Inflation Drops Significantly in July in Venezuela

The Central Bank of Venezuela (BCV) reported inflation dropped to 0.5% for the month of July, down from 1.8% registered in June of this year. This decrease also contributed to a reduction of the annual inflation for July 2006 - July 2007 to 17.2%, compared to 19.4%, for the period June 2006-June 2007.

By Kiraz Janicke - Venezuelanalysis.com
Short URL

Caracas, August 2, 2007 (venezuelanalysis.com)— The Central Bank of Venezuela (BCV) reported inflation dropped to 0.5% for the month of July, down from 1.8% registered in June of this year. This decrease also contributed to a reduction of the annual inflation for July 2006 - July 2007 to 17.2%, compared to 19.4%, for the period June 2006-June 2007. While accumulated inflation in the first 7 months of 2007 was 8.3 %, a slight increase compared to 8.1% in the same period last year, the Venezuelan government is aiming to close the year with an inflation rate of 12%, however some analysts are predicting it will be difficult to reduce the rate of inflation below 14%, (in 2006 Venezuela closed with an inflation rate of 17%, and to 14% in 2005).

In an effort to contain inflation, Venezuelan President Hugo Chavez decreed in February, a reduction in the value-added tax (VAT, similar to sales tax) by three percentage points beginning on the 1st March, from 14% to 11%, which saw inflation for that month drop to –0.7% the lowest rate recorded in 19 years, followed by a further reduction of two percentage points to 9% on July 1st.

While the BCV reported that the lower inflation rate for July could be attributed “principally to the reduction of Value-Added Tax, applied since the beginning of the month,” other key factors were the area of communications, which saw a deflation of –2.7%, and the diminution of prices for some agricultural products.

The BCV also reported that consumer inflation for goods subject to price controls as well as those free of controls “showed important decreases with respect to the previous month, from 1.5% - 0.6% and 2.0% - 0.4% respectively.”

The BCV also announced that wages had increased significantly between April and July of this year, registering the biggest overall increase of 10.3% since 1998. This was partly due to an increase in the minimum wage from Bs. 512.325 to Bs 614.790, but also due to increases for workers in the construction, manufacturing, and service industries.

Inflation, predominantly a consequence of the high levels of social spending by the Chavez government, has become a major issue facing Venezuela’s rapidly growing economy, which experienced 10.1% growth in 2006. According the Economic Survey 2006-2007 conducted by the Economic Commission for Latin America and the Caribbean (ECLAC), Venezuela was rated as the Latin American country with the largest increase in public expenditure as percentage of Gross Domestic Product (GDP). The research showed that Venezuelan public expenditures reached 4% of GDP in 2005-2006, above the regional average of 0.2% of GDP. This goes counter to the trend indicated by almost half the 19 nations participating in the study, which cut public spending.

In addition to reducing VAT, the Venezuelan government has utilized various anti-inflationary measures, such as price controls on some products, possible jail terms, and expropriation of businesses found guilty of speculation and food hoarding and have also announced a further release of PDVSA bonds of up to $US 1 billion, following a bond sale of US $5 billion in March. The bond sale is to absorb the excess liquidity in the Venezuelan currency.

Elías Eljuri, an economist and the president of the National Institute of Statistics, speaking at the 6th Social Summit for the Latin American and Caribbean Union in Caracas yesterday, detailed how the level of unemployment had decreased in the last eight years under Chavez, from 16.6% to 8.4%, how poverty had been reduced from 47.9% to 28% and extreme poverty reduced from 17.7% to 7.8% as a result of the social programs funded by the government.

“It is insufficient,” he argued, “to simply look at figures for economic growth without taking into account social and political inclusion, when determining the development of the country.”

Short URL