Ramirez is one of the single most politically powerful individuals in Venezuela. In addition to being the mines and energy minister, Ramirez is the president of state energy company Petroleos de Venezuela, S.A. (known by its Spanish acronym PDVSA), having held a virtually uncontested administration there since 2002. Control of the nation's largest source of government revenue makes Ramirez influential in government discussions concerning national economic policy.
In recent months, Ramirez has promoted economic reforms primarily intended to raise government revenue and ease the financial pressure on PDVSA. Enacting such reforms is inevitable, given the deteriorating state of PDVSA and the country's high levels of public spending. Former President Hugo Chavez secured public support through heavy social spending financed by PDVSA, although this imposed a heavy financial burden on the company. With oil production steadily falling and no practical means of raising it in the short term, Venezuela has begun cutting expenses wherever possible, despite the inherent risk of civil unrest. These measures will likely reduce the popularity of the ruling United Socialist Party of Venezuela over the coming months and years, leading to further protests.
Austerity at a Cost
Several economic changes planned or supported by Ramirez have been under consideration for months. Reports that Venezuela intends to unify its three exchange rates have persisted since April. At the moment there is a preferential exchange rate of 6.3 bolivares to the dollar for food and medicine imports, a second rate of about 10.3 bolivares to the dollar for items such as car parts and a third rate that distributes foreign exchange at nearly 50 bolivares to the dollar, primarily to the public sector.
On July 6, Ramirez announced that Venezuela's future exchange rate would be based on a system of foreign exchange bands, which will allow the currency's value to fluctuate between two set values, although no further details were provided. Previous reports claimed that the government was analyzing a unified exchange rate that could be as low as 23 bolivares to the dollar, or as high as 50 bolivares to the dollar. Central Bank President Nelson Merentes and Finance Minister Rodolfo Marco Torre reportedly also discussed raising the price of Venezuela's heavily subsidized gasoline. Although Ramirez has publicly supported such a measure, it has yet to be made because raising the price of fuel is a red line in economic reforms that the government is still unwilling to cross. Reducing subsidies on gasoline would raise PDVSA's revenue — it currently loses $12.5 billion on the subsidies every year by government estimates — but not without risk. The 1989 Caracazo riots, during which several hundred people were killed, resulted from an economic package that included a nearly 100 percent increase in the price of gasoline. The Maduro administration has likely held off on implementing such a measure because of the risk of similar unrest, despite the heavy costs to PDVSA.
PDVSA has also been steadily decreasing the amount of money it spends on social programs in the wake of the 2012 presidential election, although expenditure remains around a quarter of its yearly revenue. For 18 months PDVSA has reduced the flow of currency to parallel accounts like the National Development Fund, which has financed much of the country's public spending. The firm has also slowly increased the cost of certain price-controlled food items at state-run stores since March. The measure is necessary given the cost PDVSA incurs by importing heavily subsidized food.
The problem with enacting such reforms is that they will reduce public support for the Maduro administration. Venezuela's overvalued exchange rates are unsustainable, but unifying the three rates to a high exchange rate would be tantamount to devaluation. This would exacerbate the country's already high inflation, which increased by about 21 percent between January and May. A sharp devaluation, combined with steady increases in food prices since the beginning of the year, could cost the United Socialist Party of Venezuela voter support, leading to more protests. The party's bases of support have not yet widely protested against Maduro or abandoned support for the United Socialist Party of Venezuela. However, the steady rises in food prices, a potential devaluation and ongoing inflation will all directly affect this crucial body politic. The pace of these changes will likely be determined by how much and how quickly Maduro's backing erodes. These necessary but tough decisions will inevitably cost him some support.
The Venezuelan government will likely implement these reforms over the next few months. The government will continue cutting expenses and raising PDVSA's revenue wherever possible but will avoid the issue of raising gasoline prices for as long as possible. Further protests from the country's political opposition are very likely in the next few months, but the effects of the planned economic measures in the near term mean that the United Socialist Party of Venezuela will potentially alienate supporters in its own constituency. Such a loss of support will be another challenge for Maduro to manage.
