VZCZCXRO1529
RR RUEHDE
DE RUEHCV #0718/01 1011601
ZNR UUUUU ZZH
R 111601Z APR 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 8325
INFO RUEHHH/OPEC COLLECTIVE
RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC
UNCLAS SECTION 01 OF 08 CARACAS 000718
SIPDIS
SENSITIVE
SIPDIS
TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
HQ SOUTHCOM ALSO FOR POLAD
ENERGY FOR CDAY, DPUMPHREY, AND ALOCKWOOD
E.O. 12958: N/A
TAGS: ECON EFIN EPET EINV ENRG VE
SUBJECT: EVERYTHING YOU EVER WANTED TO KNOW ABOUT THE
VENEZUELAN ECONOMY, BUT WERE AFRAID TO ASK
CARACAS 00000718 001.2 OF 008
-------
SUMMARY
-------
1. (SBU) The BRV is spending more money than ever before on
the back of historically high oil prices. Despite these high
oil prices, PDVSA appears to have cash flow problems stemming
from its role as the BRV's cash cow. Official production
figures exceed most analyst estimates, and PDVSA's ability to
increase production is limited. PDVSA's issuance of USD 12
billion in debt in 2007 demonstrates its need for cash.
Despite these problems, the BRV probably has financial
resources of around USD 66 billion in off-budget and foreign
exchange reserves to draw on should problems mount, and the
government can always devalue if money gets too tight. The
overvalued exchange rate (currently over 60 percent) allows
the BRV to selectively promote certain imports and discourage
others. The parallel exchange rate is augmenting inflation,
which at 17 percent in 2006 was the highest in the
hemisphere. Inflation is driven by government spending that
has doubled since 1999 and by policies that cause shortages
and keep interest rates below the rate of inflation. Despite
the economic distortions, a banking crisis looks unlikely in
the near term, so long as BRV spending maintains liquidity
and regulations do not push banks into a corner. Government
handouts and the mission social programs drive Chavez'
support in the D and E classes, who have seen their incomes
and living standards rise. These programs are not cost
effective, however, and appear to be unsustainable. The
weakness of the current system is evident in the labor force,
where 400,000 people enter the labor market annually to
compete for fewer than 200,000 jobs. The government taps
also run full for military spending, which included over USD
4.3 billion in arms purchases since 2005. END SUMMARY.
--------------------------------------------- --------
Is Venezuela's fiscal spending becoming unsustainable?
--------------------------------------------- --------
2. (SBU) In 2006, we estimate the BRV spent approximately USD
65 billion (USD 54 billion in budgetary spending and another
USD 11 billion spent by PDVSA, FONDEN, and FONDESPA). If one
extrapolates spending increases of 20 percent annually (the
average increase in dollar terms over the past eight years)
and assumes that inflation meets the government's target of
12 percent (which it won't), in 2007 the government will need
to spend at least USD 87 billion in 2007, USD 117 billion in
2008, and USD 157 billion in 2009 (assuming no devaluation).
The average price for the Venezuelan oil basket was USD
56.44/barrel in 2006 (a 350 percent increase over 1999 and a
historic high) and production was approximately 2.5 million
barrels/day (see paragraph 8). Production is not expected to
rise and most analysts predict the price of the Venezuelan
oil basket to range between USD 50 to 60/barrel in 2007.
This leaves the government with the problem of stagnating
revenues and increasing costs, to say nothing if the price of
oil falls.
3. (SBU) Much like an individual, a government that begins to
run out of money has three basic options: spend less, eat
into savings, or incur debt. While it is likely that the BRV
will augment spending at a slower rate than in recent years,
it has to keep increasing spending in order to meet the
rising expectations of its citizens and to cover up
distortions caused by an increasingly inefficient and corrupt
system.
4. (SBU) The BRV has approximately USD 33 billion in
off-budget funds and another USD 34 billion in Foreign
Exchange reserves. The lack of transparency in government
accounts requires some amount of estimation in compiling
these numbers. In the last quarter of 2006, the off-budget
reserves fell by almost USD 2 billion, presumably due to the
increase in spending in advance of the December elections.
These "rainy day funds" will cushion BRV finances for some
time. In fact, Minister for People's Power of Finance (MPPF)
Rodrigo Cabezas recently claimed that the BRV could survive
without exporting a drop of oil for 18 months. Venezuela's
CARACAS 00000718 002.2 OF 008
external debt picture is also quite manageable, with an
external debt/GDP ratio of less than 25 percent and annual
external debt payments of less than USD 2.5 billion.
