The Venezuelan economy has evolved favorably since the last quarter of 2021, breaking with the recession of previous years. Since then, it has shown growth indicators that have remained stable.

The national economy, as a whole, showed an increase in GDP (gross domestic product) of more than 15% in 2022, as noted by President Nicolás Maduro recently, the largest increase registered on the continent during the past year.

But this strong trend, according to several private firms, may have slowed down by the end of 2022 and the beginning of this year, as a new cycle of devaluations has intensified, bringing wages down with it.

What possibilities and scenarios are in store for the Venezuelan economy under current conditions? It is not a simple question, if we consider that it is still subject to many factors that are difficult to predict.

Growth versus inflation

The growth in values experienced in 2022 was manifested as follows: GDP rose 17.4% between January and March. In the second quarter, it reached a peak of 23.3%, and in the third quarter, it was 13.2%.

Up to now, the figures for the fourth quarter have not been published but, although they remain positive, it was probably lower or slowing growth.

According to the Monthly Indicator of Economic Activity of the Venezuelan Finance Observatory (OVF), during the fourth quarter of 2022, the Venezuelan economy registered 9.1%, less growth than that registered in previous quarters. But the OVF emits monthly analyses that end up being outdated by the official figures, and, it must be recalled, are always lower than the actual numbers.

Even without definitive data for the fourth quarter, the registry of the Central Bank of Venezuela (BCV), up until the third quarter, showed some interesting indicators.

The country’s GDP had expanded 17.7% in the January-September 2022 period. However, thanks to data from the BCV, some important elements can be extracted that were summarized by the banking and finance media:

• A significant slowdown in oil GDP can be observed in the third quarter as a result of the drop in oil prices. The numbers are down compared to February-March-April.
• The slowdown in private consumption, representing 64% of GDP, was confirmed. This grew 17.6% in the first quarter of 2022, 16.5% in the second quarter of 2022, and 8.6% in the third quarter of that same year.
• A similar trend was registered in the imports of goods and services; however, the decrease was more pronounced than consumption—27.2% in the first quarter, 9.2% in the second quarter and 1.2% in the third quarter—which confirms the slowdown of activity and consumption.
• Normally, the October-December cycle is the period with the greatest activity, both in private consumption and in imports. It was also a period of staggered payment of utilities to public and private workers. It has not been officially confirmed how these activities played out.

The economist Asdrúbal Oliveros recently explained that the sales index in Caracas during January showed a decrease of 17.5% compared to the same period last year.

According to Oliveros, the decrease in consumption began to manifest itself in October and stretched into the month of January. He referred to a slowdown and “an alert signal” for the private sector.

However, most of the prospects for the behavior of the Venezuelan economy for 2023 remain favorable.

“The forecasts of 18 surveyed entities all point to a growth of 5.4% in GDP on average for 2023, and have as extreme values the 8% provided by Credit Suisse and the 3.6% estimate of Financial Synthesis. Aristimuño Herrera y Asociados foresees an expansion between 6% and 7% and the International Monetary Fund (IMF) [predicts] 6.5%.” These figures were reported on by the outlet Banca y Negocios [Banking and Business] in an article titled “The Venezuelan economy: challenges and perspectives for 2023,” published at the end of January.

According to the summary of data presented by that platform, Venezuela will grow more than other emerging countries, since it is estimated that it will reach 3.7% growth, while the Latin American region as a whole is forecast to grow by 1.7%, according to the IMF.

It is worth examining the data in detail. At the end of January, Vice President Delcy Rodríguez announced that inflation for 2022 was 234%. She recalled that this indicator, in 2021, had closed at 684% and, if compared with the figure of previous years, it is evident that it is slowing down, although it remains high.

The last quarter is normally the most inflationary of the year and it can be affirmed that this indicator had an impact on consumption.

It is evident that this factor has an impact on consumption and, therefore, on growth. Inflation for Venezuela is estimated between 100-130% for 2023, that is, it is set to decrease when compared to 2022.

Additionally, we must mention the credit variable. The Venezuelan economy grew in 2022, with the use of 10% of assets in foreign currency being given the green light to be delivered by banks as credit. In 2023, President Maduro announced that 30% will be authorized. This is an increase of 200%, which will have a favorable impact on economic activities. However, credit in bolivars continues to be restricted in order to limit liquidity, with the legal banking reserve currently set at 73%.

Devaluation versus wages

The bolivar registered the highest devaluation rate in 2022 in December, falling 35% against the dollar, whose price rose from bs 11.25 to bs 17.48 on the official market, totaling an increase of 55%, according to the BCV.

As we mentioned before, given that the last quarter of the year, and specifically December, is the period of greatest consumption—as is normally the case—this possibility could have vanished with a very high currency devaluation during that month, which would mean a drop in consumption, which was also felt in January.

By the end of February 2023, at the official rate, the minimum and basic salary was calculated at $5.40. In other words, wages have remained static at bs 130 for 11 months, while devaluation has escalated.

As is well known, in March 2022 this indicator was calculated at around $30 a month and remained at similar levels for more than six months before the exchange rate spasms increased beginning in October.

