VZCZCXYZ0000
RR RUEHWEB

DE RUEHCV #2708/01 2501533
ZNR UUUUU ZZH
R 071533Z SEP 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 6201
INFO RUEHBO/AMEMBASSY BOGOTA 6985
RUEHBU/AMEMBASSY BUENOS AIRES 1453
RUEHLP/AMEMBASSY LA PAZ SEP LIMA 0577
RUEHQT/AMEMBASSY QUITO 2417
RUEHSG/AMEMBASSY SANTIAGO 3759
RUEHGL/AMCONSUL GUAYAQUIL 0655
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL

UNCLAS CARACAS 002708 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV ECON VE
SUBJECT: BRV SPENDING GROWING BY LEAPS AND BOUNDS SECRET 
SECRET SECRET 
 
 
SIPDIS 
 
REF: A. 05 CARACAS 03643 
     ¶B. 05 CARACAS 03172 
     ¶C. CARACAS 00943 
     ¶D. CARACAS 01067 
     ¶E. CARACAS 02623 
 
------- 
SUMMARY 
------- 
 
¶1.  (U) From 1999 to 2006, BRV central government 
expenditures in dollar terms increased 95 percent and BRV 
central government spending as a percentage of GDP increased 
from 25 to 37 percent (including off-budget spending).  In 
bolivar terms, BRV spending increased 700 percent from 1999 
to 2006.  The 2006 BRV budget as of August 3, 2006 allocates 
USD 40.5 billion, plus additional credits of USD 9.4 billion. 
 Approved spending is directed mostly at social services (40 
percent), transfers to the states (25 percent), and debt 
service (13 percent).  In 2006, the BRV plans to spend little 
of its national budget on infrastructure, instead funneling 
resources through off-budget mechanisms such as the National 
Development Fund (FONDEN), which has received USD 15.8 
billion since its inception in July 2005, and the Special 
Fund for Economic Development (FONDESPA).  These fiscal and 
quasi-fiscal expenditures are targeted to maximize BRV 
political support and generate high, if unsustainable, levels 
of growth. 
 
-------------------------- 
EXPENDITURE CLASSIFICATION 
-------------------------- 
 
¶2.  (U) The table below shows actual BRV expenditures from 
2001 to 2005, and 2006 planned expenditures (reftels A and 
B), including additional credits as of August 3, 2006.  The 
National Assembly has approved USD 9.4 billion in additional 
credits this year (supplemental spending above the orignal 
budget), as compared to USD 2.1 billion in additional credits 
last year.  Spending for the first half of 2006 increased 64 
percent in dollar terms (and 83.5 percent in Bolivars) over 
the same period in 2005 and now accounts for over 37 percent 
of GDP.  (Note: The Central Bank (BCV) now claims to include 
spending by accounts other than the National Treasury, i.e. 
off-budget accounts, in its macroeconomic statistics.  This 
is a significant development and, if accurate, could provide 
a better understanding of overall government spending in the 
future.  That said, the BRV is increasingly characterized by 
a lack of transparency with respect to state accounts.  End 
Note.)  Spending on the most significant budget categories is 
listed in the table below.  Categories include: social 
spending, transfers to states, debt service, and defense. 
The other category includes transportation and 
communications, tourism and recreation, industry and commerce 
and other expenses. 
 
 
 
 
 
    Social   Transfers Debt    Defense       Total 
    Spending to states Service          Other 
 
2001  14,894       6,606           7,294         2,721 
7,285      38,800 
2002  10,428       4,539           8,879         1,676 
1,771      27,293 
2003  10,074       4,332           7,643        1,371 
2,417      25,837 
2004  13,280       5,670           7,032        2,010 
4,064      32,056 
2005  16,576       8,536           6,624        3,195 
5,915      40,846 
2006  20,181       12,389          6,709        3,121 
7,495      49,865 
(in USD millions) 
 
Sources:  Ministry of Finance, Central Bank, Official 
Gazette, and Embassy Estimates. 
 
