VZCZCXRO9231
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #0332/01 0461726
ZNR UUUUU ZZH
R 151726Z FEB 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7843
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 CARACAS 000332 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VE
SUBJECT: AFTER THE FIRST PASS, BRV GOES ON ATTACK AGAINST 
INFLATION 
 
REF: A. CARACAS 291 
     ¶B. 06 CARACAS 3375 
 
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SUMMARY 
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¶1. (SBU) At a press conference on February 11, Vice President 
Jorge Rodriguez, Finance Minister Rodrigo Cabezas, and 
Minister of Light Industries and Commerce (MILCO) Maria 
Cristina Iglesias announced details of the BRV's 
anti-inflation pact.  Plans include eliminating the Value 
Added Tax (IVA) on certain agricultural products, subsidizing 
agricultural production, and implementing measures to reduce 
liquidity, including dollarizing PDVSA tax payments.  These 
efforts combine harsh rhetoric with a surprising, if 
rudimentary, understanding of a market economy for the BRV. 
They also took the opportunity to continue attacks against 
"speculators, hoarders and blackmailers" and exhorted 
communal councils to be vigilant against price increases. 
END SUMMARY. 
 
----------------- 
FIRST, THE CARROT 
----------------- 
 
¶2. (U) At a February 11 press conference from Maracaibo, Vice 
President Jorge Rodriguez, Finance Minister Rodrigo Cabezas 
and Minister of Light Industries and Commerce (MILCO) Maria 
Cristina Iglesias announced a series of measures to combat 
inflation, which grew 2 percent in January and, if 
extrapolated, would mean an annualized rate of 27 percent for 
2007 (reftel).  The headline announcement was the elimination 
of the country's IVA value-added tax (currently between 8 and 
14 percent) for beef, pork, mayonnaise, oats, white cheeses, 
turkey, and other foods considered to be of "primary 
necessity." 
 
¶3. (U) The IVA is charged at every step in the production 
chain and in the case of meat, should cause a significant 
reduction (around 25 percent) in the overall cost to the 
consumer as it will remove the compounded rate charged when, 
for example, beef is sold to the slaughterhouse, then to the 
warehouse, then to the supermarkets, and finally on to the 
consumer.  However, even with the elimination of the IVA, 
supermarkets will still have to sell meat for more than the 
controlled price in order to break even.  These changes are 
expected to take effect on March 1.  (Note: A large cattle 
rancher told Econoff that the BRV will have a hard time 
enforcing the controlled price on meat as there are over 
35,000 sales points throughout the country.  End Note). 
 
¶4. (U) The VP also announced that the government would begin 
subsidizing cotton, sugar cane, corn, sorghum and rice, and 
that the BRV would spend USD 183 million in 2007 on these 
subsidies, to be paid in two lump sums in February and 
September.  According to Rodriguez, these payments would be 
part of an agreement with producers to lower their prices. 
 
¶5. (SBU) Meat has begun to return to store shelves in 
Caracas, though in limited quantities, and apparently is 
still selling at prices above those set by the government. 
In a rare act of economic good sense, Cabezas and others have 
admitted that they cannot force supermarkets to sell meat 
below cost, and instead are now aiming to reduce the cost at 
which retail vendors purchase meat to below USD 
2.30/kilogram, which according to them would allow vendors to 
sell meat at the controlled price and still make a profit. 
 
¶6. (SBU) On February 13, Iglesias announced a change to the 
price control regime, increasing the price for meat by USD 
1.20/kilogram and imposing price controls for meat at each 
stage in the supply chain.  In addition, MILCO is raising the 
prices for chicken, eggs and powdered milk (all of which had 
costs of production in excess of the regulated prices).  It 
is not clear whether these price increases will, when coupled 
with IVA elimination and subsidies, make their sale 
profitable for supermarkets.  In Venezuela, meat currently 
sells at an average price 35 percent higher than the new 
5.45/kilogram ceiling. 
 
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CARACAS 00000332  002 OF 003 
 
 
THEN, THE STICK 
--------------- 
 
¶7. (U) At the same time, the Institute for the Defense and 
Education of the Consumer (INDECU) has been raiding 
businesses and warehouses that were supposedly hoarding 
products.  According to the VP, as many of 700 tons of food 
have been retrieved and will be distributed to consumers.  A 
competition has sprung up between INDECU and the Venezuelan 
tax authority, SENIAT, which seem to be trying to outdo one 
another in closures and seizures. 
 
¶8. (SBU) MILCO Minister Iglesias also announced an upcoming 
decree from Chavez, entitled the "Law for the Defense of the 
Right to Feed and the Restitution of Order in the 
Distribution Chains of Foods under the System of Price 
Controls."  This decree reportedly would give the government 
very wide latitude to take control of food distribution 
chains in order to, in the words of Iglesias, put "food 
commercialization in the hands of the people and the 
revolutionary government." 
 
