Venezuela WT/TPR/S/108
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I. THE ECONOMIC ENVIRONMENT
(1) INTRODUCTION
1. The performance of the Venezuelan economy has been highly variable in recent years, largely
because of its heavy dependence on oil.  Despite efforts to diversify the economy, supported by a
variety of incentive schemes (chapter III), the weight of the hydrocarbons sector actually increased in
the period 1996-2001, while the relative size of sectors such as manufacturing industry declined.  The
country’s heavy reliance on the oil sector generates an anti-export bias in other sectors and makes
them less competitive, by putting pressure on costs and making it harder for domestic producers tocompete on international markets.  In addition, the behaviour of the exchange rate, managed in a
currency-band system up to February 2002, also eroded competitiveness in the non-oil sector.  The
subsequent floating of the exchange rate should provide a major stimulus to Venezuelan production
by eliminating the exchange rate’s anti-inflationary anchor role.
2. In keeping with the situation described above, Venezuela’s external trade is poorly diversified
in terms of export products, owing to a lack of comp etitiveness, and it is also limited in destination
terms.  Hydrocarbons account for over 80 per cent of all merchandise exports, and nearly 60 per cent
of total exports go the United States.  Over 80 per cent of Venezuela’s imports consist of
manufactured products, particularly machinery and transport equipment, vehicles and autoparts, office
machinery and telecommunications equipment, and automotive and chemical products.  Theconsolidation of regional preference agreements has yet to produce significant growth in Venezuelan
exports under these schemes, although imports have increased, particularly from Colombia and
Mexico.
3. Following a period of modest growth in 2000 and 2001, the economy slid into recession in
2002, and fiscal accounts deteriorated.  In response to a substantial rise in the fiscal deficit, steps were
taken in May 2002 to reduce the shortfall by imposing revenue collection and raising several VAT
rates.  Major expenditure cuts were resisted, in view of the recession detected early in the year.Recourse to domestic borrowing to cover the deficit has aggravated the fiscal situation still further,
and the widening fiscal gap has also fuelled inflation in 2002.
(2) R
ECENT ECONOMIC TRENDS
(i) Structure of the economy
4. Oil is by far the most important sector of the Venezuelan economy, accounting for more than
one-quarter of gross domestic product (GDP), over 80 per cent of merchandise exports and about one-
third of fiscal revenues.  Wide fluctuations in oil prices have made the sector highly volatile, and this
has affected the behaviour of GDP and trends in other sectors.  The latter is mainly explained by the
linkage between the oil sector and activities such as financial and professional services, construction,
and certain manufacturing activities.
5. Generally speaking, the changes that occurred in the structure of GDP during 1996-2001
reflect a strengthening of the oil sector’s role in the economy, and a reduction in the relative
importance of manufacturing industry (Table I.1).WT/TPR/S/108 Trade Policy Review
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Table I.1
Sectoral composition of gross domestic product, 1996-2001
(Percentage share and annual rate of change on a volume basis)
1995 1996 1997 1998 1999 2000 2001 1996 1997 1998 1999 2000 2001 Economic activity
Percentage of total Rate of change (%)
Oil activities 24.6 26.5 27.3 27.8 27.4 27.4 26.7 7.7 9.4 2.0 -7.4 3.2 -0.9
Oil and natural gas 19.8 21.5 22.2 22.6 21.8 22.1 .. 8.4 9.9 2.1 -9.5 4.6 1.1
Refining 4.8 5.1 5.1 5.2 5.6 5.3 .. 4.8 7.1 1.3 1.6 -2.5 -9.1
Non-oil activities 73.5 71.8 70.4 69.6 70.1 70.0 70.4 -2.5 4.2 -0.9 -5.4 3.0 4.0
Goods-producing activities 29.4 28.8 28.9 28.0 27.1 26.9 26.7 -2.3 6.6 -3.0 -9.0 2.3 4.8
Agriculture 4.8 4.9 4.7 4.7 4.9 4.9 4.9 2.0 2.4 0.6 -2.1 2.4 2.6
Mining 0.9 0.9 0.9 0.9 0.8 0.9 0.9 2.6 6.7 -4.4 -10.4 8.2 1.1
Manufacturing 16.6 15.8 15.5 14.6 14.1 14.2 14.3 -5.2 4.4 -5.6 -9.2 3.9 2.9
Electricity and water 1.7 1.8 1.7 1.8 1.9 1.9 1.9 1.2 4.7 1.3 1.1 2.2 3.8
Construction 5.4 5.5 6.1 6.1 5.4 5.1 5.1 1.1 17.2 -0.3 -16.5 -2.7 13.5
Services-producing activities 45.0 43.7 42.2 42.4 43.8 43.8 43.7 -3.3 2.8 0.6 -3.1 3.4 3.3
Commerce 9.8 9.0 8.8 8.4 7.9 8.1 8.2 -8.6 4.7 -4.3 -11.8 5.4 4.2
Restaurants and hotels 2.6 2.5 2.4 2.5 2.6 2.5 2.5 -2.0 1.8 1.7 -2.0 -0.5 0.7
Transport, warehousing and
communications4.9 5.0 5.2 5.5 5.9 6.2 6.6 1.7 9 5.9 1.6 8.1 8.8
Financial institutions and
insurance1.5 1.2 1.2 1.2 1.1 1.1 1.1 -19.4 4.1 -0.9 -13.8 3.2 1.1
Real estate 7.9 8.0 7.7 7.8 8.3 8.1 8.2 0.2 2.9 1.9 -1.1 1.7 2.5
Business services 3.5 3.4 3.3 3.3 3.3 3.3 3.3 -4.3 2.9 -0.5 -4.6 3.1 2.7
Non-profit services 6.4 6.5 6.3 6.4 6.8 6.7 6.7 1.4 3.0 1.9 -0.6 1.1 2.4
    General government services 8.3 8.0 7.2 7.3 7.9 7.9 7.8 -3.8 -3.4 0.9 1.2 3.3 1.4
- Imputed banking services 1.0 0.7 0.7 0.7 0.7 0.7 0.7 -29.0 11.4 1.0 -9.7 4.7 0.7
Subtotal 98.1 98.4 97.7 97.4 97.5 97.4 97.2 0.0 5.6 -0.1 -6.0 3.0 2.6
+ Import duties 1.9 1.6 2.3 2.6 2.5 2.6 2.8 -13.0 50.2 10.9 -10.4 10.9 9.9
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 -0.2 6.4 0.2 -6.1 3.2 2.8
 .. Not available.
