Happy new taxes, human beings!

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Two days before the New Year, Hugo Chávez’s economic svengali let everyone know they will be significantly poorer in 2011.

Starting January 1st – yes, you have two days to prepare – no longer will the government sell some dollars at BsF 2.6 and other dollars at 4.3. The 2.6 rate is disappearing, and transactions that were favored with that rate will now get dollars at BsF 4.3.

Venezuela neophytes may find it difficult to grasp why the government has any business announcing the price of a currency. It’s not like Barack Obama or Angela Merkel go on TV to announce the exchange rate of their respective currencies, right?

The reason is simple: the government, thanks to oil exports, is practically the sole supplier of currency in Venezuela, and for many years now, they decide who gets how much, and at what price.

In raising the price of the dollar, the government is, in essence, raising taxes on the purchase of currency. A devaluation in Venezuela works exactly like a tax increase, in that it takes money from importers and consumers in general in order to fatten the government’s accounts.

But the government, not content with deciding who got what price for which things, had also decided that different people would get different prices. They announced the BsF 2.6 rate in January of this year for basic stuff like food, health, and technology. In April, they announced that certain electrical and agricultural equipment would also have access to the mythical 2.6 exchange rate. Everything else got dollars at either the BsF 4.3 rate, the SITME rate (5.3), or the black market rate (currently 8.76, if you believe these guys).

So now, in keeping with Giordani’s erratic handling of the economy, everything that used to get the 2.6 rate now goes into the 4.3 bracket. I hope this includes the neck braces you will need to treat the whiplash caused by his policies.

This was expected, and its impact will be somewhat muted by the fact that getting government approval for dollars at the 2.6 exchange rate was proving to be more difficult than finding a chavista at CAP’s funeral.

El Universal has the details, including Giordani’s quip that this is done “by placing the human being at the center of economic decisions.”

Well, that human being just got screwed, medieval-style.

That human being is basically seeing his taxes rise on everything that is imported in Venezuela – and by that I mean everything, period.

Prices will have to rise to take into account the new exchange rate, and human beings at the center of this decision will have less money left over to buy other things, which will only delay our emergence from a recession that has caused considerable pain to all human beings.

So yes, human beings were placed at the center of this economic decision … in the same way a turkey is placed at the center of your New Years’ Eve dinner table.

1 COMMENT

  1. Juan,

    As you said, approvals of CADIVI dollars at that rate were rare and reserved for only the extremely well-connected. So, this move isn’t going to be enough to stem the bleeding from the Treasury. All this means is that they will have to devalue again in a month or two.

  2. What, other than the September elections, would make it wise to provide a favourable rate for food, health, and technology in January 2010, and get rid of the same subsidy-rate in January 2011?

    Are there any macro-economic factors that make this good policy?

    • I don’t know about factors that make it “good” policy, but there are macro factors that make it a necessary one.

      One of the key ones is PDVSA’s need to stop being Chavez’s cash cow and start investing in oil production and exploration. The more PDVSA needs to have cash to invest, the less cash the government has, so they need to get more BsFs for each $.

      Given how there are no elections in the near future, and with all that’s going on, the timing is perfect for the government.

  3. You sound very negative about this. But isn’t it better to get rid of the most preferential rate, with all its opportunity for self-dealing, bribes and other forms of corruption?

    And do you really think this will have any impact on inflation? Inflation in Venezuela is a monetary phenomenon. There is too much cash chasing too few goods. This doesn’t change the money supply. Or rather, if anything, it will help control money supply.

    And pricing theoretically happens at the margin. The only goods likely to increase in price are those where all distributors always got the 2.6 rate. I have no idea what goods that would apply to, but my guess is it’s a pretty small part of the average Venezuelan’s daily spending. In a normal country, it would mostly hurt the poor, who spend more of their money on the very basic necessities that were most likely getting the 2.6 rate, like flour or milk. But Venezuela isn’t normal, and these products are price-controlled, so instead, it ends up hurting the companies that supply these goods. I can think of one that starts with P, rhymes with molar…

    • I don’t think raising taxes in a recession is a good thing. True, you’re eliminating a distortion, but that’s just scratching the surface of distortions Venezuelans have to deal with.

