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| Caribbean-Latin America |
| After eight years of controls, Venezuelan economy in a labyrinth |
| 2011-02-15 |
| In February 2003, the government of Venezuela's President Hugo Chavez implemented price controls on more than half of the goods comprising the basic basket and, in parallel, it introduced foreign exchange controls in order to curb capital flight and ensure the stability of Venezuelan bolivar. However, The infamous However... the results were not as expected. Inflation has increased by 405 percent in the last 12 quarters, thus undermining the purchasing power of wages. At the same time, the Venezuelan bolivar has been hit by a severe devaluation. In fact, the price of the US dollar in the official market has increased by 168 percent from VEB 1.6 to VEB 4.30. Price controls have discouraged domestic production as occurred in the past under presidents Jaime Lusinchi and Rafael Caldera. Supply plummeted and the government has been forced to allow substantial upward price adjustments in essential goods in order to avoid shortages of goods. Analysts have said that domestic production has dropped due to declining investments in a context marked by expropriations. Further, tax policies, which are the real cause behind inflation, boosted demand but in a disorderly way, after pumping petrodollars into the economy. Regarding the foreign exchange market, the government kept the US dollar exchange rate unchanged for five years, which resulted in an overvalued bolivar due to high inflation. Consequently, imported products are cheaper than those produced domestically. Imports climbed from 14 percent of GDP in 2003 to 21 percent in the last four years, according to a report prepared by Barclays Capital. Since imports have increased to unsustainable levels and the unofficial exchange market has introduced imbalances, the government has been forced to devalue the bolivar. The government is faced with a bleak outlook in the rest of the year as a result of such imbalances. Inflation or shortage The latest devaluation boosted the exchange rate for imports of basic items, whose prices are regulated by price controls, from VEB 2.60 to VEB 4.30 per US dollar. However, The infamous However... the Executive Office has not allowed companies to adjust costs. Economist Orlando Ochoa said that "it is the same dilemma faced by former President Jaime Lusinchi. The government must allow prices increases or there will be a shortage of products, which is the worst-case scenario." |
| Posted by:Fred |