Melina Sánchez Montañés and David Smilde
Venezuela’s May economic numbers were dismal with inflation reaching a 35.2% annualized rate, growth at a 0.7% snail’s pace, and widespread scarcities of basic consumer products. How is this “stagflation” possible in an economy benefiting from oil prices over $100 per barrel?
The short answer is that Venezuela’s petrodollars can no longer meet demand. Venezuela produced an average of 3.03 million barrels of crude oil per day in 2012, providing the government with a total of USD 85.9 billion. However, this was not enough to feed the dramatic growth in public spending during an electoral year, nor to supply the dollars needed for ever growing imports. This spending generated an impressive 5.6% annual growth rate in 2012, though at the expense of heavy local borrowing and Chinese loans. While external debt only increased by 8%, internal debt soared, rising by 65.6%.
But perhaps a more important cause of the current economic situation is the distortion of the currency system. Imposed in 2003, exchange control has rendered a progressive overvaluation of the Bolívar, which has led to a wave of imports targeted for consumption rather than investment, as well as capital flight.
When no major variation in the input of petrodollars is recorded and demand remains in a steep upward slope, outside financing becomes key to ensure currency supply to the local market. This, of course, translates into higher foreign debt.
In recent months, PDVSA has resorted to additional contracts with big oil companies that will help address demand for dollars. The largest loan of USD 4 billion was secured from China, followed by USD 1.5 billion from Russia and USD 1 billion from the international Schlumberger Ltd. Even in this last case, where the negotiation amounts to an accounting change, this will free up dollars that would otherwise have gone to pay debts to Schlumberger.
Overvaluation of the Bolivar also entails less public revenue from petrodollars and insufficient resources for public spending—the executive is even having trouble paying public workers’ salaries. Thus the government needs to look for dollar financing from abroad, through petro-credits or other funds such as the Fondo Chino, principally for urgent imports, but also for state expenses, augmenting Venezuela’s external debt.
Although these new credits will certainly ease the circulation of dollars in the short run, the executive has been operating with such strained foreign reserves that it seems unlikely they will be enough. External liabilities are starting to be paid off, but there is still a considerable backlog of delayed dollar requests on hold. Moreover, the government has resorted to printing money in order to fulfill national liabilities and state expenses; a double-edge sword that stirs inflation while leaving demand for dollars unchanged.
The distorted currency system also provides enormous opportunities for corruption which siphons off a significant percentage of petrodollars. According to current BCV president Edmée Betancourt, from last year’s assigned currency destined to imports, between USD 15-20 billion represented an artificial demand. Much of these dollars leave the country as capital flight, some end up on the parallel market. But the fact that they are not used for the purposes for which they are approved means there is a growing demand for dollars on the parallel market.
In fact, since October 2012 the Bolívar has depreciated by approximately 51% in the parallel market. The inaccessibility of official rate dollars, the growing demand created by the overvaluation of the Bolívar and the exaggerated dependence on imports make recurring to an expensive parallel market the only feasible option.
The Maduro administration, under the economic leadership of former BCV president Nelson Merentes, is now looking for other ways of increasing dollar supply without getting into further debt by encouraging national production and industrialization and legally auctioning off more expensive dollars.
Will the new pragmatic approach be sufficient? The petrodollar system is so deeply rooted in all aspects of the Venezuelan economy that reforms must be comprehensive,—correcting debt, production, shortages, speculation, and corruption, for a vicious circle of internal and external obligations is controlling the Venezuelan economy. Unless the government re-orients its economic policies or benefits from an additional windfall beyond the current $100+ price of oil, within a few years state accounts will reach an undesirable level of indebtedness.
Melina Sánchez Montañés studies Economics and Latin American Studies at Yale University.
 Average exports in 2012: 2.56 million barrels per day (mmbd). Average oil price in 2012: USD 103,42. The total revenue from oil exports was USD 124,459 million. However, only USD 85,982 million were effectively fiscal contribution.
 Public spending corresponded to 51.3% of 2012’s GDP. Although the initial national budget approved by the National Assembly amounted to VEB 297.836,7 million, the government used additional credits of VEB 140.780,5 million, with a total of VEB 438.617,2 million in 2012.
 Growth rate in the oil sector (2012): 1.4%. Growth rate in the non-oil sector (2012): 5.8%. Noteworthy is the fact that most of the growth computed in the non-oil areas came from non-tradable sectors, mainly finance and construction. In 2013, it is expected that non-tradable investment will fall, and consequently, affecting Venezuela’s GDP downward. The first quarter of the year only experienced a 0.7% GDP growth.
 From USD 98.011 million in 2011 to USD 105.779 million in 2012
 From USD 35.8 million in 2011 to USD 59.3 million in 2012 (before the February 2013 devaluation; USD 40.5 million after the devaluation)
 Petrodollar income from PDVSA: USD 124,459 million in 2012, USD 124,754 million in 2011, USD 94,929 million in 2010, USD 73,819 million in 2009, USD 125,499 million in 2008.
 Since currency control was implemented in 2003, there have been four devaluations up to May 2013.
 8.7% of the total budget deficit of 2012 was driven by money printing
 Total assigned dollars for imports in 2012: USD 59 million
 October 2012: ~ VEF 12/USD. May 2013: ~ VEF 28/USD.
 At the first dollar auction after the implementation of the Sicad—which substituted Sitme—the price of the dollar was calculated to have reached the VEF 13-15/USD bound, much higher than the current VEF 6.3/USD official exchange rate.