Source :Central Bank of Venezuela.
6. State participation in the Venezuelan economy remains large and is estimated to generate
nearly 40 per cent of GDP and 80 per cent of exports.  The public-sector share of the economy stems
mainly from its dominant role in the oil sector, where it controls all refining and the majority of
extraction activity (chapter IV.5)(ii)(a)).
7. The State also has a major presence in the electricity and water sector (figure I.1).  The
privatization process carried out in recent years has substantially reduced State participation in certain
sectors, particularly among services, notably financial institutions (especially banking) and
telecommunications (chapter II.(6)(ii)).  Noneth eless, 1996-2001 saw faster growth in sectors with
greatest State participation, such as oil production and refining, natural gas, and electric powergeneration and distribution, whereas private-sector growth slowed.Venezuela WT/TPR/S/108
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03,0006,0009,00012,00015,000
1 2 3 4 5 6 7 8 9 1 01 11 21 31 41 5Figure I.1
Sectoral composition of gross domestic product, at current prices, 2001
Billions of bolívares
Public
Private
Oil activities:
1 - Oil and natural gas
2 - RefiningGoods-producing activities:
3 - Agriculture
4 - Mining 
5 - Manufacturing6 - Electricity and water7 - ConstructionService-producing activities: 
  8 - Commerce  9 - Restaurants and hotels10 - Transport, warehousing and communications
11 - Financial institutions and insurance 
12 - Real estate 13 - Business services 14 - Non-profit services 
15 - General government services 
Source:  Central Bank of Venezuela.
(ii) Economic growth and employment
8. Economic growth has fluctuated considerably throughout the 1996-2002 period: there was a
slight contraction in 1996, followed by strong growth in 1997; 1998 brought moderate stagnation,
which was followed by a further contraction in 1999 and then a period of moderate growth throughout
2000 and 2001 (Table I.2).  In the first half of 2002, the economy entered a new recessionary phase.The downturns in GDP were partly caused by circumstantial factors, such as lower oil revenues in
1999 and 2002, but, according to the authorities, they were also partly due to medium-term structural
trends, including a decline in total factor productivity.
9. Total GDP grew by 2.8 per cent in 2001, which was faster than the Latin American average
for that year, and growth in the non-oil economy averaged 4 per cent.  Economic growth in 2001 was
underpinned by a sharp increase in domestic demand – especially in gross fixed investment, which
expanded by 13.6 per cent, while private consumpti on grew by 4.7 per cent.  The expansion of grossWT/TPR/S/108 Trade Policy Review
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fixed investment in 2001 came on the heals of growth of just 1.1 per cent in 2000 and a drop of
16.4 per cent in 1999.
10. In the first quarter of 2002, GDP shrank by 4.2 per cent compared to the same period a year
earlier, owing to a substantial slowdown in oil and non-oil activities alike.  This can partly be
explained by a reduction in oil production, together with the exchange-rate adjustment made in early
2002.  The contraction in oil activities amounted to 7.8 per cent in real terms, and mainly reflected
lower production volumes, which, as the authorities pointed out, is a consequence of upholding the
policy of production cuts decided upon by OPEC.  The economic slowdown intensified in the second
quarter, when GDP fell by 9.9 per cent compared to the same period in 2001.  In the first half of 2002,
GDP came in at 7.1 per cent below its level a year earlier.
Table I.2
Basic macroeconomic indicators, 1996-2002a
(Year-on year percentage change, unless otherwise indicated)
1996 1997 1998 1999 2000 2001 2002a
Gross domestic product
Gross domestic product (billions of Bs.) 29,438 43,344 52,482 62,577 82,451 91,324 ..
Real gross domestic product (billions of 1984 Bs.) 566 602 603 566 584 600 274
Gross domestic product (millions of US dollars) 70,620 88,803 95,937 103,400 120,578 125,062 ..
Gross domestic product per capita (US dollars) 3,168 3,904 4,133 4,365 4,989 .. ..
Share of gross domestic product (% of nominal GDP)
Private consumption 63.2 65.8 71.8 69.1 63.4 68.2 ..
Public consumption 5.0 6.5 7.5 7.5 7.2 8.0 ..
Gross fixed capital formation (total) 15.8 18.7 19.0 15.7 14.2 16.4 ..
Private 8.8 9.4 8.4 6.9 6.1 9.4 ..
Public 7.0 9.4 10.7 8.8 8.1 7.0 ..
Exports of goods and services 36.5 28.4 19.9 21.6 28.4 22.7 ..
Imports of goods and services 21.3 21.7 21.1 16.4 16.3 17.6 ..
Growth of GDP (in real terms, %)
Total GDP growth -0.2 6.4 0.2 -6.1 3.2 2.8 -7.1
Private consumption -4.6 5.2 -0.2 -4.3 3.8 4.8 -8.2
Public consumption -7.6 4.2 1.4 3.0 5.0 5.9 -5.8
Gross fixed capital formation (total) -6.3 23.9 -2.5 -16.4 1.1 13.6 ..
Exports of goods and services 7.8 9.4 4.2 -10.8 5.5 -0.9 -17.4
Goods 8.1 10.7 5.1 -10.7 5.8 -1.3 ..
of which oil 9.4 10.6 2.7 -9.0 -1.1 4.7 ..
Services 3.5 -12.6 -17.6 -13.7 -3.0 10.8 ..
Imports of goods and services -11.2 33.9 9.4 -14.6 15.4 11.0 -20.2
Goods -15.2 42.3 13.1 -11.2 16.2 11.8 ..
Services 3.4 8.2 -5.4 -30.9 10.5 5.9 ..
Employment and prices
Unemployment (percentage of labour force) 11.8 11.4 11.2 14.9 13.9 11.8 ..
Consumer price index (year-on-year cumulative) 103.2 37.6 29.9 20.0 13.4 12.3 12.8
External sector
Current account balance (percentage of GDP) 12.6 3.9 -3.4 3.4 10.9 3.5 ..
