Análisis UK

Michelle Lazzari de Otero

The implications of an agreement with the IMF

The Possibilities of a Coherent Adjustment

e present extracts from a paper titled "The Possibilities of a Coherent Adjustment" by a team coordinated by Luis Carlos Palacios of INSURBECA 1. It is a 30 page paper and those wishing to read the whole text may get a copy from Venezuela Analítica.

This paper analyzes the economy's prospective for the years 96-98 under the premises of the implementation of coherent and global adjustments program. There is an evaluation of the probable effects of a change in the way how Venezuelan economy is conducted and of the instrumentation of a stabilization and structural reforms plan aimed at correcting the unbalances in the economy and at securing medium term institutional reforms supported by the International Monetary Fund and other multilateral organizations.

In the authors' opinion, discussions on economic policy have been centered on the measures to be adopted and their short term effects. It is with a medium term vision that it is possible to evaluate the potential of a coherent adjustments program, since the benefits thereof may only be perceived after having initiated the correction of basic macroeconomic unbalances, structural reforms and change in the economic agents' expectations.

There are five sections in the paper:

Exposure of the main unbalances and distortions shown by the Venezuelan economy.
The features of possible agreements with international organizations (I.M.F.).

The MODEVEN model used in determining macroeconomic assumptions.

Main features of the adjustment program and

final conclusions showing some of the difficulties that may jeopardize the exposed program's instrumentation.

The first part summarizes the country's economic standing, resulting, among other things, from the collapse of the current government's economic policy, of which the conceptual premises were laid in the 1996 Budget Act. Its central target was the control of inflation and it failed because inflation was assumed as a phenomenon not being subject to the economic agents' expectations based on estimated information regarding macroeconomic unbalances. To make matters worse, it relied on unrealistic assumptions as to how to bridge, financially, the budget gap, taking for granted that it was possible to do it entirely by means of internal indebtedness.

Cuadro 1
Situación fiscal 1995
Base caja
	MMM Bs.	% PIB
1. Ingresos totales	2.083	16,5
2. Gastos totales	2.877	22,8
3. Déficit global (2 - 1)	794	6,3
4. Amortización	356	2,8
5. Financiamiento bruto (2 - 1 + 4)	1.150	9,1

Fuente: OCEPRE 1995

Cuadro 2
Programa de Financiamiento 1995
	MMM Bs.
1. Ley Paraguas 95 (programas y proyectos)	150
- Recursos internos	78
- Recursos externos	72
2. Ley Paraguas 95 (amortización deuda y otros)	150
3. Ley Especial de Endeudamiento	399
4. Letras del Tesoro	53
5. Financiamiento BCV (Servicio TEM)	160
6. Bonos de FOGADE (capitalización)	193
7. Otros títulos valores ya emitidos	33
8. Variación de Tesorería	12
9. Total financiamiento	1.150

Fuente: OCEPRE 1995

The fiscal gap's -and generally that of the restricted public sector- and the debt's service requirements -basically the foreign debt facing serious arreas- are two catalysts having contributed to the collapse of the economic course originally followed and prompted the search of an agreement with the I.M.F. This quest for an understanding with the I.M.F. is explained by the fact that when the intention was to use the official rate of exchange as a nominal anchor to hold prices and when trying to implement a policy of easy provision of foreign currency -notwithstanding the control-, an important drop in the level of international reserves was induced. The adopted foreign exchange control policy was an error, in view of such measure's isolated nature; however, it is the authors' opinion that once such policy had been chosen it should have been coherently implemented.

Summing up, the failure of the government's measures becomes evident when 1995 ends with serious fiscal sector unbalances , considerable problems in the balance of payments and an exhausted foreign exchange system . The inflation rate for November 1995 was 5% and the 1995 inflation will easily top the 40% goal expected by government.

The second part of the paper shows the modalities and features of the agreements with the I.M.F. One may thus observe that the I.M.F. provides financial assistance in four different ways: Reserve Tranches, Credit Tranches, Standby Agreements, Extended Facilities. There is a summary of each of such arrangements and it is said that in the case of Venezuela, in June 1989 an Extended Facility agreement was entered with the Fund for 3,703 million SDRs of which only 1,757 were drawn as a consequence of the failure in reaching some goals and of the overcoming of the most serious balance of payments' problems. In view of Venezuela's current problems, at least a Standby Agreement would be advisable, which could become an Extended Facility Agreement.

Of course, such agreements do require fiscal and foreign exchange area adjustments, but then Venezuela does need already such adjustments even without I.M.F. agreements. The authors affirm that the key element for structural reforms lies in the internal strength that such objective may have and in the coherence in formulating a concrete and clear reforms program and the backing secured for it. As of this day, there are no signs that the Government is addressing such objective.

A model is used in order to determine the effects of and adjustment program in the economy. The econometric and accounting relations model used by the team is called MODEVEN and it has been designed to reach 4 objectives:

to analyze the national economy;

to simulate the short term impact of the fiscal, monetary and exchange policies;

a consistent integration of economic policy variables, functions reflecting the economy's behavior and appropriate accounting in real and prices, fiscal, monetary and external (balance of payments) areas and, finally

to rely on an instrument being easy to handle and read.

Based on econometric estimates made with said model (MODEVEN) a simulation was made representing a stabilization and structural reforms program. Such program implies scenarios for the years 1996-97 and 98 with the central elements being the need to return to fiscal equilibrium and to control inflation. It is a stabilization and structural reforms with I.M.F. financial and other multilateral organizations' financial assistance.

