy has recovered from its current slump.
49. As operations expand towards capacity in the newer plants, SIDORwill also have to find export markets for its products. SIDOR forecasts ofdomestic demand have consistently been above actual demand, not only be-cause of the sluggish economy but also because of the high income elasti-city of steel which the projections assume.3/ Only if Venezuela's futureeconomic growth continues to be heavily steel-intensive (i.e. construction,both private and public), could the growth in domestic demand projected bySIDOR be realized. Already SIDOR is exporting some surplus steel; in 1982
2/ During 1983, the availability of imported materials at a subsidizedexchange rate with the ability to export at the free market rate,combined with frozen wage rates made the open hearth operations moreprofitable. In the long run, however, such conditions will not persistand these older plants will have to be phased out.
3/ SIDOR edtimates that for a 1% increase in GDP, steel demand would haveto increase by 1.4%, ceteris paribus. In most European countries, thiselasticity is substantially less than 1.
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export sales were 14% of the volume of production. As production in-creases, SIDOR will have to continue to look for export markets to sell itsproduct. These export markets can only be reached by SIDOR at a lossunless the company becomes internationally competitive. Given the naturalresources (energy and iron) of Venezuela, the vertical integration of theseindustries which allows SIDOR to buy the inputs at less than market prices,and the modern technology in the newer plants, internationalcompetitiveness is not out of the question for SIDOR. But it can onlyoccur if SIDOR streamlines its operations and achieves financial viabilitythrough debt restructuring.
C. The Aluminum Industry
50. As part of the Government industrial plan, a major investmentprogram in aluminum began in 1974. Designed to utilize surplus electricityfrom the massive Guri hydroelectric project in the eastern part of Venezulathe program involved vertical integration of the existing aluminum fabrica-tion industry through the establishment of a bauxite processing plant andby increasing Venezuela's capacity to smelt alumina. The goal was aninternationally competitive aluminum industry for export and import sub-stitution. Although the expansion plans were carefully studied and deemedtechnically feasible, in retrospect, the projects experienced both techni-cal and financial problems which delayed execution by almost two years. Atpresent, all state enterprises in the aluminum sector are in a financiallyweak position, and will require both cash injections and debt restructuringin order to achieve the original goal.
Industry Structure
51. The Venezuelan aluminum industry consists of two smelters--Venezolana de Aluminio (VENALUM) and Aluminio del Caroni, S.A. (ALCASA)--with a combined capacity of 400,000 metric tons per year (MTPY) and onealumina refinery rated at 1 million MTPY, all three essentially governmentowned with minority foreign stockholders, coupled with a very diversefabricating segment mostly owned by private investors. 4 / One additionalproject in the aluminum sector has been approved in principle by thegovernment; a 3 million MTPY bauxite mining facility. A 65,000 MPTY alloyrolling mill has also been proposed but not as yet approved. The totalexisting investment in the subsector is of the order of US$2.8 billion,with annual revenues of US$845 million. The two new projects would addabout US$1.0 billion of investment but only US$160 million to total sectorrevenues. However the proposed projects would reduce imports by anadditional US$300 million.
52. Aluminum demand has grown rapidly since 1970. In 1974 theGovernment undertook a large expansion program, both for domesticconsumption and for export. The program consisted of:
4/ Except for some semi-fabricated products produced by one of thegovernment-owned smelters.
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a) increasing the capacity of ALCASA--a joint venture withReynolds International which had started production in1968--from 50,000 to 120,000 MTPY;
b) building a new 280,000 MTPY capacity smelter--VENALUM--mainlyintended for export; and
c) building an alumina plant of 1,000,000 MTPY to supply theneeds of the smelters, thus replacing imports.
53. The smaller 120,000 MTPY ALCASA smelter started operations in1968 at a low level, using older technology, and was expanded to itspresent size between 1974 and 1979. The cost of the expanslon was US$250million, compared to an estimated cost of US$147 million. The start-up wascompleted in August 1979, 22 months behind schedule. Two major problemswere encounted during that expansion phase. Technically, the expansion ofone of the plant's shops (the anode mill) was not designed properly, adeficiency which plagued the plant until mid-1983. The expansion's fundingnever materialized, thus the company had to borrow on short term to meetits overall deficit and consequently has been strapped financially eversince. The company owns, besides its smelter, a small 20,000 MTPY rollingmill located within the smelter and a 6,000 MTPY foil mill located innorthern Venezuela which is presently being expanded.
54. The large 280,000 MTPY VENALUM smelter was erected between 1975and 1981. Its start-up began in 1978 and is not yet completed because of amajor accident; without it, the start-up would have been completed in April1981. The total cost was US$773 million, compared to an estimated cost ofUS$441 million. Three major events occurred in 1980-1982: the appointmentof a new president; a major accident which curtailed the plant capacity by40Z in 1981; a second accident--a fire-- which impaired one of the majorshops and interfered further with capacity in 1982. The plant has, atpresent a number of technical problems an excessive number of employees,and some managerial deficiencies. The financial situation Is not criticalin spite of the poor market conditions of the past two years; the companycould be quite competitive when full production is reached if reasonableefforts are made to manage it properly.
55. The alumina refinery, Interamericana de Aluminio, C.A.(INTERALUMINA), was built from 1977 to 1983 and started production byFebruary 1983; it will be completed before the end of 1984. The projectcost will be slightly less than US$1.3 billion, compared to a 1977 estimateof US$631 million; completion will be achieved about 26 months behind theoriginal schedule. The plant's start-up went extremely well and the ratedcapacity of the first of its two production lines was reached in six weeks,compared to a norm of six months. Technically, the plant is well designed;it is also well run by highly qualified expatriates and the only criticalareas at present are maintenance and the hiring of skilled workers.Administratively, the quality of personnel is low and much improvement isnecessary to bring this aspect of operations to an acceptable standard.
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The company is financially weak and in the current depressed alumina marketits competitiveness is not favorable.
Management and Labor Quality
56. The most crucial and general issue facing the Venezuelan aluminumindustry is the urgent need to make a significant improvement in itsmanagement, both at company and plant levels. Without attacking theserious current deficiencies with the utmost determination and achievingsubstantial and sustained progress in this matter, It would not be possibleto address and overcome other important problems affecting the industry.
57. Serious deficiencies (though in different degrees amongcompanies) exist at all levels of management. These deficiencies run fromtop-level management decision6 concerning production plans, budgets,financing and definition of responsibilities, through the whole gamut ofsales, accounting methods, procurement, Inventory control and maintenance.Of the whole range of activities involving the operations of the companiesand their production units, the most crucial ones, deserving the highestpriorities are the accounting systems--including unit cost accounting--inventory control and maintenance. It is obvious that adequate andup-to-date accounting is nct only indispensable for determining the overallfinancial position of the enterprise at any given time, but an essentialinstrument for identifying and correcting flaws in the productionprocesses, reducing waste and ensuring smooth running of the plants, thusincreasing productivity and lowering production costs. In the aluminumindustry, the margins for specific errors and failures are particularlynarrow and delays in correcting them quickly become very costly. Propermaintenance at all times is therefore essential and availability of spareparts through efficient inventory control and procurement practicescrucial. Upgrading the proficiency and experience of the labor force, andstimulating workers interest in their jobs through adequate rewarding ofperformance, as well as enforcing worker discipline, complete theimprovements that are needed from the human factor side for running theindustry efficiently.
Sub-Sector Integration
58. The existing segments of the industry-the two smelters and thealumina plant-were created independently of each other, and so will be athird stage-bauxite production--if the Bauxita de Venezuela (BAUXIVEN)project is actually carried our. As they exist now, the three componentsof the industry are completely independent entities, though they all arefinancially controlled by the VIF as majority stockholder. This situation,which reflects the historical evolution of the industry, is not undesirablein itself. Although a possible merger of the two smelters has been dis-cussed several times, the two plants are too different in design and tech-nological processes to make economies of scale possible. The real issue isnot the existence of two different companies, but the absence of coordina-tion in some of their activities, which results in inefficiencies and un-necesary waste of resources. There is no decisive valid reason for the twocompanies having not only different, but in fact incompatible accountingsystems--including unit cost controls--as well as controls of inventories
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and data processing equipment. The present situation makes it impossibleto compare and interchange data and experiences, as well as to assist oneanother In cases of need, as with spare parts, for instance. Significantsavings can be made by carrying out joint activities such as purchases ofraw materials and spare parts and utilization of the same transportationfacilities. Unification of these functions could be easily accomplished bysetting up a jointly-owned subsidiary to carry them out. Such a rubsidiarycould be staffed with the most experienced personnel from the correspondingdepartments of the two companies, thus avoiding hiring new personnel.
Devaluation, Subsidies and Transfer Prices
59. ALCASA and VENALUM have been operating with a unit cost of elec-tric power much lower than is normally charged in Venezuela to industrialenterprises; a sltuation that can be mntained because the power supplier,Electrificacion del Caroni, C.A. (EDELCA), is fully owned by the VenezuelanGovernment, which covers EDELCA's losses. In addition to this advantage,which is quite important given the hlgh consumption of electricity inaluminum production, the smelters enjoy a straight cash subsidy amountingto 11 of their exports sales values. From the 1981 and 1982 profit andloss statements of the companies, it is evident that the recent devaluationof the bolivar is quite beneficial to them, since their export earnings interms of domestic currency have risen by at least 50%, at the currentexchange rate of Bs 7.5 to the U.S. dollar. Provided that increases indomestic costs, particularly alumina, labor and administration, are keptwithin narrow limits, the smelters, operating under normal conditions,could continue to turn out a significant profit. This prospect isparticularly strong, for which reason the maintenance of the currentsubsidy would no longer seem justified.
60. In the preceeding paragraph mention was made of the Governmenttransfers to the aluminum industry via the lower-than-cost price at whichit gets electric power from EDELCA and that is in fact borne by theGovernment. This issue of transfer prices is likely to arise aga.n withrespect to the prices at which the smelters will get the alumina fromINTERALUMINA, whose cost of production will be higher than that of importedalumina on which the smelters have been operating up to the present. Thesame issue Is likely to arise again if the BAUXIVEN project is Implementedand INTERALUMINA will operate with domestically-produced bauxite. li'ely tube more costly than imported bauxite. Transfer prices among GovernmexTt-owned enterprises may be thought not to be a problem except as they arereflected In the Government 'inances. In fact, transfer prices in excessof what would be the normal :.arket price of the different products docreate a very real and serioua problem both at the level of the aluminumfabricators that have to sell their products at the domestic market pricesand, much more important and serious, at the level of the smelters, since alarge proportion of their output has to be sold in the competitive inter-national export markets. This issue is particularly serious for VENALUM,which exports almost the whole of its output. The Government will do welto realize the nature of the problem, abandon any possible misconceptionthat transfer prices are not important and undertake an in-depth study ofthe problem. The study should cover the aluminum industry as a whole andeach one of its different segments, and its aim should be how to minimize
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the negative effects of the possible chain reaction of high productioncosts on the overall operation of the aluminum industry, the Governmentfinances and the country's economy.
D. The Mining Sector
61. In addition to petroleum and bauxlte, the Venezuela mining sectoralso includes iron ore, gold, diamond and coal mining. The largest sub-sector is iron ore, which had gross sales of US$223.34 million in 1982.Although iron ore has a potential for export development, and at one timewas the country's most important non-petroleum export, even under the mostoptimistic projections, the total export of the mining sector by 1987 wouldbe less than 2% of 1982 petroleum exports.
Iron
62. Iron ore mining on an artisanal scale can be traced back to 1743,when capt inon was produced close to the present mine of El Pao. Modernmining was initiated in 1950 when a subsidiary of Bethlehem Steel (U.S.)began operations at El Pao, followed by the startup of a subsidiary ofU.S. Steel (U.S.) at Cerro Bolivar in 1954. Both companies werenationalized on January 1, 1975; their assets became the property of thepresent operating Company, CVG - Ferrominera del Orinoco (FERROMINERA).
63. Total proven iron ore reserves, at 55% Fe or more as ofJanuary 1, 1983, were 2132 million metric tons. The El Pao mfine is about2 km long by 1 km wide, and the massive hemotitic ore grades 60% to 70XFe. The Cerro Bolivar mine is 6.4 km long by 1.2 ko wide, the mixture ofsoft hematite and limonite grades 58% Fe. The Cerro Altamira mlne issimilar to Cerro Bolivar. All mining Is done by open pit using 15 meterhigh banks on the hillsides; overburden is removed after blasting; oreblasting is also necessary. The broken ore from Cerro Bolivar And AltamiraIs shipped by rail to Puerto Ordaz. At the older El Pao mine, the ore ispassed through a crushing station and Is then shipped by rail to Palua onthe Orinoco. Stripping ratios vary from very light to moderate: the 1981values were .05 to 1 at Cerro Bolivar, .15 to 1 at Altamira an? 1.2 to 1 atEl Pao.
64. Processlng and beneficiation is carried out on both ores. TheCerro Bolivar/Altamira ore is crushed In Puerto Ordaz, dried, screened andblended, then either sent by railroad car to the nearby SIDOR plant orloaded into vessels for ocean shipment. The El Pao ore is beneficiated bywashing to reduce the alumina content, crushed, screened and dewatered atthe Palua plant prior to ship loading for export. The overall capacity ofthe mines and plants is 20 million MTPY.
65. A High Iron Briquette (HIB) plant is located on the FERROMINERAproperty in Puerto Ordaz and operated by Mineria del Orinoco, C.A.(MINORCA, a joint venture of FERROMINERA and U.S. Steel) to produce up to600,000 MTPY of enriched ore grading 86Z Fe.
66. Except for the MINORCA HIB plant, the mines and plants areope-ated by FERROMINERA which is, in turn, a wholly owned subsidiary ofthe CVG. The company employs about 3200 persons and operates the majorinfrastructure it owns in the mining zones.
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67. Since 1980, FERROMINERA has operated roughly at the breakevenpoint. High operating costs combined with ur -.Lally poor iron ore marketconditions have caused export sales and totai profits to fall steadilysince 1975. Although some of the loss on the export markets in recentyears has been offset by a surge in domestic sales, FERROMINERA willcontinue to operate well below capacity unless the export market expandssubstantially. Some recovery in export sales can be expected in 1984.
68. The financial position of FERROMINERA is heavily burdened by thepoor returns from the jointly owned MINORCA briquette plant which had salesin 1981 of 83,000 tons, less than 152 of the plant's capacity of 600,000per year; 1980 sales had been almost 3 times higher with 226,000 tons intotal. The resulting losses of US$10 million in 1980 and US$12 million in1981 have each exceeded twice this company's equity and the definitiveshutdown of this plant, which has never turned a profit and has neveroperated satisfactorily, is being considered.
69. FERROMINERA, in essence an export-oriented company, seem to besurviving rather well under trying circumstances. It cannot be reallyprofitable in the medium term, being too dependent upon the extremelycompetitive and depressed world market; there is little hope that thedomestic demand will grow wuch during the next few years. This is likelyto mean in turn that the high volumes (say 20 million MTPY or more) neededto yield satisfactory returns will not be achieved soon.
70. However, the company is technically well equipped-althoughmaintenance is a problem--and operacing coerficients and utilizationfactors for heavy equipment are high. Cost control information isroutinely used by operating managers.
71. The company will, if its present cost cutting efforts aremaintained, continue to mark time without heavy losses or really seriousfinancial deterioration and, in the meantime, contribute significantly tothe balance of payments, with "normal' earnings which should be on theorder of US$150 million per year.
Other Minerals
72. Coal is found in three general areas: the western basin (Zuliadeposits), its southern extension (Tachira deposits) and the eastern basin(Naricual and Tagaug). Venezuela's coals are geologically very young andtheir primary importance is as metallurgical coal. Total coal productionin 1982 was only 43,100 metric tons. The sector is very small and itsprospects are not good.
73. Gold production dated back to Spanish conquest, but most ofVenezuela's gold deposits were extracted by the end of the nineteenthcentury. Currently, 96% of production originates in the El Callao region.Total production in 1982 was 902 kilograms.
