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Venezuela's economy reels as oil income is cut in half

CARACAS, Venezuela — Prices for home appliances have skyrocketed, pharmacies are reporting shortages of drugs and General Motors is planning to stop car production here next month, as measures by the Venezuelan government to conserve dollars ripple through the weakening economy.

"Today, there's no milk, no rice, no beans, no chicken, no meat, no butter and no cooking oil," Francisco Quintero said as he shopped at a government store that sells subsidized staples for the poor.

President Hugo Chavez, a socialist, blames capitalism for the world's economic problems, but in this case he's partly at fault for Venezuela's troubles.

The global drop in oil prices, which is expected to halve the dollars that Venezuela earns from its oil exports this year from 2008, is beyond his control. However, Chavez spent so heavily on subsidies for the poor during the oil boom years — and failed to diversify the country beyond oil — that he doesn't have enough hard currency to maintain spending on imports.

The Central Bank is estimated to have $28 billion in hard currency, a cushion that's big enough to pay for nine months of imports. With reserves dropping, however, the government has begun limiting the dollars it provides to importers at the preferential official exchange rate. The move is likely to fuel inflation, already the highest in Latin America at 30 percent, said Domingo Maza Zavala, a Caracas-based economist. He expects the economy to contract by 1 to 2 percent this year.

Thus far, Chavez hasn't had paid a political price for the economic distress, but the first public demonstrations already have erupted.

Several thousand university students marched through the center of Caracas last Wednesday to protest the government's plans to cut spending on higher education by 6 percent.

One of Chavez's costly measures to make life better for the poor has been to establish government stores known as Mercales that sell basic foodstuffs at prices 40 percent below what supermarkets charge.

The government hiked the price of sugar by 35 percent last week, however, and is facing pressure to raise prices for other subsidized goods as well. A Mercal manager in a poor working neighborhood in western Caracas said that this was only the first of the hikes.

"We're expecting the government to raise prices for rice, milk, meat and chicken by 40 percent," said Marlon Barragan, who manages a Mercal in Catia. He said that the prices "will still be low." The only question is whether the goods will be available.

The government is three to four months behind in providing dollars to drug producers to pay for their imports of goods and raw materials, said Edgar Salas, who heads a pharmaceutical trade association in Caracas. In all, the companies are owed about $250 million, he said.

"About one-fourth of the products that you would normally find at a pharmacy aren't there now," Salas said, adding that the biggest shortages have been for drugs that treat diabetes, Alzheimer's and Parkinson's.

The government owes the airline industry $463 million, said Humberto Figuera, the president of its Caracas-based trade association.

American Airlines, Panama's Copa Airlines and Air France haven't received their preferential dollars since October, Figuera said, leading some airlines to weigh whether to reduce passenger capacity in and out of Venezuela.

In most countries, importers obtain their hard currency on the free market. However, Chavez, who's been stepping up state control over the economy, fixed the exchange rate at 2.15 bolivars per dollar in 2005 in an attempt to control inflation.

Inflation has soared, and Investors have lost confidence in the bolivar since then, however. So its black market value is about one-third of the official rate, at around 6.3 bolivars per dollar.

Importers have the choice of enduring lengthy delays for cheap dollars at the official rate or paying three times as much for them on the black market.

Home-appliance importers apparently have decided to go the black market route, because store prices for their products in Venezuela have doubled since December.

Shop owners are suffering. "It's like this most of the day," said Gasem Moama, the owner of an appliance store bereft of customers in downtown Caracas. One salesclerk leaned on a stove while another stared off into the distance. "People who do come into the store leave shocked by the prices."

Victoria La Roche came to another downtown home-appliance store planning to buy a toaster oven.

She took one look at the price — 490 bolivars ($78 at the black market rate of exchange) up from 390 bolivars ($62) a month ago — and headed toward the exit.

"It's too expensive," La Roche said, before turning on her heel.

Finance Minister Ali Rodriguez said that the government was planning to take steps to reduce delays in granting cheaper dollars.

Venezuela's car industry also faces dire problems.

GM's Venezuelan unit is planning to halt new-car production in June because Cadivi, the government agency that approves requests for cheaper dollars, is taking up to nine and a half months to approve the cheaper dollars for imported car parts.

GM Venezuela, which sells nearly half the cars bought here, owes $1.2 billion to foreign suppliers.

"Some of our national providers and dealerships are in precarious conditions and confront the possibility of closing definitively, causing greater unemployment as well as shortages of vehicles, parts and services," the company said last week.

Facing looming cash shortages, the government is planning to reduce overall spending by about 7 percent this year.


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