This minimum wage variable has an impact on at least seven million people, including public employees and pensioners. Hence, it could have a relationship with the increase in private consumption and, therefore, in GDP, during the first quarters of the year.

It is worth noting that the composition of the Venezuelan economy has changed since the blockade of the national economy—due to the reduction of oil income to levels like those from the beginning of the 20th century.

During 2022, 62% of the composition of GDP was due to private consumption. Clearly, salaries and pensions metabolized the internal economy for a good part of 2022, transferring huge resources to the private sector. When devaluation and inflation increased at the end of the year, consumption slowed and, thus, GDP slowed.

The year 2023 has begun with a clear trend of falling public wages and pensions. President Nicolás Maduro has stated that he is clearly aware of the situation and has referred to adjustments that are yet to be announced, but he has emphasized the need for measures to make the salary formula sustainable.

Oil revenue during the the blockade remains at minimum levels, as the BCV reported $4.8 billion last year.

Additionally, tax collection in the country increased by 97% in 2022. Through new taxes and an increase in the rigor of collection methods, the state brought to its coffers the equivalent of $4.74 billion.

However, these resources still do not equal 20% of what the state usually received prior to the blockade. It is not enough to leverage high salaries.

Obviously, more sources of income are needed and it is impossible to plan them based on reduced oil activity, subject as it is to adverse objective conditions, such as the blockade of state-controlled exports.

The Venezuelan government would have to adjust its budget, redirect it and apply new tax measures to achieve a sustainable tax base that would allow it to support salaries without renouncing its management obligations. The salary and pension base of plus or minus $30 applied in 2022 can be restored, but it must be maintained without giving in to devaluation. This implies its constant adjustment, by anchoring it to a reference value or other measures of payment or compensation.

However, one must not lose sight of the fact that the salary equation is only one part of the picture. The most important thing is the containment of the devaluation.

Here, it should be explained that income calculated in foreign currency is one thing and the state budget, which is measured in bolivars, is another. The main sources of financing in bolivars are tax collection and the sale of foreign currency through the exchange system.

Banca y Negocios [Banking and Business] published a piece in which it indicated the results of a study on the behavior of the exchange system in Venezuela, and how the BCV acted in the face of these fluctuations during the year 2022.

According to the Venezuelan outlet, the BCV’s exchange intervention policy, aimed at easing the devaluation of the bolivar against the dollar, cost it approximately $5.4 billion in 2022, which translates into an average of $450 million per month, which reflects an increase of 251.79% compared to the $1.5 billion that the BCV sold to Venezuelan commercial banks in 2021.

This is a significant sum given the current conditions of the economy. Hence, it is convenient to appreciate this important financial effort to try to regulate the exchange rate.

It is evident that, during the last quarter of 2022, the Venezuelan government had more wiggle room in terms of liquidity, because unfortunately—we must remember that the country is still blockaded—there was financialization of the budget, or the fiscal deficit.

A good part of the payment of utilities for public employees and pensioners coincided with an increase in liquidity.

Here, it is convenient to stop. Every time the “monetarist” budget debate breaks out, graphs appear for years in which the increase in liquidity is not directly expressed in devaluation and inflation, nor is there considered to be a real depreciation of wages. However, what is not incorporated into this analysis is that it was when there were abundant petrodollars with which to effectuate exchange control that the exchange regulation was paid for.

These were times of an abundant supply of foreign currency in the exchange system, of a stable exchange system—because it is controlled by dollarazos—and a stronger national currency.

It is far from today’s economy, in which every dollar is eagerly acquired by sectors and companies that want to “get rid” of their bolivars—an economy in which the abundance of bolivars encourages those who have them to be willing to pay more for each dollar, which generates an increase in the exchange rate.

From what has been said until now, it can be deduced that in the current conditions of the Venezuelan economy, the increase in liquidity implies an increase in the banking relationship. Next, it implies devaluation. This, in addition, is the trigger for the deterioration of wages, then, consumption falls and, thus, the economy slows down.

Everything indicates that the new salary formula that the government will announce shortly supposes a “sustainable” composition of the budget in order to leverage it. Maybe the new salary and pensions will come to about $40 a month as a base, which will cost about $7 billion a year, but these are only speculations.

It is a budget that must be made up of taxes and a quota for exports that sidestep the blockade. Surely the government will avoid this expansion of liquidity in the same way and will maintain restrictive policies to avoid financing the budget in this way.

The importance of this scenario consists in being able to restart another cycle of recovery for the Venezuelan economy. Bringing back a certain level of consumption capacity to more than seven million wage earners and pensioners again implies revitalizing economic activities and maintaining growth, which will generate a flow of resources that may be captured through tax collection, in order to feed back into the cycle.

The Venezuelan economy is going through a somewhat unprecedented moment. The public budget has never had to be built on a base in which the oil factor is a marginal element. That’s because the national economy is still blockaded. Sometimes we forget that air exists, even though we are breathing it.

Translated by Orinoco Tribune.