5. (SBU) While one can argue the merits of using rainy day
funds and issuing debt when oil prices are at historic highs,
it does nonetheless appear that the BRV can maintain these
spending levels for a few years before the chickens come home
to roost. A fourth option available to governments is to
print more money. A devaluation, while painful to ordinary
Venezuelans (by decreasing the value of their savings and
generating higher inflation in a country that already has the
highest inflation rate in the region), would also allow the
BRV to prolong the situation by providing more bolivars for
every dollar of oil revenue -- albeit at a significant cost.
--------------------------------------------- -----
What price of oil is Venezuela's break even point?
--------------------------------------------- -----
(see 06 CARACAS 1291 for more information)
6. (SBU) It is difficult to set a magic number on the price
for the Venezuelan oil basket which the BRV needs to sustain
its fiscal policy. It depends on the production levels of
the various types of crude that make up the Venezuelan
basket, as well as factors such as inflation, government
spending, debt issuance, and the amount of "rainy day funds"
the BRV has stored up for just such an eventuality.
Conventional wisdom is that Venezuela loses USD 1 billion in
revenues for each dollar drop in the price of oil. To define
the break even point as the point at which BRV expenditures
exceed revenues would not be illuminating, as many countries
have long-term policies of deficit spending. Rather, it is
important to estimate the point at which the BRV's fiscal
deficit becomes so large as to force it to burn through its
cash reserves and begin serious deficit spending (say in
excess of 10 percent) within a one to two year time frame.
The traditional number has been assumed to be around USD
40/barrel for the Venezuelan basket, though Econ contacts and
local analysts provide ranges from USD 25/barrel to USD
55/barrel.
7. (SBU) Demands by Chavez and Minister Ramirez for emergency
OPEC meetings and production cuts as the Venezuelan basket
price fell below USD 45/barrel (or roughly USD 55/barrel WTI)
in early 2007 imply that they see this number as a red line.
On March 15, Ramirez commented that an OPEC basket price of
USD 54/barrel (or roughly USD 50/barrel for the Venezuelan
basket) was reasonable.
-------------------------------------------
How much oil does Venezuela really produce?
-------------------------------------------
(06 CARACAS 905, 1238, 1400, 2297, CARACAS 512)
8. (SBU) According to the Ministry of People's Power for
Energy and Petroleum (MPPEP), Venezuela produces
approximately 3.4 million barrels per day (mbd) of petroleum
and petroleum derivatives, divided between PDVSA production
(2.287mbd), the former Operating Service Agreements (OSAs)
(343,000bd), PDVSA Gas (29,000bd), the Strategic Associations
(SAs) in the Faja (563,000bd), and Liquefied Natural Gas
(173,000bd). These numbers are optimistic; most independent
analysts think that Venezuela actually produces between 2.4
and 2.6mbd. Embassy estimates, based on data from service
companies and shipping firms, are that PDVSA produces around
1.6mbd, the former OSAs produce another 350,000bd (PDVSA owns
on average 60 percent) and the four SAs in the Faja were
producing around 520,000bd (of which PDVSA controls
approximately 40 percent of production) before the 2007 OPEC
cuts. This gives Venezuela a total production of around
2.45mbd, of which about 2mbd are exported.
9. (SBU) Our estimate tracks with other reliable observers.
The Department of Energy's Energy Information Administration
(EIA) estimates that Venezuela was producing 2.49mbd as of
the end of December 2006, and independent local energy
analysts estimate current production at 2.5mbd. This
CARACAS 00000718 003.2 OF 008
contrasts sharply with the data published by the MPPEP as
part of its annual report to the National Assembly in
February 2007, which claimed that Venezuela was exporting
2.9mbd, of which 2.4mbd was wholly owned by PDVSA. Post and
most analysts expect Venezuela's production to decline in the
near to medium term due to increasing inefficiencies,
underinvestment, and a reduction in private sector
participation. This is in spite of PDVSA's USD 70 billion
investment plan to raise production to 5.8mbd by 2012. PDVSA
recently announced that its investment budget for 2007 would
exceed USD 10 billion, or nearly double what it spent in
2006, which may be recognition of mounting production
difficulties.
----------------------------------
Is PDVSA Unable to Pay Its Bills?