The obtainment of fiscal adjustment and the maintenance thereof in balance or surplus is an utmost condition is inflation is to be reduced and use is to be made of the rate of exchange as a dynamic anchor. The program shown must not allow for overvalue in the exchange rate. Importance lies in the fact that both from the fiscal as from the monetary side there must be rules which are restrictive enough as to have a rate of exchange that is compatible with inflation reduction. Growth dynamics would result from the structure of public expense turned to investment, infrastructure and human resources. One is dealing with the harmonization of a typical exchange policy under expenditure switching with anti-inflationary objectives. In the fiscal area an increase of the sales tax rate to 16.5% is assumed together with an improvement in all kinds of taxes' collection; a hike of the price of gasoline in the range of 70% to 75% of the f.o.b. price is also assumed; there is a rejection of taxes on financial transactions in view of its inefficiency in time, its negative effects on the financial system and of the facts that its fosters the appearance of foreign assets portfolios.

The exogenous variables used were: Real and Prices Area, Fiscal, Monetary and Balance of Payments Area, that have been determined as such based on the information sources used. Analysis of the results based on the chosen exogenous variables may be seen in the figures Inflation Rate, G.D.P. and Fiscal Accounts.

One should point out that when reviewing those results one may observe that the dynamics of the oil sector and of that of general exports, added to the positive effect on fiscal expenditures of a deceleration of inflation, lead to a re-establishment of growth, in 1997, of the non oil economy, placed at 7% p.a. during 1996-98 with a reduction of inflation to 25% in 1998. One may see also in the figure of fiscal accounts that in this area the restriction imposed on expenditure evolution and the new conditions for non oil taxing allow for a reduction of fiscal deficit and a small surplus in 1998.

Fiscal Accounts
(as % of the GNP)

1993 1994 1995 1996 1997 1998 Ingreso total 16.74 17.77 16.26 19.22 18.96 19.75 Ingreso corriente 16.57 16.41 16.26 19.22 18.96 19.75 Ingreso petrolero 9.97 9.18 7.66 8.27 8.61 9.45 ISLR 6.77 5.70 4.47 4.20 4.49 5.18 Regalías 3.20 3.48 3.18 4.07 4.12 4.27 Ingreso no petrolero 6.60 7.22 8.61 10.96 10.34 10.30 Impuestos directos 2.10 1.76 1.83 1.99 2.00 2.00 Derechos de importación 1.84 1.18 1.53 1.53 1.65 1.73 Impuesto a las ventas 0.66 2.82 3.90 4.64 4.68 4.67 Derivados 0.64 0.39 0.33 1.61 1.01 0.96 Otros 1.35 1.07 1.01 1.18 1.01 0.93 Ingresos de capital 0.17 1.36 0.00 0.00 0.00 0.00 Débito bancario 0.00 1.31 0.00 0.00 0.00 0.00 Otros 0.17 0.06 0.00 0.00 0.00 0.00

Gasto total 20.05 25.26 22.94 22.88 20.30 19.57 Gasto corriente 15.31 18.24 17.70 19.25 16.55 15.28 Salarios 4.56 4.52 4.18 3.20 3.08 2.96 Bienes y servicios 0.97 1.01 0.94 0.69 0.64 0.62 Intereses 3.03 4.47 4.77 7.13 5.27 3.89 Externos 2.34 2.76 2.33 2.97 2.64 2.44 Internos 0.69 1.71 2.44 4.17 2.63 1.44 Transferencias corrientes 6.51 5.12 5.83 6.86 7.34 7.61 Pérdidas del BCV 0.00 2.38 1.91 1.12 0.00 0.00 Gastos extrapresupuestarios 0.24 0.73 0.07 0.24 0.22 0.20 Gasto de capital 4.75 7.02 5.24 3.64 3.75 4.30 Formación bruta de capital fijo 1.02 0.60 0.60 0.88 1.20 1.75 Otros gastos de capital 3.73 6.41 4.64 2.75 2.55 2.55
DEFICIT (SUPERAVIT) FISCAL 3.31 7.49 6.67 3.66 1.34 -0.18

Fuente: INSURBECA, C.A.

The work concludes with an accent on four aspects emerging from the review of the chosen model "assuming that a coherent structural adjustments program has been applied".

Simulations within the scenario assume that after an initial period of price contraction and hikes, economic growth and medium term reduction of inflation are viable.

The difficulty in applying an adjustments program is found in government;

more competence in the government's economic team is desirable. It appears that there isn't any environment nor ease for heteredox policies. The most serious difficulties are found in the implementation of the structural fiscal adjustment. Backing of Congress is also important if one is to implement a program of this kind.

The document ends by pointing out that it pretends to be a viable option within the country's current context and it considers that, in order to be so, importance should be given to the attainment of two kinds of reforms: the modification to the severance payments system, the creation of a pensions system that may act as an incentive for savings, for an increase in employment opportunities and nominal salaries without prompting additional inflationary pressures and resulting accordingly in an increase in real salary. Another important reform relates to the possibility of filling-up the institutional frame of an open oil policy which could foster flows of productive capital and help to reduce the foreign debt pressure.

INSURBECA is the Instituto de Urbanismo C.A., of the Faculty of Architecture of the Universidad Central de Venezuela. Edited nov/dec 1995.

The original work can be obtained from its authors to the e-mail address. Alternatively, please contact the Editor, (or the writer-in-charge) whom shall forward the correspondance to the author.

Translation by Carlos Armando Figueredo

URL: http://www.internet.ve/analitica

Messages to the writter in charge: motero@ccs.internet.ve