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Venezuela increasing oil prices, minimum wage to battle shrinking economy

In 2015, Venezuela's economy shrank over 5 percent and suffered 180 percent inflation.
By Andrew V. Pestano Follow @AVPLive9 Contact the Author   |   Feb. 18, 2016 at 1:22 PM

CARACAS, Venezuela, Feb. 18 (UPI) -- Venezuelan President Nicolas Maduro announced sweeping measures to deal with an escalating economic crisis that include increasing the minimum wage by 20 percent, introducing a complex devaluation of currency and an increase in gasoline prices -- the first in nearly 20 years.

The minimum wage hike and a pension payment increase come into effect in March. The government will also increase food subsidies in order to raise the "real income" of workers. In 2015, Maduro approved four minimum wage increases.

"Notice to pensioners and workers of the country: We will combine the first increases this year to defend the real income," Maduro said in a televised address Wednesday.

Global investors have grown concerned about a Venezuelan default on significant debts in 2016, which could further deteriorate a struggling economy. In recent years, the government has been unable to pay to import basic foods and medicines -- leading to social unrest. Historically low oil prices mean Venezuela could export $27 billion worth of oil in 2016, down dramatically from $75 billion in 2014.

The government funds for the recent measure will come from new taxes, the higher gasoline price and a new currency exchange system.

Venezuela will weaken the primary exchange rate used for essential imports, such as food and medicine, from 6.3 Venezuelan bolivars per dollar to 10 bolivars per dollar. An intermediate rate, known as the Supplementary System for Administration of Foreign Exchange, or SICAD, that last sold dollars for about 13 bolivars, was eliminated.

In exchange, Venezuela will enhance the Marginal System of Foreign Exchange, or SIMADI, with a Complementary Floating System that officially began trading at a weaker 200 bolivars per dollar.

The complex devaluation will allow the state-owned Petróleos de Venezuela S.A., or PDVSA, oil company to gain more bolivars for each dollar of oil revenue. The devaluation may also force the government to increase the cost of food staples, such as rice, flour and bread, to generate more revenue -- partially offsetting the "real income" increase.

The government will also benefit from a per-liter oil price increase from 9.7 Venezuelan cents, or centavos, to 6 bolivars. In comparison, that amounts to $0.94 per gallon at the latest, and soon-to-change, official exchange rate or $0.11 per gallon using the newly-established SIMADI exchange rate. Maduro's socialist government could save about $800 million a year with the oil price increase.

Venezuelans will still likely enjoy the least expensive gasoline in the world, even though shortages of basic foods and medicines are common and prices are high. A recent drought in the South American country has also exacerbated an electricity shortage.

"Venezuela has the cheapest gasoline in the world," Maduro said when announcing the price increase. "This is a necessary measure, I assume the responsibility."

During his 14-year rule of Venezuela, former President Hugo Chavez never increased the price of gasoline. Among other reasons, fuel and gasoline price increases in 1989 led to the deadly "Caracazo" riots, which in part -- along with an unpopular oil price increase in 1996 -- helped pave the way for Chavez to assume power after the 1998 elections.

It costs PDVSA about 2.7 bolivars to produce one liter of gasoline. The company has been selling oil in Venezuela at a loss for years, especially in 2013 when it lost $15.2 billion to maintain the country's fuel subsidy amid a currency crash.

Soon after Maduro announced the measures, the Central Bank of Venezuela unexpectedly released its official Consumer Price Index, which showed a 180.9 percent inflation increase in 2015. The overall economy shrank at least 5.7 percent.

Central Bank of Venezuela: Consumer Price Index

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