----------------------------------
(06 CARACAS 2227, 3311, 3558, CARACAS 183)
10. (SBU) PDVSA's finances are a black box; transparency and
accountability are sorely lacking. Nonetheless, all signs
indicate that PDVSA has cash flow problems. PDVSA has had
trouble paying its joint venture partners, services
companies, and (reportedly) even its income tax bill. The
press has reported that PDVSA is offering oil instead of cash
to pay for the lost equity in the conversion process for the
Strategic Associations in the Faja. PDVSA's bottom line is
being strained by BRV demands for more and more cash,
especially for social programs, having contributed at least
USD 13 billion to BRV budgetary and off-budgetary coffers in
2006. PDVSA's role as the BRV,s cash cow, coupled with
rising costs and increasing inefficiency, is evident in its
increasing costs and decreasing profits, even as revenues
continue to grow on the back of high oil prices. Given
PDVSA's USD 100 billion in worldwide revenues during 2006,
PDVSA looks more like a company lacking financial controls,
rather than one threatened with bankruptcy. Were PDVSA ever
to get into real trouble, it could in theory decrease these
transfers or take steps to increase production.
11. (SBU) Political pressures, however, make the likelihood
that PDVSA would decrease social spending unlikely. In fact,
it will probably go up in 2007. PDVSA's plans to increase
production frequently fail to be implemented in a timely
manner. The normal time lag in increasing oil production
coupled with high global demand for oil machinery and
services make the ability to quickly increase production
remote in the short to medium term. There is very little
spare production capacity in Venezuela currently.
12. (SBU) PDVSA only had about USD 4 billion in debt in 2006,
and investment bankers have indicated to econoffs that
increasing its debt profile would not be difficult given
global liquidity glut chasing returns in emerging market
debt. Already in 2007, PDVSA has secured USD 4.5 billion in
lines of credit and on April 12 it will issue a further USD
7.5 billion in debt, which will be the largest debt issuance
in emerging market history. After this issuance, PDVSA
should have between USD 15 and 16 billion in debt.
----------------------------------------
How much does the BRV have stashed away?
----------------------------------------
(06 CARACAS 3411)
13. (SBU) While the BRV's finances are intentionally opaque,
current Embassy estimates are that the BRV had around USD
33.4 billion in available funds (as of the end of February
2007), not counting USD 34 billion in Central Bank (BCV)
reserves. Much of the money in off-budget funds is already
allocated, but could presumably be reallocated in a crisis.
The off-budget funds are divided between treasury funds held
in the BCV (USD 1.8 billion), BRV deposits in private sector
banks (USD 8.7 billion in bolivars), The Bank for Social and
Economic Development (BANDES) (USD 9.9 billion), The Treasury
Bank (USD 5.7 billion in bolivars plus FONDEN's assets in
dollars), the Fund for National Development (FONDEN) (USD 6.2
billion, held by the Treasury Bank) and the Fund for Social
CARACAS 00000718 004.2 OF 008
and Economic Development (FONDESPA) (USD 1 billion). FONDEN
has since received USD 3.7 billion in transfers from the BCV.
(Note: These numbers are gleaned from BCV reports and public
comments by BRV officials. There is considerable doubt as to
the accuracy of BRV financial accounting and many reports are
significantly late. End Note.) In addition to the rainy day
funds and official reserves, PDVSA has tens of millions of
dollars in escrow accounts tied to the Faja strategic
associations. PDVSA can only draw on the accounts by
presenting audited financial statements. It is very possible
that PDVSA has additional funds held in off-shore accounts,
but we have no way of verifying their existence.
-------------------------------
What is the true exchange rate?
-------------------------------
(06 CARACAS 1215, 3434, CARACAS 216, 493, 574)
14. (SBU) Virtually everyone agrees that the official
exchange rate of 2150 Venezuelan Bolivars (Bs.) to the dollar
is overvalued. A parallel market exists to convert bolivars
to dollars using securities transactions. This so-called
parallel rate is currently around Bs. 3550 to the dollar
(after spiking to nearly Bs. 4500/dollar earlier in the
year). It reflects a high demand for dollars driven by
request denials by the Commission for the Administration of
Foreign Exchange (CADIVI) (requiring firms to obtain parallel
dollars to import goods or repatriate profits), excess
liquidity, high internal demand from GDP growth, and capital
flight. More than a quarter of the currency exchange market
in Venezuela goes through the parallel market.
15. (SBU) Another means of evaluating the value of the
bolivar is to divide the money supply (M2) by Venezuela's
foreign exchange reserves, which yields an implicit rate of
Bs. 3472 to the dollar as of March 30. By just about any
measure Venezuela's currency is significantly overvalued,
making imports cheaper and hurting domestic production.
