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Venezuela has failed to put aside money from oil revenue surplus

OPEC co-founder Juan Pablo Pérez Alfonzo once warned about inefficient, wasteful public sector spending

The National Development Fund (Fonden) has amassed USD 110 billion in oil revenues since 2005 (File photo)
ERNESTO J. TOVAR |  EL UNIVERSAL
Saturday January 25, 2014  12:00 AM
The Norwegian 5.09 million citizens have been made "theoretical" millionaires thanks to the huge fortune amassed by the Government Pension Fund Global (Norway's sovereign wealth fund) after years of building up wealth from Norway's oil and gas investments around the world.

The Norwegian fund has recently reached a milestone 5.11 trillion kroners (USD 828.660 billion) -more than a million kroners per inhabitant- according to figures from Norway's central bank cited by Reuters.

Norway's Government Pension Fund Global, which was laid down in 1990, was designed in such a way that the government can spend up to 4% its value a year, since it is meant to protect Norway's economy from volatile fluctuations on the oil and gas market by smoothing out the disruptive effects of fiscal cycles, while building up wealth for future generations.

The devil's excrement

Rich deposits of oil were discovered in the North Sea off the coast of Norway in 1969. Since then, the country has found that "temporary large revenues from natural resource exploitation produce relatively short-lived booms that are followed by difficult adjustments," as Norwegian Finance Minister Siv Jensen said.

The Norwegian petroleum fund is not a world first. In 1997, in an international seminar on "Macroeconomic Stabilization Funds" held in Caracas, organized by the Central Bank of Venezuela and the World Bank, the idea of putting aside money from oil bounty was discussed. Economist Ricardo Hausmann proposed establishing a Macroeconomic Stabilization Fund to improve "internal macroeconomic dynamics within a context of highly unstable oil revenues."

"In order to achieve this, real expenditure must be stabilized. If we fail to do this at levels that are sustainable over time, the result will be an unstable exchange rate. The exchange rate in Venezuela over the last 15 years (from 1981 to 1996) has been determined primarily by financial crises," Haussmann said.

Long before Hausmann, former Oil Minister and OPEC co-founder Juan Pablo Pérez Alfonzo had warned about the harmful effects of excessive public sector spending financed by oil revenues.

"This increasingly dangerous hell-bent race contributed greatly to the surge in waste, as spending was made so very inefficient (...). This has proved entirely futile, lacking the necessary clear-sightedness to understand the harmful effects of foreign currencies, as they are unable to help in solving the nation's problems. Quite on the contrary, they further exacerbate these problems by promoting imports, thus negatively shaping Venezuelans' life and attitudes", said Pérez Alfonzo back in the 1970s.

It was not meant to be

In the aftermath of the sharp drop in crude oil prices of the 1990s, and around the time Hugo Chávez came to power, austerity and fiscal prudence had become deep-seated ideas among the general populace.

By mid-1999, under Jorge Giordani's tenure as planning minister, the Investment Fund for Macroeconomic Stabilization (FIEM) was implemented as a saving scheme. Back then, Giordani said that the Chávez's government approach was "that of squirrels, who save up their bounty for future use when they can't find food."

By December 2001, the FIEM totaled USD 7.1 billion. But in 2003, after a two-month general strike against Venezuelan President Hugo Chávez, the government dipped into the FIEM to cover the budget. More than USD 6 billion were withdrawn, and only USD 700 million remained in the fund.

In the intervening years the FIEM was changed to the Macroeconomic Stabilization Fund (FEM), and the government failed to contribute to the savings, while establishing new spending funds. Through the reform of the Central Bank Law of 2005, the National Development Fund (Fonden) was established. It has amassed USD 110 billion in oil revenues, from state-owned oil company and Venezuela's main generator of dollars Pdvsa, and the central bank, who also gets dollars from Pdvsa.

As Igor Hernández, the coordinator of the Energy Center at the Institute of Higher Administration Studies (IESA), explains, "Since 2000 we have witnessed the exacerbation of distortions from heavy dependency on the oil market and greater State involvement in the economic activity."

Despite huge oil revenues, Venezuela currently holds USD 30 billion in foreign assets, USD 14 billion of which are liquid assets, according to Barclays.

Under the current severe forex drought, dollars owed to the private sector amount to 43% of international reserves, estimated at USD 20.78 billion.

"Exchange control measures and procyclical fiscal management have caused external volatility to have a greater impact on the internal market, thus adding uncertainty and hindering the development of a productive industrial sector," Hernández says.

As Pérez Alfonzo once pointed out, "Had we refused to let ourselves be dragged into petroleum craze, we would be in a much sounder, hopeful position than we are now. Had we pursued a policy aimed at reducing dependence on oil, we would not have gotten ourselves into the current predicament, expecting the Orinoco Oil Belt to give us a fresh impetus."

Translated by Sancho Araujo
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