--------------- 
SOCIAL SPENDING 
--------------- 
 
¶3.  (U) From 2005 to 2006, the BRV increased social spending 
in dollar terms by 21.7 percent, reaching USD 20.2 billion 
(13.2 percent of GDP).  However, social expenditures as a 
percentage of total central government spending have remained 
at approximately 40 percent during that time.  (Note: When 
Chavez came to power in 1998 social spending amounted to 
approximately 5 percent of budgetary expenditures.  End 
note.)  Original budgeted social expenditures for 2006 
included education (USD 7.3 billion), social security (USD 
4.3 billion), health (USD 2 billion), social development (USD 
1.7 billion), infrastructure (USD 600 million), culture and 
communications (USD 361 million), and science and technology 
(USD 261 million).  These figures do not include significant 
off-budget spending by FONDEN, FONDESPA, and PDVSA. 
 
¶4.  (U) The 2006 planned social expenditures support 
ministerial expenditures as well as special social 
initiatives, both known for their inefficiency and poor 
administration.  Major BRV education initiatives include the 
Simoncito program to meet the development needs of children 6 
years and younger, adult educational programs and the 
"Bolivarian school initiative8 to improve school 
infrastructure, purchase equipment and provide nutrition 
programs.  Social security funding is designated for pension 
and retirement payments, employer contributions to the 
Venezuelan Institute of Health (IVSS), Social Security 
Institute for the Armed Forces (IPSFA), and Social Security 
Institute for teachers (IPASME).  Health care funding is 
designated for food, pharmaceuticals, elderly poor, 
ambulatory services, medical equipment, medicines, and family 
planning and sexual education for adolescents. 
 
¶5. (U) In July 2006, Finance Minister Merentes announced the 
BRV would spend USD 6.9 billion during 2006 on BRV Missions. 
Funding sources include: the central government budget (USD 
837 million), additional credits (USD 1.5 billion), PDVSA 
trusts (USD 1.5 billion), and other sources (USD 3 billion), 
such as FONDEN (reftel C). 
 
¶6.  (U) After years of minimal spending, the Chavez 
administration finally identified additional funding to 
address infrastructure problems and the housing deficit, 
which has grown significantly in recent years (Note: Experts 
estimate that Venezuela currently has a housing deficit of 
1.68 million domiciles.  The housing shortage is an endemic 
problem in Venezuela and has been increasing by approximately 
60,000 homes a year.  In 1998 the figure was approximately 
1.4 million.  End note.)  The initial budget allocation for 
infrastructure was USD 600 million and approximately USD 
1.549 billion of the additional credits support 
infrastructure.  This funding supports mostly housing, but 
also includes improvements for potable water systems and 
highways, and neighborhood rehabilitation.  Despite the focus 
on housing, local media report that, as of June 9, the BRV 
had completed just 27,165 housing units, or 18 percent of its 
2006 housing goal of 150,000 units. 
 
¶7.  (U) The BRV plans to fund many of the highly visible 
infrastructure projects, such as roads, railroads, and energy 
projects, through FONDEN and FONDESPA (reftel C), rather than 
the 2006 national budget.  As of July 7 FONDEN had disbursed 
USD 6.1 billion, with a reported USD 8.8 billion remaining in 
its accounts (see reftel E).  In Chavez's September 3 weekly 
television show, "Alo Presidente," Finance Minister Merentes 
announced that FONDEN is currently working on 93 projects 
worth over USD 13 billion.  Chavez added that FONDEN has 
received USD 15.8 billion to date.  We estimate that FONDESPA 
has approximately USD 2 billion available to spend.  The BRV 
has said that it will inaugurate many large infrastructure 
 
and transportation projects this year, including Caracas 
Metroline 4, a Cardiac Children's Hospital, and the train 
between Caracas and Cua. 
 