--------------------------------------------- -----------
Why does Venezuela maintain an overvalued exchange rate?
--------------------------------------------- -----------
16. (SBU) A "strong bolivar" serves as an anchor against
inflation by keeping imports relatively cheap and increasing
the purchasing power of the average Venezuelan. For example,
Venezuela imports from 60 to 70 percent of its food, and by
keeping the bolivar overvalued, foodstuffs are kept cheap in
bolivar terms for Venezuelan consumers (although given that
inflation for foodstuffs was over 26 percent in 2006, this
clearly is not solving the BRV's problems).
17. (SBU) The currency controls that maintain the exchange
rate also serve as a mechanism to control the importation of
goods to Venezuela. Through CADIVI, the BRV can promote
certain imports (by approving dollar requests at Bs.
2150/dollar) and discourage other goods (by refusing requests
and forcing importers to pay Bs. 3550 for every dollar of
imports). This form of Import Substitution Industrialization
(ISI) also requires certificates of no production or
insufficient production in order to import goods. By forcing
someone to prove that the good s/he is trying to import is
not produced locally, the BRV in effect protects certain
local markets competition. At the same time, the overvalued
official exchange rate paradoxically hurts those domestic
producers by requiring them to compete with artificially
cheap imports. Many firms in Venezuela have commoditized
their businesses, shutting down the factory and becoming
importers instead. (Comment: The arbitrariness of the
exchange rate mechanism also allows the BRV to selectively
deny individuals' or firms' foreign exchange requests and
provides a wide avenue for corruption. End Comment.)
-----------------------------------
Will Venezuela devalue the Bolivar?
-----------------------------------
(CARACAS 568)
CARACAS 00000718 005.2 OF 008
18. (SBU) Economists disagree as to whether the BRV will
devalue the currency. A devaluation would bring the official
and parallel markets more into line, improve the
competitiveness of Venezuela's few exporting firms, and
multiply the domestic spending power of the government (as
most of its revenues are from oil sales in dollars).
However, a devaluation would also contribute substantially to
inflation (which was 17 percent in 2006) and fighting
inflation is, at the moment, Chavez' prime economic concern.
19. (SBU) Plans are underway to create a new currency, the
"Bolivar Fuerte," which would remove three zeroes from the
old Bolivar, but according to MPPF Cabezas, leave its value
vis a vis the dollar intact. Former Central Bank Director
Maza Zavala recently argued that the conditions do not exist
for Venezuela to gain from devaluation. According to Zavala,
Venezuela's lack of a productive capacity which would allow
for local production to replace imports or an export capacity
to allow Venezuelan firms to take advantage of the cheaper
currency means that devaluation would only hurt Venezuelan
industry and increase the already high inflation rate.
Should the BRV devalue, estimates are that the devaluation
would be between 10-30 percent from the current official
rate. Falling oil prices could hasten the need to devalue,
as government expenditures become crimped. Post does not
discount the possibility that devaluation could be hidden in
the monetary conversion scheduled for January 2008.
--------------------------------------
What is causing all of this inflation?
--------------------------------------
(06 CARACAS 2244, 2831, 3500, CARACAS 291)
20. (SBU) Official inflation was 17 percent in 2006 and an
accumulated 3.5 percent for January and February 2007
(typically months of low inflation). Certain categories are
growing faster, though, and the prices of foodstuffs and
non-alcoholic beverages has increased over 30 percent in the
past 12 months. Inflation in Venezuela is driven mostly by
government spending, which rose 62 percent in dollar terms
from 2005 to 2006, and excess liquidity. Foreign exchange
controls keep people from moving their money overseas, as
Venezuelans have traditionally done, and this bottleneck led
to an almost 70 percent increase in liquidity (M2) in 2006
alone. As a percentage of GDP, government spending has
nearly doubled since Chavez took office, going from 19.8
percent of GDP in 1999 to almost 38 percent in 2006 (when
estimated off-budget spending is included).
21. (SBU) The increase in money on the street has not led to
a commensurate increase in goods available for sale, due to
inefficiencies in the economy and BRV-initiated distortions,
which include price controls, fixed interest rates, and an
increase in the state's role in the private sector through
expropriations, nationalizations, and new regulations.
Interest rates are fixed by the BRV below the rate of
inflation. In maintaining political support through cheap
credit, the BRV is impeded from raising rates to encourage
saving and fight inflation. Inflation is predicted to
continue to rise, ending 2007 somewhere between 20 and 30
percent, as more money continues to chase a limited supply of
goods.
