- Created: 24 February 2016
Published on 18 February 2016 by Venezuela Analysis
A whole packet of new economic initiatives will take effect in Venezuela this week after the country’s president, Nicolas Maduro, announced a series of far-reaching measures in response to the economic crisis on Wednesday evening.
In a five hour address to the nation on national television, Maduro explained the extent of the economic crisis afflicting the country as well as his government’s plan to tackle it.
The economic initiatives include changes to the country’s multi-tiered exchange rate, an increase in the domestic price of gasoline, the implementation of a new tax system, and expansion of community control over food distribution.
He also reaffirmed his commitment to continuing his government’s investment in Venezuela’s many public services known as the “missions”.
The far reaching reforms come after the Venezuelan Supreme Court of Justice (TSJ) moved to approve a state of economic emergency decree emitted by Maduro in January, overriding what it described as an unconstitutional attempt by the opposition-controlled National Assembly to block it.
The country’s economy has been consistently worsening over the past two years, suffering from skyrocketing inflation, which peaked at over 140% in 2015. A 97% drop in earnings from oil– the country’s principle source of income– due to plummeting global prices and shortages of key imported goods have also contributed to the turmoil, as well as whittled away at the ruling socialist government’s support.
Since the TSJ ruling– which allows Maduro to make far reaching changes to the economy– the country has been on tenterhooks awaiting news of the measures.
The most anticipated announcement is the government’s decision to amend the country’s multi-tiered exchange rate system.
Maduro announced that the system, which fixes a series of differing prices for the bolivar to dollar exchange rate, will be changed to a dual model - falling short of the complete unification of exchange rates hoped for by some economists.
The new system will consist of one subsidised exchange rate of ten bolivars per dollar, and one free floating exchange rate that will be based on market supply and demand. The preferential rate will be made available to the health and food sectors, the missions and to industries involved in national production.
A similar “supply and demand” initiative known as the SIMADI was implemented in 2015, but stagnated when it was unable to keep up with the climbing black market rate, in large part due to the Central Bank of Venezuela (BCV) placing a ceiling of 200 bolivars on the price of the dollar.
It is still unknown what constraints, if any, the government will place on the new rate, which will begin to float at 200 bolivars.
The government also increased the domestic cost of gasoline for the first time in two decades– following years of debate on the subject.
The heavily subsidised black gold will be raised by 6000%, and will now sell at six bolivars a litre– up from just under ten cents per litre before.
Venezuelan gasoline will still be the cheapest in the world and drivers will continue to be able to fill their tanks for less than the cost of a milkshake. The increased state revenue earned from the price hike will be invested in the state’s social missions.
But despite the substantial raise, some critics say that the move does not go far enough– pointing to the heavy production costs associated with processing Venezuelan oil.
Nonetheless, the raise has been welcomed by environmental groups who blame the extremely low price of petrol for creating an apathetic attitude towards energy usage in the country.
In other reforms, the government also promised to carry out a “tax revolution” with the help of the Ecuadorean government.
Maduro explained that the government’s tax and customs body, the SENIAT, would begin to implement an electronic and digital system for collecting national contributions.
“The system has had extraordinary results in Ecuador for the Citizens’ Revolution and I have asked president Rafael Correo, alongside our team, to immediately begin conforming a Venezuela-Ecuador team, to install a system against tax evasion, fraud and avoidance in Venezuela,” the head of state explained.
Maduro went on to note that tax reforms implemented in 2014 had successfully managed to generate 2.3 billion bolivars in 2015 that were invested in the national pension scheme. The executive said the SENIAT is expected to collect 4 billion bolivars this coming year, which will be used to sustain the social missions.
Recognising that high levels of corruption had stymied the Bolivarian government’s attempts to come to grips with the economic crisis, Maduro pledged to make ministries more efficient and turn them into “true” institutions of “people’s power”.
He also took the unexpected move of putting local communities organised into communal councils in charge of administering the state supermarket chain, Asbastos Bicentenario.
The decision comes in light of an investigation by intelligence services into the state supermarket chain earlier this month, which saw more than 55 officials arrested for corruption, including former Abastos Bicentenario president Barbara Gonzalez.
The president said state institutions would no longer act as a gravy train for corrupt state functionaries.
“Either we have a distributive system run by mafias and parasites, or we change,” he stated.
Increased efficiency and transparency in state institutions will be vital over the coming year, as the president also approved 190 billion bolivars for public infrastructure.
Other measures that will be implemented as part of the sweeping reforms include creating a new “price fixing system” to calculate the state-regulated selling costs of subsidised items such as cornflour and milk to reflect the reality of production costs.
The newly appointed vice-president for the productive economy, Miguel Pérez Abad, will be in charge of the re-evaluation.
The national minimum wage will also rise from 9,649 bolivars a month to 11.578, and workers’ food coupons from 6,650 to 13,275. A system for providing some 796,000 vulnerable families with direct and targeted subsidies will also be set up through the creation of “Socialist Mission Cards”.
“It’s going to be a social programme safety mechanism for financing the family, protecting children,” said Maduro.
An 100 day drive to promote urban agriculture amongst communities will also begin over the coming weeks, the president added.