CARACAS, Monday December 26, 2011 | Update
Economic Outlook | Analysts note that the only government's action to control prices is the Costs Law

Expansionary spending policy is to hit 2012 inflation target

In 2011, the Venezuelan government projected inflation at 23%-25%, but through November inflation hit 25.4%

In 2011, food recorded the highest inflation rate, which climbed 31.3% in 11 months (File photo)
Monday December 26, 2011  11:12 AM

In 2012, the Venezuelan government will increase public spending. In this context, authorities have estimated the Venezuelan annual inflation rate at between 20% and 22%. Analysts, however, believe that higher spending will prevent such inflation target.

When the FY2012 budget was submitted last October, Finance and Planning Minister Jorge Giordani said that the struggle against inflation would continue. However, in the budget, authorities warned that in order to boost economic growth, "an expansion of spending is required. This will increase net monetary injections, thus speeding up the liquidity growth rate."

The need to spend more -because 2012 is an election year- has consequences. Director of the School of Economics, Central University of Venezuela, José Guerra, said that "the (inflation) goal can not be met because of the projected spending." Meanwhile, economist Orlando Ochoa believes that the expansionary spending policy will limit the inflation goal. "Authorities' statements show that there are no measures to tackle the causes of the acceleration of prices."

For analysts, the behavior of prices will be similar to that in 2011.

In 2011, the Venezuelan government projected inflation at 23%-25%, but through November inflation hit 25.4%. Earlier in December, Central Bank president Nelson Merentes announced that inflation would be around 27% in 2011.

Although in the first quarter both Merentes and Giordani ensured that inflation was performing as estimated, in the end inflation was higher.

A foreign exchange rate adjustment, the increase in the price of 16 basic food items, overvaluation and higher public spending had an impact on prices. And while public spending is one of the mechanisms to spur demand, Venezuelans are now faced with a scenario of higher liquidity and stagnant supply.

Central bank data on economic growth for the third quarter showed that manufacture rose just 2.1%, but food fell 9.1%. In 2011, food recorded the highest inflation rates, which climbed 31.3% in 11 months.

Last week, the president of the central bank admitted that efforts must be made in order to boost production. "We have not balanced consumption and production. We have to gradually increase production, especially of perishable products, and have to import properly."

A law to curb inflation

The measures adopted in 2011 are expected to be repeated in 2012. Analysts say that the only anti-inflation measure the government has implemented so far is the Law on Costs and Prices, which is expected to hit the supply of products.

Ochoa said that the Central Bank of Venezuela no longer discusses anti-inflation policies, as the only goal the bank has is growth. "The Costs Law will be used to curb prices, thus affecting especially the private sector." He added that "another move we will see next year is the acceleration of imports by the public sector." In fact, at the end of the third quarter of 2011, imports by the public sector grew 51%.

Guerra added that "the (Costs) Law will worsen the shortage of products and hit the quality of items."

Merentes said in recent days that the Costs Law, which came into effect in November, "could cut inflation by one to three percentage points," adding that "the law is a tool, but inflation is a difficult problem."

Translated by Maryflor Suárez R.

The end of a cycle

Hundreds of thousands of demonstrators took to the streets of Brazil on March 13 to demand the ouster of embattled President Dilma Rousseff, carrying banners expressing anger at bribery scandals and economic woes. A banner read "We don't want a new Venezuela in Brazil."

fotter Estampas
fotter Estampas