Striving to contain inflation

Por Venezuela Real - 10 de Octubre, 2007, 15:04, Categoría: Economía

Arcaya & Asociados
Economist Intelligence Unit
October 10, 2007

With constitutional reforms still pending, Venezuelan authorities have  focused in recent weeks on macroeconomic policymaking, and in particular  on the continuing battle to control inflation. A plethora of heterodox  measures have been undertaken this year in response to the upward drift of  inflation above 20% at the beginning of 2007. For the most part, these have  failed to tackle the fundamental causes of recent price pressures—a  combination of extremely expansionary fiscal policy, exchange controls and  domestic capacity constraints—but they are evidently having some  beneficial impact in the short term.

An important component of the anti-inflation drive has been a combination  of stricter price controls and stricter penalties for "hoarding and  speculation". This has been generally intended as a means of combating now  frequent shortages and black-market sales of basic foods such as milk, meat  and sugar, which have come about as a result of a lack of price adjustments  for controlled items. Producers now claim that their costs are higher than the  fixed consumer price, which, combined with more general uncertainty over  property rights, has proved a serious disincentive to investment in new  domestic production.

Targeting healthcare

Private healthcare services have in recent weeks become the government's  latest target in its drive against "speculators". A sharp rise in incomes per  head and the imposition of exchange controls has served to boost demand  for private healthcare in the past two years. At the same time, President  Hugo Chávez’s focus on the health policy "misiones" has, it is claimed,  resulted in vastly improved health services in the poorest areas of the  country, but at the expense of public hospitals serving a large chunk of the  population. The latter facilities have deteriorated, while there has been little investment in new private facilities as a result of weak property rights  protection.

The result has been a sharp rise in the price of healthcare services, which account for just over 4% of the consumer price index. In August, for  example, the price of healthcare (including equipment and services) rose by  26% year on year, considerably above the 12% average increase registered  in2006.

This has attracted the attention of government members, including President  Chávez, who has threatened private facilities with expropriation if they do  not heed the planned introduction of price controls. In mid-September  representatives of the industry attempted to pre-empt a unilateral move by  the government, presenting proposals for a 15% price reduction for a variety  of the most common medical procedures to the National Assembly. The  initial reaction of the Assembly has been discouraging; the chair of a  congressional committee examining the issue has stated that the government  is looking instead at cuts of 25-30%. This is a figure that private hospitals  suggest will impact on the quality of care.

A new bond issue

Other efforts at controlling inflation also continue. The Ministry of Finance  relaunched the Bono del Sur III in late September, the latest in a series of  joint bond issues with Argentina. The issue had to be postponed in August as  a result of severe instability in global financial markets. As with previous  issuance, the bonds are purchasable in local currency at the fixed exchange  rate, making the bono an attractive tool for draining excess liquidity from the  domestic financial system.

In early September the government also announced the arrival of new  supplies of imported subsidised sugar and black beans, although local  producers complain that such measures further weaken their  competitiveness, exacerbating shortages in the long term.

Finally, the authorities are preparing for currency reform, another plank in  the anti-inflation plan announced in January, which will entail removing  three zeroes off the value of the currency and renaming it the bolívar fuerte (the strong bolívar). However, it is extremely unlikely that this in itself will  have any beneficial impact on inflation.

Indeed, despite this combination of measures, the Economist Intelligence  Unit forecasts year-end inflation of 18% this year, and 17% in 2008. We  project double-digit inflation into the medium term as well.

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