Balance payments, deficits, etc.
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1. Use the information from the balance of payments (Exhibit 1) to answers these questions:
a. In 2015, is Venezuela living beyond its means?
b. In 2015, is Venezuela a net lender or a net borrower?
c. In 2015, is Venezuela’s central bank intervening in the foreign exchange market? If it is,
is it buying or selling bolivar?
d. What can explain the sharp changes in Venezuela’s balance of payments between 2008
and 2015?
EXHIBIT 1,
2008
2015
Current Account
Goods (exports)
Goods (imports)
Services (exports)
Services (imports)
Income (earned)
Income (paid)
Current Transfers (received)
Current Transfers (given)
31,297
96,053
-51,169
2,187
-13,274
7,539
-9,106
799
-1,732
-20,360
37,232
-36,464
1,593
-14,300
850
-9,060
594
-805
Capital Account
Capital Transfers (received)
Capital Transfers (given)
0
0
0
-3,980
0
-3,980
-31,297
-767
2,083
4,199
610
0
-27,475
1,417
-9,452
-1,912
24,340
-1,054
3,764
502
-3,455
-315
17,780
5,301
4,470
-2,653
Financial Account
Direct Investment (outward)
Direct Investment (inward)
Portfolio Investment (outward)
Portfolio Investment (inward)
Financial Derivatives (net)
Other Investment (outward)
Other Investment (inward)
Reserves Account
Net Errors and Omissions
Exhibit 1: Venezuela’s Balance of Payments (Millions of USD). Source: IMF.
2. The article mentions that Venezuela’s large fiscal deficit is financed by “money printing.”
Unlike the U.S. Federal Reserve and the central banks of many other countries, which have
a large degree of independence, the central bank of Venezuela is under absolute
government control. At any time, it can be instructed to create new money and transfer it to
the government. This way the government doesn’t have to raise taxes, cut spending, or
borrow from investors.
a. Let’s analyze the consequences of an increase in government spending paid by the
central bank on the Venezuelan economy. In particular, assume that the central bank
gives 10 billion Venezuelan bolivar (VEF) to the government, and the government uses
that money to pay for a 10 billion increase in government expenditures. This money
transfer is a gift, not a loan, and it should be treated as an increase in government
revenue. Explain the consequences of the central-bank-financed government spending
on Venezuela’s real GDP, GDP price index, real risk-free interest rate, quantity of real
loanable funds per period, the value of the Venezuelan bolivar against the U.S. dollar,
and the quantity of bolivar traded in the foreign exchange market. Take into account that:

The Venezuelan bolivar (VEF) has a fixed exchange rate against the U.S. dollar
(use the U.S. dollar as the foreign currency in the foreign exchange market).

Venezuela has low international capital mobility.

Venezuela’s economy is in the intermediate range of its aggregate supply curve.
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b. Use the conclusions you reached in the previous section to answer how the following
Venezuelan macroeconomic variables should change. In each case you must explain
why.

Unemployment rate:

Active government budget deficit:

Passive government budget deficit:

Total government budget deficit:

Real exchange rate:

Balance on current international transactions (CT):

Balance on net non-reserve-related international borrowing (NI):

Balance on the official reserves account (RA):

Monetary base:
Central bank’s foreign exchange reserves:
Venezuela gold reserves drop to record low:
Economic crisis
Venezuela’s gold reserves have plunged to their lowest level on record after it sold $1.7bn of the
precious metal in the first quarter of the year to repay debts. The country is grappling with an
economic crisis that has left it struggling to feed its population.
The Opec member’s gold reserves have dropped by almost a third over the past year and it sold more
than 40 tonnes in February and March, according to IMF data. Gold now makes up almost 70 per cent
of the country’s total reserves, which fell to a low of $12.1bn last week.
Venezuela has larger crude reserves than Saudi Arabia but has been hard hit by years of
mismanagement and, more recently, depressed prices for oil. Oil accounts for 95 per cent of its export
earnings. Despite the recent price rebound, declining oil output is likely to take a further toll on the
economy.
The IMF forecasts the economy will shrink 8 per cent this year, and 4.5 per cent in 2017, after a 5.7
per cent contraction in 2015.
Inflation is forecast to exceed 1,642 per cent next year, fuelled by printing money to fund a fiscal
deficit estimated at about 20 per cent of gross domestic product.
Venezuela began selling its gold reserves in March 2015, according to IMF data. At roughly 367
tonnes, Venezuela has the world’s 16th-biggest gold reserves, according to the World Gold Council. In
contrast, China and Russia both added to their gold holdings this year, the data show. Gold prices
have risen 15 per cent this year. Last year Venezuela’s central bank swapped part of its gold reserves
for $1bn in cash through a complex agreement with Citi.
The late president Hugo Chavez said he would free Venezuela from the “dictatorship of the dollar” and
directed the central bank to ditch greenbacks and start amassing gold instead. In 2011, as a
safeguard against market instability, Chavez brought most of the gold stored overseas back to
Caracas. The gold swap is another indication the country is desperate for cash. Venezuela and its
national oil company PDVSA have some $6bn to repay in principal and interest payments this year,
according to Russ Dallen of investment bank Caracas Capital Markets.
Seeking to reassure investors this month, Miguel Perez Abad, Venezuela’s economic tsar, told news
agencies that the country had reached a deal with its main financier China to extend loans, and that
he would further cut imports – even if shortages of basic goods are ravaging the country.
“We have a cash flow problem, but we have sufficient assets for the short term and will reprofile the
debt levels in an intelligent manner.
“There are various scenarios, and all of the proposals are extraordinary for the bondholders. They
have the absolute assurance that their securities are guaranteed,” Mr Abad told Bloomberg .
Ecoanalitica, a Caracas-based consultancy said in a note that “we consider that the payments of
external debt is a priority for the executive”.
Credit: By Henry Sanderson in London and Andres Schipani in Caracas

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