On Sept. 25, Venezuelan Vice President Jorge Arreaza announced measures intended to optimize how the country imports goods. The government will waive requirements limiting firms' access to foreign exchange to pay for food, medicine and hygiene products. The waiver will last until Dec. 31. Ports will operate seven days a week to distribute these products more efficiently.
Arreaza's announcement follows reports of increased cash flow difficulties in Venezuela. An unofficial report in El Universal said the Central Bank of Venezuela's liquid cash reserves have fallen to $900 million — a significant drop from approximately $3 billion in July. A report in El Nacional, which cited unnamed government officials, also claimed that China denied a Venezuelan delegation's request for a cash loan. Instead, the Chinese reportedly agreed to fund $5 billion worth of infrastructure projects that Venezuela will have to repay in oil. If the reports are true, Venezuelan officials will have even fewer options for replenishing shortages in their country's foreign reserves. (Maduro has since denied El Nacional's report.)
Two things are responsible for the financial pressure on the government: declining oil exports and sustained high levels of government spending. Inefficiencies have degraded the country's energy sector, leading to frequent accidents, particularly in the refining industry. As a result, Venezuela only exported an estimated 1.7 million barrels per day of oil in 2012, down from 2.3 million barrels per day in 2004 and 3.1 million barrels per day in 1997.
Meanwhile, imports of refined products from the United States jumped nearly six-fold, from $568.9 million in 2011 to $3.3 billion in 2012. The net result of these developments is that it is becoming increasingly difficult for Venezuelan state-owned oil company Petroleos de Venezuela, more commonly known as PDVSA, to continue directly financing the country's massive state-managed social safety net. As a result, transfers from the company to the state have been falling. PDVSA transferred roughly $1.2 billion to the central bank in the first half of 2013, compared to about $4.1 billion during the same period in 2012. As Venezuela's primary industry and main source of revenue, PDVSA's declining contributions add to the country's growing overall financial uncertainty.
With less inflow and high demands for foreign exchange to finance imports, official central bank reserves have fallen sharply this year, from $29.8 billion in January to $22.3 billion in late September. Even these numbers may be overstated. Much of Venezuela's central bank reserves are held in gold, and the recent fall in futures prices is not reflected in Caracas' accounting. In August, the Central Bank of Venezuela announced that its cash reserves totaled $1.8 billion and that its gold reserves totaled $17 billion. While it is difficult to be sure precisely how much of Venezuela's reserves are in foreign exchange, the overwhelming message is that the institution lacks sufficient foreign exchange to manage its currency without selling off the gold reserves. Venezuela may also use its gold reserves deposited abroad as collateral to secure future loans.
The overall shortage of foreign exchange available in Venezuela's financial system is a major impediment to maintaining the country's reliance on imported goods. According to one independent assessment, Venezuela's private and public sectors are making do with a shortage in foreign exchange that will total about $8 billion in 2013. As a result, the value of the bolivar on the unofficial exchange markets has plummeted (it is currently 40 bolivars to the dollar). Meanwhile, the government has nominally held tightly to the official exchange rate of 6.3 bolivars to the dollar while simultaneously auctioning dollars in limited quantities at around 11 bolivars to the dollar.
Venezuela's leadership is currently discussing a new foreign exchange system whereby currency and bond exchanges would link private and public entities in a more open trading environment than is currently possible. A similar system was in place before it was outlawed in 2010, when all legal currency transactions were brought under government control. Even with PDVSA promising to inject some $6 billion through the new system, the bolivar in all likelihood would nonetheless lose its value in such a market exchange, effectively representing the third such change in value this year.
There may be significant political consequences if the bolivar does in fact devalue again. The shortage of foreign exchange has added to inflation, which totaled 31.4 percent between January and August. According to an independent estimate, inflation in 2013 may reach as high as 44 percent, compared to reported inflation in 2012 of 20 percent. The government may raise reserve requirements and force banks to buy government bonds to absorb bolivars and control the parallel dollar exchange rate. The Central Bank of Venezuela is studying an increase in the reserve requirement for banks, which is currently 17 percent. A new exchange system to allow more foreign currency into the domestic economy is necessary in this case, but it faces problems in its implementation.
For one thing, the proposed system remains a politically sensitive topic because of its potential effect on public support for the government. Political discussions over the exchange system have pitted PDVSA President Rafael Ramirez and Planning Minister Jorge Giordani against Finance Minister Nelson Merentes and Central Bank President Eudomar Tovar. Giordani had previously opposed the devaluation of the bolivar in early 2013 because of the inflation it would create. The new exchange system's potential effect on inflation will likely delay its implementation until after Dec. 8 municipal elections.
Currency devaluation created by the new exchange system now seems inevitable. Venezuelan officials appear increasingly constrained because they may no longer be able to rely on loans or high currency reserves to fund the country's social expenditures. Therefore, the government faces the politically unpopular choice of undoing economic problems inherited from the previous administration or remaining in an untenable economic situation.