República Bolivariana de Venezuela and the IMF
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The International Monetary Fund (IMF) today approved a 12-month stand-by credit for Venezuela equivalent to SDR 975.65 million (about US$1.4 billion) to support the Government's 1996-97 economic program.
Following a decade of sluggish economic growth, the Venezuelan economy expanded vigorously in the early 1990s as a result of the confidence generated by the policy reforms supported by the 1989 extended facility from the IMF and the rise in world oil prices associated with the Middle East War of 1990. Subsequently, however, world oil prices fell sharply and public finances and the balance of payments weakened. In 1994, these difficulties were exacerbated by a major banking crisis; exchange and price controls were introduced in mid-year; economic activity fell by 3 percent; and 12-month inflation reached 70 percent by end-December.
In 1995, exchange controls were relaxed and a parallel market for foreign exchange was legalized. This allowed imbalances to spill over into the balance of payments. Banking difficulties continued, public finances remained weak, and the 12-month inflation rate reached 57 percent by end-December. In mid-December, the bolivar was devalued in the official market, but imbalances persisted. Although real GDP rose by 2 percent in 1995, the non-oil economy grew very little, and unemployment rose to 10.5 percent of the labor force.
The 1996-97 Program
To redress this situation, and set the stage for sustained growth and a reduction in poverty, in April 1996 the Venezuelan authorities began implementing an ambitious and front-loaded economic program aimed at a rapid and substantial reduction in inflation, restoring confidence, and improving resource allocation. Following an effective communications strategy to achieve a social and political consensus, the authorities increased domestic fuel prices, liberalized interest rates, unified the exchange system, abolished controls on current and capital transactions, eliminated price controls (except on medicines), and started strengthening the social safety net.
The economic program, which the stand-by credit supports, seeks a reversal of the decline in real GDP during the fourth quarter of 1996, and real GDP growth of 4 percent in 1997; a reduction in the monthly rate of inflation to 1.5-2 percent in the second half of 1996, 1 percent in the first half of 1997, and to international levels thereafter; and an increase in the external current account surplus from 2.4 percent of GDP in 1995 to 4.3 percent of GDP in 1996, followed by a halving of the surplus in 1997. Net international reserves are targeted to increase by $1.6 billion in 1996, to the equivalent of 5.6 months of imports, and to rise further in 1997.
To these ends, the centerpiece of the adjustment effort is a major reduction in the underlying public sector deficit (excluding net assistance to banks) to less than 1.5 percent of GDP in 1996 from 4.3 percent in 1995. In 1997, the underlying fiscal position is projected to be in balance. The fiscal effort will rely on expenditure restraint and increasing tax revenues, as well as on improving the efficiency and equity of the tax system. Revenue measures include an increase in the rate of the general sales and luxury tax to 16.5 percent from 12.5 percent, and a considerable increase in domestic fuel prices.
Fiscal consolidation will facilitate the implementation of credit policies consistent with the inflation and net international reserves objectives of the program. Both the net domestic assets of the Central Bank and its credit to the public sector are projected to decline during 1996; this will permit a reduction in the stock of central bank securities and losses relative to GDP.
Exchange rate policy will be aimed at lowering inflationary expectations while providing a reasonable degree of exchange rate flexibility. For this purpose, in early July, in accordance with the economic program, the Central Bank established bands around a central rate that will be adjusted in line with the preannounced inflation target for the fourth quarter of 1996.
The program envisages major structural reforms to achieve sustained economic growth. The groundwork for a major reform of the public sector will be prepared and the privatization effort will be resumed. The authorities consider it essential to continue strengthening the banking system to restore confidence, improve the efficiency of financial intermediation, and maintain macroeconomic stability. Therefore, the program gives high priority to strengthening bank supervision and the capital base of banks. A contingency fund is being established to facilitate bank mergers and acquisitions, and possibly loan purchasing or rescheduling operations. The system of severance payments will be reformed to promote employment. In addition to the reprivatization of nationalized banks, the privatization effort will include the sale of the remaining government shares in the telecommunication company (CANTV), and the sale of state-owned aluminum, steel and electricity companies.
The program seeks to protect the living standards of the most vulnerable social groups. Spending on social safety net programs will be increased by 1 percent of GDP in 1996. A transportation subsidy was introduced to avoid an immediate increase in public transportation fares resulting from the rise in gasoline prices, and the social safety net will be improved further with the assistance of the World Bank and the Inter-American Development Bank.
The Challenge Ahead
The success of Venezuela's ambitious economic program will require strict adherence to policy implementation and the continued decisiveness and strong commitment of the Venezuelan authorities, as well as the strengthening of institutional capacity to respond rapidly and effectively to changing developments.
Venezuela joined the IMF in December 30, 1946. Its quota1 is SDR 1,951.3 million (about US$2.8 billion), and its outstanding use of IMF credit currently totals SDR 1,328 million (about US$1.9 billion).
Sources: Venezuelan authorities; and IMF staff estimates and projections.
1. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT