Venezuelan Government Applies Law Limiting Costs, Prices and Profits

Mérida, 10^th February 2014 (Venezuelanalysis.com) – The period allowed for businesses to adjust their prices to the new Fair Prices Law ended today, with the government planning a wave of inspections to ensure the legal measure is applied.

The Law for the Control of Fair Costs, Prices and Profits aims to prevent price speculation, product hoarding and other activities deemed to be “destabilising” the Venezuelan economy and contributing to on-going economic problems. Further, a maximum profit margin of 30% has been established across the economy to prevent companies from over-charging.

“From Monday, the someone … who is hoarding and speculating will have the law enforced on them. No one has any excuse, because it [the law] has three weeks since it was published,” said President Nicolas Maduro over the weekend.

For the past year citizens have experienced high inflation and shortages in some basic goods, while the value of the dollar on the illegal market has increased to over twelve times the official value.

The government argues that these problems are due to an “economic war” being promoted by business sectors opposed to the government, who allegedly stall production, hoard or divert products, and speculate on prices to provoke discontent and increase their profits.

Critics and the country’s conservative opposition blame government policies such as currency exchange controls and pricing regulations as the cause of the situation, claiming companies lack dollars for imports and have no incentive to produce.

The government hopes that the Fair Prices Law will crack down on economic crimes and establish “order” in the national economy, guaranteeing a “fair price” for consumers. To that end the legislation contains punishments for thirty economic crimes, including between two and fourteen years in prison depending on the offense committed.

The most serious crimes include engaging in contraband activity, boycott or “economic destabilisation”.

The law also allows for hefty fines for offenders and stipulates that authorities can temporarily occupy companies deemed to be breaking the new regulations.

A case of product hoarding was discovered over the weekend, when the Venezuelan Daily Industries company was found to be hoarding 72 tonnes of powdered milk, a Venezuelan staple in short supply. The milk will be distributed to supermarkets, and the company fined 2.14 million bolivars (US $339.700).

Karlin Granadillo, a top official of the government agency enforcing the new price law, said today that the maximum profit limit for each economic sector is still being studied and decided, as not every sector uses or requires a 30% profit margin. The limits will be published this Friday.

Fedecamaras criticisms

The Fair Price Law has been criticised by Fedecamaras, Venezuela’s largest business federation, as “unconstitutional” and “inapplicable”. The federation plans to request the annulment of the law in the country’s courts.

“Every law that tries to control prices always fails,” said Fedecamaras president Jorge Roig in an interview last week.

President Maduro, who accuses Fedecamaras of participating in an “economic war” to undermine his government, hit back at the criticisms on Saturday. The Venezuelan president also accused Fedecamaras of opening foreign bank accounts and promoting “capital flight”.

“For how long will Fedecamaras cause damage to the country…Your last embarrassment was the state coup against President [Hugo] Chavez”, said Maduro in reference to Fedecamaras’ prominent role in the April 2002 short-lived coup attempt.

Dollar auctions

The Venezuelan Central Bank will hold an auction of US $440 million this week to Venezuelan individuals and businesses under the complementary SICAD system of foreign currency exchange. The amount is double that of the usual $220 million auctioned every week, due to last week’s auction being cancelled after “anomalies” were discovered in the system.

Under Venezuelan currency controls the state allows businesses to buy a certain amount of dollars at a preferential exchange rate for imports and production, and to citizens for foreign purchases, study or travel.

The majority of goods are imported at a fixed rate of 6.3 bolivars to the dollar, while “non-priority” importations, travel money and other foreign currency is acquired at the SICAD rate of around 11.3 bolivars to the dollar.

The SICAD auctions are meant to ensure that any “excess” foreign currency requirements are met, so that citizens and businesses don’t resort to the “black market” where a dollar can cost over 80 bolivars.

Last week President Maduro defended the currency controls after some economic sectors claimed that not enough dollars were being approved to businesses. The president said that a total of US $1.3 billion were sold to the economy in January, almost 90% of these at the 6.3 rate.

“We have to work so that the dollars of the republic are invested where they should be. We are going to see our country flourish, and we’re going to see how the dollars of our country are converted into services,” he said.

The currency control system, first established in 2003, was recently overhauled with the aim of making sure the state’s currency reserves, which almost entirely come from oil sales, are allocated to businesses in a “rational” way that avoids currency fraud and speculation.