Thursday, December 06, 2007

Hugo Woes

CARACAS, Venezuela (AP) -- After nearly four years of economic growth fed by record oil prices, inflation is beginning to eat away at Venezuela's economy despite efforts by President Hugo Chavez's government to put a cap on swiftly rising prices.

Inflation surged to 4.4 percent last month alone, sending annual accumulated inflation to 18.6 percent -- raising concerns the problem could be growing out of control. And rising prices come as shortages of basic goods from milk to toilet paper also become a growing aggravation for Venezuelans.

"Food has gone up the most. The prices of these products, if you can find them, are in the clouds," quipped Jose Guevara, a 54-year-old shopkeeper, as he left a supermarket in downtown Caracas.

Over the last year, food and beverage prices have skyrocketed by 33 percent. Analysts expect this oil-rich South American country to close the year with an inflation rate of 20 percent or more despite government-imposed price controls on 400 consumer products.

In February, the government announced an anti-inflationary plan, that featured the lifting of price controls from several staples, while reducing the value-added tax from 15 to 9 percent.

The government is also lopping off three zeros from the nation's currency, the bolivar. On Wednesday it unveiled anti-counterfeiting features of the revamped currency, dubbed the "Strong Bolivar," which will start circulating in the New Year.

But efforts to slow inflation have been undermined by near-record public spending by Chavez's oil-rich government, which has put billions of dollars (euros) into social programs for the poor, said Jose Guerra, an economist who closely monitored government spending at the Central Bank before leaving the institution in 2005.

"The spending policy has been too intense and there's no way to bring down prices with such high spending," Guerra said.

Guerra said that price controls have been accompanied by foreign currency controls, which have also boosted inflation by forcing many businesses to buy U.S. dollars on the black market for as much as 6,500 bolivars -- or more than three times the official rate fixed at 2,150 to the dollar.

"The worst part is there's no hope that things will improve because everything is going to continue to rise because dollars on the black market are rising," Javier Barreiro, a 26-year-old shopkeeper.

-------Very similar path in the Nicaraguan economy of the 1980s. We almost needed a shopping cart to carry home the cordobas after a dollar exchange. It was illegal to buy dollars on the black market but everyone, including the government, did. We dubbed the local toilet paper Grade Z because I swear it still had wood chips. In all those years I saw 1 egg and no bacon. Once, tired of the same meal over and over, I hung my head and cried like a baby over a plate of government provided beans. But the coffee was great. The limes and Flor de Cana rum were cheap and plentiful so everyone could stay buzzed on an empty stomach. Inflation reached an unbelievable 33,000 percent before the economy collapsed.

Hugo needs to figure out how best to invest those windfalls of war for oil profits, quickly.

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