Growth via the public sector.  First quarter results clearly showed the hampering effect that lingering political uncertainty has had on the recovery of economic activity.  Despite the ongoing oil bonanza, the economy grew a meagre 0.3%.  Even though the upcoming elections promise to bring to an end the political reform process and to force politicians to focus on economic policy, high oil prices and a concomitant easing of fiscal pressures are likely to forestall progress on important structural reforms.  The Chávez administration's clear preference for a more populist agenda is likely to influence the scope and quality of important new legislation that affects economic policy.  The incoming Congress is required by the new Constitution to revisit legislation covering labour, social security and pension reform, as well as the fiscal code and Central Bank independence.  If progress on the economic agenda is perceived as unsatisfactory, private investors are likely to continue to shy away from new commitments.  The impetus behind any recovery this year, therefore, is likely to be the public sector.

The growth prospects in 2000 will depend heavily on favourable oil prices, since oil revenues provide more than half of the government's fiscal resources.  Consensus Forecast data indicates that panellists believe that the public sector agenda is likely to favour economic growth, which is anticipated to recover at a healthy pace in the third and fourth quarter of this year.

Public spending on the increase.  The temptation to apportion surplus oil revenues to current spending and social outlays remains strong, particularly since the economic upturn has still not been felt by most Venezuelans and Chávez is eager to maintain his current popularity until the elections.  In mid June, the Finance Ministry reported that the government plans to raise the budget nominally by 35% this year in order to spur on the sluggish economic recovery and lower unemployment through new infrastructure projects.  As a result, the revised 2000 budget will amount to US$ 32.9 billion, up from US$ 24.4 billion in the original budget. 

The government claims that the windfall in oil revenues will finance the budget increase.  On 7 July, the average price of the Venezuelan mix of crude oils remained above US$ 25 per barrel, well above the budgeted US$ 15 per barrel.  For every US$ 1 above the budget price the government receives approximately US$ 800 million in additional revenues.  According to the new requirements for the Macroeconomic Stabilization Fund (FIEM) half of the excess oil revenues have to be used to stock up the FIEM, which is intended for use in times of low oil prices, while the other half goes to the Social Unity Fund (FUS) to finance social outlays.  If the current average oil price persists throughout the end of the year, the government will have US$ 4.1 billion in funds available from the FUS (presumably to finance the new infrastructure projects) but not sufficient to finance the full US$ 8.5 billion budget expansion.  Thus, the government will have to resort to using the FIEM resources or incur a higher fiscal deficit this year.  The official fiscal deficit target for this year remains at 2.2% of GDP.  

Wage hike announced.  Further confirming his populist credentials, Chávez decreed a minimum wage increase for private sector employees on 3 July.  The decree dictates:

·          a 20% increase in the minimum wage to Bs 144.000 a month (US$ 206);

·          that the wage increase will take effect retroactively beginning 1 May; and

·          that firms are subject to a dismissal freeze and prohibited to reduce staff during a 60‑day period (through 1 September).

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