¶9. (SBU) Community Councils also gained new responsibilities 
at the press conference, where they were charged by Iglesias 
with forming a version of Neighborhood Watch programs, 
designed to keep an eye on vendors and ensure adherence to 
the 400-some odd price controlled items currently in place in 
Venezuela.  In revising the Community Council law, Rodriguez 
argued that the government had to give "tools to the public" 
to "attend to the necessities of the population," including 
monitoring, and potentially being able to sanction, 
supermarkets and salespeople. 
 
------------------------------------------- 
FINALLY, STEPS TO IMPROVE THE PLAYING FIELD 
------------------------------------------- 
 
¶10. (SBU) Finance Minister Cabezas also announced that the 
Commission for the Administration of Foreign Exchange 
(CADIVI) would increase dollar authorizations per person per 
year for credit card purchases abroad (from USD 4000 to 
5000), cash transactions (from USD 400 to 600), and internet 
purchases (USD 2500 to USD 3000) to help drain liquidity.  A 
currency trader contact noted to Econoff that this action was 
specifically targeted at the middle class, as the upper 
classes have other means of obtaining dollars and Venezuela's 
poor aren't taking vacations to Disney Land or purchasing 
iPods online.  Due to the country's overvalued official 
exchange rate, a lively trade already exists where 
Venezuelans purchase goods on-line from the U.S. at 
2150Bs./dollar and then sell them here at the  higher 3900 
Bs./dollar parallel rate.  A series of websites have been 
setup to assist this trade. 
 
¶11. (SBU) Cabezas also outlined a plan for PDVSA to pay its 
taxes in dollars instead of Bolivars, which in theory could 
temporarily reduce liquidity.  As explained by Cabezas, 
instead of paying its royalties, income tax, and dividends 
(last year valued at around USD 26 billion) to the government 
in Bolivars, PDVSA will now pay these taxes in dollars into a 
special treasury account.  These dollars will remain at the 
Treasury until the government needs to spend money, at which 
point the Central Bank will convert the dollars to Bolivars 
as needed. 
 
¶12. (SBU) PDVSA already has a dollar treasury account (USD 
3.1 billion as of December 2006) where it accumulates dollar 
proceeds until they are needed to pay expenses locally.  It 
remains to be seen if this new account will function 
similarly.  In addition, the private banking sector currently 
holds approximately USD 9.1 billion in allocated, unspent 
government funds.  Banks make onward loans with these funds 
and increase the money supply.  Were the government to save 
its money in dollars instead of in Bolivars in the banking 
system, it could in turn reduce liquidity, but only as far as 
the BRV holds back on spending.  As soon as it starts 
spending these tax revenues (in Bolivars), liquidity will 
again rise.  Given the BRV's insatiable desire to spend, it 
is unlikely these dollars will remain untouched for long. 
While most economists do not expect a devaluation in 2007 
(barring a plummet in oil prices), holding its income in 
dollars has the added benefit of protecting the government's 
 
CARACAS 00000332  003 OF 003 
 
 
liquid assets from devaluation and inflation. 
 
¶13. (SBU) In additional bids to reduce liquidity, PDVSA and 
the BRV are planning bond issuances.  Having finally obtained 
a credit rating (Moody's B1), PDVSA is purported to be 
pondering up to a USD 3.5 billion issuance.  At the same time 
the Finance Ministry is planning another "bonos del sur" 
issuance with Argentina valued at USD 1.5 billion.  It is 
currently unclear whether these instruments will be 
convertible to dollars, or merely dollar-denominated 
(inflation protected) bonds payable in Bolivars.  As was the 
case at the end of November, it is likely that any such 
issuance will be over-subscribed (reftel).  If there is 
insufficient supply of dollar-convertible bonds (which allow 
individuals and businesses in Venezuela to get their money 
out), it is likely that the parallel market will spike again. 
 
------- 
COMMENT 
------- 
 
¶14. (SBU) This is the third "anti-inflation pact" in recent 
history.  As with previous anti-inflation pacts in the 1980s 
and 1990s , this one too will do more to treat the symptoms 
than the cause.  As in many Latin American countries in the 
last century, the government here believes that it can bully, 
badger and threaten inflation away, while at the same time 
promoting policies that encourage inflation to grow 
(government expenditures, a fixed, overvalued exchange rate, 
artificially low interest rates, etc.).  While many of these 
steps will likely dent inflation in the very short run, they 
are unlikely to do much in the medium term.  The Venezuelan 
Central Bank is expected to announce additional measures this 
week and it is likely that the government and National 
Assembly will continue to gin up new ideas. 
 
¶15. (SBU) At times sounding far more sensible than in recent 
weeks, the VP and government ministers have admitted to the 
problem and, in the case of meat, displayed a rudimentary 
understanding of capitalism -- people won't sell products at 
a loss.  At the same time, much of the rhetoric and action 
seems determined to blame those rascally capitalists as the 
government's control over the economy seems to grow.  END 
COMMENT. 
 
BROWNFIELD