International reserves (billions of US dollars) 15.23 17.82 14.85 15.38 20.47 18.52 15.14
 of which FIEM (billions of US dollars) .. .. .. 0.2 4.59 6.23 3.70
External debt service (billions of US dollars) 3.14 2.8 3.3 3.5 3.8 3.3 1.9Venezuela WT/TPR/S/108
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1996 1997 1998 1999 2000 2001 2002a
General State finances
Central government financial balance (percentage of GDP) 0.4 1.7 -3.8 -1.6 -1.6 -4.3 ..
Income (percentage of GDP) 19.0 23.1 16.6 17.1 19.3 20.4 ..
of which oil (percentage of GDP) 7.5 11.7 5.6 6.3 9.8 9.3 ..
Expenditure (percentage of GDP) 18.6 21.4 20.4 18.8 21.2 24.7 ..
Net transfers to FIEM (percentage of GDP) n.a. n.a. n.a. 0.3 3.5 1.9 ..
Total gross public debt (billions of US dollars) 30.2 28.2 27.5 28.3 31.8 36.4 ..
Gross external public debt (billions of US dollars) 25.5 23.9 23.4 22.8 21.8 22.6 ..
Gross domestic public debt (billions of US dollars) 4.7 4.3 4.1 5.5 10.0 13.8 ..
Money and interest rates
Money in circulation, M1 (annual average) 88.3 83.7 6.6 23.5 31.5 13.2 4.8
Monetary liquidity, M2 (annual average) 55.4 63.0 18.6 20.0 27.8 4.3 4.0
Broad liquidity, M3 (annual average) 55.3 63.0 18.9 20.2 27.7 4.2 3.9
Interest rate on loans:  average of six main universal banks (per
cent per year)37.2 22.2 45.2 31.9 23.9 25.6 35.1
Real interest rate on loans:  average of six main universal banks
(per cent per year, deflated by the CPI)-32.5 -11.2 11.8 9.9 9.3 11.8 ..
Interest rate on deposits:  average of six main universal banks
(per cent per year)18.4 6.8 10.3 7.1 3.4 2.4 3.7
Real interest rate on deposits:  average of six main universal
banks (per cent per year, deflated by the CPI)-41.7 -22.4 -15.1 -10.8 -8.8 -8.8 ..
Exchange rates
Nominal exchange rate (bolívares per US dollar) 417.3 488.6 547.6 605.7 679.9 723.6 1,088.0b
Real effective exchange rate  (1995=100) 84.3 110.5 135.5 152.3 161.6 173.0 ..
.. Not available.
n.a. Not applicable.
a First semester  2002 (provisional).
b Average of first nine months.
Source :Central Bank of Venezuela.
11. The GDP figures are heavily influenced by wide fluctuations in investment, particularly in the
oil sector.  The ratio of total investment to (nominal) GDP fell during 1997-2000, to stand at 14.2 per
cent at the end of that period.  Given State control of the oil sector and major State participation in
mining, electricity and other activities, much of the country’s investment is in public-sector hands,
and this situation intensified in 1997-2000.  Private-sector investment accounted for just 6.1 per cent
of GDP in 2000, compared to 9.4 per cent in 1997.  In 2001, in the wake of an upturn in the oil sector,the ratios of private investment/GDP and total investment/GDP both increased, but investment
retreated once again in the first half of 2002.
12. The low rate of investment is a structural problem in the Venezuelan economy.  The
authorities have noted that the pattern of investment during 1996-2001 was heavily influenced by a
variety of variables, such as the price cycle in the oil sector, and the multiplier effect of oil
investments on other parts of the economy.  A paper published by the Central Bank of Venezuela
(BCV) states that a secular real GDP growth rate of 6 per cent is both optimal and viable, but thiswould involve raising the investment rate to at least 25 per cent of GDP.
1
                                                     
1 Parra Luzardo, Gastón, Condiciones y perspectivas del crecimiento económico en Venezuela , Central
Bank of Venezuela, Caracas, 2002.WT/TPR/S/108 Trade Policy Review
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13. Private consumption contracted by 0.1 and 4.3 per cent in 1998 and 1999, before expanding
in the two following years.  Public consumption ha s been a major engine of growth, expanding faster
than GDP during 1998-2001.
14. Exports of goods and services, which had grown faster than GDP between 1995 and 1998,
contracted sharply in 1999, before expanding on the back of the oil sector in 2000, and then retreating
once more in 2001 and the first half of 2002.  While merchandise exports grew during 1996-2001,
exports of services fell by one-third during the reporting period (see infra ).
15. Unemployment rose from 11.8 per cent of the labour force in 1996 to 13.9 per cent in 2000,
but then eased from the second half of 2000 before  climbing again in the early months of 2002 to
reach 16.2 per cent in June.  In recent years manufacturing employment has declined in line with
shrinking activity in that sector, while employment in services has expanded.  The private sector
accounts for the bulk of employment, with 82.2 per cent of the working population employed in that
sector in June 2002.
16. A feature of the Venezuelan economy is its high rate of informal employment, which
accounted for 50.4 per cent of the employed population in the first half of 2002, according to
estimates by Venezuela’s National Institute of Statistics (INE).2  These high unemployment and
informality rates generate a poverty index of 45 per cent according to INE estimates (18.7 per cent
living in extreme poverty and 26.3 per cent in conditions of critical poverty).3
(iii) Prices
17. After peaking at 103.2 per cent in 1996, inflation was reduced dramatically between then and
2001, thanks largely to the counter-inflationary-anchor role played by the exchange rate.  Cumulative
inflation in 2001, measured by the rise in the consumer price index (CPI) for metropolitan Caracas,
came in at 12.3 per cent (average inflation for the year was 12.5 per cent); this was below the 2000
figure (Table I.2).
18. In early 2002, the introduction of a free-floating exchange-rate system (see below) initially
caused inflation to accelerate, and the CPI for March rose by 4.2 per cent compared to previous
month.  In the first three months of 2002 the CPI rose by a cumulative 7 per cent. This inflationary
spike reflected adjustments made to the prices of goods and services, particularly those that use
imported inputs, in the wake of bolívar depreciation after flotation, and was further fuelled by
expectations concerning the level to which the exchange rate might rise.  Nonetheless, the full extentof the devaluation has not been passed through to prices.  The pace of inflation eased in April and
May, before accelerating once more in the following months; during the first eight months of 2002 the
CPI rose by 19.8 per cent.
