Venezuela's economy reels as oil income is cut in half

President Hugo Chavez, a socialist, blames capitalism for the world’s economic problems, but in this case he’s partly at fault for Venezuela’s troubles.

The global drop in oil prices, which is expected to halve the dollars that Venezuela earns from its oil exports this year from 2008, is beyond his control. However, Chavez spent so heavily on subsidies for the poor during the oil boom years — and failed to diversify the country beyond oil — that he doesn’t have enough hard currency to maintain spending on imports.
The Central Bank is estimated to have $28 billion in hard currency, a cushion that’s big enough to pay for nine months of imports. With reserves dropping, however, the government has begun limiting the dollars it provides to importers at the preferential official exchange rate. The move is likely to fuel inflation, already the highest in Latin America at 30 percent, said Domingo Maza Zavala, a Caracas-based economist. He expects the economy to contract by 1 to 2 percent this year.

Thus far, Chavez hasn’t had paid a political price for the economic distress, but the first public demonstrations already have erupted.

Several thousand university students marched through the center of Caracas last Wednesday to protest the government’s plans to cut spending on higher education by 6 percent.

One of Chavez’s costly measures to make life better for the poor has been to establish government stores known as Mercales that sell basic foodstuffs at prices 40 percent below what supermarkets charge.

The government hiked the price of sugar by 35 percent last week, however, and is facing pressure to raise prices for other subsidized goods as well. A Mercal manager in a poor working neighborhood in western Caracas said that this was only the first of the hikes.

Miami Herald