------------------- 
TRANSFERS TO STATES 
------------------- 
 
¶8.  (U) Approximately 25 percent of approved 2006 central 
government expenditures represent transfers to the states. 
All but two of Venezuela's twenty-four states are headed by 
Chavista governors.  From 2005 to 2006, the BRV increased 
transfers to the states by 45.1 percent to reach USD 12.4 
billion (8.1 percent of GDP).  States primarily receive their 
funding from the central government through three mechanisms: 
the Constitutional Allocation (20 percent of total ordinary 
government income), the Law for Special Economic Allocations 
(LAEE) (25 percent of oil and mines incomes after the 
deduction of the Constitutional Allocation), and the 
Intergovernmental Fund for Decentralization (FIDES) (15 
percent of the value added tax).  The Constitutional 
Allocation is distributed between states (30 percent) and 
municipalities (70 percent).  FIDES is allocated by state 
based on three criteria: population (45 percent of the 
total), the state's physical size (10 percent) and level of 
development (45 percent, with lesser-developed states 
receiving more funding).  FIDES funding to each state is then 
divided between the state government (42 percent), 
municipalities (28 percent) and local councils (30 percent). 
FIDES and LAEE also allocate funds to states for specific 
projects.  In the original budget estimate, the 
Constitutional Allocation to the states received USD 5.3 
billion, LAEE received USD 1 billion, and FIDES received USD 
0.8 billion.  Additional credits have included funds to 
address prior year obligations to the states.  (Note: In May 
2006, USD 287 million in FIDES funds from 2001 and 2002 
remained undistributed.  End Note.) 
 
¶9.  (SBU) According to an academic contact, state governments 
depend almost entirely upon the central government for 
funding.  State governments can raise funds through the fees 
they charge for services (to change the title of a property, 
for example).  Municipalities receive disbursements from the 
federal government (including a percentage of the value added 
tax) and also collect a variety of local taxes on commercial 
activity, gambling, property taxes, etc.  The 2006 budget 
assumes an average price for oil of USD 26/barrel, of which a 
percentage goes to the states.  Additional proceeds from oil 
sales above this price (the average price for Venezuelan 
crude during 2006 has been USD 58.68) go to the central 
government, the effect of which is to cut state revenues. 
Funds transferred from the Central Bank and PDVSA to FONDEN 
and FONDESPA avoid direct distribution to the states.  The 
BRV also reformed the FIDES and LAEE laws to direct a portion 
of these funds in future budgets directly to community 
councils rather than regional governments, allowing greater 
Chavista influence at the local level (reftel D). 
 
------------ 
DEBT SERVICE 
------------ 
 
¶10.  (SBU) The BRV plans to spend USD 6.7 billion (4.4 
percent of GDP) for debt service, of which USD 1.2 billion 
will be from ordinary revenues (revenue from taxes) and USD 
5.5 billion will come from issuing additional public debt 
(reftel D).  This is almost the same in dollar terms as in 
¶2005.  Official statistics show a decrease in overall debt 
stock from USD 46.6 billion at the end of 2005 (36 percent of 
GDP) to USD 43.1 billion (28 percent of GDP) at the end of 
the second quarter 2006.  (Note: The majority of this decline 
as a percentage of GDP is due to GDP growth rather than 
significant decreases in external debt.  According to recent 
news reports, the BRV will issue additional debt in the 
second half of this year to cover its operating deficit and 
this may include the &bonos de sur8 issued jointly with 
 
Argentina.  End Note.)  Most economists agree that 
Venezuela's debt load is manageable given the high oil price 
environment. 
 
-------------------- 
DEFENSE AND SECURITY 
-------------------- 
 
¶11.  (C) From 2005 to 2006, Venezuela maintained 
approximately the same level of spending for security and 
defense.  The 2006 expenditures of USD 3.1 billion (2 percent 
of GDP) for defense and security include maintenance of 
existing military systems and equipment, investment and 
construction projects, and the maintenance and repair of 
military infrastructure.  (Note: This does not include the 
reported USD 3 billion deal for Russian fighter aircraft and 
helicopters.  The source of funding for these purchases has 
not been announced.  End note.)  The budget stresses support 
to Mission Miranda, Chavez,s military reserve force created 
in 2003 with prior enlisted military personnel.  Despite the 
increases in funding, DAO reports defense funding shortages 
for equipment, travel, and fuel, among other areas.  These 
shortages could be due to widely alleged corruption, 
mismanagement, diversion of funds, or as a result of Chavez 
favoritism.  (Comment: Chavez is believed to be spending on 
the National Guard and Army, but minimally supporting the 
Navy and Air Force because he does not trust them.  End 
comment.) 
 
