Wild Spending Gives Way to Caution : Venezuela’s President Halts Economic Decline

After a year of self-imposed austerity, President Jaime Lusinchi has halted a four-year decline in Venezuela’s economy and restored the international credit of this once spendthrift oil-producing country.

On weekends, the discotheques in Las Mercedes are jammed with dancers wearing local versions of Paris and New York fashions. The sporty automobiles can barely find places to park around the best restaurants and boutiques. There is no shortage of imported whiskies, and Venezuelans rank among the world’s largest consumers per capita.

“We don’t go to Miami for weekends, the way people did before, but we still can have a good time here,” said a young lawyer at La Pimenta, a crowded wine-and-cheese cantina.

But the evidence that Venezuelans can still indulge consumption habits acquired during the oil boom are accompanied by other clear signs that some belt-tightening is taking place, primarily in the government sector. The days of wild spending and uncontrolled debt are over.

In fact, the government under Lusinchi, who took office Feb. 2, 1984, saved so much money last year from oil exports, after a 32% devaluation of the bolivar, its currency, that it accumulated a budget surplus equal to 4% of the gross national product. Instead of spending the windfall on new projects, it reduced the money in circulation and paid off some internal debts.

“The recovery program has been a success,” said U.S. Ambassador George W. Landau, a career diplomat with expertise in international economics.

Foreign bankers evidently feel the same way. They have agreed to refinance $20.7 billion of Venezuela’s $27 billion in foreign public debt over 12 years at interest rates lower than those offered other Latin American borrowers, 10 of whom joined Venezuela in Santo Domingo, Dominican Republic, on Thursday to discuss the debt situation.

The recovery program has been executed without Venezuela’s entering into a “stabilization agreement” with the International Monetary Fund, a politically unpalatable arrangement that Lusinchi rejected. But with greater flexibility in exchange rates and price management, the government has achieved better results than have other Latin American countries operating under the IMF’s supervision.

Politically, this reversal of Venezuela’s recent economic disorder has been managed without the social and labor discord that has buffeted other Latin American governments, which have been forced to reduce wages, increase unemployment and eliminate imports as the price for debt relief.

“The president’s popularity remains as high as when he was elected last year because the public knows that financial irresponsibility here had to come to an end,” said Simon Alberto Consalvi, a Cabinet minister with the title of secretary of the presidency.

Consalvi, a member of the president’s Democratic Action party, points to public opinion polls that show that Lusinchi is regarded as doing a good job by more than half of those polled.

In the last year of the previous government, only 12% of the poll sample gave the same rating to former President Luis Herrera Campins of the Christian Democratic COPEI Party.

A key factor in Lusinchi’s favor is the strong identification between the governing Democratic Action Party and Venezuela’s Workers Confederation, the country’s dominant labor organization. Despite declining real wages last year, there were few strikes and labor demands were channeled through government-sponsored committees on wages, employment and prices.

Inflation was contained last year at 15%, according to official figures, but wages were not increased. The government decreed a transportation bonus for all workers, public and private, after fuel prices were increased and fares rose. But removal of subsidies or price controls on consumer goods put wage earners on an austerity regime.

This stringency was also reflected in government finances. In 1982, when Venezuela’s finances were in crisis, the public sector deficit accounted for 9% of the country’s total production of goods and services. The consequent inflation forced a devaluation in 1983 that toppled confidence in the once-solid Venezuelan bolivar. But even before the devaluation, rich Venezuelans shipped an estimated $20 billion out of the country to invest in Florida real estate, high-interest U.S. securities and other capital havens.

This capital has not started coming back yet, but the flight has been stemmed. The central bank announced that international reserves had built up by the end of last year to $12.7 billion after a year in which the trade surplus was $4 billion.

With this strong international reserve position, Venezuela has successfully negotiated with the steering committee of some 550 foreign creditor banks a 12-year refinancing of the foreign public debt coming due between 1983 and 1988. It paid nearly $5 billion last year in capital and interest payments that were in arrears. Under the new terms, Venezuela will theoretically pay off all of its $27 billion public foreign debt by 1998.

Finance Minister Manuel Azpurua said government concern is now shifting toward achieving sustained, non-inflationary growth. “We need stabilization and investor confidence, not just to pay our debts, but to resume growth,” he said.

Now that the foreign debt is being repaid, Azpurua said he was confident that in the future foreign lending will be available for public projects and key investments.

The government has submitted to congress the Seventh National Plan, a blueprint for economic and social development until 1989. The program emphasizes expansion of domestic agriculture, because 50% of the food supplies for Venezuela’s 16 million people is imported. But this is a long-term effort, involving investments in irrigation, storage and agricultural credit.

The plan also proposed a substantial increase in public spending this year to create jobs in small public works, as well as training for the unskilled young workers entering the labor force. Unemployment has remained stubbornly high--at 14% of the country’s estimated 4 million workers.

Spending Proposal

Minister of Planning Luis Raul Matos Azocar, who resigned after completing the Seventh National Plan draft, proposed increased public spending this year of about $3 billion. Showing continuing caution, Minister of Development Hector Hurtado has lowered the figure to $1.5 billion.

Fear of inflation as well as the prospect that Venezuela’s oil revenues will decline this year from last year’s $14.9 billion underlie much of the caution. The National Plan estimated $14.7 billion in oil income this year, but if the price of Venezuelan oil drops from the level of $27 a barrel last year, oil income could drop to below $13 billion. Oil accounted for 90% of Venezuela’s export earnings last year.

Even so, Venezuela can easily meet its new foreign debt schedule, requiring about $5 billion in payments. At worst, reserves would decline, since import levels will continue low, at an estimated $8 billion.