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74. Alluvial gold is extracted by semi-artisanal methods, includingsluicing, dredging, hookah diving and suction dredging; lode gold is mined,generally from quartzites, by chambers or stopes at 100-foot level inter-vals. Two state owned corporations are now involved in the gold sub-sector: Venezolana de Oro, C.A. (VENORCA) and Mineria de Venezuela, C.A.(MINERVEN). VENORCA operates a small 300 ton per day cyanuration plantbuilt in the 1930's and somewhat reconditioned; it processes the ores ofthe local miners. MINERVEN is the last owner (in a long series) of 12small gold properties in the El Callao region which were shut down severaltimes and resuscitated in 1953 when the Ministry of Energy and Mines re-opened them under the name Mocca. Large losses forced a shutdown in 1966,but in 1970 MINERVEN, created by the state owned Corporacion Venezolana deFomento (CVF), took the properties over, then sold them to FIV in 1975.The Fund developed a project for the mining of 2 million tons of ore at 18grams per ton (according to the studies) in 4 deposits (Colombia, SosaMendez, Union, America), and the related erection of a 700 MT/day moderncyanuration plant with a projected production of 4.5 tons of gold per yearduring 9 years; first production was planned for 1978. The constructionbudget, prepared in 1976, reached US$53 million.
75. The cost accumulated in mid 1981 (the most recent informationmade available to the mission), was US$98 million and the project was farfrom complete. The highest yearly production reached in 1982 was 380 kg or8%Xof the initially planned production; a partial technical report preparedin 1982 projects the 1985 production at about 2.5 tons. The project isplagued with problems, technical and managerial; an attempt to support itsmanagement with resident Bechtel (US) consultants does not seem to haveworked out, and progress in the mine development is years behind schedule.The average ore grade is now estimated at 10 grams per ton and maximumproduction at 210,000 tons per year.
76. It is difficult to be optimistic about prospects for the goldsubsector which, except for the two periods of glory in the nineteeth andearly twentieth centuries, has a long history of failures and disappoint-ments. If the present MINERVEN production plans are met, the 1985 sub-sector output would reach 2.6 tons, with a market value (at US$350 per troyounce before refining) of US$30 million; the MINERVEN revenue would beUS$24 million. However, MINERVEN projections should be viewed withcaution.
77. Diamonds. According to the records of the Ministry of Energy andMines, the first diamonds were found in 1913 in the vicinity of the CaroniRiver, in the area now covered by the reservoir of the Guri dam. Theplacers of the Gran Sabana were discovered in 1930; the largest diamondrecovered in Venezuela to date (the 155 carat 'Libertador") was found in1942, which triggered a rush of diamond mining by nationals and, illegally,by Brazilians and Guyanese; the placers were exhausted by the latefifties. The discovery (or rediscovery) of the San Salvador de Paulplacers in 1968 (25 km south of the confluent of the Caroni and CauraRivers) rekindled the activity which reached the record production of 1.25million carats in 1974, then decreased regularly to the present level ofhalf a million carats per year, in spite of the 1970 discovery of theGuanimo placers, (from which about 75% of the present productionoriginates), because of the exhaustion of the San Salvador de Paul area.
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78. Production in 1982 was 435 thousand metric carats, about half ofaverage production in the years 1975-1980. Almost all production comesfrom the "free supply" component of the sector; in 1980, the last year forwhich records are available, about 1.8 thousand carats came from legal con-cessions and the balance of 664 thousand carats was recovered by smallminers without concessions. Tnis practice has been illegal since 1977, butthe legislation has not had any practical effect except to increase theamount of smuggling: the data since 1977 are even less reliable than thoseof earlier years and it is certain that the actual production drop sincethat year is less marked than the data above indicate, as a large propor-tion of the production is now escaping measurement.
79. The subsector's position in the world market is not significant;in the total world production estimated at 70 to 80 million carats yearly,the controlled Venezuelan share represents substantially less than 1%. Nostatistics relating to the value of the output are available and estimatesare not practical, considering the large variations of diamond prices withquality, but it is clear that the subsector is of very minor economicimportance.
E. The Power Sector
80. The past twelve years in Venezuela have seen enormous growth inelectrical production stimulated by large increases in demand, both indus-trial and residential. During the period 1971-1980, public service elec-tricity production expanded at an average yearly rate of 13.1%. Today,Venezuela has the highest per capita electricity consumption in LatinAmerica (in 1982: 2700 kwh). Accompanying this growth were importantchanges in the structure of the power sector--most notably, increasedgovernment ownership and involvement in the sector. Unfortunately, thisrapid growth has created a number of sector organizational, legal, andfinancial problems which, owing to the extent of government involvement inthe sector, have become somewhat policitized. The current difficulteconomic situation of the country renders the search for solutions all themore critical for the long-term viability of the sector.
Sector Operations
81. Power facilities are concentrated in the northern part of thecountry which consumes about 99% of the country's electricity production.In 1982, total installed capacity in the country amounted to 10,536 MW, ofwhich 93% provide public services; the rest supply only the needs of auto-producers (oil companies, cement plants, sugar mills, forestry and otherindustries). Generating capacity is 75% thermal (43% fuel oil, 28% gas and3% diesel oil) and the remaining 25% is hydro. Industrial consumption isthe largest share of sales (48% in 1982). The country is divided, foroperational purposes, into four regions: Oriental, Central, Occidental, andZulia. It is mainly served through a fairly well developed interconnectedsystem, which leaves less than 1% of the public installed capacity inisolated systems. The interconnected system has, nevertheless, trans-mission bottlenecks which preclude adequate energy transfers from the
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Central region to the Occidental region and between the Occidental regionand the Zulia region, thus ne ' allowing the optimization of systemsoperations.
82. The sector is served by four state-owned power companies whichtogether account for 78% of electricity sales and seven privately-ownedutilities which account for the rest. The largest state owned company isthe Compania Anonima de Administracion y Fomento Electrico (CADAFE), whichwas organized in 1959 through the merger of various small utilities spreadthroughout the country. Its shareholders are the FIV (72%) and CVF (28%).CADAFE accounts for about one third of Venezuela's installed generatingcapacity and serves over one half of the total customers of the sector.The second largest company is EDELCA, which was organized in 1963 with themain purpose of developing the hydropotential of the Caroni River, on whichthe Guri project is located. Its shareholders are the FIV (71%) and theCVG (29%). EDELCA presently accounts for close to 30% of the installedcapacity in all power utilities, and it sells its energy in bulk to CADAFEand to large industrial consumers. C.A. Energia Electrica de Venezuela(ENELVEN), which operates in the western part of the country, was formed bythe purchase from a Canadian firm of several utilities in the area and isnow fully owned by the FIV. It accounts for about 11% of the installedcapacity and sales by all power companies. C.A. Energia Electrica deBarguisimeta (ENELBAR), the smallest state-owned company, has a mrketaccounting for about 2% of all power sales. The largest private company isC.A. La Flectricidad de Caracas (ELECAR), which serves most of Caracas.
83. In 1969, CADAFE, EDELCA and ELECAR associated to create a Centerfor Operating the Interconnected System (OPSIS). In 1981 ENELVEN was link-ed to the interconnected system, and now ENELVEN is also entering into theOPSIS agreement. In 1982 these four utilities generated 89% of the totalpublic service electricity in the country (35,400 GWh), thus the importanceof coordinating their operations is evident. OPSIS has been provided withadequate infrastructure and has succeeded in managing the inter-utilityinterconnection contracts and in performing operational planning, which islimited to improving the reliability of supply. It has not, however,assumed any role in economic optimization of system operations, and doesnot have the infrastructure, nor is it prepared to accomplish this role,which would be beyond its current purposes. Reliability of supplypresently is the major concern in coordinating system operations. Theenergy costs which are used for deciding energy transfers are accountingcosts, as measured by each utility, which, owing to the subsidization ofpetroleum and natural gas prices are a very poor proxy for economic costs.The accounting cost criteria could conceivably lead to economic aberrationsfrom a national point of view, i.e., to produce thermal energy while theGuri hydroelectric facilitv may be spilling water. If system optimizationbecomes a policy objective of system operations (as it should be), OPSISshould provide the system with an operations coordination center. Thiswould require major modifications in the agreements between the utilities,under the supervision of the regulatory agency.
84. Even though the need for power expansion planning at a nationallevel has been recognized since the 50's, expansion programs are stilldefined by each utility based on its own needs and using its own planningmethods and criteria. The CVF prepared successive national expansion
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programs in 1956 and 1958; both only partially implemented. A specialcommission created in 1971 (Comision para la Elaboracion de un PlanNacional de Energia) prepared a new plan, also never implemented. In thelast 20 years CORDIPLAN has also prepared five global national developmentprograms, each having a chapter on the power sector, which have been viewedmore as expressions of political intent and never seriously considered bythe utilities. OPSIS has a "Planning Committee" composed by the planningheads of CADAFE, ELECAR, EDELCA and, recently, ENELVEN which, on paper, hasthe role of coordinating the utilities' planning. In practice the OPSISPlanning Committee receives, as input, the generation and transmissionplanning decisions from the four utilites and coordinates the systemoperations in the framework of the interconnection agreements.
85. As a result of the lack of coordination inside the power sector,huge investments have been committed, almost at the same time, for thecountry's public utilities. The largest generating plant under construc-tion is EDELCA's expansion of Guri which will add to the interconnectedsystem capacities about 250 MW in 1983, 1,680 MW in 1984, 2,470 MW in 1985and 3,350 MW in 1986 for a total of 7,750 MW.5/ CADAFE is finishing theexpansion6/ of Planta Centro with 2,000 MW of thermal capacity and hasunder construction the Uribante Caparo hydro complex, which has a firststage capacity of 300 MW. ELECAR recently completed the expansion of itsTacoa thermal plant in which it added, from 1978, three units of about 400MW each.
86. In addition to the above-mentioned large generation expansionprogram, the utilities are considering the construction of other powerplants. CADAFE has scheduled stages 2 and 3 of the Uribante Caparo complex(about 1,020 MW), ENELVEN is considering the construction of two coal-firedthermal plants of 250 MW each, and EDELCA would like to implementMacagua II in the low Caroni (2,400 MW). The country's recent economicsituation has, nevertheless, reduced the expectation of obtaining FIV'sapproval for the corresponding investments.
87. The generation capacity expansion plan, as compared to the latestdemand forecast--prepared for FIV by consultants-is shown in Table 6. Adetailed evaluation of the demand/supply balance of the interconnectedsystem is beyond the scope of this report as it would require taking intoaccount the seasonal availability of hydro energy and the globalreliability of the system. However, a very simple analysis, restricted toevaluating the difference between installed capacity and demand (reservemargin), shows that there will be an excess of installed capacity duringthe next few years. Assuming that capacity additions (Guri and the firststage of Uribante Caparo) will be put in operation as scheduled, and thatthere will not be transmission bottlenecks between regions, the reservemargin will grow to 112% by 1986 and, assuming that no new powerinstallations or major retirements take place since, it will decrease toabout 31% by 1996.
5/ The original capacity of Guri was 1,820 MW. The final installedcapacity will be 9,570 MW.
6/ Four units of 400 MW each.
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Table 6: PROJECTED ENERGY DEMAND AND INSTALLED CAPACITY BALANCE,INTERCONNECTED SYSTEM, 1980-1996
1/ Assuming 68% annual load factor.f/ The total installed capacity of the public utilities was about 9,790 MW
at the end of 1982. About 1% of this capacity, installed in isolatedsystems, has been deducted for purposes of estimating the balance forthe interconnected system.
31 Additions considered are: 1983: Planta Centrol 400 MW, Ramon Laguna150 MW, Guri 250 MW; 1984: Ramon Laguna 150 MW; Guri 1180 MW; 1985:Uribante Caparo 230 MW, Guri 2279 MW; and 1986: uribante Caparo 150 MW,Guri 3350 MW. After Guri comes on line, part of the oldest small sizethermal generators will be retired. The total retired capacity may beon the order of 400 MW, and has not been considered in this balance.
88. The reserve margin which would result from an optimum expansionpiogram--accepting adequate levels of reliability-may be, for a mixedsystem like the Venezuelan, oa the order of 30%. The preliminary analysis,based on the FIV demand fore:asts, shows that no additional capacity wouldbe needed until 1997. With the slowdown in the economy, a lower rate ofpower demand growth should be assumed, and thus additional capacityprobably will not be required until an even later date.
89. Looking back, reasons may be found for the commitment of excessinstalled capacity: the expansion of Guri suffered long delays, which ledCADAFE to install additional thermal capacity. ELECAR did not have enoughconfidence in the reliability of supply from CADAFE. ENELVEN does nottrust CADAFE to supply ENELVEN's future needs from CADAFE's Occidentalzone. However, it is obvious that consistent central power planning couldhave avoided such a large and evident departure from a least-costexpansion. Before committing itself to any new expansion, it is advisable
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for the sector to evaluate its needs and prepare a sound long-term invest-ment plan. In this context, an assessment of the actual possibilities andthe cost implications of suspending the construction of Uribante Caparowas made by the Bank. The analysis concludes that stages 2 and 3 of theproject could be postponed to the year 2000 with interconnectionreinforcement.
90. The large amounts of hydraulic energy that could be produced inGuri cannot be fully utilized unless sizeable investments in transmissionlines are made. Two 800 kV transmission lines from Guri to the CentralZone are being constructed but a third circuit is needed to use theremaining available power. The main transmission bottleneck, nevertheless,is between the Central zone and the West. To linkup the West atransmission system has been programmed by CADAFE. CADAFE claims that, asresponsible for providing power to the West, it should be in charge ofthese works. EDELCA claims that the system will transfer Guri's energy andit already has experience in extra high voltage transmission andconsequently it should be in charge of such project. In the middle of thisdispute, ENELVEN believes that the transmission lines may not be ready intime to meet the energy requirements of the Maracaibo zone and would preferdeveloping its own generation (the Zulia coal-fired thermal plant).
91. Another problem which may affect the utilization of Guri's energyis pricing. The country's largest consumption center, known as "GreaterCaracas," is served by ELECAR mainly with thermal generation from its ownplants and from CADAFE's. The system's operation optimization wouldevidently require that hydroenergy be fully utilized before any thermalgeneration takes place. This would mean that CADAFE and ELECAR's thermalplants should either be shut down for periods of time or kept on stand-by.We do not foresee problems in this regard with CADAFE's power plants.However, ELECAR would have to purchase energy from EDELCA, and since thefuel oil for ELECAR is highly subsidized it is likely that the ELECAR'soperating costs generating its own energy would be lower than the cost ofpurchasing hydro energy from EDELCA. Thus there is little incentive tomotivate ELECAR. to use hydro energy instead of burning fuel. Anappropriate policy at this time would be to price domestic sales of fueloil at international levels.
The Institutional Setting
92. At present, Venezuelan institutional arrangements do not providean adequate framework for the sound development of the power sector.Venezuela does not have an electricity law and the activities carried outby the public power companies are governed by general legislation, specificlegislation applicable to all public sector entities, and a mosaic of adhoc provisions which have been developed through time in response to speci-fic needs. The lack of a coherent framework to a large degree reflects theTRnezuelan political environment; however the improvement and modernizationof the institutional framework in which the power sector operates is cri-tical to the efficient operation of the sector.
93. Control over the sector is shared by the FIV, which funds thelargest part of the Government-owned companies' investment programs,CORDIPLAN (which sets investment programs for the sector in the context offive-year national plans), Congress (which, through law, sets limits to theamounts of long-term borrowings the companies may seek), the Ministry of
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Energy and Mines (which has general supervisory responsibilities over thesector), and the Ministry of Development (which approves tariffs). TheGovernment-owned enterprises enjoy a substantial degree of independence,but through the VIF, which is their largest shareholder, the Government isbeginning to exercise some control over their operations. Control over theprivate utilities is very limited.
94. Conflicts between the Government-owned companies as to who shoulddo what (especially over the construction of the proposed transmissionlines) have also led to the idea of creating a power sector holding companyfrom which the four Government-owned companies would operate. This wouldbe a reasonable way of addressing some of the coordination problems thatthe sector faces, provided that the holding company has well defined re-sponsibilities, strong leverage and capable technical staff.
95. There seems to be a consensus within the companies and Governmentofficials that some comprehensive power sector legislation would be desira-ble. Such legislation should: (a) define the system of concessions, andthe rights and obligations of the concessionaires, (b) provide for theassignment of regulatory functions and tariff decisions to appropriateagencies within the Government, (c) allow a centralization of systemplanning, (d) define the criteria and set financial standards, under whichelectricity tariffs are to be set, (e) establish a framework for companyfinancial policies, to ensure their soundness, and (f) establish generalguidelines for the operation of the interconnected system, to ensure thatsuch operation is consistent with national economic objectives.
96. The currently proposed electricity law, however, seems a weakcompromise between the present state of affairs and an ideal situation. Itis a step forward in that it proposes to centralize in the Ministry ofEnergy all policy making and control functions, including the setting oftariffs. It does not address, however, the definition of criteria fortariff setting (except in the broadest terms) and does not provide themeans for addressing the financial problems that the sector currentlyfaces. The draft discusses in some detail the framework under which con-cessions are to be granted and the rights and obligations of theconcessionary companies. However, it indicates that the term of suchconcessions may not be longer than 30 years, at the end of which they maybe renewed or not. In the latter case, the concessionaries' assets wouldbe transferred to the Government in the terms set forth in the concessioncontract. This approach is likely to be a source of conflict between thestate and the private companies and may politize the issue of power companyownership in an undesirable direction.