----------------------- 
OFF-BUDGET EXPENDITURES 
----------------------- 
 
¶12. (SBU) In June of 2006, Ruth de Krivoy, former BCV 
President and local economic consultant, estimated that the 
BRV had USD 37 billion in public sector assets accessible in 
the banking system and public sector off-budget funds.  She 
estimated that the BRV could sustain 10 months of public 
sector spending without any additional revenue.  (Note: 
Santander, another respected economic consultancy, estimates 
this amount could be as high as USD 47 billion.  End Note.) 
These amounts exclude approximately USD 35 billion in BCV 
reserves, which exceed the USD 25-29 billion that Chavez and 
the Central Bank consider as the adequate level of reserves 
(implying future raids on the BCV's international reserves). 
The BRV has announced that FONDEN and FONDESPA will fund much 
of the BRV Missions and various large scale transportation 
infrastructure, railroad, and energy projects. 
 
--------------------- 
ECONOMIC IMPLICATIONS 
--------------------- 
 
¶13. (SBU) BRV spending fueled by windfall revenues from oil 
revenues remains the primary engine for economic growth. 
With aggressive fiscal expenditures this year, local analysts 
anticipate economic growth at 7 to 9 percent for 2006. 
During the first six months of 2006, the BRV spent USD 24.6 
billion, 64 percent more in dollar terms than during the same 
period last year.  Despite the oil windfall, the BRV is 
running a central government deficit of over USD 2.4 billion 
(4.8 percent of the budget, or 1.5 percent of GDP).  Analysts 
note that the BRV typically spends more aggressively towards 
the end of the year.  Jose Guerra, former head of the BCV's 
Economic Studies Department, noted that BRV expenditures are 
outpacing revenue.  If the pace of BRV spending continues, 
Guerra argues that the BRV will eventually have to devalue to 
address the fiscal gap.  This huge injection of public funds 
into a controlled economy like Venezuela also creates strong 
inflationary pressures, which remains a major BRV political 
concern.  Inflation is currently running at an annualized 
rate of 14.9 percent.  BRV attempts to combat inflation will 
be discussed in septel. 
 
¶14.  (U) Local analysts criticize these expenditures as 
wasteful and unsustainable, and designed to create large 
 
constituencies dependent on the BRV for assistance.  Handouts 
and make-work schemes from BRV Missions create disincentives 
to seeking employment, which in turn yields low official 
unemployment figures (9.6 percent for July 2006 according to 
the National Institute of Statistics).  The government has 
also hired significantly more personnel and is increasing 
wages.  The effectiveness of BRV expenditures is also 
hindered due to lack of technical skills and corruption in 
the BRV ministries and at the state government level. 
 
------- 
COMMENT 
------- 
 
¶15.  (SBU) The BRV appears to have an insatiable appetite for 
spending.  Instead of taking more orthodox measures to deal 
with windfall oil profits, such as paying down foreign debt 
and investing in stabilization or rainy day funds, the BRV 
seems willing and able to borrow and spend to win support at 
the ballot box in December 2006.  These measures alleviate 
extreme poverty and increase GDP growth over the short and 
perhaps medium term, but are clearly unsustainable in the 
longer run when oil prices or production decline.  Current 
estimates are that the BRV can maintain this high level of 
quasi-fiscal expenditure and imbalance between central 
government expenditures and revenues for at least the next 
two years due to continuing high oil prices and the purported 
USD 37 ) 47 billion stashed away in private banks and the 
public sector.  When the boom does end, however, the BRV will 
have little to show for its years of excess. 
WHITAKER