JPEG - 15.3 kb

Venezuela’s President Hugo Chávez wants to spend some of the country’s foreign reserves, and if bank officials disagree, the question could be submitted to a national referendum, said Chávez on Saturday. The question has flitted in and out of public debate recently, but the government’s ambitious social spending is forcing them to look for a short-term financial salve.

Opposition to Chávez and his “Bolívarian revolution,”-named for Latin American independence leader Simón Bolívar-has recently taken an economic form. Since he came to power in 1998, Chávez faced down several general strikes, including one that led up to a short-lived coup against him in April 2002, and one that shut down the oil industry from December 2002 to February 2003. The latter was an especially sharp blow, given that oil revenues account for approximately 80 per cent of export earnings, and 40 per cent of Venezuela’s GDP.

In the past, drops in Venezuela’s international reserves have largely been related to periods of economic and political instability in the country. The drop in 1998 was caused by massive capital flight as investors sent their money to Miami upon Chávez’s inauguration.

The sharpest dip came in early 2002 when the world oil prices dropped and the opposition launched a campaign against the government’s proposed land reform and the restructuring of the state oil company PDVSA. This unrest, in which the union federation and the employer federation joined forces, culminated in the April coup, which was overturned 48-hours later by massive pro-Chávez protests and loyal elements of the military.

Finally, the oil industry shutdown in late 2002 to early 2003 caused a further drop bringing reserves to the lowest point in Chávez’s tenure at under US$14 billion.

Since 2002-03, however, oil prices have continued a seemingly never-ending climb, and Chávez has bested the opposition for the near future, adding to the country’s stability. Aided by capital and price controls imposed in 2003, the reserves now approach an all-time high of US$28 billion.

JPEG - 15 kb

According to Chávez this is much more than the Venezuelan currency-the Bolívar-needs, and US$8 billion of it should be freed up to be spent on social programs. But Domingo Maza Zavala, the director of the Central Bank, disagrees. Zavala told Union Radio last week that withdrawing the bank’s international reserves could create an imbalance that would ultimately fuel inflation.

Chávez denies this, insisting in remarks on Saturday that the reserves need be no higher than US$20 billion, and that the excess should be used to fund crucial social programs for the country’s estimated 70% who are poor (less than US$2 dollars/day) instead of being tied up in foreign banks.

Chávez has asked deputies to the National Assembly (AN) to draft legislation to impose a limit on the Central Bank’s foreign exchange holdings at around US$20 billion. “It’s absurd that having all these needs we have so many reserves,” said Chávez. “With $20 billion it would be more than enough,” he added. Though he has vaguely identified social needs as the motivation for spending the reserves, Chávez has yet to say exactly how he intends to spend the “excess.”

If necessary, the question will be put to the Venezuelan people via a referendum, said Chávez.