97. An issue which is not addressed in the draft law nor in the hold-ing company proposal is how the activities of the privately owned companieswill be coordinated and controlled. To the extent that price signalsare--as at present-very distorted, such coordination becomes essential.
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Electricity Pricing
98. Electricity tariffs in Venezuela are insufficient to meet operat-ing costs, pay debt service and provide a reasonable contribution toinvestment. Inadequate tariffs reflect, among other things, the high levelof operating costs (in spite of the highly subsidized fuel costs) which iscaused by system inefficiencies, and also the high debt-service burdenoccasioned by both the large investments made in recent years and cohmit-ments arising from ongoing projects.
99. By international standards average tariff levels seem somewhatlow, but any comparison is very difficult due to the circumstances now pre-vailing in thte economies of all Latin American countries and to exchangerate uncertainties. In 1983 the average price of electricity to a residen-tial consumer ranged between Bs 0.135 for a very large (5,000 kWh) consumerof ENELVEN and Bs 0.290 for a snall (100 kWh) consumer served by CADAFE.Proposals for tariff increases for CADAFE and ENLVEN have been recentlysubmitted to the Ministry of Development (Ministerio de Fomento).
100. Compared to long-run marginal costs, which provide a standard for"correct' pricing for resource allocation purposes, tariffs of the finalconsumer may be somewhat low now, but may be, on the average, high whencompared to long run marginal cost projected to 1985-1995. It should berecognized, however, that in the case of Venezuela marginal cost studiesmay be distorted by the huge size and influence of the Guri expansionproject. The analysis based on long-run marginal costs is affected by thesignificant investments so far made in the Guri project, which are regardedas sunk costs in a forward-looking analysis. A study recently completedunder the auspices of the IDB7/ shows that the ratio between marginalenergy costs based on 1980-1985 and marginal energy costs based on1986-1995 would be close to 3:1.
101. A review of the overall legal, institutional, and organizationalaspects of the sector is warranted as well as an update of the study thattakes into account revised demand forecasts, investment programs and unitcosts. Howcver, until such update is completed, revision of the tariffschedules to take into account the =-in findings would be an importantfirst step. Such revision will lead to a simplification of the schedulesand should result in a more efficient use of energy by the finalconsumers. Tariff issues are particularly complex to address, however, forthe following reasons: (i) each company has a different rate schedule(i.e.: not only are unit prices to the same consumer categories different,but the classification of consumers into categories and the nature of thecharges applied differ from one company to another); and (ii) ft '. pricesare heavily subsidized, so that the price of fuel relative to electricityis low, thus providing incentives for autogeneration, and any increase inelectricity tariffs not accompanied by an offsetting increase in fuelprices would worsen this problem.
7/ F. Lecaros, 'El sistema electrico interconectado de Venezuela' inAbouy (ed.), Analisis de Costos Marginales y Dise o de Tarifas deElectricidad y Agua, (Washington, D.C.; Interamerican DevelopmentBank, 1983).
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Sector Finances
102. The power sector is presently facing serious financialdifflculties. Until one or two years ago the economic prosperity enjoyedby Venezuela had created expectations of continued high growth and thiscaused the sector to embark on an ambitious investment program, enabled byeasy access to financing. The reduction in world oil prices, worldwiderecession, and deteriorated confidence in the creditworthiness of LatinAmerican countries has significantly affected the Venezuelan economy andproven the expectations of the past to have been unduly optimistic. As aresult, Venezuela now has excess installed capacity in electricitygeneration; and the power sector has incurred in further investmentcommitments which it will have to meet, in conjunction with the heavy debtservice requirements arising from the investments of the past, at a timewhen the capacity of the sector to generate funds from its operations iseroded by lower demand growth, collection difficulties and rising costs.The problems faced by the sector are further compounded by constraints toaccess to external credit and by FIV's own budget constraints, which makeit unlikely that FIV will be able to provide fresh capital and/or equitycontributions in the amounts required by the sector to finance itsinvestment programs.
103. The company in the worst financial situation is CADAFE. For thepast three years, CADAFE's self-financing ratio has been very low, and thecompany has been carrying out a very sizeable investment program financedby the FIV, long-term borrowings from other sources and significantreliance on short-term borrowings-including non-payment of accountspayable. CADAFE's tariffs are much too low, and should be increased by atleast 50%. The company is neither collecting from, nor paying to thepublic sector, which consequently affects the finances of EDELCA, CADAFE'sbulk provider of energy. EDELCA itself is suffering from a working capitalshortage since other large customers besides CADAFE are delaying billpayments, resources from FIV are now limited, and external borrowing hasbecome increasingly difficult. Even if the non-paying accounts receivablebegin paying, EDELCA requires significant tariff increases in the nearfuture, as well as fresh borrowing or equity contributions to enable it tocomplete the Guri project in 1986. In contrast, ENELVEN has followedfairly conservative financial practices and, despite a large investmentprogram, has managed to keep its long term debt-equity ratio low. ENELVENalso, however, requires a tariff increase.
104. To address satisfactorily these financial issues, the followingsteps should be taken:
(a) significant tariff increases (i.e.: not less than 50% effec-tive early in 1984) to improve the sector's cash generationcapabilities;
(b) a centralized revision of the investment programs of thelarge utilities to insure that the projects undertaken arerequired to meet the revised demand forecast, and that these
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projects are the least-cost solution (in this regard, thereare prima facie grounds to question the Uribante-Caparoworks and the TERHOZULIA coal plant);
(c) implementation of a program to improve the operational effi-ciency of the sector by addressing issues such as: (i) highgeneration reserve margin requirements, which may be due topoor maintenance policies and to inadequate staff trainingin the operation of large steam units (in the case ofCADAFE), (ii) high system losses, which could be caused bytheft, inadequate metering or administrative deficiencies,and (iii) excess personnel, due to political interferencesin the management of CADAFE;
(d) Government measures (i.e.: earmarking budget allocations,establishing severe late pay penalties) to cause all publicsector entities to pay their future electricity bills whendue, and settlement of overdue accounts now outstandingthrough a centrally-administered conciliation which wouldallow payment of net balances due over a period of time; and
(e) where feasible, refinancing or funding of outstanding debts,to reduce debt-service requirements in the coming years.
105. The sector has never in the past faced financial problems of themagnitude of its present ones, and the measures required to address themface strong political opposition which will pose a serious challenge to thewill and ingenuity of sector officials. However, failure to address theproblems in a timely manner, through measures commensurate with thedifficulties faced would lead to deterioration in the creditworthiness ofthe utililities to the point where works would have to be stopped affectingquality of service, destroying the morale of sector staff, and in themedium-term placing Venezuela in the unfortunate company of those LatinAmerican countries in which poor and unreliable electricity supply acts asa constraint to ecoroamic development.
F. Agriculture
106. Although Venezuela's agricultural sector has been a smallfraction of GNP over the past decade, output has increased at a real rateof 3.2Z per annum between 1970-1982, allowing the share of agriculture inGDP to remain roughly constant over the period. This recent expansion ofagriculture has been associated with significant changes in output composi-tion and land use, as livestock and food and feed grain production expandedsubstantially, while production of traditional commercial crops such assesame, coffee, cocoa and sugar showed little or no improvement over theperiod. Several factors have contributed to this growth and compositionalchange, including a number of direct government actions such as thesubsidized provision of credit, implementation of price supports andsubsidies, and infrastructure investments in the sector. Many of thesehave come under increasing criticism, however, as being inefficient and/orineffective.
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Growth and Change in Output and Productivity
107. Growth in Venezuela's agriculture continues to be dominated bythe livestock subsector, with a 66Z output increase since 1970. The rapidgrowth of this subsector can be attributed to the expansion of poultry(7.9Z growth rate p.a.) and pork (5.9% growth rate p.a.) during theperiod. Beef and dairy production also increased, but at a slower rate.In the case of beef, this was prizmrily due to low prices for beefthroughout the period. In contrast to livestock, crop production has beenerratic since 1979, when acreage under cultivation reached a peak; croparea harvested declined during the period 1979-1982 from 1.9 millionhectares to 1.6 million hectares despite high government guaranteed pricesfor many crops. The leading sector in crop production has been cereals,which accounted for 21X of the total value of the crop sector in 1970 but33Z in 1979. Much of the land removed from crop production has beenshifted to pasture for the growing livestock sector.
108. Reduction of the area under crops has been, as a whole, offset byincreased yields. This trend, however, does not hold for all crops. Ofthe major commercial crops, the reduction in area was fully or more thanfully compensated for by increases in yields in the cases of black beans,maize, and casava. For peanuts, however, although yields per hectarealmost doubled, the 81% reduction in acreage resulted in a substantialdecrease in total output. Cotton output dropped sharply (71%) reflecting alarge reduction in both acreage and yields. With regard to rice, asignificant increase in yields combined with a nearly doubling of acreage,expanded output by 128% over the nine-year period. On a per capita basis,real output of the people employed in agriculture increased in constant1968 prices from Bs 4.802 to Bs 7,108, or 4.8% per year on average.
109. Increases in labor and land productivity reflect the simultaneousoperation of several aspects of higher technology. In the case of rice, animportant factor has been the expansion of the area under Irrigation andImproved water management. Other more general factors affecting most cropshave been the wider utilization of Improved seeds, fertilizers andmechanical equipment. Four-wheel tractor imports have ranged from 3,000 to5,000 units per year, or about 1 for every 10 to 11 farmers with enoughland and crops suited for mechanization. Use of insecticides--domestic andimported-have ranged from 5,000 to 8,000 tons annually, while sales offertilizers have approached about half a million tons per year. Moderntechnology enters Venezuelan agriculture in three principal ways. First,it is introduced and maintained by agribusiness private sector firmsinterested in selling large volumes of mixed feeds, farm machinery,pesticides and fertilizers. For poultry and swine, these firms develop acombination of imported and domestic hatching eggs, baby chicks, breeds ofhogs and well formulated feeds that assure rapid growth and productivity.Second, technology is developed and distributed by several entities of theMinistry of Agriculture (the Fondo Nacional de InvestlsclonesAgropecuarias (FONAIAP), the Instituto Agrario Nacional (IAN), and severaltraining institutions) that conduct farmer meetings and short courses. TheCKA often supplies certified or other high quality seeds through imports ordomestic production contracts. Third, several Ministry of Agricultureagencies supply technology, credit and input subsidies In a package, and
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frequently supply some of the inputs, e.g., millions of seedlings of coffeeand cocoa. The first and third of these methods have been the moreeffective, and usually are tied to specific commodities.
110. A number of factors have contributed to these treuds inproduction and productivity in agriculture. Livestock production has beenstimulated primarily by variables outside the range of government policy:
(a) the limitation in the quality of land resources inVenezuela, making expansinn in crop production difficultwhile imports of feed enable livestock producers to draw onless fertile lands;
(b) increasing rural-urban migration, causing a decline Inseasonal labor available for crop production, permittinglivestock production to compete for labor more effectivelyby providing more days of employment per year; and
(c) increased domestic supply of high technology inputs(referred to above) allowing large increases inproductivity.
111. Crop production, on the other hand, has expanded primarily as aresult of government policies, which have been costly. Minimum prices tofarmers have been well above world levels. and since Venezuela must importsubstantial amounts of wheat, feed grain, cotton, vegetable oils, and milk,a complex system of domestic subsldies, import licenses and retail foodprice controls has been established. The doubling of rice yields in 20years has been possible In part because of substantial water controlprojects financed by the Central Government.
Government Policies
Credit
112. For many years, through the 1960's and 1970's, farm credit at lowinterest rates was the principal and almost sole policy instrument used bythe Government to stimulate production. From 1970 to 1974 the amountsloaned by the three government agricultural credit institutions (BancoAgricola y Pecuario (BAP), Instituto de Credito Agropecuarlo (ICAP), andBanco de Desarrollo Agropecuario, (BANDAGRO)) jumped from Bs 252 million toBs 854 million. By 1981, that amount had increased more than fourfold, butin 1982 fell by 11%. In real terms (1968 constant prices), credit tofarmers by public institutions between 1970 and 1982 noarly doubled.
113. In 1974 the Government adopted two measures of far-reaching, butnegative consequences. All farmers' debts, to both public and privatecreditors were immediately paid in full by the Government, cancelling outall previous agriculture debt. At the same time, an Agricultural Fund forInvestments was created for lending to farmers at very low interest rates,ranging from 3 to 5%. No distinction vas made as to the type of farmersand sizes of farms. A most elementary statement as to the purposes rc theloans (certified by an agronomist) was all that was required for borrowingfrom the Fund. The Government's Intention was to operate the Fund through
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the commercial banks, but no significant participation was obtained fromthem despite a government guarantee that finally was raised to 90% ofloans. For this reason the operation of the Fund had to be entrusted toBANDAGRO. It is uncertain how much of the Fund's resources have actuallybeen used in agriculture, since the large negative rate of interest of theFund's lending--especially in the absence of any kind of control andsupervision--made it very attractive to borrow from it and relend theproceeds elsewhere. In addition, the cancellation of debts created theexpectation that such a policy will be repeated. This increaseddelinquency, and even the extremely cheap loans obtained from the Fund arenot being repaid. The current stringency of government fiscal resourceshas restricted the ability of the Government to replenish the Fund,decreasing resources available to the government agricultural creditinstitutions. The expectation that the cancelling of debts will berepeated has in fact materialized recently with a measure to that effectadopted by the new Government that took office early this year.
Price Support and Subsidies
114. In recent years minimum guaranteed prices to producers havebecome the main policy instrument of the Government for expandingagricultural output. In 1973 only seven products were covered by the pricesupport scheme; the following year the scheme was extended to 22 productsand fish. Slnce 1974 the initial minimum prices, already high compared tointernational prices, were increased three times, so that in 1982 theywere, for almost all products, about double or more the minimum establishedin 1974, as shown in the following table:
Table 7: MINIMUM PRICES TO FARMERS FOR PRINCIPAL PRODUCTS INDESIGNATED YEARS
Sour:es: CHA Informe Anual 1980, p. 89; CMA, Boletin Informativo deProductos .Agricolas, Vol. II, No. 4, Dec. 1982, pp. 1-3.
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115. To implement the price support scheme, the CMA (the implementingagency) had three major tools. First, the CMA, at 24 buying stationsacross the country, announced its readiness to buy any amount offered of agiven commodity at the guaranteed price, with some adjustments forquality. Second, for milk producers, the CMA paid stated amounts to theprocessors for each liter received, this payment to be reflected in theprice paid by the processor to the producer, while another payment was madeto the processor to subsidize conversion of fresh milk to pasteurized orpowdered milk. Third, for imports, decisions on the quantity of feedstuffsand meat allowed in the country were the responsibility of CIA, enablingthis institution to manage prices by controlling the flow of imports. Forcocoa and coffee, export subsidies by their respective commodityorganizations make minimum prices effective by increasing or reducingexports as needed.
116. Comparisons of actual and guaranteed farm prices during the late1970's indicate that most actual prices were close to or higher than theguaranteed prices. The table below compares the guaranteed minimum pricesand the international prices for eight of the most important agriculturalproducts. To effect the comparison, the guaranteed prices in localcurrency are expressed in U.S. dollars at the exchange rate of Bs 4.3 perdollar, which was in effect during the whole of the period covered. Itreadily can be seen that in most cases the domestic prices have been fromtwo to four times higher than the import prices and still would be quitehigher even if transportation costs were added.
Product Bolivar U.S. Dollars U.S. Dollars LocationPolished Rice 2,400 560 397 FOB Mill,
Houston
Sorghum 1,400 326 114 US, FOB Vessel
Maize, white 1,800 419 103 FOB, Buenos Aires
Maize, yellow 1,400 326 107 US Gulfports, FOBVessel
Soybeans 2,000 465 222 US Gulfports, FOBVessel
Cotton, Med. Staple 4,650 3,000 1,315 US 9-market Ave.SLM 1-1/6 inch
Acala 12,510 fiber a/
Milk, liter 2.5 ave .58 .30 US price to far-mers
* Per metric ton, except as otherwise noted.a! Assuming 33.33% fiber and deducting value of cotton seed at Bs 720
per metric ton.