(iv) Monetary policy
19. The BCV is responsible for formulating and executing monetary policy, and for participating
in the design and execution of exchange-rate policy.  The Bank does not receive instructions from the
Government, and it cannot finance the fiscal deficit.  Its fundamental objectives are to achieve price
stability and preserve the value of the currency.  The monetary programme includes establishing an
inflation target, which was set between 10 and 12 per cent in 2001.  The target for 2002 was set in
July at 25-27 per cent, bearing in mind the impact of fiscal and exchange-rate policies.  The strategy
                                                     
2 http://www.ine.gov.ve (“Tips informativos”).
3 OCEI-UNDP, Perfiles de la condición de vida. Info rme sobre Desarrollo Humano en Venezuela,
2000 . Available on the Internet at http://www.ine.gov.ve/ine/idh/tablaidh1.htm.Venezuela WT/TPR/S/108
Page 7
to meet this target uses elements corresponding to a system of indicators reflecting agents’
expectations, with interest rates as the operational instrument.
20. The BCV executes monetary policy mainly through open-market operations.  It also adjusts
reserve requirements, and sets interest rates on its own operations.  Open-market operations are
conducted mainly through auctions for the purchase and sale of public-sector national debt paper
(repos).  Competitive auctions are held for banks and stockmarket firms, with the corresponding repo
rates being determined by supply and demand.  Non-competitive auctions open to the general public
were introduced in May 2001; in this case the rates are predetermined according to the results of thecompetitive auctions held earlier that same day.
21. The BCV sets the interest rate charged on its discount and rediscount operations, and on repos
and advances (rediscount rate), thereby providing a top-tier indicator for market lending rates.  On
other occasions, however, interest-rate movements have responded to market trends instead of
anticipating them; changes in the rediscount rate also reflect BCV expectations of market trends.  Thelegal reserve requirement for private-sector deposits in local currency has remained unchanged at
17 per cent in recent years; but, in early 2002, it was decided to unify the reserve requirement and
progressively lower it to 15 per cent, a level attained in May.  In August 2001, it was decided to apply
a higher reserve ratio on public-sector deposits (known as the encaje especial) ;  this was initially set at
30 per cent, but was lowered to 25 per cent in the early months of 2002.
22. In line with the monetary policy pursued, grow th in the monetary aggregates M1 (money in
circulation) and M2 (monetary liquidity) slowed abruptly between 1997 and 1998, but outpaced
inflation in 1999 and 2000.  When a more stringent monetary policy was adopted in 2001, M1 growth
approximately matched accumulated inflation, but the expansion of M2 implied a real tightening of
monetary liquidity.
23. The monetary policy implemented since 1998 has resulted in real lending rates of about
10 per cent (WTO Secretariat calculations); deposit rates, in contrast, have been strongly negative.The spread between lending and deposit rates has remained large, and in an attempt to narrow this,
repo operations with the general public have been increased, thereby introducing possibilities for
saving at higher interest rates than those offered by the banking sector.
(v) Exchange-rate policy
24. Until early 2002, Venezuela’s exchange-rate system consisted of a central parity subject to an
annual devaluation of 7 per cent (10 per cent as from January 2002), with fluctuations of up to 7.5 per
cent allowed on either side.  Under this system the bolívar appreciated in real terms, because the
nominal depreciation was less than inflation (figure I.2). This real appreciation eroded the
competitiveness of non-oil exports, without producing any productivity gain.  It also had a negative
effect on import-competing activities, since import prices fell in relation to locally producedsubstitutes.WT/TPR/S/108 Trade Policy Review
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010020030040050060070080090010001100
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002020406080100120140160180200Figure I.2 
Nominal and real effective exchange rate, 1989 - September 2002
Nominal exchange rate
(Bs/US$)
Nominal exchange 
rate (L-H axis)
Central Bank of Venezuela and IMF, International Financial Statistics.Real effective exchan ge 
rate (1995 = 100) 
Real effective exchan ge 
rate 
(R-H axis)
Source :
25. In response to pressures on the foreign-exchange market in anticipation of a bolívar
devaluation, given deteriorating external balances and a worsening fiscal situation, the Government
and the BCV introduced a floating exchange-rate system in February 2002.  The declared objective of
the new regime, which does not rule out interventions to prevent exchange-rate movements
considered excessive, is to sustain the level of international reserves, supply foreign currency to matchthe needs of the economy, and enhance competitiveness in the productive sector.  The authorities have
noted that the new exchange-rate regime will help to make monetary policy more effective in its
fundamental task of maintaining price stability, since the exchange rate will no longer be used as an
anti-inflationary anchor.
26. The BCV holds at least one foreign-exchange auction every day, for a predetermined amount
that is announced at the time of the auction.  In the sale auction, authorized foreign-exchange
operators (commercial banks, universal banks, saving and loan institutions and bureaux de change)
can submit up to five bids to buy foreign exchange, indicating the amount and the exchange rate.  At
the same time, a purchase auction is held, in which foreign-exchange operators present quotes and
amounts offered to the BCV.  The Bank in principle accepts the lowest offers.  The auctionsdetermine the maximum, minimum and weighted-avera ge exchange rates, the latter being consideredVenezuela WT/TPR/S/108
Page 9
the reference or benchmark rate.  The BCV announces the reference exchange rate every business day
through its website.4
27. Following the introduction of a floating exchange-rate regime, the bolívar depreciated almost
immediately, losing a cumulative 92.8 per cent of its value between February and September.  This
pushed up inflation in the early months of 2002, al though not by the full amount of the depreciation.
(vi) Fiscal policy
28. Fiscal policy has generally being aimed at maintaining a surplus of current income over
expenditure, in order to finance outgoings from the capital account which is structurally in deficit.These outflows are specially burdensome in the categories of public investment and (capital) transfers
to the states.
29. To reinforce the stabilizing role of fiscal policy, a Macroeconomic Stabilization Investment
Fund (FIEM) was created.  This performs a stabilizing function by limiting the effect of oil revenues
on the fiscal situation, smoothing out the business cycle and trying to prevent situations such as"Dutch disease" from arising.
5  Transfers to the FIEM began in December 1999, but the deteriorating
fiscal situation meant that no further transfers were made from the fourth quarter of 2001 till late
2002.  Between October 2001 and March 2002, the Government drew US$1.559 billion from the fund
to meet fiscal needs; its total value in early 2002 stood at US$5.586 billion.