-------------------------------------------
Is Venezuela in danger of a banking crisis?
-------------------------------------------
(06 CARACAS 2622, CARACAS 686)
22. (SBU) The financial sector in Venezuela had one of its
best years ever in 2006, with record revenues and profits.
At the same time, banks are under constant rhetorical attack
by the BRV for their "excessive profits." The BRV is not
afraid to regulate to achieve its political ends: directed
lending now makes up 31.5 percent of a bank's portfolio and
interest rates are currently fixed, with banks having to pay
depositors 6.5 percent on savings accounts, 10 percent on
timed deposits, and the maximum loan rate capped at 28
percent. This spread is shrinking as the BRV continues to
CARACAS 00000718 006.2 OF 008
lower the maximum interest rate, which is already near the
rate of inflation (18.5 percent for the 12 months ending
March 2007). At the same time, reserve requirements are
increasing, with the statutory minimum up from 15 percent of
deposits at the beginning of 2006 to 30 percent of new
deposits today. These restrictions will help cushion any
crisis by providing reserves to cover shortfalls, but are
also forcing the banks into riskier behavior, including
increasing car and home loans and credit card issuances, in
order to make money. According to Banking Superintendent
Diaz, only two percent of banks' portfolios are currently
non-performing. High GDP growth and increasing salaries mean
that their customers, for now, can pay their loans. Should
government spending dry up and the economy slow down, many
banks may see large increases in outperforming loans, which
could potentially cause some of the banks to close.
23. (SBU) In addition, approximately USD 8.7 billion of
Venezuelan government funds are currently deposited in the
banking sector. Banks use these deposits to fund loans, even
though in theory at some point the government will need this
money to pay its expenses. The Treasury Bank that was
created in 2006 was designed in theory to hold all of the
government's funds until they were spent. (Note: In many
cases this money appears "parked" with these banks, which are
rumored to pay hefty bribes to BRV officials and
intermediaries for the deposits. End Note.) The Treasury
Bank's assets have increased from around USD 8 billion to USD
13 billion as of December 2006 as the government has begun
storing its money there. This amount is broken into the USD
9 billion the bank holds for FONDEN (in dollar and euro
denominated assets abroad) and USD 4 billion or so in
bolivars of budgetary money. As of yet there has not been
any large scale transfer of funds out of the private banking
sector; however, such a transfer could also trigger a crisis
as banks would have to suddenly call in loans to avoid
becoming insolvent.
----------------------------------
Has poverty declined under Chavez?
----------------------------------
(05 CARACAS 3830, septel)
24. (SBU) Reliable poverty statistics are hard to come by in
Venezuela since the National Statistics Institute (INE)
changed its methodology under political pressure from Chavez
in late 2004. Unsurprisingly, since then, it has shown a
steady decrease in the number of people living in "poverty
and "extreme poverty" and is used to justify the claim that,
under Chavez, poverty in Venezuela has fallen 10 percentage
points, from 44 percent of the population at the end of 1998
to 34 percent of the population as of the first half of 2006
(the last date for which INE has published statistics).
Households that cannot afford INE's basic basket of goods and
services (USD 919 a month at the official exchange rate) are
defined as "poor" and those that cannot afford the basic food
basket (USD 232) are "extremely poor." The average
Venezuelan household has 4.3 members. Both baskets are made
up of many price controlled items, which keep the cost of the
basket down, but many such items also are often sold above
the legal rate or are unavailable due to recurring shortages.
The comparison between 1999 and today is, of course,
misleading because INE is comparing apples and oranges -- two
different poverty calculations.
25. (SBU) Datanalisis, the largest polling and market survey
firm in Venezuela, has a different method that calculates
socio-economic status (SES). Their research divides
Venezuela into five SES groups: A, B, C, D, and E, with A
being the most well off. These groups are defined by income,
education, type of housing, and geographic residency, with
members of classes A and B (3 percent of the population)
earning at least USD 4,000 a month, C (16 percent) earning an
average of USD 900 a month, D (38 percent) averaging USD 415
a month, and E (43 percent) averaging USD 238 a month (all at
the official exchange rate). Groups A, B, and C have seen
real declines in their incomes of 23 percent since 1999.
Group D makes about as much in real terms as it did at the
CARACAS 00000718 007.2 OF 008
start of Chavez's presidency, and group E has seen its income
rise by 14 percent in real terms during this period. The
increase in earnings is coupled with the advent of the BRV
"missions" that provide subsidized food, health care, and
other services to these lower-income groups. Thus, at the
same time that the salaries of Venezuela's poor have
increased, the cost of certain goods and services has almost
certainly decreased. The support of these "missions" and of
Chavez is linked to the perception by members of the D and E
SES groups that they are better off and that things in
Venezuela are improving. This strategy of poverty
alleviation via transfer payments is clearly unsustainable in
the medium to long term.
