Venezuela Shies Away from Major Economic Reforms

5 MINS READSep 4, 2014 | 11:08 GMT
Venezuela Shies Away from Major Economic Reforms
Venezuelan President Nicholas Maduro, Vice President Jorge Arreaza and Minister of Petroleum and Mining Rafael Ramirez address questions at a 2013 press conference in Caracas.

A Cabinet reshuffle suggests that Venezuela has chosen to take tentative steps toward economic reforms in upcoming months. Although such reshuffles are frequent in Venezuela, the Sept. 2 changes are notable because they sidelined the politically powerful Rafael Ramirez, who had been the president of state-owned energy firm Petroleos de Venezuela since 2004 and the minister of mines and energy since 2002.

Ramirez promoted economic measures that, although necessary, likely would have cost Venezuelan President Nicolas Maduro public support. Moreover, Ramirez's political clout probably made him a potential competitor to Maduro. With Ramirez removed from economic policymaking, the government will proceed carefully with economic measures in the coming months, unable to arrest the country's steep economic decline

As the head of Petroleos de Venezuela, more commonly known by its Spanish acronym, PDVSA, which is responsible for a majority of the foreign currency entering the country, Ramirez had gained power in crafting Venezuelan economic policy. Maduro effectively removed Ramirez from any direct role in economic decisions by naming him to replace veteran bureaucrat Elias Jaua as foreign minister. PDVSA Vice President of Exploration and Production Eulogio Del Pino replaced Ramirez at the helm of the oil firm, and Asdrubal Chavez (a relative of former Venezuelan President Hugo Chavez) was appointed minister of energy and mines. Jaua was named head of the Ministry of Communes, which is tasked with administering the distribution of resources to communes and other local government units.

Ramirez was also removed from his post as vice president for economic affairs, a position he had held since he replaced current Venezuelan Central Bank President Nelson Merentes in October 2013. The post went to Finance Minister Rodolfo Marco Torres, who will concurrently manage the economic affairs vice presidency and the finance ministry.

Political Motivations and Economic Problems

Ramirez's sidelining was likely a result of the lengthy disputes within the ruling United Socialist Party of Venezuela concerning the management of the country's deteriorating economy. Since Chavez's death in 2013, the task of running the country has fallen to politically powerful individuals and factions. In recent months, divisions emerged in the Cabinet over the best way to address Venezuela's declining public finances and the economic health of PDVSA.

In the dispute, Ramirez favored economic measures, such as devaluation, that would improve the state-owned energy firm's bottom line but would raise consumer prices further. This would be a socially unacceptable cost for Maduro, who likely would lose public support if he adopted Ramirez's suggestions. Sharp increases in consumer prices and dwindling public finances have put Maduro in a position where continued inaction is unsustainable. However, Ramirez's removal from economic policymaking suggests that Caracas will not enact major economic reforms and is likely to delay large economic adjustments as long as it can.

Over the past few months, Ramirez promoted a series of reform measures that included unifying the country's three exchange rates, increasing gasoline prices to mitigate PDVSA financial losses, and transferring foreign currency from funds outside the national budget, such as the National Development Fund, to bolster declining foreign exchange reserves at the Venezuelan Central Bank. Maduro has adopted the proposal to boost the central bank's reserves, announcing that he will move currency from the National Development Fund and Chinese-Venezuelan Fund to strengthen the remaining $20 billion in reserves (of which only about $2.7 billion is held in cash, according to figures from late June) in upcoming months. The size of these funds and of any eventual transfers remains undisclosed. An unofficial estimate placed the money in all such funds at $9.3 billion at the end of July, although the government does not report expenses from these funds. This move could help Maduro direct more cash toward funding imports. Moreover, Maduro placed the Foreign Trade Center, the government body responsible for allocating currency for imports, under Vice President Jorge Arreaza, further suggesting that Maduro is attempting to directly manage the declining stock of foreign currency in the country.

The principal struggle appears to center on the timing and severity of these reforms. Maduro and other leaders of the fractious ruling party disagree with measures that could erode voter support. During the policy debate, Ramirez preferred the unification of the exchange rates by year's end and wanted a single exchange rate. Other bureaucrats, such as Arreaza, Jaua, Merentes and Foreign Trade Center President Alejandro Fleming, reportedly preferred more tentative moves toward unifying the exchange rates. According to an unofficial report, two new exchange rates — one trading at 15 bolivars to the dollar and another at 49 bolivars to the dollar, similar to the rate at which the existing Sicad II mechanism auctions currency — could be implemented. Merentes reportedly wanted to delay any major economic adjustments until after the December 2015 legislative elections.

Unconfirmed reports also indicate that concerns over Ramirez's growing power could have influenced Maduro's decision to oust him. According to Venezuelan private consulting firm Ecoanalitica, Merentes voiced concerns that Ramirez's measures would cost Maduro political support. A separate report claimed that Ramirez's political power as head of PDVSA influenced the decision to seek his replacement.

Eventual Action Needed

Despite the government's apparent wariness of reform, the increasingly untenable political and economic situation will continue affecting the government's decisions. Venezuela faces annual inflation of more than 60 percent, food and consumer goods prices that have doubled in a year, and nationwide food shortages that cannot immediately be addressed. Moreover, the government must maintain high levels of public spending that drain the state-owned energy firm's finances. Piecemeal measures such as bolstering the central bank reserves provide temporary relief, but the country's fundamental cash flow problems will only worsen with inaction.

Maduro seemingly does not want to undertake deliberate decisions that will affect his popular backing. However, with Venezuela's economy in decline, he eventually could be forced to concede on other proposed reforms, including raising the price of gasoline.

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