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117. The Government policy in this field has pursued simultaneouslythe three objectives of ensuring that farmers received the guaranteedminimum prices, that importers do not obtain windfall profits and that theincreases in prices passed on to the consumers are limited. SinceVenezuela must import substantial quantities of wheat, feed grains, cotton,vegetable oils and milk, the pursuance of these objectives bave requiredsetting up a complex system of subsidies, import licenses and retailmaximum prices. Quite apart from its effectiveness--discussed later--thesepolicies have been costly. Since as indicated earlier, guaranteed priceshave beer. far above international prices, the CMA has consistently incurredheavy financial losses in paying cash subsidies or absorbing pricemarkdowns. On the average, these losses have amounted to about Bs 2.5billion annually. Another significant--though less obvious--cost has beenthe increased spoilage, inefficiencies and delays resulting from thecentralized control of marketing. Finally, a hidden cost to the Governmentis the absence of charges for irrigation water, which has been an importantfactor in the expansion of rice production.
118. It is not possible to determine--much less to measure--by directmethods and with any degree of certainty, the effectiveness of the abovedescribed policies in increasing agricultural production. We haveattempted to draw some inferences from the behavior of output of severalimportant subsidized crops during 1973-82. In the absence of subsidies,output of the crop sector as a whole might have been substantially lower,and certainly the output mix would have been different. Policy instrumentsof high guaranteed prices, control of imports and-in the case ofrice-free of cost irrigation water, have clearly been quite effective insubstantially expanding rice and sorghum production since the area underthese crops expanded enormously despite significant increases in yields.This area expansion has been to a certain degree largely at the expense ofcorn and cotton and to a minor extent all other commercial crops.
Assessment of Government Policies
119. From the discussion of the preceeding sections it may beconcluded that, with few exceptions, the Government policies have not beeneffective in expanding agricultural production in Venezuela in recentyears. The emphasis of policy was on the expansion of crops. Actually,crop production increased slowly during the last decade, while thelivestock subsector grew much faster with limited cost to the Governmentand to the economy. The reason is simple: Venezuela uses advancedtechnology, and has a comparative advantage in livestock productioncompared with most other crops other than cocoa and coffee.
120. As mentioned earlier, the remission of farmers' debt in 1974,created widespread expectations of its being repeated, increasing arrearsin the servicing of new debts even at the extremely low inter...st ratescharged. This results in a faster and continuous decapitalization ofagricultural public financial institutions, which require ever-recuirringgovernment contribations. As to the private commercial banks, though theirfarm portfolios increased somewhat in the last three years, their lendinggoes mainly to very large farming enterprises and, in addition, the actualfinal use of the funds always remains doubtful.
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121. With regard to the price support and direct cash subsidies, theiroverall effect has been to induce certain shifts among crops, rather thanto increase total output. Moreover, the two cases of successful expansionof output, namely rice and sorghum, pose serious questions concerning theefficient allocation of resources in agriculture. In the case of rice,where the area harvested nearly doubled since 1973, the incentives policieshave overshot the mark, since production is likely to exceed domesticrequirements and Venezuela will find itself burdened with a substantialrice surplus which could not be exported due to high price and poor productquality. As regards sorghum, a guaranteed price of nearly three times theinternational price imposes a very heavy burden on livestock production,and has diverted to this crop 180,000 hectares of scarce crop land thatcould better be used for growing other deficit products, such as cotton andoil seeds, to which production shifts from sorghum can occur quite easilyon a significant number of farms.
122. Not only have agricultural pricing policies affected producerdecisions regarding output volume and mix, they have also conveyed signalsto the consumer which are not consistent with those conveyed to theproducer because of the complex marketing interventions. Consequently,consumer prices do not reflect the real costs to the Venezuelan economy.More important, this system of price guarantees and subsidies is signi-ficant for large farms and medium-scale operators, perhaps 50,000 farms andmore than half the cultivated area. For some 200,000 small-scale, nearsubsistence farmers, the system has little meaning because they sell onlysmall amounts.
123. The promotion of technological change by the Ministry ofAgriculture has doubtless encouraged the rapid increases in productivity inVenezuelan agriculture over the past decade. Raising agriculturalproductivity further through greater use of modern technological inputs iscrucial for Venezuelan agriculture, since it has been estimated that only14% of the country's agricultural land is of A or B grade (on a scale offive), and twice that much is already under cultivation. However, moderntechnology generally is associated with large farms which have significantvolumes of output. Poultry enterprises do not need large amounts of land,and many coffee and cocoa producers are also small scale enterprises highup on distant mountain slopes or on tropical low lands. For these farmers,an all-weather road reaching their farms may have more impact on productionthan any combination of improved tree varieties and fertilizers.
124. The latest (1984) devaluation is likely to have some beneficialeffects on agriculture. On the import side, the list of 4.3 rate ofexchange has been limited to a total of US$1.8 billion of goods of popularconsumption. All other imports have to be made at the new official rate ofBs 7.50 per U.S. dollar, so the devaluation should stimulate agriculturalproduction as a whole, through import substitution of many products. Onthe export side, the new exchange rate will be a substantial stimulus forexpanding production and as well as for becoming more competitive in exportmarkets. However, for this potential benefit to materialize, it would benecessary, first, to remove or substantially reduce existing restrictionson price increases for these products. Apart from these effects, thedevaluation offers an opportunity to carry out some desirable adjustmentsin the pattern of relative prices in agriculture. The removal of the
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several feedstuffs and feedstuff components and of sorghum and corn fromthe preferential list should make it possible to eliminate the existingsubsidies. The present circumstances provide an opportunity to develop amore rational set of product prices and resources use, and enable Venezuelato import products expensive to produce domestically and import less ofproducts most adapted to the country's agricultural resources. The newGovernment has not so far explicitly stated a change of policies concerningagriculture. However, the transfer of agricultural prices and importpolicies to the Ministerio de Fomento as a first step in the elimination ofCMA, together with the lowering of the maximum interest for farm loans to8.5% and rediscount facilities in the Central Bank at 6.5% seem to indicatethat agricultural policy may be moving away from the direct controls andinterventions of recent years that have been far from succesful.
125. Finally, it is important to recognize that the nature ofVenezuelan agriculture has changed over the past few decades. Most of theoutput of the sector is now being produced by large modern farms usingadvanced technology. The number of small farmers has declined sharply andit is highly questionable as to whether price and subsidy policies have hadany impact on their income. If the government is interested in the welfareof these farmers then subsidy programs designed for and targeted explicitlyto this group should be implemented. Existing price and subsidy programscan be Justified only in terms of inducing production responses, and inthis regard, due attention should be paid to the issues of technology andcomparative advantage in Venezuelan agriculture. The sector can be asefficient as any in the world with high technology, feed lot operations(such as poultry, pigs, and cattle), but because of the limited fertilityof Venezuelan soils it will be more efficient to import feed grains than togrow them locally.
Export Possibilities
126. The lack of information on costs of production of each of themain commercial crops makes it impossible to assess their competitivenessin international markets and project exports. We have to limit ourselves,therefore, to some comments on the export possibilities of some crops basedon certain assumptions as to exchange rates and other policy instruments,without any attempt at quantification, as follows.
127. Coffee: Production of coffee has been fairly stable at between50,000 to 3UPW metric tons over the past 20 years. Exports were as highas 360,000 bags of 60 kilos as recently as 1975-76 but reached only 17,000bags in 1981-82. Exports had been maintained by a special coffee exchangerate and more recently by an export bonus at levels designed to maintain anacceptable flow of income to coffee farmers whose major resources werecommitted to coffee production. The Government, consulting with theInternational Coffee Agreement, accepted a reduction in its export quota inmid-1982 to 80,000 bags. Sharp increases in domestic consumption areresponsible for the decline in exports. Exports in 1982 were valued atBs 10.8 million but required a Bs 5 million subsidy. For the past threeyears, planting programs have replaced more than 12% of the trees. Asthese trees come into harvest in the next several years and other programsto increase yields and total production come into play, coffee production
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should increase. If regulations are relaxed, permitting prices to increaseby the amount of devaluation, higher prices would stimulate greater care,higher yields and larger harvests. Any exchange rate greater than Bs 6 perdollar would permit abolition of the subsidy, and coffee exports wouldbecome possible.
128. Cocoa. Although production has declined slightly, export volumeshave held up better than for coffee and the required subsidy has beensmaller. High prices in the world market, until recently, are the primaryreason for this difference. Exports in 1982 were valued at Bs 93.5 millionwith a subsidy of Bs 16.5 million. A variety of technical assistance pro-grams and special loans also have been used to encourage an expansion inproduction, but the 1982 drop in world prices led to some discouragementand defaults in loan repayments. The new exchange rate of Bs 7.5 perdollar would permit the elimination of the subsidy, even taking intoaccount the recent decline in world prices.
129. Rice. The high price guarantees, the increased area under irri-gation and improvements in technology combined to bring a near doubling ofyields, a tripling of area harvested and a sixfold increase in total pro-duction over the past 20 years. Although yields leveled off in the past 2years, acreage is still on an upward trend: obviously production has beenprofitable, compared with other possible irrigated crops. If the rationalefor high price guarantees is a desire to increase production, then thepresent situation, particularly the expectation of more land under irriga-tion and the recent devaluation would argue for a lowering of the priceguarantee. The exchange rate of Bs 7.5 per dollar should make it possibleto export rice without subsidy. It would bring forth the rice needed fordomestic consumption and some exports, particularly, if combined withefforts in a few selected areas relatively close to shipping ports andimproved, so as to provide a product readily accepted in internationalmarkets.
130. Fruits and Vegetables. Small quantities of tropical fruits andvegetables appear regularly in the export lists. While some of these salesmay be to passing steamers, the numbers indicate some commercial exports,probably to nearby countries.
131. Other Agricultural Products. Venezuela is less than self-sufficient in other agricultural products. Production trends are downwardfor cotton, white corn and most of the oilseeds, largely because they can-not compete with rice and sorghum at the existing minimum prices. Changesof price ratios in their favor could lead to some expansion in productionand so reduce the degree of dependency upon imports, but no exports ofthese products can be visualized in the foreseeable future.
G. Social Services
132. At the level of national averages, Venezuela is fairly advancedin the provision of essential social services. She leads Latin Americancountries in the provision of most services, and in a number of instancesis approaching the levels of basic needs provision enjoyed by developedwestern nations. For Venezuela, this achievement is the result of almosttwo decades of investment in education, housing, health service provision
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and basic social infrastructure. Despite Venezuela's great strides in thisarea, there is room for significant improvement in the distribution ofsocial services, both by geographic area and income group. In addition,for all services, the efficiency of service delivery could be improved.Maintenance of public buildings is also a problem area for social serviceagencies.
Education
133. According to all available indicators, Venezuela has made notableimprovements in the field of education during the last six years. In termsof basic literacy, total illiteracy declined from 16% in 1977 to 11.9% in1981, and illiteracy among adults, 30 years and older, declined from 28.1%to 22.2% over the same period. In rural areas, illiteracy declined sub-stantially as well, although the illiteracy rate in rural areas is stillover three times greater than that in urban areas. Currently, primary edu-cation is virtually universal, and enrollment in secondary and highereducation continues to increase. However, Venezuela is still below herLatin American neighbors in secondary enrollments despite the latter'slower income per capita.
Table 9: NUMBER ENROLLED IN SECONDARY AND HIGHER EDUCATION AS APERCENTAGE OF THE AGE GROUP, SELECTED LATIN AMERICAN COUNTRIES, 1980
134. Although total expenditure on education in Venezuela is high--around 10X of GDP-the allocation of expenditures favors higher incomegroups. Much of education expenditure remains private, as public expendi-tures are only 50% of total education expenditure. Public sector expen-ditures are heavily concentrated in higher education, to the detriment of
Table 10: PUBLIC SECTOR EDUCATION EXPENDITURES BY TYPE, 1982(Percent)
primary and secondary education, which benefit a larger portion of thepopulation. Expenditures on adult informal education also are very low,although the Government has been increasing these expenditures in absoluteand relative terms. Administrative costs are too large a percentage ofeducation expenditures. Quality of teaching staff varies by district, andbuilding maintenance is also very poor.
135. In addition to the general problem of the distribution of educa-tional funding, there are two specific issues of concern for Venezuela'seducational system in the near future. The first is the quality of primaryeducation. The number of dropouts is quite large, almost 10% in primaryeducation. At the same time the number of repeaters has been increasing,and while this may indicate that academic requirements are more strictlyenforced, nevertheless, steps should be taken to provide better instructionthe first time around. Despite recent improvements, the pupil/teacherratio is still too high in public primary schools. From the financialpoint of view, quality enhancing expenditures should pay off both in termsof lowering repeaters and in increasing enrollment in secondary schools.
136. In the area of higher education, the public sector has beengranting fellowships for technical and university education. Since 1974,more than 30,000 fellowships (becas) have been granted through the Mariscalde Ayacucho Foundation; more than 7,000 people have already completed theirstudies. The fellowships have been granted mostly for university and post-graduate studies in foreign countries.
Table 11: FUNDACION HARISCAL DE AYACUCHO FELLOWSHIPS(1974-81)
Country (Z) 100.0 100.0Venezuela 35.9 36.4Foreign 64.1 63.6
Source: CORDIPLAN Informe Social, 1981.
137. The program is quite expensive, and although is has been inexistence since 1974, there is very little evidence of its impact becauseno comprehensive evaluation has been undertaken. The contribution of theprograms of fellowships to the Venezuelan economy should be evaluated,given the pressing needs for further improvements in quality in the lowergrades. Perhaps the country could better focus on absorbing the trainedpersonnel, and at the same time, consider a shift in composition thusputting more emphasis on the country's critical need for trained technicalpersonnel instead of general university or post-graduate courses.
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138. For the future, the country should be prepared to deal with newissues emerging from the recent expansion of education in urban areas.First, if increased education raises the female labor force participationrate, the labor force can be expected to grow even faster than projected,which is an impressive 4% p.a. Presently, less than 30% of the women inthe 15-64 age bracket participate in the labor market. Second, highereducation standards in urban areas combined with rural/urban migrationbring poorly educated workers to the city. These workers have troublecompeting for jobs, both because of their low level of education andbecause their limited education did not include any specific skillstraining. These issues have already emerged and could become more visiblein the years to come. While they should be addressed in the context ofoverall macro-policy formulations, there are some aspects that areappropriately addressed at the sector level. In this regard, secondary andtechnical education, vocationally oriented, for both adults and teenagersshould assume an increasing role in both rural and urban areas in themedium- and long-term.
Health
139. In the last ten years, the number of physicians per person hasincreased by 20%, and total health support staff, (nurses and auxiliaries)has increased sharply. Hospital beds per thousand persons has remainedroughly constant over the decade, at about 30. On all three of thesehealth service supply indicators, Venezuela is well above the majority ofher Latin American neighbors. However, significant differences areregistered in these indicators by region. In 1980, physicians per thousandpersons ranged from 2.5 in the capital to around 0.7 in the rural areas.The distribution of health support staff is also heavily concentrated inthe capital, while in many outlaying areas the ratio of nurses per thousandis below the minimum necessary for standard emergency health care.
140. The mortality rate, which had been declining until 1978, hasremained constant since then. Infant mortality has declined sharply whileheart-related mortality has increased. Mortality caused by cancer hasremained roughly at about the same level during the last decade. Accidentis the most important cause of death for adults under 44 years of age, andthis rate has been increasing, particularly among men. This trendindicates the need for improved enforcement of traffic safety as acomplement to increased health service provision.
141. Public hospitals are reputedly in poor condition due to the lackof proper maintenance. Expenditures are heavily concentrated on salariesand administration which absorb more than 80Z of the total publicexpenditures on health, leaving very little funds for maintenance and othertypes of expenditures.
142. Expenditures on health are about 4% of GDP. Public expendituresaccount for more than half of the total, and real public expenditures percapita on health care have Increased over the decade, despite recentcutbacks in public expenditures required by the deteriorated fiscalsituation of recent years. Although the level of expenditure issubstantial, a redistribution of expenditures is needed to:
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(i) reduce regional differences in health services; and
(ii) maintain public hospitals and equipment properly.
Housing
143. Under the stimulus of strong government incentives to thissector, housing availability has improved steadily in recent years. Thestock of houses has increased by about 3.3X per year during the last fiveyears while population has increased by about 3%. During this period, thenumber of persons per room has also been declining, indicating a qualityimprovement as well. Home ownership has been increasing, and homeconstruction in rural areas has been increasing in absolute and relativeterms since 1979.
144. Officlal housing policies emphasize ownership by each Venezuelanfamily. They are designed to encourage residential construction in ruralareas and improvement and/or construction in poor urban neighborhoods(areas marginales). These policies have played an active role in housingnot only through direct construction programs but also through subsidiesfor private construction. The most important Government programs are:
(a) Instituto Nacional de Vivienda (INAVI) which financesresidential construction and/or home improvement forfamilies with incomes up to Bs 4,000 per month; usual terms:25-30 years, 72;
(b) Vivienda Rural, a program for rural areas, (population up to15,000) with household income lower than that of INAVI;
(c) other middle income family programs such as Fondo para elDesarrollo Urbano (FONDUR), which finances residentialconstruction/purchase of homes costing up to Bs 450,000in Caracas or Bs 350,000 in other areas;
(d) guararxtees and promotion of private construction, includinga Government commitment to buy houses or apartments if theyare not sold in the mrket In a given period at apredetermined price; Government credit guarantees, landprovision, and an expeditious permit processing.
The importance of (d) has been declining and was finally suspended by theGovernment in 1982, as part of a cutback in government expenditures.
145. Public policy in this sector seems to have been ill-directed; atthe end of 1982 the stock of unsold houses and apartments reached 38,804.Of this total, 46% were apartments costing between US$50,000 and US$80,000and the majority were located in Caracas and the central region. It is notappropriate to subsidize housing construction in the higher price brackets,and it is even less appropriate now given the oversupply. If the aim ofpolicy is to stimulate low-cost and rural residential construction, thensubsidies and loan programs should be targeted specifically for theseareas, especially given the current squeeze on government budgetaryresources. To improve the efficiency of properly targeted housing loan
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programs, collections, which have lagged substantially behinddisbursements, should be improved. Resolution of this issue may involvestrengthening INAVI and FONDUR.
H. Employment and Income Distribution
146. Primarily as a result of increasing oil revenues, Venezuela'sreal national income per capita grew at the impressive rate of 5X per annumbetween 1972 and 1981. Although iuch of the petroleum income was absorbedby the public sector, private per capita income also increased over theperiod at an average rate of 2% p.a., despite much slower growth of outputper capita over the period. Increased national income on this scale canaffect the economic welfare of segments of the population dramatically oronly marginally, depending upon how the income is distributed both directlyto the private sector and indirectly, through the multiplier effects ofincreased government spending. For the poorest households, the extent oftheir integration into the multiplier mechanism is critical in determiningwhether they, too, share in Venezuela's new wealth.
147. Preliminary evidence on changes in income distribution over theperiod suggests that the majority of the population did indeed share in thebenefits of the oil bonus. Long-term evidence on household income distri-bution is currently available for urban areas only. Considering the dis-tribution of household income unadjusted for size of household (Table 12,below), urban household survey results show a clearly identifiable trendtoward increasing equality of income. The share of the poorest quintileincreased 42% over the period 1970-81, while the share of the richestquintile declined by 25Z. The middle and upper middle quintiles alsogained, an indication of the growing middle class in urban Venezuela. Thisequalizing trend among urban households occurred while there was strongrural-urban migration over the period which caused the urban population toincrease at over twice the rate of the rural population.
Sources: 1970: Banco Nacional de Ahorro y Prestam , MERCAVI-70: Estudiodel mercado real de Vivienda en Venezuela; 1979-81: Encuesta de Hogaresfirst semester 1979-81. Quintiles estimated by interpolation.
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148. Data are available for the whole population from the Encuestade Hogares, a biannual household sample survey begun in 1977. Tabulatinghousehold labor income distribution by deciles of people, these data onceagain show a trend of increased income equality over the period, as poorerhouseholds increased their share of labor income relative to richerhouseholds (Table 13). Note that this distribution is a much weakerindicator of the distribution of economic welfare across households becauseit excludes non-labor income which is typically much more highlyconcentrated in tne upper quintiles than labor income.
149. A final indicator of the impact of petroleum revenues on theincomes of poorer households in Venezuela is a comparison of Venezuelanhousehold income distribution (total household income) with theinternational norm for its income group, estimated by the Kuznets curve ofrelationship between income per capita and the share of total income of thelowest income group. This comparison is shown in Table 14 below. Althoughthis type of calculation has an associated margin of error which is verylarge, it is clear from the comparison that by 1979 Venezuela wasperforming at least as well as the norm, and possibly substantially better.
Table 14: HOUSEHOLD INCOME DISTRIBUTION, 1979
Quintiles of Percent of IncomeHouseholds Actual Predicted, Kuznets Curve20- 4.7 4.220 9.8 8.920 15.2 11.020 22.3 21.020+ 47.9 51.9
100.0 100.0
GINI Coefficient .396 .460
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150. Income distribution data are in general, subject to a number ofwell known measurement problems including the underreporting of income. Inaddition, total household income distribution is a poor proxy for thedistribution of economic welfare, because households with smaller percapita incomes tend co be larger households, whose total income may berelatively high.8/ Nevertheless, the extent of income distributionimprovement registered in the fragmentary data is persuasive. While moredetailed analysis is necessary to quantify fully the extent and detail ofthe distribution shifts, the inescapable conclusion at this juncture isthat the poorest households did indeed share in the petroleum-led incomegrowth which occurred over the past decade.
151. What were the mechanisms in Venezuela which transferred thisincome to the poorest households? Household income distribution isaffected by a number of factors including the demographics of householdcomposition (size, number of labor force participants, age of primaryincome earner), the distribution of labor income, the distribution ofnon-labor cash income, and the distribution of non-cash benefits andincome. The quantitative influence of these variables is difficult toisolate using the aggregated data which is available for Venezuela. Thebest that can be done here is to identify qualitatively some trends inthese variables and the probable effect that they had on the householdincome distribution over the period.
152. On the demographic side, total population increased at a fairlyconstant rate as slight decreases in fertility were offset by decreases inmortality. However, the decrease in fertility resulted in a changing agestructure of the population, with the working age population increasingfaster than the total population (4.0% compared to 3.4% for 1970-81).Related to this changing population structure was an increase in laborforce participants per household, from 1.4 in 1971 to 1.9 in 1981. Laborforce participation rate (LFPR) appears to have changed very little how-ever, either by age group or sex (although this detailed breakdown is onlyavailable for the period 1977-1981).
153. Normally, a rapid growth in the labor force such as occurred inVenezuela would be associated with deteriorating labor market conditionsand worsening income distribution at the bottom, where new entrants arecommonly found. However, in this case the high rate of labor force growthwas matched by an equally high rate of employment growth over the period.Employment increased an average of 4% per annum between 1971-81, and duringthe period 1972-78, when output was growing rapidly, employment expandedfaster than the labor force, especially in the public sector. Thisexpansion of employment allowed underemployed workers to move out of lowerpaid jobs into more highly paid jobs, leaving migrant labor from othercountries (primarily Colombia) to fill the lowest paying jobs.Consequently, aggregate real wages increased during this boom period,especially at the lower skill levels. Average real wages for obreros (bluecollar workers) in the industrial sector increased 5.6% p.a. from1972-78, despite the expansion of the labor force which brought in younger,less experienced workers. As the economy contracted between 1979-81,
8/ GDP per capita calculated at 1968 market prices.
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employment continued to expand (although at a slower rate) but real wagesbegan to fall so that overall wage gains for the period were partiallyerroded. Evidence from household survey data suggests that real wagesdecreased proportionally more at the upper earnings brackets, however,which may have prevented a deterioration in income distribution in the lastfew years.
154. Ic appears, therefore, that the improvement in incomedistribution is primarily the result of improved labor market conditions,which occurred despite the handicaps of rapid labor force growth combinedwith an average increase of real GDP per capita of less than 1% per annumfor the period. How did this expansion of employment occur, and whichsectors were dynamic in terms of employment and output? Detailed data onemployment expansion for the entire period are only available fromfirm-reported data for the industrial sectors, but some impressions can begleaned by examining these trends (Table 15 below and Appendix Table 8.5).For the first six years of the period, large employment increases for themost part occurred in those sectors where output was expanding fastest:beverages, chemicals, electricity, transportation, rubber and rubberpri.iucts. For these sectors, average real wages also Increasedsubstantially (see Appendix Tables 8.6 and 8.7) indicating that theemployment growth was not associated with declining labor productivity.Only a few industries had employment-output elasticities greater than 1 inthis boom period, and these were primarily the protected sectors oftextiles, cement, and basic iron and steel products. Those industrieswhere employment and output moved in the opposite direction were in themining sectors, reflecting increased sector investment (which islabor-intensive). The employment-output growth ratios and the growth Inreal wages in this period suggest that the growth in employment was aresponse to the expansion of aggregate demand in the economy.
155. In the latter half of the period, however, this demand side pullweakened in the industrial sector. GDP growth came to a halt, outputdeclined in 7 of the 17 industries, and employment declined in nine. lnsix Industries, (tobacco, textiles, footwear, chemicals, cement and metalproducts) employment declined faster than output and the only industriesdynamic in employment over the period were the overwhelmingly public sectorindustries of basic iron and steel products, electricity, and mining(petroleum and iron). In petroleum, the large negative employment/outputgrowth ratio in both periods reflects increased exploration (a highlylabor-intensive activity) whlch should result in future output increases.Real wages for all employees declined during this period, especially in theprivate sector industries. Thus in the industrial sector, the employmentgrowth was output-driven in the first portion of the period but not so Inthe second portion.
156. The importance of the public sector in absorbing the rapidlygrowing labor force during the period of economic decline can be seen inTable 16, calculated from household survey data. The growth rate of publicsector employment (which represented 202 of total employment in 1981) was70Z higher than that of private sector employment. Private sectoremployment growth primarily occurred among the self-employed, and in thesectors of Commerce, Financial Services, and Construction. In the lattersector, that employment grew at all is puzzling, because real output (atmarket prices) declined 22% over the period.
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Tab 1X: UWI AND J L OU1W AVUME GWf RAUm AMU IN Dl S DIEXI5R!S 197241
Total Fplxmkeunt 3870.4 3994.4 4106.5 4244.8 4328.7 2.8
1/ AU fIgre refer tDsed sester.2/ 1977-1980 ooly.
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157. The role of wage increases and employment growth as an incometransmission mechanism in the Venezuelan economy, combined with the highrate of labor force growth and employment-output elasticities observed(especially in the period 1977-81) have important policy implications forthe future. In an average economy, employment will grow at rate of aboutone half of the growth of GDP; in Venezuela during the period 1977-81employment grew 3 time as fast as GDP, and over the period as a whole, theratio of growth rates was about 0.9. The high elasticity of employment isparticularly prominant in tl public sector, but even in the private sectorthe absorption was high. Tie implication of these trends is that thelargesse of petroleum has allowed Venezuela to employ significantly morepeople than economic efficiency would dictate, without a consequentdeterioration in real wage levels, and in this way achieve a significantmeasure of income redistribution in favor of labor income during thedecade. The problem will be to preserve these distribution gains in thecoming years. Unemployment, which has traditionally remained at about 5%of the labor force, has shown an increasing trend since 1977, rising to 8%in 1982; the rate of unemployment among young workers tas risen to about10-15%. Furthermore, the average length of unemployment has alsoincreased. Although the fertility rate is beginning to decline, pastfertility implies that labor force growth rates are projected to remainabout 3-3.5% per annum for the next 15 years. The absorption of this laborforce in an economically effiAient manner will require real output growthof about 6% per annum. To the extent that there are limits to petroleum asa prime source of growth and income in the medium term, employment andincome distribution problems will become more acute. In order to prevent aserious decline in the relative living standard of the poorest groups,Venezuela will need a growth path which makes substantially more efficientuse of its factors of production.
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III. THE OUTLOOK FOR THE VENEZUELAN ECONOMY
A. Development Policy Issues
158. The preceding chapters have described the evolution of theVenezuelan economy since the oil price increases of 1973-74, focusingparticularly on the years since 1978. They have also analyzed the conductof economic policy, both in its function of carrying out the plans of theGovernment for achieving social and economic objectives, as well as itsrole in reacting to the events outside the economy and outside the controlof the policy makers. In-addition, those chapters have presented a reviewof some of the key sectors of the economy with the purpose not only ofidentifying the main problems at the sectoral level, but also of bringingout the bearing of those sectoral problems on the overall performance ofthe economy and the importance of solving them to ensure future sustainedeconomic growth in Venezuela.
159. From a macro-economic point of view, Venezuela presents anunusual case. The investment over the past decade and the growth in theemployed labor force would have, in an average economy, produced roughlytwice the growth that was actually experienced. In Venezuela this ineffi-ciency in the use of factors has come in the first place from an abundanceof financial resources. In the absence of financial constraints at thebeginning of the 1974-83 period, the institutions of the Government and thepublic sector generally have lacked the necessary discipline and restraintin the use of resources. The second most important cause of thedeterioration of the economy in the recent years was the lack ofappreciation of the severe limitations posed by the scarcity of skilledlabor and experienced manageria.1 . personnel relative to the ambitiousprograms undertaken. This was particularly so in the public sector. Thecombination of these two factors has resulted in gross inefficiencies,enormous waste of resources and an accummulation of a large external debt.
160. This report purposely gives to the short run situation onlypassing attention since other institutions, in particular the IMF, havefocused on this in detail. However, the impact of the current situation onthe functioning of the economy over the longer term cannot be overlooked;and the fiscal, balance of payments, and monetary polities necessary to putthe economy back on course are treated here where they are important to thelong run functioning of the economy. For this reason, our discussion inthis report of the mediumr and long-run prospects of the economy is basedon the following assumptions: (a) that the exchange rate situation will beresolved either by a near-term reunification, or by a gradual movement, aswas the case in 1960-62, (b) that appropriate incomes and fiscal policieswill be undertaken so as to ensure that the new exchange rate is a viableone, and (c) that arrangements, whether de facto or de jure, will be madein the near future between Venezuela and the foreign commercial bankscurrently holding Venezuelan debt.
161. The problems facing the Venezuelan authorities are to restoreconfidence in the private sector and to impose discipline in thefunctioning of public sector institutions. The balance of payments
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generally exhibits a trade surplus. Current account invisibles, however,particularly travel and interest on debt, have been quite large and havecreated deficits on the current account in years of difficulty such as1977, 1978 and 1982. More importantly, the capital account registered astrong drain on the balance of payments during the 1979-82 period. Whilethe current account registered large deficits in 1977 and 1978 whichresulted in reserves losses, the serious imbalances registered during1979-82 were basically outflows of capital, not current deficits. It isessential, therefore, to restore confidence in the economy of Venezuela andits management, since failure to do so would require the maintenance of thecurrent restrictions indefinitely, with concomitant undesirableconsequences for the program to stabilize the economy and eventually resumegrowth. Moreover, the adjustment of the exchange rate opens an cpportunityfor removing certain distortions in the economy, including subsidies tonon-traditional exports, as well as the remaining domestic subsidies,particularly those on energy.
162. The events of the past decade have demonstrated the overwhelmi:Lgdependence of the entire economy on the petroleum industry. The fall ingovernment revenues in 1982 and 1983 has demonstrated dramatically the roleof revenues from petroleum in the public sector. Rising revenues createspending pressures that are hard to reverse and falling revenues bringabout severe fiscal strains. It is therefore essential that Veneztuela setin motion legislation and administrative arrangements to broaden therevenue base of the Go,ernment. An extensive analysis on this subject wascarried out by the IMF tander technical assistance in 1982; the World Bankendorses the recommendations of that mission.
163. On the expenditure side, the performance of the CentralGovernment in itself miy be considered fairly satisfactory. The problemsof overspending, excess labor and short-term borrowing arise primarily inthe state enterprises. These organizations, though owned by theGovernment--mostly through the instrumentality of the FIV-function, infact, as responsible to no one, having for the most part refused to submitto centralized fiscal discipline and, through their uncontrolled borrowing,have been allowed to become the proximate cause of the debt crisis. Inaddition, their investment programs are often contradictory and redundantand have resulted in a significant waste of national resources. Someorganizational arrangements for centralizing policies and decisions and forproviding services, would be useful, particularly in aluminum and power.Because at present lines of authority in the Venezuelan public sector arenot clearly defined, it has often been difficult to adopt or enforce policydecisions. This situation needs to be corrected. A failing of theGovernment during 1979-83 was lack of coherence in decision making, whichmade even more difficult the exercise of real control by enforcingdecisions. One of the consequences of such a situation was theuncontrolled borrowing of the state agencies and enterprises that led tothe debt crises.
164. Apart from the problems of excess labor and poor management,which are quite common, a problem which is symptomatic of almos. the entirepublic sector concerns maintenance. As a wealthy country with virtuallyunlimited capital, Venezuela has tended to purchase and buil ' fixed assetsand then simply replace them when they wear out. The result has been a
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substantial waste of resources compared to the situation that could havebeen if even simple maintenance had been observed. Given the limitedoutlook for resources in the future, a vigorous program of maintenance forall public capital stock, as well as an encouragement of private effortsalong the same lines, would be of great importance in the coming years.
