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Venezuela with the highest inflation in Latin America

Low savings rates translate in high prices eating up savings

Declining purchasing power is undermining living standards (File Photo)


Only six months away from the moment when the board of the Central Bank of Venezuela (BCV) crowns the economy and trumpets the birth of the new strong bolivar, the Venezuelan legal tender is under fire from the highest inflation rate in Latin America.

Between May 2006 and May 2007, prices climbed 19.5 percent in the Bolivarian Republic of Venezuela, followed by Costa Rica, where inflation soared 9.17 percent.

The lowest inflation rates in the region are seen in Peru, 0.94 percent; Chile, 2.90 percent; Brazil, 3.18 percent; Mexico, 3.95 percent and Colombia, 6.23 percent. In the United States, one of Venezuela's major trade partners, inflation stands at 2.6 percent.

Since the official exchange rate to the US dollar has been unchanged at VEB 2,150 per US dollar since February 2005, imported goods are cheaper than domestic items, thus leaving Venezuelan industrialists in a weak position to face competition.

Economist and professor Abelardo Daza in a recent report said the major cause behind inflation in Venezuela is excess liquidity and restricted supply.

"Over the last four years, liquidity increased sixfold, from some USD 8.8 billion in the first quarter of 2003 to more than USD 54 billion in the first quarter this year. In the meantime, the economy has only grown threefold, from USD 60.5 billion in 2003 to USD 181 billion ending 2006," said Daza.
Consistently increasing prices have serious consequences. Basically, inflation results in weakened purchasing power and triggers poverty. Simultaneously, however, industrialists stop creating jobs and freeze investment plans.

Further, savings rates do not offset inflation, and therefore savers are losing.

Daza argues that this is not a new problem. "Based on time deposits since 1986 to date, converting financial losses to US dollars and investing the resulting US dollars in US Treasury bonds, the estimated losses of Venezuelan savers are at around USD 15.8 billion, which translate into VEB 34 trillion at the official exchange rate."

Daza stressed that such "figure amounts to 9 percent of Gross Domestic Product in 2006 and 30 percent of present liquidity."

The major factor fueling liquidity is public expenses. In Venezuela, most public revenues come from oil sales, which provide US dollar that have to be changed into Venezuelan bolivars.

Consequently, every time the government spends money to pay subsidies, scholarships, wages, public works, it is injecting more bolivars in the domestic economy.

So far, President Hugo Chávez' administration has sent no signals of plans to curb growing expenses, which have increased by 21 percent of GDP in 2000 to 34 percent of GDP in 2006.

In a move intended to stop inflation, the government chose to implement exchange controls, price controls, VAT cuts and a number of issues of debt bonds aimed at absorbing liquidity.

However, new moves need to be implemented soon. Over the last 12 months, food prices -the economic factor that has the most serious impact on low-income households- have skyrocketed 30.2 percent.

Gastón Parra Luzardo, the chair of the Central Bank of Venezuela (BCV), on June 8 said new moves would be implemented to try to meet the inflation goal set for this year of 12 percent. Up to May, accumulated inflation amounted to 5.9 percent.

However, Minister of Finance Rodrigo Cabezas stressed that his office is not taking new economic measures, claiming that such steps would be taken by the board of BCV.
The Venezuelan Economic Council has warned that the goal to curb inflation will be hard to attain without putting a cap on public expenses.

Translated by Maryflor Suárez R.

Victor Salmeron

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