Chavez cuts tax, paperwork to boost economic growth

June 14, 2008

CARACAS (Bloomberg) -- Venezuelan President Hugo Chavez eliminated a financial transactions tax and cut paperwork for some importers in a bid to jump-start growth and rein in Latin America’s highest inflation rate.

The president also said he’ll increase agricultural subsidies, help pay off debts owed by food producers and create a $1 billion fund to finance projects with the private sector to boost manufacturing and food production.
“This tax was causing inflation and we don’t need it,” the president said in comments broadcast by state television. “We’re going to continue pushing the economy forward.”
Economic growth in Venezuela, the biggest oil exporter in the Western Hemisphere, dropped to its lowest in more than four years in the first quarter as inflation accelerated to almost 30 percent. Government price and currency controls and a series of nationalizations have discouraged investment and restricted the supply of consumer goods and foods.
While cutting the financial tax may reduce annual inflation this year by about 1 percentage point, none of the other measures announced are likely to have an impact on growth and inflation, said Miguel Carpio, chief economist at Banco Federal CA in Caracas.
“You’ve got demand that’s exceeding supply, and as long as that situation exists you’re going to continue to have inflationary pressure,” he said. “We still have economic controls and enormous public spending.”
----------------Development fund
The 1.5 percent tax on financial transactions that’s being eliminated was put in place in November. Chavez said he doesn’t plan to create any new taxes for the rest of the year.
The government will direct $500 million from a new windfall tax on the oil industry passed earlier this year to the new $1 billion development fund announced yesterday, the president said. The other half of the money will come from a fund created with China.
New exchange control rules should also speed up the importing process, the president said. Companies that need to obtain dollars from the government-run Foreign Exchange Administration Commission for imports of capital goods and other items needed to increase productivity will be allowed to bypass paperwork.
The new rules, which Chavez said are “perimental,” only apply to companies seeking as much as $50,000. The president said he’ll go back to the old system if he detects that companies are abusing the new plan.
“This is a new stage for our exchange controls,” the president said.
-------------------Slowing growth
Venezuela’s economy grew 4.8 percent in the first quarter after expanding on average 12 percent during the previous four years.
The slowdown in growth was spread over almost all parts of the private sector. Manufacturing expanded 1.4 percent in the period, down from 6.8 percent in the same period a year earlier. The financial sector contracted 6.4 percent, after expanding 28.8 percent in the first quarter last year. Capital investment decreased 1.8 percent in the first quarter.
Venezuela’s annual inflation rate, the highest in Latin America, reached a five-year peak in May, at 31.4 percent. Food inflation drove up the consumer price index last month, as the government increased regulated food prices in a bid to ease shortages of staples including milk and beans.
“In the announced plan, with the exception of the elimination of the financial transactions tax, fell somewhat short of expectations,” Goldman Sachs Group Inc. economist Alberto Ramos wrote in a note to investors. “It’s unlikely to generate a significant impact either on the economy or on inflation.”
----------------Government budget swells
Chavez said that, while the government is concerned about inflation indicators, he won’t curb government spending to stabilize prices.
“We’re not going to put the brakes on the economy,” he said.
Venezuela has benefited from a more than 200 percent gain in oil prices since 2004, allowing Chavez to ramp up spending on education, health care and food programs for the poor, contributing to inflation.
The government’s budget has grown more than sixfold since 2000. Chavez has also ordered the state oil company to start directly financing social programs.
The president is expected to announce a replacement for outgoing Finance Minister Rafael Isea this month. Policies put in place under Isea led to a 40 percent gain in the bolivar in the parallel, unregulated currency market to 3.4 per dollar. Venezuelans turn to the parallel currency market when they can’t get permission from the government to buy dollars at the official rate of 2.15 per dollar.
“After the first-quarter growth figures, we’ve seen it’s not enough to have high oil prices,” said Asdrubal Oliveros, director of Caracas-based Ecoanalitica, in a telephone interview. “Bad policies need to be corrected.”