165. In general, the policies of the Central Government in the lastyears were, in the circumstances, well oriented. Ironically, the slowingdown of the economy in 1979 and the attempt to eliminate price distortionsmay in fact have been a source of increased fears on the part of theoverprotected and subsidized private sector, which then engaged in capitalflight.
166. In the social fields, the overall emphasis on basic needs andincome distribution was both necessary and appropriate. The progress onthe social front is especially noteworthy and the trends in incomedistribution and basic needs are also in the right direction. We wouldobserve, however, that the basic needs and poverty programs of theGovernment have had an urban bias and that there still exist significantproblems with the rur i poor. Moreover, this group is not being reached bythe conventional agriculture sector programs, and thus special programs mayneed to be developed for this target group.
167. Although in the past few years the production outlook for petro-leum has become favorable, in the short- to mediumrrun, petroleum is hardto sell and revenues are uncertain. The economy needs to be broadened bothin production as well as exports for reasons of fiscal soundness, stabilityand long-run viability. The mission therefore looked in some depth atmajor non-petroleum sectors of the economy with a view to the policies thatwould make them competitive in world markets.
168. Concerning the agriculture sector, the key point is thatVenezuela agriculture is, for all intents and purposes, a modern corporateindustry. In the production of pigs and poultry, Venezuela is as efficientas any country in the world. It could become reasonably efficient also inother livestock. These products come, however, from modern, capitalintensive farms. Price support programs, ostensibly designed for the poorfarmer, are not reaching him, as he has little marketable surplus. Thesubsidies are going, rather, to large corporations. Venezuela, as atropical country, can never be as efficient as temperate areas in theproduction of feed grains and certainly a rational long-run policy shouldcontemplate the importation, rather than the production, of most of thoseproducts. In the area of exports, there are possibilities for theexpansion of coffee and cocoa, particularly at the current more favorableexchange rate. Rice is produced in surplus, but only as a result of asupport price that is far above the world market and significantly inexcess of that which is necessary to provide for domestic needs. Problemsof quality, as well as price, would have to be resolved before this producthas possibilities in export markets. The milk price is also too high andappears to have been raised as a result of the Government's impatience withthe response to price incentives. Given the fact that arrears in thepayment of subsidies by CMA are high, it is the general feeling thateffective administration and timely payment, even at a significantly lowerprice, will, in the long run, be more effective than a high support pricein stimulating milk production.
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169. In the field of electric power the mission notes several Issues.First, in our judgment two investments, Guri and the Zulia interconnection,remain of high priority in spite of the present financial difficulties ofthe public sector. On the contrary, Uribante-Caparo and Carbozulia do notseem Justified at this time. As for electric power tariffs, they are ingeneral too low, but more significant, there is a serious problem ofarrears with accounts to the public sector. This is true not only forcompanies in financial difficulty such as SIDOR, but for the CentralGovernment as well. Finally, there is the serious issue of a lack ofbalance for prices of alternate fuels. This makes it cheaper for powercompanies to burn fuel oil to generate power than to purchase electricityfrom Guri, resulting in losses to Guri and wastage of the non-renewablenatural resource of petroleum. It is more important at this point toequalize fuel prices across the country in terms of their energy contentthan it is to raise them to opportunity cost levels if doing the latterwould maintain the present imbalances.
170. The mission looked in some depth at SIDOR. In the first placethe project was too large to be undertaken within the time and financialcontraints set down at the beginning. Technical and start-up problems,which might have been anticipated, caused cost overruns and reduced exist-ing production, and by reducing operating revenues these, in turn createdscarcities of funding which were solved in an ad hoc fashion, adding verysignificantly to the financial problems of the enterprise. In addition,there were technical problems as well. A priori the HYLSA direct reductionprocess was seen to be the best, and thus SIDOR put the major part of itsnew capacity into this type of plant, which had not been proven in such alarge scale. As things turned out, however, the Midrex process was thebette= one. There are a significant number of technical problems of thisnature that can be worked out or accommodated, but SIDOR will remain as anoperation of marginal viability at a unified exchange rate unless costs arereduced, mainly by gradually curtailing the large excess labor and loweringfinancial costs. Eventual profitability would in addition entail thoroughrationalization including the closure of the open hearth operations.
171. The aluminum subsector is potentially a very profitable business,although it has many problems in common with SIDOR--excess labor, costoverruns, and difficult markets. It is currently, and likely to remain,Venezuela's most important export after petroleum. Unlike SIDOR, it hasthree operating entities each of which exhibits the intensely autonomouscharacteristics of most of the Venezuelan public sector entities. The lackof coordination and cooperation is costly to the country. An example ofthis is given by the fact that ALCASA and VENALUM are committed to purchasesome 400,000 tons of alumina from abroad during 1984 and 1985 at $230 perton, while Interalumina will have a surplus of well over 500,000 tons whichit will have to export into a difficult market and which, if it is lucky,will bring $130 per ton. Recent information indicates that the problem hasbeen resolved through a series of swaps, and the availability of aBs 7.5/US$ exchange rate will allow the companies to show a bolivar profit,but it is clear that the country will have lost foreign exchange whichcould have been prevented had there been a willingness to cooperate. It isevident the need for a centralized arrangement for procurement,standardization of accounting systems and other operational matters. Theissue of subsidies is also important. The industry receives, through power
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subsidies and export incentives, roughly $85 million in annual subsidy atfull capacity. Given the cost structure of the aluminum industry,production cannot vary significantly and thus subsidies cannot stimulateoutput. In addition, the power subsidy (the average cost of EDELCA powerto the aluminum smelters is 4.5 ails per KWH while reasonable internationalcomparisons would indicate 12 mils) operates to the detriment of Guri.
B. Macroeconomic Outlook
172. The major macroeconomic task of Venezuela in the medium-term willbe to establish and maintain a program of economic diversification, and toavoid the balance of payments and external debt crises of the previous sixyears. For Venezuela, this requires (a) some type of debt rescheduling ofthe current short- and medium-term debt over an extended period and(b) growth, income and expenditure policies to insure that the balance ofpayments remains viable over the period of debt repayment. The degrees offreedom associated with Venezuela's long term growth strategy will beprimarily determined by the international petroleum market, as petroleumremains the mDst important determinant of Venezuela's terms of trade andbalance of payments position as well as fiscal revenues. Given the termsof a debt rescheduling and a long-term petroleum forecast, the balance ofpayments performance is essentially the result of growth and expenditurepatterns, which determine the level of imports. Thus, the question forVenezuela today is: What macroeconomic growth and expenditures policiesare compatible with a sustainable balance of payments and resonable debtservicing given certain levels cf petroleum revenues?
173. In the immediate future (the period which is most crucial for therecovery of the Venezuelan economy), the international petroleum marketdoes not have a bright outlook. It is likely that the OPEC average pricewill fall slightly in nominal terms in 1984 and would probably not recoverto the 1982 average until 1987 or after. In real terms this means thatVenezuela cannot expect the returns from a barrel of petroleum to return tothe 1980-82 levels until after 1990. In the 1970's the international termsof trade were very much in Venezuela's favor; in the 1980's they haveturned against oil exporters. Thus the only sources of real increases inexport earnings available to the country are non-traditional exports andincreases in the volume of petroleum. Although the former can, with appro-priate policies, be expected to increase, it accounts for less than 10% ofexport earnings, faces difficult markets (steel, aluminum) and will underthe mDst favorable conditions take some time to be a significant source ofoverall growth in real export earnings. An increase in petroleum volumecould be a strong factor in the balance of payments over the rest of the1980's. Current production levels are about 1.8 million barrels per daywhile the country has a sustainable capacity of 2.5 mb/d, which wouldrepresent an increase of nearly 40%. However, the OPEC agreement placeslimits on the production of petroleum, not exports, and market conditionsmake it unlikely that Venezuela will be able to produce any more than 1.8mb/d during 1984. We have assumed that after 1984 the country will beallowed to increase production by about 2% per annum. The restriction, asmentioned above, is on production; Venezuela can increase export earnings
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by consuming less at home. In 1976 the country consumed about 250,000 b/d,by 1982 this had climbed to 410,000 b/d; this increase cost the countrysome US$2 billion of foreign exchange in that year. The domestic priceincreases on products in 1982 are estimated to have reduced consumption toabout 300,000 b/d and it is assamed that appropriate price increases (suchas occurred in early 1984) will keep the increases in domestic use ofpetroleum to about a 2% annual growth rate.
174. In order to be consistent with the balance of paymentsconstraints set forth above, the economy of Venezuela, as the result of itsaccumulated debt and its import structure, will probably not be able togrow more than 3% per annum over the long run. Venezuela's per capitaconsumption was about US$3,500 in 1982, it will probably be no greater thanUS$3,400 (1982 dollars) in 1990. Full recovery of real per capitaconsumption levels will be achievable before the end of the century with acombination of a slowing of the population growth rate, a significantimprovement in the efficiency of the economy and a drop in the importcontent of output, all of which are long-run possibilities which can comeabout with a proper and maintained set of economic policies.
175. The overriding problem for the balance of payments, and thus forthe economy during the rest of the 1980's is the external debt. At roughlyUS$35 billion, it is twice the amount of export earnings. Almost 3CZ ofexport earnings are currently devoted to interest on this debt. It isneither realistic nor desirable that the entire debt be repaid in the nearfuture, but Venezuela will have to be a net exporter of capital for someyears to come in order to get the debt down to manageable levels. If aconsistent policy of debt management is followed and if domestic policiesconducive to the establishment and maintainence of efficiency are adoptedand maintained, the country could be considered creditworthy for limitedamounts of net additional borrowing, particularly if such borrowing isdirected at highly productive projects and accompanied by policies toencourage efficiency.
176. It is assumed that the private capital flows will remain neutralin the coming decade, exhibiting neither the massive exodus of 1979-82 nora significant inflow. If however, development and economic managementpolicies conducive to efficiency and to the encouragement of the privatesector were set in place and maintained, a significant reflow of some ofthe capital that left the country might be possible. The Government whichtook office in early 1984 has thus far given strong indication that itintends to pursue such a course. Under such circumstances, both investmentand growth could be considerably higher than is currently foreseen, andreal consumption could be allowed to return to the levels of the early1980's albeit with some caution and restraint on the import of consumrgoods.
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STATISTICAL APPENDIX
TABLE OF CONTENTS
Table No.
I. Population, Employment and Income Distribution
Table 1.1 Population By Age Group, 1972 and 1983.Table 1.2 Annual Birth and Death Figures and Rates, 1972-1983.Table 1.3 Employment By Economic Activity, 1977-1983.Table 1.4 Employment By Branch of Economic Activity and Occupation,
1971, 1974 and 1977-1983.Table 1.5 Cumulative Household Labor Income Distribution, Decile
Shares (Z) and Gini Coefficient, 1977 to 1982.Table 1.6 Factors Affecting Income Distribution, 1971 and 1979 to
1983.
II. National Accounts
Table 2.1 Gross Domestic Product at Market Prices by Sector, 1970-1983(Current Prices).
Table 2.2 Gross Domestic Product at Market Prices by Sector, 1970-1983(Constant Prices).
Table 2.3 GDP of the Public and Private Sector by Economic Activity,1978-1982 (Constant Prices).
Table 2.4 Gross Domestic Product by Type of Expenditure, 1970-1983(Current Prices).
Table 2.5 Gross Domestic Product by Type of Expenditure, 1970-3JR3(Current Prices).
Table 2.7 Fixed Gross Investment by Type of Good, Imported andDomestic, 1970-1982.
Table 2.8 National Disposable Income, 1970-1982.Table 2.9 Investment and Its Financing, 1970 to 1983.
III. Balance of Payments
Table 3.1 Balance of Payments, 1968 to 1983.Table 3.2 Composition of Merchandise Exports, 1970 to 1982.Table 3.3 Composition of Merchandise Imports, 1970 to 1982.Table 3.4 Imports by Economic Category, 1970-1982.Table 3.5 Export Detail, 1970 to 1982.Table 3.6 Isport Detail, 1970 to 1982.Table 3.7 Net International Reserves, 1970 to 1983.
IV. External Debt
Table 4.1 External Public Debt Outstanding Including Undisbursed as ofDecember 31, 1982, Debt Repayable in Forei-n Currency andGoods.
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Table 4.2 Service Payments, Commitments, Disbursements and OutstandingAmounts of External Public Debt, Projections Based on DebtOutstanding Including Undisbursed as of December 31, 1982,Debt Repayable in Foreign Currency and Goods.
Table 4.3 Detail of Public/Publi-'v Guaranteed External Debt andAverage Terms of New Public Debt Commitments, 1973, 1975 and1977-1982 and Projected Public Debt Service, 1983-1990.
V. Public Finance
Table 5.1 Central Government Operations, 1970 to 1983.Tabie 5.2 Regional Government Accounts, 1970-1983.Table 5.3 Municipal Government Accounts, 1970-1983.Table 5.4 Decentralized Agencies Accounts, 1970 to 1983.Table 5.5 Petroleum Sector Consolidated Accounts, 1976 to 1983.Table 5.6 Nonfinancial State Enterprises Consolidated Accounts, 1970
to 1982.Table 5.7 Financial State Enterprises Consolidated Accounts, 1970 to
1982.Table 5.8 Consolidated Public Sector Accounts, 1970 to 1982.Table 5.9 Accounts of the Venezuelan Investment Fund, 1975 to 1983.Table 5.10 Central Government Revenues, 1974 to 1983.Table 5.11 Central Government Current Expenditures, 1974 to 1983.Table 5.12 Central Government Capital Expenditures, 1974 to 1983.Table 5.13 Public Sector Resources for Investment, 1974 - 1982.
VI. Monetary Statistics
Table 6.1 Accounts of the Banking System, 1979-1984.Table 6.2 Change in Net Bank Credit by Origin, Destination and
Financing, 1978-1983.Table 6.3 Private Sector Claims on the Banking System, 1978-1984.Table 6.4 Legal Reserve Position of the Commercial Banks, 1978-1983.
VII. Agriculture
Table 7.1 Volume of Agricultural Production of Major Commodities, 1970to 1983.
Table 7.2 Value of Agricultural Production, 1970 to 1982.Table 7.3 Value Added of Agricultural Production, 1970 to 1983
(Constant Prices).Table 7.4 Exports of Selected Agricultural Products, 1970 to 1982.Table 7.5 Volume of Selected Agricultural Imports, 1970 to 1978.Table 7.6 Imports of Selected Agricultural Products, 1970 to 1978.Table 7.7 Area Harvested, Selected Crops, 1970 to 1983.Table 7.8 Use of Inputs in Agriculture, 1970 to 1980.Table 7.9 Financial Resources Assigned to Institutions in the
Agricultural Sector, 1970 to 1982.Table 7.10 Agricultural Credit Supplied by Public Agricultural Banks,
Financial Associations, and Commercial Banks, 1970 to 1983.
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Table 7.11 Producer Prices of Principal Agricultural Products, 1970 to1978.
Table 7.12 Retai Prices for Selected Food Products, 1970 to 1978.
VIII. Industry and Industrial Employment and Wages
Table 8.1 Production of the Venezuelan Oil Sector, 1970 to 1983.Table 8.2 Value Added in Industrial Production, 1970 to 1983 (Constant
Prices).Table 8.3 Volume of Production for Selected Industries, 1970 to 1983.Table 8.4 Manufacturing Industries of the Public Sector, Volume and
Value of Production and Sales, 1980-1982.Table 8.5 Index of Industrial Employment Growth by Activity,
1972-1981.Table 8.6 Average Real Wages, Obreros, 1972-1981, Selected Activities.Table 8.7 Average Real Wages, Empleados, 1972-1981, Selected
Activities.Table 8.8 Public Financing Assigned to the Manufacturing Sector, 1970
to 1983.Table 8.9 Balance Sheet of the Venezuelan Investment Fund, 1975 to
1983.