30. A key element of fiscal policy involves redistribution of income from central government to
the states and municipalities through a system of constitutionally mandated revenue-sharing, known
as the  Situado Constitucional .  This is a specific budgetary item that absorbs between 15 and 20 per
cent of total ordinary revenues as estimated annually by the National Treasury.  It is distributed
among the states and the capital district in the following manner: 30 per cent of the allocation in equal
parts, and the remaining 70 per cent in proportion to population.  In each fiscal year, the states are
required to allocate at least 50 per cent of their revenue-sharing receipts to investment.  Municipalities
are entitled to at least 20 per cent of the total Situado  transferred to their state.
31. Taxes collected by the National Integrated Customs and Tax Administration Service
(SENIAT) accounted for 43 per cent of total tax revenue, including value-added tax (VAT), income
tax (ISRL), and tariffs.  Import duties accounted for 16 per cent of the central government’s ordinary
revenues in 2001, while the oil sector generates the bulk of fiscal revenue, accounting for 55 per cent
of total central government income in that year.  Dividends paid by Petróleos de Venezuela, S.A.(PDVSA) provided 40 per cent of the sector’s contribution, while the remainder came from
hydrocarbon earnings, ISRL, and taxes on gasoline and other petroleum products, in that order.
32. Under the Budgetary Regime Law of 1999 a ma ximum of 62 per cent of revenue obtained
from oil earnings can be used to finance expenditure, and this proportion will be reduced by one
percentage point each year until it reaches a level of 50 per cent.
6  The remainder of oil revenues have
to be used for investment, oil industry development, and scientific and technological development
projects, with up to 20 per cent eligible for use in operations to reduce and amortize the public debt.
                                                     
4 www.bcv.org.ve.
5 “Dutch disease” occurs when revenues from a given export sector (hydrocarbons in the Venezuelan
case) cause the exchange rate to appreciate in real terms. This reduces exports of non-natural resource
products, and causes imports to increase and domestic production to shift towards non-tradable goods, forcing
up their prices.
6 Decree 185 of 26 June 1999. Published in th e Official Gazette, Special edition No. 5358, of
29 June 1999.WT/TPR/S/108 Trade Policy Review
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33. Central Government accounts have been in deficit since 1998, as a result of smaller oil
revenues, compounded by a decrease in tax revenue collected from the non-oil sector and the relative
inelasticity of public expenditure.  The remainder of the consolidated restricted public sector7 has
generally been in surplus, such that the overall position until early 2001 (except for 1998) displayed a
consolidated surplus, which amounted to 4.3 per cent of GDP in 2000.  Starting in the second half of
2001, however, the central government deficit was compounded by a deterioration in the financial
situation of PDVSA and the rest of the public sector.  This resulted in a deficit for the consolidated
restricted public sector in 2001, equivalent to 4.5 per cent of GDP.8  The current surplus was smaller
than in earlier years, and was used to finance pa rt of the deficit on capital account.  The original
deficit target established by the Ministry of Finance for 2002 was 4.3 per cent of GDP, based on a
GDP growth rate of 4.1 per cent and average inflation of 10.1 per cent.9  By mid-2002, however, these
estimates were being revised in the light of the fisc al deterioration in the early months of the year,
which saw a 38 per cent decline in fiscal revenue.
34. The government announced measures to tackle the deficit in May 2002, noting that total
financing requirements amounted to 8.8 per cent of GDP; of this, 2.7 percentage points correspond
strictly to financing the fiscal deficit while 6.1 percentage points are needed to amortize the debt.  The
government’s lines of action in the taxation sphere aim firstly to broaden the tax base and then, in the
medium-term, to lower domestic tax rates.  Accordingly, the Government announced an increase inVAT to 16 per cent, with a view to gradually elimin ating exemptions and lowering the rate.  It also
announced a second line of action to improve revenue collection in the customs service, which is
expected to yield 1 per cent of GDP; in addition it raised the tax on bank debits from 0.75 to 1 per
cent.
10  The proposal does not envisage cutting expenditure, but reallocating it with a slightly
expansionary effect.  The government was also considering speeding up the concessions and
privatization programme.
35. Fiscal deficits have mainly been financed through domestic borrowing, although both external
and domestic public-sector borrowing is subject to limits imposed annually by special borrowing
laws.  The Special Law on Annual Borrowing for Fiscal 2002 sets a maximum of US$10.884 billion.
36. In late 2001 the total public-sector debt amounted to US$36.401 billion, or 28.7 per cent of
GDP.  Total service on this debt amounted to 9 per cent of GDP, a similar percentage to the 1996
figure, with the reduction in external debt offsetting the increase in domestic borrowing.  Externaldebt totalled US$22.593 billion, of which 40 per cent has been restructured through Brady bonds.
More than half of the unrestructured debt is held in bonds by non-residents, while the remainder
largely consists of debt owed to multilateral and bilateral organizations.  In December 2001,
Venezuela repaid its debt to the International Monetary Fund (IMF).
37. Domestic debt reached a level of US$13.8 billion in late 2001.  In local currency, it grew by
50.4 per cent compared to the previous year’s level, to account for 11 per cent of GDP. Of this, 90 per
cent is held in bonds, mainly national public debt bonds (DPNs) and treasury bills, which generally
                                                     
7 The consolidated restricted pub lic sector consists of central government, PDVSA, non-financial
public-sector firms, the Institute of Housing an d Social Security (IVSS), the Deposit Guarantee Fund
(FOGADE) and Banco de Desarrollo (BANDES).
8 Ministry of Finance, Office of Macroeconomic Programming and Analysis, Quarterly report on
financial management , First quarter 2001 (July 2001); Second Quarter 2001 (November 2001) and Third
Quarter 2001 (February 2002).
9 República Bolivariana de Venezuela, Exposición de Motivos del Proyecto de Ley de Presupuesto
para el Ejercicio Fiscal 2002.
10 Created by the Law Establishing the Tax on Bank Debits, Official Gazette No. 37.401 of
11 March 2002.Venezuela WT/TPR/S/108
Page 11
have short repayment terms (the average maturity of DPNs placed in 2001 was two years and eight
months).  The cost of borrowing is high: the effective weighted average rate at which DPN bonds
were floated in the third quarter of 2001 was 19.8 per cent, equivalent to a real interest rate of about7 per cent.  This implies a high level of domestic debt service: including amortization and interest
payments, this item absorbed 5.5 per cent of GDP in 2001, compared to 3.2 per cent in 1996.
