Venezuelan Consumption Increases and Inflation Remains High

Mérida, July 9, 2008 (venezuelanalysis.com)– According to the Central Bank of Venezuela (BCV), consumer prices rose by 2.4% in June, bringing total accumulated inflation for the first half of this year to 15.1%. Meanwhile, Venezuelans are spending more with their credits cards, while new car sales have cooled off relative to the 2007 boom.

Amidst government efforts to moderate consumption, encourage savings, and improve national production in order to stifle inflation, credit card-holding Venezuelans are spending plastic money more and more, according to the Superintendent of Banks and Other Financial Institutions (SUDEBAN).

Credit card use grew from $6.6 million at the start of this year $7.5 million in May.

The spending growth occurred despite the fact that the government tried to tighten the money supply by increasing the maximum interest rate for credit cards from 28% at the start of 2008 to 33% last May, and increased interest rates on savings accounts to 15%.

As a result, liquidity grew by only 0.8% in the first five months, according to the newspaper El Universal. Still, some Venezuelan analysts speculate that expanded credit card spending despite high interest rates would continue to put pressure on inflation.

Venezuelan economist and private banker José Grasso Vecchio told Venezuelan newspapers last week, “The majority of banks are interested in attending new segments and strata: Those without bank accounts, micro-entrepreneurs, those people who had remained excluded from the banking system.”

For several years, extensive government social programs, cheap credit, and investments aimed at the poorest populations have dramatically increased demand and spurred 18 consecutive quarters of economic growth during which the supply of many goods, including food, came up short. Food price inflation was 19.3% in the first half of 2008, 4.2 percentage points higher than general inflation, according to the BCV.

To deal with this in the short term, the government prioritized imports of food, health care items, and agricultural machinery.

Car Imports Reduced

Also, so as to increase domestic production of industrial products, the government placed restrictions this year on the importation of non-essential items such as new cars. As a result, new car sales plunged by 27.4%, according to the Venezuelan Chamber of Automobiles (CANEVEZ).

Last year, new car sales increased by 43% overall, and car imports increased 81%, relative to two years ago. Demand was so great in 2007 that the waiting list for some models had reached 8 months. Cheaper imported models were preferred over domestic models, so domestic plants functioned at half their capacity, according to former Finance Minister Rafael Isea.

Isea explained that the reduction of car import permits issued in the first half of this year to 219,000 had the intention of stimulating domestic car production and generating employment.

So far, however, domestic sales have not risen, and imports have dropped below the number of import licenses available. 82,481 imported cars have been sold, which is a 41.1% decline relative to the first half of last year, and 72,095 cars produced domestically have been sold, 1.2% fewer than last year.

Moreover, General Motors, which controls more than half of Venezuela’s domestic car production, announced Tuesday that it plans a “progressive” downscaling of its production in Venezuela because of import restrictions on essential car parts and uncertainty regarding government requirements that new cars have dual gas-diesel engines.

Focus on Agricultural Production

Two weeks ago, Venezuela’s new Finance Minister, Alí Rodríguez, announced the ministry’s intention to invest heavily in national state-run agricultural production to boost the food supply and control food price inflation in the long term.

The president of the Venezuelan Confederation of Industries (CONINDUSTRIA), President Ismael Pérez Virgil, agreed that to fight inflation “the country has to increase its productive capacity,” but he criticized the government for investing public money rather than emphasizing national and international private capital.

Pérez also criticized the government’s regulation of food distribution since March through so-called “mobilization guides,” which assure that the amount of food delivered to each region of the country matches the demand and is not lost to contraband, hoarded, or disproportionately supplied to the rich.

“To think that the government is going to have a mechanism to tell consumers to what extent they will be able to consume or what quantity or how it will be distributed is nothing more than the eagerness to control everything,” said Pérez.