IX. Prices
Table 9.1 Cost of Living Index-Caracas Metropolitan Area, 1968 to1984.
i v,o.s Fo. 3.I0 1511 111 21222 21 =1 243, 374 2 11m7 50l4 3I2,% lSIt 3577 1212 3 Ism 0773Iquatatl Wm 53 511 in 34 44% 1£ SD1 lois 3035 273 Vs MW 41) all D w uns
lquat d C ti 1a 2aD l07 221MM 2 ) 1117 1114 WM 7106 so 12373 ICC lUllS llnC I 5 l31 3VJ7
Inae k n Wa 42 1 MD0 474 17k 41 224 41 -2S1A_ "IE 111I -- 536 91 a Ua -2V37 N 27
bt ear r nlr -711 -. 31S -511 -71 -W -dm -eN Imon 41 -in -s -177 a in -4 %n -2224ilt, 43 S 7 1 S 17 Sl 27 . 4 1. 714 t 11152 I3 Ih 22tA VA 5%% 14)Few T J 02 hn7 771 117 917 91 kW *w N1b 1st IU1 VI ins emll AM vim
met tintw Tlurra -77 41 41 --a bW 1 -11% -141 -It -211 _1-I i n 07 -14 -O1 -1%
oan At h1et. -a -3 -2 4 43 13171 2 -571 17 4130 40 _421 1m
Not Cqt, TtaI fwm -1 4 h 4 4 44 ii -1D -51 -U -22 -1 411 -11 -
I Ianial to Not Crma Tr fa CrFwet blt i tmnr d a ItIL nt tib 3.W kaths climr _m_us Uwu-tm bwalgw (ito).
Sawn! 1W. h n arm_ ar.. L979. 19W. 1931. 1992 frwwiSAay daa).
Pas. I of 2
_ mm w_ a 3. 1o U
_E _ S ,^ 9 ̂ x nw w ~5411- Zw Uw S6
_1t U.ti.q am {-as ai asia 2W am 11 15 54 63 3,X,,,, ~1 (-3, 1. 5 (. 54s (r -1 a0 (-3 54 31 Ii 1
h" 30 (- Ms t-t W as "ita aIs ao316 (-331 (- 5 - 315 () 33 233 50 .356
ford4. r-a1i 30 M Ws WI IM 411 5111 Ii 410 in pUUqdG U F0 s) Il (3} Ii (3 n1 (M33 3o i,n
M .- 3 3 (-3 a (-3 .. .. S 4Go f(-ts (33 -3 1 -3 3 33 3b v
h.16a Wa C<-) NI (-M a (-s Di (-3 3 u aM*3 (-3 5 (-3 S (-3 U (-3 M I G 6
*bm4t a a- 6 (-3 3 (- PA ( I 2 6 146
To" 1a.4imm 1153 U 24 515 M 19 NV SW M4 W313 a"3 8ltm4 %& t VA a 1 14 a allr 36t S Xn a
le@3 Ui . 11 a. J i 13 3 1 11£ 1 213 15 5Aa.. a a Al * I Isa 6 lb at 1CEt 1A I3 3 16 1a 1a 1£ l 1 1 s
u I u 1 Ii * 13 t it n 26 17
War Loomms M& it DU1 55 US lU1 1131 be 31r., Is. - - a £4 1 2r"lu"*- - - - . .. . . 5 * * -Uh a 10 a 1 * U 13 33 U ? 1 1raw 1. 6 6e * . 12 *. 2 .. 1___ 4o .* .. - .. I .. a. .. ui Iwn ARLI -06441 Guipmob ~~~~. ma3 113 3306Ih.t., 3 5) u 5 31 r 15 ur 42 39 1 * .*4INo_m* 1 L u 4 n a& * nl 6
1/ Net LI,tr tck Rarue figre In this table differ from th bilance -of pq,tg (table 3.1) due to tih inclueian oE the NatONalPletroleum Cmwr adt the eaIzi of tbe ictegory 'offidal eetion of zyer>M.
2/ Data fran IW. Gold wluad at the ny offitcal price of 1.5S300 per acm Introduced an September 27, 1982. CetTal Ihdc Iljitlitim how liconettel act oE foeigi eI p.
3/ Data from rlU. On SeptqWer 27. 1982 thle short tenn aets except for the acdam vable aM a suli operstirg halance wertramcferred to the Cetral BRi
S--our: V.Y Worfm 4ono do oar e .Yom the lW.
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Table 4.1s EXTEiRAL PUBLIC DEBT UTtlTANDIIN INCLUDING
UlI6IUStstO ASe OPcSECEmIe 51. 132e
DEBT REPAYABLE It FOUtEI11 CUReECCT ARD 60006 Of bi
DI Dnly debt. vitl em origlnal or extended maturity of over goe year erelecladed.
ce Deb' outstanding laced.. principal Ie arreere but eucledes Interest Is
ereer.
gSerces SCY
- 88 -
Table 4.2: SERVICE PA?IMTS, COITIENTS, uISBURSBENTS MND CUTSTANDIN?C AMOINTS OF Page 1 of 10EIRSL PUBLIC DOCA?
PROJECTIONS BASED ON DEBT OUTSTANIJING INCLtMINO UNIOZSBRSED A5 OF DEC. 31. 982DEST REPAYABLE IN FOREI14 CURRENCY AND aOODS
(IN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR SUPPLIERS CREDITS
TOTALYEAR DEBTOUTOSTAtlJINGA T T RA N S A C t I O N S D URIN P E R I OD OTHER CHANGES
: BEGINNINC OF PERIOD
: DISOURSEO : INCLUDING C0MMIT- : DISSSE- : S E R V I C I P A N t E N T S CANCEL- AO.US1 -J NLY :UNDISBUASEO: MENTS : MNTS -..............................-- -.. 5 LATIONS :Ea i
PRINCIPAL INTERCST: TOTAL: (1) : 3 t :2) (3) (4) (: 1 (61 (7) (a) 15l
* ThIS COLUNN 1SHOWS THE AMOUNT (If AkITiiMLTIC IMALANCE IN THE AMOUNT OUTSTANDING INCLUODItJ UN32SB17ASED frOM ONEYEA2 TO THE NXT. THE MOST COMON CAUSES Of IBALANCES ARE ChANGES 1N ExCHANGE RATES AND TR&NSFER OF aEtrSFIOM4 ONE CATECORY J0 ANOTHER IN THE TABLE.
_ 89 _
Table 4.2: CUVIZC P ,AIHN . CMITMENTS. DISRURSENENTS MD OUTSTANDING AkUNTS OF Page 2 oa 10RUERNAL PUBLIC DEBT
PROJECTIONS BASED ON OEBT OUTSTANDING INCLUDINO UNDISLURSED AS OF DEC. 31. 1982DEBT REPAYABLE IN FOREIGN CURRENCV AND GOODS
(IN T#HOUSANDS OF U.S. DOLLAUSITYPE OF CREDITOR FINANCIAL INSTITUTIONS
TOTALYE A OEST OUTSTANDING AT : T R A N S A C T I O N S o U R I N C P E R I 0 D : OTHER CHAIJGES
DISBUhSEDt: INCLUDING COMISST-: DISBURSE-: S f R V I C E P A Y N E N T S CANCEL- ADJUST-ONLY :tINDZSBURSED: MENTS : MENIS :------- - ----------- ----------- LATIONS MINT
_ -HIS COLUMN SHOUS THE AMOLUr OF ARITH4METIC IMBALANCE IN THE AMOUNT OJTSTANU]f- IN:LUOIN0 U?.UIS9URSEO FROM CNEYEAR TO THE NEXT. THE MOST COMMIN CAUSES OF IMBALANCES ARE CHANGES IN E)CHANG.E RATES AND 1RANSFER GF DEBTSFROM ONE CATEGORY TO ANOTHER IN THE TABLE.
- 90 -
Table 4.2: SERVICE PAYtNS, CONNIThENTS, DISBURSEMENTS MND OUTSTADINDC MOUNTS JFEXTERNAL PUBLIC DEBT Fag 3 of 13
PROJECTIONS BASED ON DEUT OUTSTANDING INCLUDING UNOIS6URSMD £S Of DEC. 31. '062DEST REPAYASLE IN FOREIGN CURRENCY AND 0000S
(IN THOUSANDS OF U.S. DOLLARS)TypE Of CSEOITOR BONDS
TOTALYEAR DEBT OUTSTANDINGA T : T R A N S A C T I O N S O u R I N C P E R I a o oTHE CIALNCGS
:ECXNNIWiOf or IDoo :-----------------------~~~~~~~~~~~~~~~~~~ ............ ...... ........... ......................................
OISSURSEO: INCLUDING COMMIT-: OIS6URSE- S E R v I C E P A v N f N T s CANCEL- :&0AUST-ONLV :UIDISBURSED: MINIS NEWTS :. LATIONS MCEI J
* THIS COLUMN SHOWS THE AMONT OF ARITHMETIC IALAINCE IN THE AMOUNT OUTSTAI.O3%G lteLUOING uro.:6.si%Eo rum. a.VE-Ar TO THE NEXT. THE MOST COMON CAUSES OF IMALANCES ARC CH"ANES IJ EaCo- CGE RATES ANO lQar;SId OF DCLTSWP ONE CATECORY TO ANOTHOER IN THE TABLE.
- 91 -
Table 4.2: SERVICE FAYKNT!, COX NITHENTS. DISIURSEMNTS MD OUTSTMNDINC AMOUNT OWVXTARNAL PUBLIC DEBT Page 4 of 10
PEOJECTIONS *aSED ON OCOT OUTSTANDING INCLUDING UNODIS4UPSEO AS OF DEC. 31. 1962ODET REPAYABLE IN FOREIGN CURflNCY AND GOODS
tIN 7HOUSANWS OF U.S. DOLLARS)TVPE OF CREDITOR NATIONALIZATION
TOTALvisa : mOT OUTSYNOIN AT T R A N S A C T I O N S OUR aI N P I P I O D UINER CHANCES
*CGINNING OF PERIOD
0ISSURSE9 INCLUDWIN CO IT- DIS0URSt- : S a v I C I P A V N E N I S CANCEL- AoDUST-ONLY UNDISBURSED: HWTS :NETS ----------- --------- -,,,,,---LATIONS MN1I .
* * * * * * THE FOLLOWING FIGURiS Aug P*OJECTEO * * * * -
1913 19.9 19.399 - .700 l.35U 21.056 -
1964 9.700 9.700 , - -. 700 * 2 10.282
THVS COLUIR SHOWS 1111 AMOUNT OF ARITH.aIIC ISMALANCE IN THE AmOUNr OUTSTANDING INCLUDING UNDIS3uASED PrON ONEVIEC 10 THE 74E1. THE MOST COMAON CAUSES OF I*GALANCES &RI CHANGES IN SxCHANUE RATES 11.0 TR&NSFpa OE61 DgSFROM ONi CATEGO*Y TO ANOTHER IN THE TABLE.
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Table 4.2: SERVICZ PAYMENTS. COKMITIENTS. DISRURSLMLNTS AND OUTSTADN OUnS or * S EXTERNAL PUBLIC DELtP
PiIOZECTIONS BaSIO ON DCST OUTSTANDINa INCLUOING tMISOURS5D AS OF VeC. 31. 1962DEtT REPAVABLE IN P`if ION CLuR.OCw AND co Os
(IN INOUSANDS OF U.S. DOLLARS)TPE OF CREDITOR MULTILATIRAL LOANS
CREDITOR COUNTaV CORP. ANDIN& POMENTOEAR : DEBT OUTS&NDINGA T T A A N S A C T I O N S O U R I N a r .R C2OahlAs
; C0GINNING OF PIRIOO...... ............... ......... ............... ...... ........... .......................
OISSURSED ; INCLUWINC COMMIT- :ZsIURSE- S t I V I C E P A * N E N I S CANCEL- A:oUST-ONLY UNOISSURSED: MtNTS NTS --.-------- ......... ... LATIONS MINT .
T41S COLLUM S.OiaS TIC AMOUNT Of AUITSI6.TIC INDALA%CE Ii THE ANOtiNT OUT:A%n:NQ. If.C;,LpU4C UwOG 4 lM,tO fUf? ON.%CAR TO CN1E NtAT. THE "CCi COMHN CAUSES Of INCALANC(S ARC CHANWCS 1k tAb K&tM. ta IECS VID Iaaer.rO Of 0(011FrON ONC CAT(EOVT 10 ANOITHR IN 1II TAULE.
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Table 4.2: SZIVICZ ATS 5, COKrMS DISOUiCIENTS MID WUTST*NDIG JL4OUNTM O Page 6 of 10- EXTEUI FPUL IC DEEt
PMOJ&CIIOS 5S50 ON DoET OUTSTANOING INCLULING UNOISSItSUO AS of DEC. 31. 1962aigT mgravrahs IN fOPEION CURRECY AM GOODS
(IfN THOAIS OF U.S. OOLL&ASITYPg or CUEOITUR WLTILAVEnAL LOANS
CDlTOIO COWiTRv to"WEA DE: TOUTSTANDINGAT TIAN"s ca bOcS DURINa PEIOD OTHER CHAMOS
*E@3#41No OF P16100o,, ........................................................ ........ ............. ,_,__........... .......................
OISURSEO SINCLUOINS: COMMIT- OISOURS11: S I V I C pAY N 4 CANCEL- ADJUSCtONLY :UWOISOUESEz: 0EN'TS MiNTS ........... _ -. .. ..... LASON% wM-
PRINCIPAL INIIRISI TOTAL(1) fl 5 z (4) (SI is) (76 (so
* 1"3S 1oCuO.d SV1 THE alCFmt Or ARITMETIC tZSALANCE IN THE AUPDUIE OUtS?ANOIUO 3"CLUOINO UNDISSuOSSO rFow oNETEAR to TUE NtEA. T" MOST COVM CAUSES or INIALANCtS "aE CHANGES IN EXCHANGE 3675tts ANO liANs i of 066PROM ONE CAftECOV TO ANOT0E4 IN TE.TABLE.
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Table 4.2: 5ISVICE PAnTETs. COKhkTMelNTS* DISSURSElMETS MND OUTSTANDING AMOUNTS OI Pa,c* ? of 10UxTrUAL FUILIC DgT
reaOCCt ows "Sao ON OUlT OuT SlAMmIN 1NCLUO1M6 uNOSSURSCO *S OF DEC. 31. 114201DT REPAVAILE IN POUgtC CuaI(NCv AND 0o0S
(IN 70HUSN&DS ap U.S. DOLLARS)TYPE OF CR t07OR MULTILATERAL LOANS
CRtDIIa. COUNTRY IDWEA" : 1t OUTSTLNDiNG AT T a SACTIO N S DU I N G P a a a o0 OTHER CHANGES
:tGIINGW or OF w oo;
:DISUUSID: INCLUOIS: COMIT* i DISIRS1- I 5 I ; V I C C P A V NI H T S CANCEL- :AODJUST-ONLy :UN1SI'JRSEO: MINTS I NTS -: LATIONS :HENt
tHM COLUMN s5MsW 764 AMOUNT Of A41?TOMTIC IWALANCt IN 1*04 AMOUNT OUTSTANOI)iJ1 ItCLUr:Ii4 6t* CLJUJ:tO faUU OPAVE&* TO 7.T %faT. TIN MOST COMMO4 C1USt; Of ImeALANcts ARE CiJ"AtS IN EXCHIANGE MRAiS &O tRAN"fla Of CLI5T5FnOM ONE C&TlWNV 10 ANOT,4i AN THE TAILS.
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Table 4-2: sEvCz PAT?ENTh, CDOMITM1ENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF Page 8 of 10EXTRNAL PUBLIC DEBT
PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC. 31. 1982DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS
(IN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR MULTILATERAL LOANS
TOTALYEAR : OEBT OUTSTANDING AT T R A N S A C T I O N S D U R I N G P E R I O D OTHER CHANGES-
: SEG!NNIIG; OF PERIOD
DISBURSED : INCLUDING COMMIT- : DISBURSE- S E R V I C E P A V M E N T S CANCEL- ADJUST-ONLY :UNDISBURSEO: RENTS : RENTS ----------- ----------- .----------- LATIONS MENT -
THIS COLUMN SHOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMNUNT OUTSTANODN INCLUt7IN UNDISCURSED rROt ONEYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER Of DEeTSrROM ONE CATEGORY TO ANOTHER IN THE TABLE.
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Table 4.2: SERVICZ PAMENS. COUtI UTS. DIISUURSDENZTS MND STADINC MWNTS OF Page 9 of 10* =RUAL PUBLIC DENT
PROJECTIONS BASED ON DEBT OUTSTAIDINO INCLUDIN UIDSCURSED AS OF DEC. 31. 1982DEBT REPAYABLE IN FOREIGN cuJREIC AND G00DS
(TN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR BILATERAL LOANS
- TOTALYEAR : DEBT OUTSTANDING T : T R A N S A C T I O N S D U R I N G P E R l O D OTHER CHANGES
DISWURSED: INCLUDING COMUIT-: DISBURSE-: S E R V I C E P A Y N E N T S CANCEL- ADJUST-ONLV :UNDIS3URSEtO: PENTS : *E%ETS - -- :-----------: LAT7ONS MI ENT
- THIS COLUMN SNOWS THE AMNOUT Of ARITHMETIC IMBALANCE IN nlE AMOUNT OUTSTAMOItG INCLUDING UCD!SSURSED FROM4 ONEYEAR TO THE NEXT. THE MOST COMMN CAUSES OF IMBALANCES ARE CHANGES iN EXCIIANGE RATES AND TRANSFER OF DEBTSFROM ONE CATEGORY TO ANOTHER IN THE TABLE.
