Real GDP increased by 4.8% in 2008, indicating that the economic recovery after the recession of 2002-2003 is slowing down. This economic recovery, which featured growth of over 10% from 2004-2006, was driven by a large increase in government expenditures, based on an oil windfall, which in turn generated higher consumption levels.
The Consumer Price Index increased by 31.9% in 2008, following increases of 18.7% in 2007, 13.7% in 2006, and 16.0% in 2005. Inflation for 2009 is expected to be 30%.
All requests for foreign exchange at the official exchange rate must be approved by the National Exchange Control Administration (CADIVI), and the Central Bank (BCV) completes all legal purchase and sale of foreign currency. In January 2008, the Venezuelan Government adopted the "bolívar fuerte" as its new currency, effectively redenominating the previous currency, the "bolívar," by removing three zeroes (1 bolivar fuerte=1,000 bolívars). The current exchange control regime rate for U.S. dollar exchange is Bs.F. 2.145=U.S. $1.00. There is a legal alternative exchange market (called the parallel or “permuta” market), accessed through a bond swap mechanism; this unofficial exchange rate is far higher. BCV international reserves were U.S. $43 billion at the end of 2008.
The Venezuelan Government dominates the economy. The state oil company, PDVSA, controls the petroleum sector. Government companies control the electricity sector and important parts of the telecommunications and media sectors. In 2008, the government nationalized cement and steel producers, as well as select companies in the milk and meat distribution sectors. In 2009 it nationalized Banco de Venezuela, one of the country’s largest private banks, as well as numerous companies in the oilfield services sector, the steel briquette industry, and a processed rice plant owned by a U.S. company. These and previous nationalizations, as well as other threats to property rights and an uncertain macroeconomic environment characterized by high inflation and foreign exchange controls, have led to reduced space for the private sector and low levels of private investment.
There is considerable income inequality. The Gini coefficient was 0.42 in the first half of 2007. According to government statistics, the percentages of poor and extremely poor among Venezuelan population were 20.7% and 7.9%, respectively, in the second half of 2007.
Although economic growth has been impressive, as a result of the oil windfall, many in the Venezuelan business community remain very concerned about President Chavez's vision for "21st Century Socialism" and what it portends for the private sector. With oil prices down more than 50% between July 2008 and early June 2009, the Venezuelan economy appears to be struggling in 2009.
Petroleum and Other Resources
Economic prospects remain mostly dependent on oil prices and the export of petroleum. The oil sector accounts for roughly 30% of GDP, 90% of export earnings, and more than half of the central government's ordinary revenues. Venezuela remains a leading supplier of imported crude and refined petroleum products to the United States.
In the 1990s, the Government of Venezuela opened up much of the hydrocarbon sector to foreign investment, promoting multi-billion dollar investment in heavy oil production, reactivation of old fields, and investment in several petrochemical joint ventures. By the late 1990s almost 60 foreign companies representing 14 different countries participated in one or more aspects of Venezuela's oil sector. On November 13, 2001, under an enabling law authorized by the National Assembly, President Chavez enacted a new Hydrocarbons Law, which came into effect in January 2002. This law replaced the Hydrocarbons Law of 1943 and the Nationalization Law of 1975. Among other things, the new law provided that all oil production and distribution activities would be the domain of the Venezuelan state, with the exception of the joint ventures targeting extra-heavy crude oil production. Under the new law, private investors cannot own 50% or more of the capital stock in joint ventures involved in upstream activities. The new law also provided that private investors could own up to 100% of the capital stock in downstream ventures. A Gaseous Hydrocarbons law promulgated earlier by the Chávez government also allowed substantial participation by private investors with respect to gas production ventures.
During the December 2002-February 2003 general strike, petroleum production and refining by PDVSA, the state-owned oil company, almost ceased. Despite the strike, these activities eventually were substantially restarted. Out of a total workforce of 45,000, over 20,000 PDVSA management and workers were subsequently dismissed because the government asserted they had abandoned their jobs during the strike. Current levels of production remain a subject of debate, with considerable difference between the levels cited by the Venezuelan Government and those cited by private sector and international observers.
