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Venezuela Plans Fiscal Stimulus For 2010 Budget

by Mike Godfrey, Tax-News.com, Washington

19 October 2009

The 2010 Venezuelan Budget has been delivered to the National Assembly. It is intended to provide a fiscal stimulus to reverse the expected contraction in the economy of between -1% and -2% for 2009, and to encourage positive growth of 0.5% in 2010, although many analysts predict growth of up to 3%. President Chavez wants to rein back inflation in election year from the present 26% (expected by December 2009) to 20-22%.

Venezuela is reliant primarily on oil for its tax revenues, and it has based its expenditures on an assumption of a USD40 per barrel oil price. With this in mind, government expenditures would be set at about VEB180bn (USD84bn). The government has already embarked on a program of selling USD denominated bonds in the domestic market to soak up excess money supply.

Asdrubal Oliveros, an economist and director of the Venezuelan think tank Ecoanalítica, describes fiscal policy in Venezuela as the policy of the "store manager"; if oil prices are high, the government will spend much more and approve additional appropriations, disregarding the agreed budget and debt implications.

Oliveros suggests that inflation targets in 2010 will be difficult to meet in an election year with the temptation for increased spending. He is also concerned about the growth of foreign currency debt, unassociated as it is with underlying investment, regarding it rather as a tool to manipulate exchange rates to support the unrealistically high official rate of the Bolivar. This has led to an unhealthy "parallel" market growth in currency dealings. Oliveros estimates that almost half of external purchases this year are now acquired through unofficial market currency purchases.

Venezuela severed ties with the IMF and World Bank in 2007 and is not subject to the kind of fiscal and monetary disciplines that conventional economists of the IMF recommend. Venezuela now has the highest rate of inflation in the Americas.

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