      As per inflation, experience suggests that prices go up after devaluations. But we’ll find out soon enough!

    • “The only goods likely to increase in price are those where all distributors always got the 2.6 rate. I have no idea what goods that would apply to, but my guess is it’s a pretty small part of the average Venezuelan’s daily spending.”

      Think about it this way: Most of the dollars at 2.6 that were sold, went to well-connected chavistas who immediately turned around to sell them in the black market for a huge profit. Once that is no longer possible, they’ll try to do the same with 4.3 dollars, which will cause the parallel rate to go up quite a bit. So the question is: how much of the dollars that were used for actual imports (as opposed to the ones used to fatten chavista purses) came indirectly from the 2.6 pile? If that amount isn’t trivial, then the parallel rate will skyrocket and take everything to the stratosphere with it.

    • There are a few items that got the 2,6 (apart form the corruption) and medicines come to mind. There were supply problems, but at least the medicines I and my closest relatives take were subsidized with the 2,6 and the price was 25% of what they cost in Colombia or USA>
      Also the comment about the parallel rate is totally true, people who expected this were not selling dollars waiting until the devaluation to ask for more. So the chances are we will see a inflation as a result.

    • Setty your often far more well read then this post. First CADIVI has not been that tight this year. I work woth CADIVI. I work with the 4.6 exchange rate, but the truth is you need to use the parallel market for most of your larger purchases.

      This hits food and pharmacutical items, includeing chemicals brought in to produce drugs in the country. This is a hugh hit on the every day Venezuelan. Worse it will affect my business because, once again I need the parallel market to make larger purchases since I don’t have the capital to buy them myself without useing some of the money given to me at the time of the order to start the production of the order. Yes, if everything goes well in 7 to 12 months I have it back in CADIVI but I have one order that is close to 2 years without CADIVI, and would have bankrupted me if I didn’t charge prices in useing the parallel market.

      With the parallel market rising everything will rise. So while this directly affects food and medicine, perhaps the largest amount of imports this country is involved in, you can be sure that it will affect everything. I expect inflation this year to go to about 40% or higher.

  4. oh my god, I just had a good laugh reading the comment in Aporrea, this one was a total gem:

    “Igualemente me pregunto ¿en donde estan los reales?, coño si se calcula el presupuesto nacional por debajo del precio del Petroleo y se recolecta mas en impuestos de lo que estaba planteado en el presupuesto, por que se tiene que devaluar y aumentar el IVA??, no entiendo que alguien me lo explique.”

    Please someone explain to him, because he does not understad, jajaja, que vaina tan buena…
    http://aporrealos.com/forum/viewtopic.php?p=529505

  5. As Moraima did, I just checked the Aporrea site. Plenty of consternation and incomprehension, but, from what I’ve read, the most common reaction is anger. They are pissed off at Giordani. If the anger of his base does not abate quickly, one of Chavez’s most obvious stop-gag measures would be to offer Giordani as a chivo expiatorio.

  6. Does anyone know exactly what percentage of imports were approved at 2.6 prior to now? Miguel at The Devil’s Excrement thinks it was about half or more. I tend to respect him as an authority, but is there somewhere, where CADIVI statistics are published?

  7. You see, now the subject of abuse of power, revolution, decay of constitutional rights, etc. shifts back to the unraveling of the economy. Chavez can have all the power he wants, military weapons, political might, etc. but he can still go bankrupt!

    This reminds me of the game of chess, where one player (Chavez) has all the pieces in place, but his king gets into checkmate by surprise.

    • Gordo: Maybe he would save himself and his Revolution, if he were cautious. But the feeling here is: He won’t brake. Crash and burn, then. Let’s see what the other occupants (Venezuelans) will do, to wrestle the car off his hands or to jump out…

  8. I dont know the exact numbers but the representative chavista must be paying a higher percentage of his income on food than a representative esqualido, so chavez is downplaying by not appealing to his demographics, unless hes just trying to expand mercal and pdval so that all the low food prices come directly from government enterprises making him look good and avoiding rent seeking behaviours that originate from the dual exchange rate, so chavez is always appealing to his demograhics, this is venezuela after all.

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