(vii) Balance of payments
38. Given the substantial trade surplus generated by oil exports, Venezuela’s balance of payments
on current account is usually in surplus.  This was the case throughout 1996-2001, except for 1998(Table I.3) when a fall in oil prices coincided wi th an increase in imports, substantially cutting the
trade surplus and generating the first current-account deficit since 1988 – equivalent to 3.4 per cent of
GDP.  The subsequent recovery of oil prices and a contraction in imports restored surpluses of 3.4 per
cent of GDP in 1999 and 10.8 per cent in 2000.  In the following year, the surplus fell sharply to
3.2 per cent of GDP, in the wake of another fall in oil prices, which was compounded by importgrowth associated with relatively resilient domestic demand, and, in particular, an upturn in
investment.
Table I.3
Balance of payments, 1995-2002a
(Millions of U.S. dollars)
1995 1996 1997 1998 1999 2000 2001 2002
Current account balance 2,014 8,914 3,467 -3,253 3,557 13,111 4,080 1,757
Trade balance (goods) 7,013 13,770 10,025 2,471 7,606 17,544 9,360 5,199
Exports f.o.b. 19,082 23,707 23,703 17,576 20,819 33,035 26,751 11,910
Oil 13,862 18,660 18,301 12,134 16,697 27,885 21574 9,456
Non-oil 5,220 5,047 5,402 5,442 4,122 5,150 5,177 2,454
Imports f.o.b. -12,069 -9,937 -13,678 -15,105 -13,213 -15,491 -17,391 -6,711
Oil -1,754 -2,205 -1,973 -2,232 -1,648 -1,759 -2147 -750
Non-oil -10,315 -7,732 -11,705 -12,873 -11,565 -13,732 -15,244 -5,961
Services -3,165 -3,269 -4,006 -3,685 -2,462 -3,018 -3,215 -1,413
Transport -846 -739 -1,265 -1,307 -1,050 -1,277 -1,423 -519
Travel -865 -1,349 -1,619 -1,490 -932 -1,071 -1,117 -453
Communications 6 0 -32 -34 -30 -68 -98 -63
Insurance -83 -85 -74 -71 -57 -75 -78 -53
Government services -40 -92 -17 -70 -24 -29 16 40
Other -1,337 -1,004 -999 -713 -369 -498 -515 -365
Interest -1,943 -1,725 -2,408 -1,931 -1,527 -1,204 -1,458 -1,663
Transfers 109 138 -144 -108 -60 -211 -607 -366
Balance of financial transactions -2,647 -1,495 1,523 1,780 -1,004 -2,790 -1,009 -4,002
Direct investments 894 1,676 5,036 4,262 2,789 4,357 3,076 434
Abroad -91 -507 -500 -233 -501 -107 -333 -362
In Venezuela 985 2,183 5,536 4,495 3,290 4,464 3,409 796
Portfolio investments (net) -801 739 506 1,289 1,938 -2,418 649 -1,031WT/TPR/S/108 Trade Policy Review
Page 12
1995 1996 1997 1998 1999 2000 2001 2002
Other investments -2,740 -3,910 -4,019 -3,771 -5,731 -4,729 -4,734 -3,405
Errors and omissions -493 -892 -1,460 -1,442 -1,504 -4,503 -5,142 -1,530
Overall balance -1,126 6,527 3,530 -2,915 1,049 5,818 -2,071 -3,775
Change in reserves (increase- )b1,126 -6,527 -3,530 2,915 -1,049 -5,818 - 2,071 3,775
a First semester 2002
b Excludes adjustments relating to exchange rates, prices and accounting updates of balances at the Central Bank of Venezuela.
Note: Part of the change in reserves in 2000 and 2001 corresponds to contributions to the FIEM.
Source : Central Bank of Venezuela.
39. The balance of trade in services posted deficits ranging between 2.5 and 4.6 per cent of GDP
every year in 1996-2001, with particularly negative results in transport and travel.  Net investment
income is structurally negative, although the deficit has been smaller in recent years thanks to lower
interest and dividend payments abroad.  The capital account also runs a structural deficit, mainly
because of large outflows of private capital (in the “Other investments” category of Table I.3) andbecause of external debt amortization.  This deficit is in a range between 1.5 and 2.5 per cent of GDP.
Apparent capital outflows under the heading “Errors and omissions” largely correspond to deposits
made in the FIEM.  Net international reserves, including FIEM deposits, totalled about US$20 billion
in 2000, equivalent to nearly 16 months’ imports; but they shrank by about US$2 billion in 2001 and
continued to fall during the first half of 2002, reaching a level slightly below US$15 billion in lateJune.
(3) D
EVELOPMENTS IN TRADE11
40. As the oil sector generates over 80 per cent of the value of Venezuela’s goods and services
exports, fluctuations in oil prices are the dominant factor in total export value.  Total exportsexpanded at an average annual rate of 7.6 per cent between 1996 and 2000, before contracting in
2001.  This performance is entirely explained by the behaviour of oil exports, which grew by an
average of 7.9 per cent per year between 1996 and 2000, and then fell back in the following year.  The
value of non-oil exports shrank between 1996 and 2001, mainly because of a decline in agricultural
exports (Table AI.2).  The value of manufactured exports has remained flat in recent years.
41. On the other side of the equation, imports grew at an average annual rate of 13.9 per cent
between 1996 and 2001, mainly on the back of a strong expansion in manufactured imports,
amounting to 14.4 per cent per year.  This was driven by imports of automobiles, office equipment
and telecommunications, and non-electrical machinery.  Import growth in these categories has
reflected robust demand for industrial supplies, especially in the oil, investment and consumer durable
goods sectors, and has also been encouraged by the overvaluation of the bolívar.
42. Exports of commercial services followed a downwards trend in 1995-2000, falling in value by
about one-third during this period (Table I.4).  There were reductions in all service areas, but these
were most pronounced in transport, partly because of the bankruptcy of VIASA, Venezuela’sinternational airline.  Imports of services fell slightly between 1995 and 2000 – mainly in the “Other
services” category, which covers computer and information services, royalties and licensing fees,
financial services, other business services, and personal, cultural and recreational services, among
others.
