Chavez Announces 5 Point Decrease in Sales Tax, Monetary Reform

Venezuelan President Hugo Chavez yesterday announced government plans to reduce the rate of value added tax (VAT) by 5 percentage points, as well as plans to make changes to the Venezuelan currency, the Bolivar.

Caracas, February 16, 2007 (— Venezuelan President Hugo Chavez yesterday announced government plans to reduce the rate of value added tax (VAT) by 5 percentage points, as well as plans to make changes to the Venezuelan currency, the Bolivar. Yesterday’s measures are the latest in a series of new government policies aimed at curbing inflation.

“In broad terms, it is estimated that this [reduction in VAT] will reduce inflation by three percentage points a year,” Chavez said on his rescheduled weekly program Alo Presidente, (Hello President), adding that the currency would be ready for launch in February 2008.

Chavez said the government planned to cut VAT, currently at 14%, in two stages. From March 1, the rate would be brought down to 11%, and from July 1, a further 2 point reduction would come into effect, making the VAT rate 9%. He added that the government’s aim was to progressively reduce VAT until it reached zero.

During the program Chavez urged Venezuela’s tax collection agency, SENIAT, to improve income tax collection in order to compensate for the loss of fiscal contributions from VAT.

Regarding the announcement on monetary reform, Chavez outlined the plan to eliminate three zeros from the Bolivar, saying it would come into effect in February 2008.

Chavez said the aim was to establish a “strong Bolivar,” which would recover lost ground in relation to the Dollar, the Euro and other currencies.

“The measure will make the payment system in Venezuela more efficient, it will consolidate the national currency and produce positive psychological effects on peoples’ expectations,” Chavez stated.

However, critics of the proposal say it could have the opposite effect, leading people to increase their spending, and stores and suppliers to round up their prices.

“With rounding it’s always the same problem, there’s never any rounding down,” said Domingo Maza Zavala, an ex-central bank director, on the private radio station Union Radio Friday.

Chavez said that according to the timetable established with the Central Bank of Venezuela, (BCV), the relevant studies should be finalized by the end of March, and the law approved in the second semester of 2007.

“If this timetable is met, we would have the strong Bolivar in the first weeks of 2008,” Chavez said.

“The recovery of oil prices, the increase in international reserves (US$ 35.7 billion) and the decrease in unemployment are variables that account for Venezuela’s economic growth,” Chavez stated, adding that these variables showed that Venezuela had the right conditions to apply a monetary reform.

Among other things Chavez addressed on his Television program Alo Presidente (Hello President) was the new Law Against Hoarding and Speculation of foods under the price control system, due to be passed today. Chavez said this law would enable the government to take stiff measures against hoarders and speculators, which would include the possibility of large fines, and prison sentences of between 2 and 6 years.

“Reflect,” Chavez urged agricultural producers, “as I will not allow this to go on,” he warned, saying “speculation, the hoarding of foods, is a crime, an attack on the health of the people, the health of the nation.”

Chavez stated that Mercal, a government-run network of subsidized food outlets, which he said is used by over 10 million people, has not increased prices since its creation over three years ago. Chavez put Mercal’s zero inflation rate down to efforts made by the government, the people and the “revolution” to try and halt what he termed the “perverse inflation” that he said was unleashed in Venezuela after black Friday in 1983, “when the economic crisis began.”

“I remember, there were years in the nineties when inflation reached over 100% and wages were frozen, and price controls were eliminated; that is a capitalist economy,” Chavez said.

Also on Chavez’s agenda yesterday was the announcement that the budget for Communal Councils was increased to US$2.79 billion . Communal Councils, created in April 2006, are a government initiative whereby central government funds are allocated directly communities of 200 to 400 families, so that these can attend to their own needs.

Chavez made his statements on the first revamped and rescheduled Alo Presidente program. The new schedule for Alo Presidente, which until recently aired for up to six or seven hours every Sunday, will now be broadcast on the radio on Mondays, Tuesdays, Wednesdays and Fridays at 6pm, with a television version once a week on Thursdays at 8pm, which will last 90 minutes.

Chavez said the new daily format of Alo Presidente is part of “the revolutionary offensive to accelerate the ignition of the five constituent ‘engines’,” which include the Enabling Law, constitutional reform, a reform of the educational system, the reconfiguration of state power, and lastly, the empowerment of Communal Councils.