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Table 4.2: SzVCE Pk!NNTS oDKNi1NNSs DIns srSEs mD OUTsTANDING AHouT Or Page 10 of 10EXrERNAL PUBLIC DEW
PROJECTIONS SASED ON DOET OUISTANDTIN INCLUDING UNOISWRSED AS OF DEC. 31. 198iDEBT REPAYABLE IN FOREIGN CURRENCY AND) OODS
(IN THOUSANDS OF U.S. DOLLARS)TOTAL
YEAR :ODEUTUTSTANDINC AT : T R A N S A C T I O N S U R I N P E R I O D OTHER CHANGES.: 8EGINPNG OF PERIOD
--- -- -- --- -- -- -- -------- -------- -------- -------- -------- ------------- .. .. .. .. .. .. .. .* DISBURSED: INCLUDING: COMMIT-: DISBURSE- : S E R v I C E P A Y N E N T S CANCEL- : ADJUST-
: ONLY :JNDISBURSED: MENTS :ENTS ---- :-----------:-----------: LATIONS : "ENT -: PRINCIPAL INTEREST: TOTAL
= THIS COLIJWd SHOWS THE A4MOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNDISSURSED FROM ONEYEAR TO THE NEXT. THE MOST COM1ON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER Or DESTSFROM ONE CATEGORY TO ANOTHER IN THE TABLE.
- 98 -
TELL 4.38 hcAU CC bbUcUtley 0jim.d I 8t11 bb A-twm term at Mv hhUc t611 Olmncm.1973, 17, ad 1971-191-HU d P?RI--W MAt1c igI L, 11-9
GtM LLOM) Aw I at 2
1973 1973 1971 191 1919 19W 1979 Am2
3L aL J 5IAIUUC D1111D OLT-' UIL mu (-) t-) t-) t-) t-) C-) (-) (-)
ahlI.le/R6l1y Gar. I 540.6 1 261.5 6 42.S 689.8 9 W5.0 10 81L6 *1, M20 321221Plivak NP_weed C-) ?t- t- (-Tf H7 3 {-) {-)Tt_cLvmtwout mAtt ad
JI Fi:xds t1 pi with e,orft p r i ion bs. for Bm.35 vrUllon in 1974, Ds 93 adlliU in 1975, Bs.104 mIlUon in 1976 Be. 185 tillinIn 1977, 3B 182 -II-fan in 1978, Ds. U4 idLIIm in 1979, ant uspdfied arunts in 1980 thms 1982.
2/ Eu&s Be. 1715 uil1-on of reim emts of public debt opeetam for 1979. Incluees Be 635.7 illion and Hs.68.8 mdllinn in 1978aid 1979 rmpectielyr frm the 'F de G.wtsi.
3/ Fim the Ce=r1 GwA=vm to Pegional sod Mzcdpal Gowrenvos s Deotralized A .ncie.I; Lclnd debt Wt prescribed by is.Credit from the BCv mamted to Be. 7 bilmio.
Sourac: WV, Izfos Emadco, 1979, 198), 1981. an 1982 (prenlinay data). Oficir de Prenupuato. 1.slficwamn de los LcasFIsm1a- ad the 1W.
1/ LIlud cqAWtnl tra,fem frut Central Gawrnent.I/ Includes B0.291 mlllia ad Bg. 91. ldlUor. nF cpttal tramffes to h3 eholO t.n 1972 am 1973, rpeettwely.
smwrm: wCY* Infome Eluico, 1979. 1981 od 1981 ssd the FW.
- 104 -
Tabl 5.5: PETROLEUM SECTOR CONSOLIDATED ACCOUNTS, 1976 TO 1983(Millions of Current Dollvares)
i/ Excludex depreciation expenditures and variations in stocks.if Includes other taxes not classified under transfers to the Central Government.*- Includes tax on paymer.ts for technological assistance to former oil concesstonartes.
Source.: PDVSA, laforme Anual. 1981 and 1982; BCV, Lnforme Economico. various years:and IMF.
- 105 _
Tibd 56: IW3AL 337lM 1WIU X LM_ = ACUMX S, 1970 W 1982 1/Q 11111m of Qar BorvDrim)
B.908 aIllion, aid Bs.1041 illi2n Ji.1209 million for the yea 1974 to 1982. rpectively.3/ Inchua igyadtis paid fra 1970 to 1975.!5 Latxsud raoc trisfem to 044 only from 1974 to 1977.
Sm5m: WCV. Iofor Ea,c on wnim y a-d tabim frao BCV'a Dqpartnc of Public Sector Accauna ad the Df.
- 106 -
Sble 5.7: FUWEAL SlATE 1NS WIULaN AMXS 1970 W 1916241111 d0 Of QrMw ol_wz)
It 09.y 19 oad 1912 hm. bon awala wuIW to inu nrd9 . r_m n d.a.-2/ Inel_ dIvrd hwsr'1/ Iaclu3 )Ixddpul Gvwmm'. cial33tfn d fbwi.t' 1ndW * CGweal Gmamw - in I _ Sta 1 J rpi (drtall unotlabir foWr bWd.n 1t_e fl t'I ad a Ia
.. teprln) fnr 1970 to 19 o. In onl ad 39r2, i9r9_wtua wr av lahle ror GCmvuI Gtwnwu uay.5/ hcalm ,1t3 tumfen to tIu pul v. wter In tlw MM" d lb-'91 Ed lo.94 iIioen far 1972 Ed 3973 min m inly.WI/ 7ih3& at lm an den not pmeuled by law. I 1 In tlw famlp imaa 99 VI? Ed tim Nstam. P_rqlar 1, * t9 r
*-,it otulwu Ed s b iuw
Sum I KW, IIIaw E mularnimnmd thi DV.
- 108 -
Mible 5.9: A3N5 WV S WEM DNDWT m, 1975 70 191006UO ofd QwOe Ioliwz)
1/ E,cudes Bs.11715 mllion of relimaewnts of public debt qetapios.It Iixhl Bs.635.7 ndlim aix Bs.6S.8 ilmi In 1978 ard 1979 respectively from the Faodb de Garnriea'.
San-an: BKV, Idaore Ecoumw, vaiUs yeas, tle IM, ad Oficl'a de PesuUmeUo, Clmalficadon de Io Irgfos Fiaales-
Other 21 667 1,285 1,838 434 638 573 982 736 167 169Tnmfer= to decen t tralized ag 44 72 107 122 89 62 255 604 689 771Trazfers to other uzznolidstal sector 3/ 673 - 386 - 9 - - 105 67 8Tramfers t die private eor - - - - - - - - 133 54
1/ c t fes to IPASFA, IPAE, FlCAEE, EVCCAD, FCE, Fn mD,, vDcA, snl DuY.
3 Ie m catal ti fer to CVll, 1EXMl, %tIwI Dodqards (ADWIA 4), Nat-oal Airlirn (LAV), VIMFS , DIUMLD. PFtOffice (IE0L), Shdppilg CxqiV (C&VN), Rafrudlr (MAFE), Tampmattmn (INMEM), Militrzy In&mtry (CAVM). MIEC31 , HltelCcrpornloc (DWRIU), O3RfR , VMA A, Television Station (VIV), ElcFcity CammJ (MEMA), and IarAet al Mrport,(TAO).For 1975 ad 1976, PE EW and CUP otdi Na. 1,000 tadllin as Ea.1 ,500 rapeciwly.
31 I=,, de Furd for Eqort FinAucirg (FDERPO), the Fuxl for Regioral Developa (FMD), awd the Venuelan Television Stoati (VIV).
Scre: BW an the DF.
- 112 -
Tahl 5.13: EC SER EE( UUS DI MSD(, 1974-1982(NIHxuo of Oizrreit hoUvare)
Total 3,8 30,890 39,854 42,695 43,679 5D,557 65,146 84,80 68,343
1/ Incle trasfers to private secor sl abmd.'/ COperating surplus or deficit mnt of taxe paid to Central G_erit.1,/ Inluries contri1zitim to iwntentioewi organzations./Balatcig item.
Sourc: BLV
- 113 -
Mbe 6.1: AON1'S CF 1EM B RMU SYSIUf, 19791984 Paw 1 of 9(- n MlWions of BoijaM)
stt *t ad local n (-634) (-574) (-269) (-26) (-t2 (13) (13) (-99)Nt off'icil " mira i. (-9,313) (-9,433) (-9,994) (-9,201) (-17,116) (-19,553) (-19,553) (-21.052)
offLdal icuIl *d *urpl -6,809 -,546 -10,500 -11,758 -4,078 -13,977 -13,977 -15,549Cb dot to d of ftmida.1 systm 1.3b5 750 695 1,036 1.03b 879 679 1,667CLidlt to pclYWs scotor 99,860 125,137 141,924 162.U02 162,02 I67.425 167,425 167,964Not Coat to _mtazy i0m stim.
1/ For conprlm paqpau tlm .ffct of tai follAdg in a awludbd: (a) pld rwvalualnc; (b) s-t raliztica of Itarrttanlwarvm. aly to th nt of ch. dpluts af PlSA Imlt at the Cmral Bh* (Is.7,915 mdilUn); and (c) tnefor of lb. 3.610Millo of thc Sswrd_ StaMbl1-t4on Find to the Central Covet . The firn two 1m thur aoaaurz-svy in ttm c=t.patunrequited fomii .dun4 aoit. hcw 1st arructimn mints Um Pxmd Athin afficial ita1 au mupl1.
Z1 In acxdom Mdth the 0d-f. Wml _t.T/ For c Iu pgpin, data in ti colum man ctudt I 7,000D mllian trmfer d aural Ibk gpM mmalustlm pofit. to
the Clal cmmit.
Sm9rci: WCV ad the DF.
- 122 -
Table 6.2: CANZ I8 N Mr BANC CDIT Y ORI=N, D NATI,AND FDWIN, 197?-1983(in Bi11iQW of H1IIvurm)
2/ From June 1975, there has been a marginal reserve requirement of 100 per cent on deposit obligations inexcess over a limit of 20 times the paid-up capital and reserves.
3/ A 25 per cent additional reserve requirement was inLtroduced on all public sector deposits with commercialbanks in April 1976. In July 1977 the reserve requirement was increased by 10 per cent for sight deposits.15 per cent for savings deposits, and 67 per cent for time deposits. In June 1978 the additional reserverequirement was rescinded.
4/ Commercial banks were required to hold 20 per cent of their portfolio in agricultural credit and, to theextent that they fail to meet this requirement, they are subject to a 100 per cent reserve requirement onthe amount of the shortfall. This requirement was raised to 22.5 percent In February, 1984.
5/ Includes deposits required to meet reserve requirements on foreign currency deposits, nonresident deposits,and certain types of credit operatiors.
6/ The Banco Nacional de Descuento (END) ran into serious difficulties in 1978. The Government intervened inDecember of 1978 and made it an official bank. Since then it has not been able to comply with the reserverequirements.
7/ Excess reserves minus Central Bank credit to commercial banks.
8/ Excess reserves excluding END minus Central Bank credit to commercial banks excluding BND.
Sources: Central Bank of Venezuela ard the IMP.
- 125 -
Table 7.1: Vtf OF fWAWUXIUAL ljCrii (F M WMUR OIMU, 1970 to 1983 1/
-: less than 50 tons.1/ Sorghum and other unground grain.2/ Includes soya beans lentils, garbanzo beans, sesame, peanut and soya flour and soya oil.3/ Refers to November through December only.4/ Includes fish meal for all years; 1975 figure includes beef meal as well.
Total 455.7 443.2 486.7 1,037.1 1,361.4 1,498.5 1.677.2 2.908.1 2,847.3
I/ Sorghum and other unground grains.2/ Includes soya beans. lentils, garbanzo beans. sesame, peanut and soya fluu;, and soya oil.-TI R,fers to November through Decenber only._/ Includes fish meal for all year.; 1975 figure includes beef meal as vell.
Tt Before 1971, an average of all milk; from 1971 on, cold &Ilk at pauteurLaing plant._/ Before 1972, all beef, live weight; from 1972 on, youn samLals 300 to 375 kilos, for slaughter.
11 Volum In mifliow of barels Pit uten ilkatte otherwise.I/ NUlc E 3.31 DOmec Cmwuopid Inclm delveeds to lrtercatanal mrlide and air tranport In tmsit.W/ 1Ipxs1 deziFie cumd by the petroleiu irdhstry fran 1977 to 198.
Sman IDVS& ad BCY, hInforme FELan, varis yea.
- 138 -
Table 82: V1UE AID IN DuulAL MWIY lW, 1970 70 1963 1I11111' of BoUliem at C fst 198 Pice)
I/ No det led bre*dam available. t-eridte C totd includ private seetw bmic metal*s :metrle./ZI Includes *wg Ah dmrel, hotminr, BH9as ad Toba.'3/ Incxaes szk ad mde. vow aid blk De.ivr1i of P lcro1m aid Go gad aw ler iabktries.
/ Incli p.blid luatd rim for all as._I Inclds private Inist fra 1970 to 1981.
SAres: BCV.oL, unom Eciao vriam years. Orltnal dat fma B.I.V.. C.V.F., mWDPIPJM1 F.C. aid F.I.V.
- 145 -
T81 6.9: MW N MM U Or NM I1UDVl1 p , 1975 1M 19M041111mm of an.)
o to IBM 430 430 430 430 40 369 339 1,546 1,3954or bD Ie W S s d LOBa - - 13 21 23 32 37 31 21Fha In tant of MB 396 816 1,245 1,675 2,104 2,147 2,147 2,132 2,110RICKab In taNt of Cmrbbeu RewlnLe Bar 7 34 60 87 107 107 107 105 106
Damu tic Per 16,33 11,653 7,496 2,121 1,372 302 338 462 76CdLo ad alrty - L 2 2 2 2 2 2 5
emsits In Ceatra Bak 16,343 11,652 7,494 2,119 1.370 300 336 460 73
Net doetIc credit -2D 833 48 723 -17 2S4 412 62 -11 863 14 423 19 433 546Met credit to -a sectr _tW < 3S, S 4 5,633 S2,S69
1/ Data refers to those students who are repeating an entire grade or one semesteronly. Decree #1633 (June 15,1976) eliminated automatic promotion from grades Ithrough 3 and 6th grade. Figures for last 6 years refer only to those studentsnot passing year end exams required for promotion.
Source: Ministerlo de Educacion, Anuario Estaditico, 1982 and 1983.
- 153 -
Table 10.5: STUDENT/TEACHER RATIO IN BASIC EDUCATION BY TYPE OFINSTITUTION, 1981/82 AND 1982/83
Students 1/ Teachers 1/ Student/TeacherRatio
81/82 82/83 81/82 82/83 81/82 82/83
Total 2591.0 2660.4 78.5 80.8 33 33
Public Institution 2285.7 2352.4 69.6 71.6 33 33
National 1428.6 1445.1 41.8 42.4 34 34
Autonomous 5.5 6.1 0.2 0.2 28 31
State 740.3 786.1 24.1 25.4 31 31
Municipal 111.3 115.1 3.5 3.6 32 32
Private Institution 305.3 308.0 8.9 9.2 34 33
1/ In thousands.
Source: Ministerio de Educacion, Anuario Estadistico, 1982 and 1983.
- 154 -
Table 10.6: HOUSING-BASIC STATISTICS, 1977-1983
Percentage of Construction# of Houses Construction 2/ houses owned by Persons/Room of Rural
Year Thousands 1/ (Thousands) their occupants Urban Rural Houses 3/
1977 2,363 65.0 71.0 1.91 2.18 33.3
1978 2,428 74.1 72.5 1.95 2.34 34.8
1979 2,502 83.4 73.4 1.93 2.31 22.6
1980 2,585 91.0 74.1 1.90 2.23 26.7
1981 2,676 89.6 74.9 1.88 2.18 35.1
1982 2,766 96.4 n.a. n.a. n.a. n.a.
1983 2,862 n.a. n.a n.a. n.a. n.a.
1/ Based on stock at the beginning of 1977 plus the # of "Soluciones habitacionales-~J Soluciones habitacionales.
B, By the public sector.
Sources: CORDIPLAN, Mission estimates.
- 155 -
Table 10.7: SUPPLY, SALE AND RESERVE OFAPARTMENTS (PRIVATE SECTOR) 1977 TO 1981
Initial New FinalReserve Construction Total Sales Reserve