The Economist
February 9, 2013

Courtesy of: TalCual

It is now two months since Venezuelans last saw or heard from their president, Hugo Chávez, who remains in intensive care in a high-security Havana hospital, battling what seems to be terminal cancer. But it is an absence of a different kind that is uppermost in many people’s minds. Cooking oil, sugar, wheat flour, coffee and the all-important pre-cooked maize flour that goes into many Venezuelan dishes are among the staple items that have largely disappeared from the shelves. Both the Central Bank, which tracks the level of supply, and private economists reckon that shortages are at their greatest since 2008.

Temporary shortages often occur at the start of the year, thanks to higher demand, reduced output and distribution delays over the Christmas holidays. But this year they are a symptom of bigger distortions, which include a black-market dollar that trades at more than four times the official exchange rate, and chronic inflation (20.1% in 2012 and likely to rise this year).

Economists expected a big devaluation in the early months of this year. That would make revenue from oil exports go further in local currency, bridging a fiscal deficit which reached 8.5% of GDP last year after an increase in spending of 26% in real terms in the 12 months before a presidential election in October, won by Mr Chávez. But there is no sign of it, probably because the president’s agony means that a fresh election is just around the corner.

The underlying problem is a shortage of cash at the state oil monopoly, Petróleos de Venezuela (PDVSA), which provides 94% of the country’s foreign earnings. Under a plan announced in 2005, Venezuela should have produced 5.8m barrels a day by 2012. Even by the government’s reckoning, it pumped little more than 3m; private sources suggest the number was around 2.8m. Local consumption has risen sharply, partly because petrol is provided almost free to Venezuelans but also because power plants have switched to fuel oil because PDVSA is unable to supply them with gas. Around 270,000 b/d of oil goes to China, to repay loans to the government, and almost 400,000 b/d at a big discount to Cuba and other allies. Refinery and production snags have even forced the company to import crude and oil products.

PDVSA is also obliged by the government to divert billions of dollars into unaudited funds which the president manages at his discretion. The biggest, known as Fonden, absorbed $15.5 billion last year, forcing PDVSA to pay part of its taxes in the form of IOUs. The Central Bank’s foreign reserves have been depleted, too, to $30 billion (down from $42 billion in 2008). Most of that is in gold or other non-liquid assets; liquid reserves amount to only a couple of months’ worth of imports. Importers say it is taking six months to obtain foreign currency at the official rate.

Official propaganda proclaims that Mr Chávez’s socialist revolution has promoted sovereignty and “endogenous development”. But Venezuela is more dependent than ever on imports. Domestic production has fallen victim to an overvalued currency and government hostility to the private sector. A wave of expropriations and confiscations has left millions of hectares of farmland and a swathe of the food industry in government hands. The expansion of the money supply, along with redistributive policies, has raised demand for food and other basic goods, met largely by imports.

Officials blame private-sector “hoarders” and “speculators” for inflation and shortages. They have raided warehouses, seizing 8,520 tonnes of sugar, for example, from Pepsi-Cola, which the company says was imported with government permission. As with other staples, the state controls the price and import licences for sugar, and its distribution (which can only be carried out with government permits). It also owns most of the sugar industry. In the case of pre-cooked maize flour, the government owns half of production capacity, but only supplies a fifth of the market, according to figures from Datanálisis, a market-research company.

Some stopgap measures have been taken to ease the flow of dollars. The government has quietly started to cut spending, and shaved PDVSA’s annual contribution to Fonden by $2.9 billion. It is looking for fresh loans, especially from China. But Fedecámaras, the main employers’ federation, says it will take three or four months to reduce food scarcity. That suggests that predictions of a March election are wide of the mark. Eventually, says Jorge Botti, the chairman of Fedecámaras, the government will have to “move towards the centre and understand how the private sector works”. But there is no sign of that yet.

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