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Inflation easing but only due to controls
In April, consumer prices rose 1.7% more than twice 0.8% rate observed in
March. Nevertheless, the annual inflation rate continued its downward
path, albeit only moderately, declining to 33.5% in April from 34.1% in
the prior month. The current deceleration of inflation is mostly
attributable to the strong contraction in economic activity and government
imposed exchange and price controls. Wholesale prices continue to develop
in the opposite direction, which implies that underlying inflationary
pressure persist but that wholesale providers are currently unable to
pass-through the full cost of products to consumers. In April, wholesale
prices rose 1.1%, an improvement from the 6.0% monthly rate in March.
Nevertheless, the annual variation in wholesale prices rose to 65.0% in
April from 64.3% in the previous month. Participants expect inflationary
pressures to mount throughout the year.
Planning minister resigns and previous officeholder returns
The Minister of Planning and Development, Felipe Pérez resigned on 22
April. His resignation was unexpected and purportedly emerged as the
result of the minister’s desire to extend his ministerial responsibilities
into the areas belonging to the Finance Ministry. Furthermore, Pérez was
criticized for his lack of coordination with the Finance Minister Tobías
Nóbrega in his announcement for key economic forecasts at a time when
policy clarity is increasingly essential. While the Finance Ministry had
anticipated a more pronounced 8.9% drop in economic activity and inflation
at 35% for 2003, Pérez was optimistically forecasting a 3% to 5% drop with
27% inflation. The departure of Pérez brought back former Minister of
Planning, Jorge Giordani, who had resigned in early 2002, amid the strong
public backlash to his economic policy agenda. Giordani is considered
somewhat of a political mentor for president Chávez and will be the
deciding factor for economic policy for the time being. Unlike Pérez,
Giordani is not considered a proponent of the floating exchange rate
regime and believes in using the currency as an inflation anchor. Even if
exchange rate controls are lifted, he would be likely to vie for the
adoption of a crawling band currency regime supported by strong
international reserves and a robust oil sector.
Government raises minimum wage and fiscal adjustment likely
On 30 April, the government decreed a 30% minimum wage hike for both the
public and private sector, which will be split up between a 10% hike
starting 1 July and another 20% increase in September. The administration
estimates that the hike will cost the public sector 800 billion bolivares
(US$ 500 million) and will be financed with this year’s Central Bank
profits due to the Finance Ministry and resources generated by the
financial transactions tax. Since the wage hike was not specifically
budgeted, the government will have to make fiscal adjustments to ensure
that the public sector deficit does not rise above its current 2.0% of GDP
target for this year. Given the high likelihood of a dramatic decline in
tax collection resulting from the drop in economic activity and
uncertainty in the scope of revenues forthcoming from the oil sector, the
fiscal deficit is unlikely to be on target this year.
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