The Devil's Excrement

It was the first day of the new financial transaction tax and lo andbehold, the financial system sort of ground to a halt, given the
level of improvisation and the lack of preparation by the Government. Basically, the Government did indeed modify the terms of the original decree, exempting some transactions like credit cards, the stock exchange and the interbank system from the new 1.5% tax. But things were so unclear, and the regulations so badly defined, that banks did not process any transaction via the Venezuelan Central Bank and their policy was very clear: when in doubt, charge the tax, which led to most large transactions, including those with local debt, which in theory is exempt, not taking place for the time being. Thus, only cash and checks were processed since it was very clear in their exchange that a 1.5% tax had to be charged.

One of the main victims of the halt was the parallel swap market, which simply died in the last three days ahead of the tax, and today was functioning with a huge spread so that if the transaction was eventually charged the 1.5% tax, then banks and brokers would be covered.

Thus, volumes were small, and few transactions were taking place, which simply adds to the pent up demand of the last few days and may fuel further rises in the upcoming days.

And October inflation was announced today and it was much higher than analysts were expecting at 2.4%, certainly showing the effect of the soaring swap rate, despite the fact that the Government claims it is irrelevant. As I have suggested before, if it is so irrelevant how come the Government spent some US$ 12 billion so far this year trying to bring it down?

In any case, with the 2.4% this month, the accumulated rate increase for the year is already 13.4%, above the 12% target set by the Government and still two more months to go. This, despite the fact that the value added tax was lowered by 6 percentage points in two stages, which gave the CPI an artificial decrease. Even worse, the Food and Beverages group, which affects the poor the most, as over 80% of their income is spent on this group, was up 4.1% for the month of October. For the last twelve months food inflation has been 33%, absolutely killing purchasing power gains by the poor. Add to this shortages and the contribution of the new tax to inflation in upcoming two months of the year and anyone that argues, like the Minister of Planning, that things are going well, has no clue as to what he is talking about.  And that is in large part the origin of the problem.

The Government has yet to explain how with record oil prices it needs to set such a financial transaction tax at a whopping 1.5%, which will generate next year 9% of the budget. One thing is for sure, it will add between 4 and 5% to the CPI in the remainder of this year, absolutely destroying not only the Government’s goals, but also the purchasing power of the Venezuelan poor. But tell that to the Tax Superintendent who still insists this tax does not contribute to inflation. Maybe e should look at Alcoholic Beverages and tobacco in October, as this group was up 9.1% after a special new 10% tax was levied on those items last month.

So, another oil windfall in Venezuela’s history becomes a lost opportunity, as mismanagement and ignorance are such that people have not felt the effects of the huge inflows into the country.