What were the measures implemented by this relatively new government as far as your ministry is concerned?
We arrived in office in 1999: allow me to explain all that concerns the financial sector, and its relation with the other sectors of the economy. Upon arrival in office with a situation from the point of view of the fiscal revenues: we had oil prices that had fallen down at 7 and 8 dollars per barrel. We had a fiscal deficit that was about 8-9% of the GDP, and it was a situation where we had approximately 40% inflation. It was a very difficult situation. We had no more than 30 days in the treasury to pay our obligations. The expectations on the forecast were that we would have to devaluate over 40%. We entered with the dollar worth more than a thousand bolivares. People thought that President Chavez would provoke an outflow of capital. Actually, it was the contrary.
What were our objectives when we arrived? First, we had evaluated that the Venezuelan economy was characterized by the high volatility. The stability of the market was unsure due to the variations of the crisis. The agent decided not to take too many risks. The agent had another characteristic, he had higher rate of return, and short-term preference. The debt was widespread; we did not know how much was the lowest amount of debt. We had to default every time because we did not know what were our obligations with all the banks that we had come with an agreement. Therefore, our main objective was to come through the volatility, to see how we could finance a stable economy. To make the agents feel confident in the country, we began with an enabling law so as to create a legal framework for the economic activity; we also created a value added tax law on gross operations. We then transformed this law into a value added tax.
The second measure we took was the creation of a tax on financial operations. We noticed that the budget was done in a way that did not correspond to the allocation of resources. We paid all what was externally necessary for the offices, and we were exposed to a cash flow issue because the resources were not in line with the budget. The budget did not correspond to the true structure of the public spending. We began to do treasury management and we began to save resources. By the end of the year, we were able to bring down the fiscal deficit from 9% to 2%. We reduced the budget about 10%, so it was in the order of 2 billion Bolivares. On the other hand, we started to raise the issue of oil prices. We created a quota on the oil in accordance with OPEC. We finished 1999 with 20 dollars per barrel.
We created the Macroeconomic Stabilization Fund, and we fixed a revenue of 9 dollars per barrel. For any barrel of 9 USD - half goes to the Macroeconomic Stabilization Fund and the other half goes to fiscal revenues. Finally, all these measure allowed us to reduce the inflation rate from 20 % to 15 %.
Clearly this has bought about a complete change since you entered office?
Yes. We supported a strong bolivar policy, and we finished with a 15% depreciation of the bolivar. Our currency was relatively stable this year.
As mentioned, we wanted first and foremost to control the volatility and let the agent decide on the risk. Secondly, the market had to revive its adjustment mechanisms. Thirdly, we had to make sure that the agents were more efficient. In what concerns the inflation, we have a very difficult time.
We have been able to control the inflation, because the mechanism of price development has changed; we noticed that the poverty, which is very high is co- related with the devaluation. The devaluation provoked inflation and the inflation created a fall in the purchasing power of the people. It was a policy that was very tough to apply. It was difficult to apply a policy with an exchange rate that was very restrictive; we implemented the strongest adjustment ever done in the Venezuelan economic history. We cut more than 10% of the budget and even we cut all the expenditures that were not necessary for the administration. We did not have the institutional and the judicial way to act for the law of budget and the Public Finance Law. Then there was the oil policy that permitted us to recuperate oil prices. So, we finished the year 1999 very well. It was a good indicator. We finished with an exchange rate about 600 bolivares. The inflation fell to 17 %.
In the year 2000, we were convinced that it was necessary to induce an institution that would change public finance. First we started the Public Finance Law, it is "la ley de Administracion Financiera y Control Fiscal" that is based on the sustainability of the expenditure, the expansion of the fiscal balance. Second, we introduced the first column of our first objective, because we are convinced that there are 4 main elements for the financial equilibrium. First the fiscal equilibrium, second, the stability of the exchange rate, third savings and pension funds, and fourth the stability of the financial and banking sector.
Regarding the fiscal balance, we created the law from which would derive the treasury agency, the debt agency and the cultural agency of the expenditure. And now from the 1st January all the operations that we have will be electronic. We moved from manual, which was a very primitive system, to an electronic one.
