Chavez Government Raids Official Reserves as Storm Clouds Loom

The government has drawn heavily from Venezuela's official reserves to fill the financing gap on state spending in the wake of declining worldwide oil demand and export earnings.

Latest official figures show that the Venezuelan Central Bank (BCV) â€" which would once have resisted any such move â€" transferred $12.543 billion to the government. This reduced the official reserves to $29.47 billion â€" a little below the government's estimate of $30 billion for the "optimum" level of reserves required by an economy such as Venezuela's.

Anything above this watershed is deemed to be "excess" or "surplus" reserves which should be put to use rather than left to accumulate interest, according to Chavez. The transfer is legal after a reform of the Central Banking Law four years ago.

Until then, the BCV had independent control over the reserves and a remit to safeguard them in the nation's interest. However, the central bank's autonomy was curbed drastically when the law was changed in 2005.

The official rationale for the drawdown is that the funds will be used for "investment," implying state civil works projects. But there's a suspicion that a substantial part of the money if not all of it will go directly into Chávez' "missions" or social welfare programs.

The transfer comes amid growing concern about the likely ramifications of the drop in oil income on the economy and standards of living this year. The widespread conclusion is that 2009 is inevitably going to be a tough year, although nobody yet seems to have worked out just how hard times could become.

The transfer is seen as a sign that the government, which initially claimed that Venezuela could ride out the knock-on effect on oil markets of the global financial crisis, has realized this can't be so.

Economic growth slowed before the financial storm erupted after Lehman Brothers collapsed last year. At the same time, high inflation prompts warnings that the economy could implode.

Inflation, which has Venezuela at the top of the Latin American league at 30.9% last year, shows no signs of abating. If anything, economists warn that the trend is upwards and likely to remain so unless the government imposes some degree of austerity.

This basically boils down to reining in state spending, the extent of which is unclear in the absence of regular statistics about the national finances. Chávez has urged "workers" to exercise austerity in their own lives because of the crisis, but is deemed not to have followed suit on government expenditure -- although there is speculation that he is waiting until after the referendum on indefinite re-election on 15 February to announce hard times.

Meanwhile, a new study by Miguel Octavio, Head of Research at leading Venezuelan investment bank BBO, concludes that with this latest withdrawal of $12 billion from the Reserves, the money supply in circulation is now 3 times the amount of reserves held by the Central Bank -- a new high. BBO warned that when the money supply reached twice the reserves under President Rafael Caldera in 1994-1995, the country went through one of its largest devaluations ever.