------------------------------
Do most Venezuelans have jobs?
------------------------------
septel
26. (SBU) According to INE, the unemployment rate in
Venezuela fell from 15.3 percent in 1999 to 9.5 percent at
the end of 2006. INE defines anyone working at least four
hours a week as well as the participants of many of the
missions as "employed." Economic researchers at the local
economic consulting firm EconAnalitica estimate that over
750,000 unemployed people are considered employed due to
their participation in a mission, and an additional 500,000
"employed" Venezuelans are working less than 15 hours a week
and therefore would not be considered employed by
international bodies like the UN.
27. (SBU) Estimates are that up to half of the labor force is
employed in the informal sector. With around 400,000 new
entrants into the job market annually, and job creation last
year of only 190,000, the deficit of jobs continues to grow.
In addition, the number of people considered disabled or
unable to work has grown considerably since 1999. During the
past seven years, the labor force grew by 21 percent and the
number of disabled people almost doubled to over 1 million
(or 5.5 percent of the labor force), implying the perverse
incentive (hardly limited to Venezuela) for people to collect
disability payments instead of seeking gainful employment.
The employment situation is also marked by an increase in
public sector jobs and a decrease in private sector jobs, as
government spending increases and private firms reduce
hiring. Thus, while it would appear that the percentage of
people technically unemployed has fallen, the number of
people with actual jobs seems to not have grown in tandem
with the economy.
-----------------------------------------
Do the Missions really make a difference?
-----------------------------------------
(06 CARACAS 3505)
28. (SBU) By Post's count, there are currently 25 missions in
Venezuela. They range from providing subsidized food
(Mercal) to free health care from mostly Cuban health
practitioners (Barrio Adentro), to literacy and education
instruction (Robinson, Ribas, Simoncito, and others) to
energy-efficient fluorescent light bulbs (Energetica), and
are costing the government somewhere between USD 6-10 billion
dollars a year, when funding from the national budget,
FONDEN, and PDVSA is added together. The missions receive
high marks in public opinion surveys, with Mercal and Barrio
Adentro being the most used and most popular. While Mercal's
star has faded recently due to shortages, nonetheless, 63
percent of respondents in a recent poll were positive about
the program.
29. (SBU) A discussion of the BRV's missions requires an
explanation of opportunity cost. While most all would agree
that these programs do help Venezuela's lower classes, the
money could arguably be spent in such a way to help many more
people in an even more significant manner. The BRV's
literacy programs, for example, cost USD 583 per student at
the official rate and have had very little effect on reducing
illiteracy. According to the Economic Commission for Latin
CARACAS 00000718 008.2 OF 008
America and the Caribbean (CEPAL), illiteracy in Venezuela
fell from 7.5 percent at the start of Chavez' term to 6
percent at the end of 2005, despite this massive spending.
Most statisticians agree that most of this decline is due to
population changes and not educational programs. By paying
both teachers and students to participate, however, they
provide a benefit to these individuals in the form of
supplemental income. (Note: According to UNESCO, the average
cost of a literacy program in Latin America was USD 61 per
pupil in 2005 -- about one-tenth of BRV spending. End Note).
--------------------------------------------- --------------
How much money is Venezuela spending on military purchases?
--------------------------------------------- --------------
30. (SBU) Since 2005, Venezuela has agreed to purchase over
USD 4.3 billion in military hardware and equipment. Many of
these purchases are funded by FONDEN or through other
off-budget means that reduce the transparency of the
purchases and make tracking their actual cost and completion
difficult to ascertain. Over USD 3 billion of this amount
constitutes deals with Russia, which include the purchase of
100,000 AK-103 assault rifles, 24 Su-30Mk2 fighter aircraft,
Spanish patrol boats, helicopters, and surface to air missile
batteries. These purchases mark significant increases in
military spending, which, not including these extra-budgetary
purchases, only amounted to USD 3.2 billion in 2005 and USD
3.1 billion in 2006. The arms buildup has caused concern
amongst Venezuela's neighbors and shows no signs of abating.
In 2007, the BRV has announced that it plans to purchase
additional helicopters, trainer aircraft, and submarines for
at least another USD 3 billion.
BROWNFIELD