Within the treasury Agency, all the expenditures and orders of payments must be backed up by cash. The old law was 82 years old. We changed it because it did not correspond to today's requirements. Concerning the banking sector, we implemented a policy that had the objective of adapting the size of the banking system to the size of the economy. We had before more than 40 banks, now we have less than 30. They are more efficient and they have reduced costs; we have allowed them to bring down interest rates, and their operations are much better structured. | Considering the current mergers & acquisitions' trend, do the Venezuelan banks follow it?
More mergers will come, and the system is going to reach a point where the banking system will be of the same size than the economy. When the economy starts growing, the banking system will grow as well. Before, the growth of the monetary system was very high but it did not reflect the economic growth, and provoked that so many banks went bankrupt. So, our main focus was to adapt the size of the banking system to the economy. Now we think that this objective is very rigid because there have been so many bank mergers.
What financial products show the strongest potential for future growth?
I think potential lies in credit terms. Credit has been lacking in the last 7 to 8 years because of the high interest rates; however, as mentioned before our objective is to provide credit facilities. We began reactivating credits since the last quarter of the year 2000. We are gradually reaching our goal.
We are also discussing the creation of pension funds co-managed by the public and private sectors.
Last but not least, the exchange rate; it is maybe the easiest to implement. We maintain our exchange rate policy and for this year we think we are going to have a depreciation of 6 %. Regarding inflation, our target for 2001 is to have an 11% inflation rate; as far as unemployment is concerned, we want to take it down by 2%.
What is the present unemployment rate?
It is at 13%, so we want to bring it down to 11 %. The exchange rate is about 725 bolivares to a dollar. We want to keep the fiscal deficit below 3%. Concerning this last figure, we had a fiscal deficit of 3.7% in 1998, 2.25% in 1999, and 1.78% in 2000.
From the debt stand, we know our obligations towards the banks, how much and where are everyone's bills, and we are up to date with all our debt.
Now we have a strategy to modify the presence of Venezuela in the international market, because we have no presence or personality in the international market. Our objective is to have a personality and to make Venezuela known internationally.
Venezuela has a long history with international organizations and donors. What is the present relation with groups such as the BID and the World Bank?
Our relationships are good. In 1999, when we took office, they came and they found that we were in a terrible situation, because we made a very hard adjustment, they wanted us to devalue. We showed them that our adjustment was very well done, and we established a very good long-term relation with the IMF with the international bilateral and multi-lateral agencies. An IMF mission came two months ago, and they were satisfied with what had been achieved. The IMF has agreed the Statistics Agency office…
Have you obtained any support from these donors to create awareness on the international arena about the investment opportunities in Venezuela?
That is what we want to do now, to make Venezuela more attractive. Because Venezuela is not perceived in the right sense, there are so many distortions we need to rectify. It is necessary now to make Venezuela known in the international market. We have begun working with rating agencies, as well as with the banking sector. It is necessary to restore confidence in Venezuela.
How do you intend to do this?
I believe we have to market Venezuela so as to portray the true investment risk our country represents. We need to be present in markets with operations and information. But this is a very difficult task. It takes time because you must convince people and it is a difficult task changing the tradition of Venezuela, before the last administration had weak management on their fiscal elements.
Five years from now, which sectors do you believe will revolutionize the country?
I think the main elements to revolutionize the country will be education and health. Education is critical. Second, is healthcare. But this has a very important economic component. To improve these sectors, we have to create employment, to make the system grow, to offer salaries that will correspond to the productivity so that people can have a higher purchasing power. It is a challenge to have all these elements of fiscal equilibrium in the financial sector, and government policy at the same time, with a population that has more than 80% poverty. How would you begin a policy without finding a solution to poverty? The social policies are very expensive.
What final message would you address to our readers?
I think, we can offer a very stable country, a country which is striving to become a market economy, but with a social ingredient. We have political stability; we have a very peaceful country where the people work hard, with so many investment opportunities in the gas, mining, oil, and energy sector. Opportunities are also boundless in the service industry. It is an economy that has a very high standard of living. What is very important is to create employment.
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Ministry of Finance