In early 2005, the government informed companies with operating service contracts for mature fields that they must migrate the contracts to joint ventures that conform to the 2001 Hydrocarbons Law. The government threatened to seize fields operating under the services contracts on December 31, 2005 if oil companies did not sign transition agreements to migrate their contracts. All but three companies ultimately signed joint venture agreements with the government. One company was bought out by its partner, while the fields operated by two other companies were ultimately taken over by the government. One of these disputes was handled by negotiation, while another company decided to take its case to international arbitration. In early 2007, President Chávez announced that the Venezuelan Government would take a majority government share in the remaining foreign investments in the oil sector, including the four heavy-oil "strategic associations" in the Orinoco belt. Several international oil companies agreed to migrate their interests to joint ventures with majority government ownership. Two U.S. companies decided to pull out of Venezuela and have filed for international arbitration.
In May 2009 the National Assembly passed an oil services sector law reserving to the state all primary hydrocarbons activity. This legislation laid the foundation for the expropriation of nearly 80 oil services companies, including at least three U.S. firms. The National Assembly in June passed legislation to require private-sector petrochemicals producers to enter joint ventures with Petroquímica de Venezuela (Pequiven, the state chemicals company). This will affect many foreign companies operating in Venezuela.
Trade, Manufacturing, and Agriculture
Despite political tensions between the U.S. and Venezuela, the U.S. remains Venezuela's most important trading partner. In 2008, bilateral trade topped U.S. $60 billion. Venezuelan exports to the U.S. were U.S. $51.4 billion (accounting for at least 60% of total Venezuelan exports), and U.S. exports to Venezuela were $12.6 billion (or 26% of total Venezuelan imports). The U.S. is the single most important customer for Venezuelan oil. Venezuela shipped an average of 1.2 million barrels of crude oil and petroleum products per day to the U.S. in 2008, a figure which accounts for at least half of Venezuelan oil exports and 9% of U.S. oil imports.
The Government of Venezuela has taken a vocal role against the proposed Free Trade Area of the Americas (FTAA). Its stated goal is to expand its Bolivarian Alternative for the Americas (ALBA) project and develop a South American bloc (see Foreign Relations).
Manufacturing contributed an estimated 16% of GDP in 2008. The manufacturing sector continued its recovery that started in 2004, but remained hindered by a marked lack of private investment, and, lately, by a highly overvalued official exchange rate that inhibits exports and makes it difficult to compete against imports. Venezuela manufactures and exports steel, aluminum, textiles, apparel, beverages, and foodstuffs. It produces cement, tires, paper, fertilizer, and assembles cars both for domestic and export markets.
Agriculture accounts for approximately 4% of GDP, 10% of the labor force, and at least one-fourth of Venezuela's land area. Venezuela exports rice, cigarettes, fish, tropical fruits, coffee, cocoa, and manufactured products. The country is not self-sufficient in most areas of agriculture. Venezuela imports about two-thirds of its food needs. Through 2008, U.S. firms exported $1.6 billion worth of agricultural products, including wheat, corn, soybeans, soybean meal, cotton, animal fats, vegetable oils, and other items to make Venezuela one of the top two U.S. markets in South America. The United States supplies roughly one-quarter of Venezuela's food imports.
Labor and Infrastructure
Official unemployment statistics registered 6% unemployment at year-end 2008. Unofficial estimates are significantly higher. The public sector employs about 13% of the work force, while less than 1% work in the capital-intensive oil industry. About 18% of the labor force is unionized, and unions are particularly strong in the petroleum and public sectors. The "informal" sector accounts for some 45% of the work force, or 5.5 million people.
Labor unions allege the government repeatedly violates International Labor Organization (ILO) agreements on freedom of association and the right to organize and bargain collectively. Specifically, the Constitution and laws permit undue influence in the internal elections of unions. The government has told the ILO it will correct the problem; draft legislation remains pending in the National Assembly.
Venezuela has an extensive road system. With the exception of air service, transportation has failed to keep pace with the country's needs. Much of the infrastructure suffers from inadequate maintenance. Caracas has a modern subway but only one functioning rail line serves the rest of the country. Venezuela’s ports, recently nationalized, do not currently match the country’s status as a trader. Venezuela’s importers and exporters complain of delays and high costs.
Information by U.S. Department of State