                                                     
11 Except as indicated otherwise, the data used in this section were obtained from the COMTRADE
database of the United Nations Statistics Division.Venezuela WT/TPR/S/108
Page 13
Table I.4
Exports and imports of commercial services, 1996- 2000
(Millions of US dollars)
1996 1997 1998 1999 2000
Balance -3,269 -4,006 -3,685 -2,462 -3,018
Exports 1,573 1,489 1,461 1,310 1,237
Transport 484 347 282 331 363
Public oil 182 175 117 178 195
Public non-oil 114 120 129 115 131
Private 188 52 36 38 37
Travel 884 933 961 736 634
Private 884 933 961 736 634
C o m m u n i c a t i o n s 2 81 11 21 1 1 1
Public non-oil 3 3 5 4 3
P r i v a t e 2 5877 8
I n s u r a n c e 2222 4
P r i v a t e 2222 4
Government services 125 125 160 185 170
Public non-oil 125 125 160 185 170
Other services 50 71 44 45 55
Public non-oil .. 32 .. 4 ..
P r i v a t e 5 03 94 44 1 5 5
Imports 4,842 5,495 5,146 3,772 4,255
Transport 1,223 1,612 1,589 1,381 1,640
Public oil 261 294 262 189 233
Public non-oil 92 119 71 80 77
Private 870 1,199 1,256 1,112 1,330
Travel 2,233 2,552 2,451 1,668 1,705
P u b l i c  o i l 1 32 72 0 9 8
Public non-oil 13 16 15 7 1
Private 2,207 2,509 2,416 1,652 1,696
C o m m u n i c a t i o n s 2 84 34 64 1 7 9
Public non-oil 2 3 2 2 ..
P r i v a t e 2 64 04 43 9 7 9
I n s u r a n c e 8 77 67 35 9 7 9
P u b l i c  o i l 4 33 52 92 5 3 1
Public non-oil 3 2 3 .. 4
P r i v a t e 4 13 94 13 4 4 4
Government services 217 142 230 209 199
Public non-oil 217 142 230 209 199
Other services 1,054 1,070 757 414 553
Public oil 801 800 544 238 253
Public non-oil 54 79 72 54 51
Private 199 191 141 122 249
.. Not available.
Source: Central Bank of Venezuela.
43. Of total imports in 2001, 81.3 per cent consisted of manufactured goods – in particular,
machinery and transport equipment, vehicles and autoparts, office machines and telecommunicationsWT/TPR/S/108 Trade Policy Review
Page 14
equipment, products of the automotive industry and chemical goods.  The most significant change in
the composition of the import basket was a relative decrease in agricultural imports and an almost
identical increase in manufactured goods.  Imports of agricultural products represented 12.8 per centof the total in 2001, well below the share recorded in 1996 (see Table AI.2).  In value terms, however,
these totalled US$2,103.6 million in 2000, compared to US$1,666.4 million in 1996 – an increase of
26.2 per cent.  Imports of manufactured goods, on the other hand, grew by 96 per cent in value terms
between 1996 and 2000 (rising from US$6,818.6 million to US$13,362.1 million in that period).
(i) Direction of trade
44. Venezuela’s main trading partner is the United States, which absorbed 56.4 per cent of its
exports, and supplied 33.9 per cent of its imports in 2001.  The importance of the United States as the
leading market for Venezuelan exports, particularly crude oil, was maintained throughout 1996-2001,
despite fluctuations in relative percentage shares; but its importance as a supplier has declined
considerably.  Nearly 84 per cent of Venezuelan exports are sent to other countries in the Americas,while the remainder goes mainly to the European Union and Asia.  Apart from the United States, the
main sources of imports are European Union countries, followed by Colombia, Brazil, Mexico and
Japan (Tables AI.3 and AI.4).
45. According to preliminary statistics from the Secretariat General of the Andean Community,
intra-Andean Community trade totalled US$5.68 billion in 2001 – an increase of 10 per cent over theprevious year and matching the record level achieved in 1997 (Table I.5).  However, exports from
Venezuela to other members of the subregion shrank to about US$1.29 billion, mostly represented by
non-oil products, as a result of reduced oil exports.  Information from the same source shows that
trade between Andean partners encompasses 4,760 NANDINA subheadings, and 91 per cent involves
trade in manufactured goods.
Table I.5
Trade within the Andean Community, 1999-2001
1999 2000 2001 1999 2000 2001
Millions of US dollars Annual percentage rate of change
Exports within Andean Community 3,940 5,175 5,680 -27.2 31.3 9.8
Bolivia 294 304 351 -7.9 3.4 15.5
Colombia 1,634 2,167 2,744 -23.3 32.6 26.6
Ecuador 445 663 779 -17.6 49.0 17.5
Peru 347 446 518 -25.9 28.5 16.1
Venezuela 1,220 1,595 1,288 -37.5 30.7 -19.2
Non-traditional products 890 1,031 1,043 -44.9 15.8 1.2
Oil and petroleum products 330 564 245 -1.4 70.9 -56.6
Source: General Secretariat of the Andean Community.
46. Since the G-3 agreement came into force, trade between Venezuela and Mexico has almost
doubled, largely because of an expansion in Mexican exports, which totalled US$772 million in 2001
compared to US$357 million in 1996.  As a percenta ge of the total, however , trade between the two
countries remains limited.
(4) TRENDS AND PATTERNS IN FOREIGN DIRECT INVESTMENT (FDI)
47. In the reporting period, Venezuela has been striving to attract foreign direct investment (FDI),
and has reformed its legislation for this purpose.  Steps taken to enhance the protection afforded toVenezuela WT/TPR/S/108
Page 15
foreign investment include measures contained in the 1999 Investment Promotion and Protection
Law, which have helped improve the investment climate (chapter II.6).
48. New foreign investments totalled US$948.1 million in 2001, of which US$727.7 million were
made in non-oil activities and US$220.4 million in the oil sector, particularly in hydrocarbons and
petrochemicals.  Although the level of FDI in 2001 was 47.5 per cent above the previous year’s
figure, it is still way below the five-year high achieved in 1998, which included privatization of the
steel producer SIDOR in the manufacturing sector (chapter IV.6)(iii)(a).  Excluding 1998, foreign
investment flows have been relatively stable over  the last decade, generally representing between 0.5
and 0.7 per cent of GDP.
49. During 1997-2001, the largest volumes of FDI were channelled into the manufacturing sector,
which absorbed US$2,343.2 million, or 46.5 per cent of the US$5,044.4 million total (Table I.6).  The
second most important FDI recipient was hydrocarbons , although considering the size of this sector,
the actual amount of foreign investment was quite small.  The transport and communications sectorwas the third largest FDI recipient in 1997-2001, thanks to the opening up of telecommunications
services.
Table I.6
New foreign direct investment, 1997-2001(Millions of US dollars)
Economic activity 1997 1998 1999 2000 2001 1997-2001
Agriculture and livestock 49.2 0.2 16.7 4.1 0.6 70.8
Manufacturing industry 253.9 1,358.5 254.4 196.9 279.5 2,343.2
Construction 32.7 19.2 42.5 64.8 1.9 161.1
Commerce 23.0 41.2 80.0 153.6 28.3 326.1
Transport, warehousing and communications 4.7 9.3 38.1 77.1 381.1 510.3
Financial services 163.4 90.5 40.4 42.6 31.9 368.8
Social services 0.0 1.7 6.6 10.6 1.5 20.4
Electricity, gas and water 4.0 30.4 37.0 35.7 3.0 110.1
Other, not specified 175.5 19.6 232.7 0.0 0.0 0.0
Total non-oil sector 705.4 1,570.7 748.5 585.5 727.7 4,337.8
Hydrocarbons 139.1 28.6 233.9 56.6 110.5 568.7
Petrochemicals 20.1 4.2 2.8 0.8 109.9 137.8
Natural gas 0.0 0.0 0.1 0.0 0.0 0.1
Mining 0.0 0.0 0.0 0.2 0.0 0.2
Total oil and mining sector 159.2 32.8 236.8 57.4 220.4 706.6
Total 864.6 1,603.5 985.3 642.9 948.1 5,044.4
Source: Superintendency of Foreign Investment, Ministry of Energy and Mines.
50. The United States is the leading foreign investor in Venezuela, accounting for one-third of
FDI accumulated up to 2001.  This country is followed by the Cayman Islands (15.3 per cent), the
Netherlands (10.3 per cent), Spain (5.9 per cent) , and Switzerland (4.3 per cent) (Table I.7).
United States FDI is distributed mainly in consumer goods production, financial services,
manufactures, pharmaceuticals and telecommunications, and in electricity and the exploration and
production of crude oil in marginal areas.  Investments by the Netherlands are concentrated inconsumer goods production and banking, Spanish investments are mainly in the financial sector and
Swiss investments are in food and pharmaceutical products.WT/TPR/S/108 Trade Policy Review
Page 16
Table I.7
Foreign direct investment by country of origin, 1997-2001
(Millions of US dollars)
1997 1998 1999 2000 2001
FlowsCumulative
total aPercentage of
cumulative
total
Non-oil sector
United States 248.0 122.2 98.2 85.9 93.2 4,351.7 33.6
Cayman Islands 4.4 1,203.5 202.1 34.7 71.0 1,986.2 15.3
Netherlands 0.0 0.0 0.0 83.5 371.0 1,334.3 10.3
Spain 118.3 14.9 19.7 59.7 24.0 761.3 5.9
Switzerland 8.7 16.2 15.4 42.8 3.4 557.0 4.3
United Kingdom 46.9 8.8 10.6 5.9 3.4 452.8 3.5
Panama 38.4 28.5 41.0 27.0 22.3 462.4 3.6
Japan 8.6 13.3 3.1 50.8 2.0 434.2 3.4
France 6.7 9.6 9.4 6.9 6.8 268.6 2.1
Colombia 9.8 61.4 55.9 51.8 34.9 242.5 1.9
Italy 1.6 0.2 0.0 0.7 0.8 194.0 1.5
British Virgin Islands 26.1 18.7 3.3 11.0 3.0 195.9 1.5
Chile 1.4 0.0 4.5 0.0 80.5 268.6 2.1
Bermuda 4.9 7.3 2.3 66.8 0.1 141.7 1.1
Canada 30.6 0.0 1.2 0.1 0.3 138.3 1.1
Bahamas 11.2 0.2 75.3 11.0 1.1 131.1 1.0
Germany 7.9 10.2 3.7 2.7 4.8 124.1 1.0
Curaçao 0.0 7.3 1.4 1.3 0.3 117.5 0.9
Other 131.9 46.6 201.4 42.9 4.8 798.5 6.2
Total non-oil sector 705.4 1,570.7 748.5 585.5 727.7 12,957.0 100.0
Oil and mining sector b
United States 128.3 25.4 28.8 38.1 30.6 .. ..
Cayman Islands 1.2 3.4 165.7 9.7 14.0 .. ..
Netherlands 1.1 0.0 10.3 0.1 98.2 .. ..
Panama 0.0 0.0 25.0 2.5 0.0 .. ..
Virgin Islands 0.0 0.2 0.0 0.0 82.7 .. ..
Canada 19.8 0.0 0.0 0.0 0.0 .. ..
France 1.1 1.2 5.1 0.0 0.0 .. ..
Other 7.7 3.3 2.0 6.9 5.3 .. ..
Total 159.18 32.77 236.83 57.40 220.43 .. ..
.. Not available.
a Includes cumulative investment up to 2001 unadjusted for depreciation.
b Includes hydrocarbons, petrochemicals, mining and natural gas.
Source: CONAPRI, based on information provided by SIEX, and Ministry of Energy and Mines, Technology and Foreign Investment
Division.
(5) OUTLOOK
51. In a report published in August 2002, the Economic Commission for Latin America and the
Caribbean (ECLAC) forecast that Venezuelan GDP would contract by 3.5 per cent in 2002, largely asVenezuela WT/TPR/S/108
Page 17
a result of adjustment measures adopted to deal with macroeconomic imbalances.  ECLAC also
predicted that inflation would rise to an annual rate close to 30 per cent.12
                                                     
12 Economic Commission for Latin America and the Caribbean (ECLAC), Situación y perspectivas
2002. Estudio Económico de América Latina y el Caribe 2001-2002. Available on the Internet at
http://www.cepal.org/publicaciones /DesarrolloEconomico/4/LCG2184P.