CHAVEZ TO LOWER VAT, "STRENGTHEN" CURRENCY AND

UNCLAS SECTION 01 OF 02 CARACAS 000358

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
ENERGY FOR CDAY, DPUMPHERY, AND ALOCKWOOD

E.O. 12958: N/A
TAGS: ECON ENRG PGOV VE
SUBJECT: CHAVEZ TO LOWER VAT, "STRENGTHEN" CURRENCY AND
PUNISH HOARDERS

CARACAS 00000358 001.2 OF 002



1. (SBU) Summary: On February 15, Chavez announced a two
stage reduction of the value added sales tax (VAT),which
will reduce the tax from 14 percent to 9 percent by July

2007. He also presented a plan for "monetary reform,"
removing three zeroes places from the bolivar by 2008, to
create the appearance of a strong currency. Chavez announced
that he would sign a decree-law on February 16 giving him to
power to nationalize supermarkets and food distributors and
criminalize speculation and hoarding. End Summary.

--------------
Lowering the IVA by 5 Percentage Points
--------------


2. (SBU) During his newly-formulated call-in television
program "Alo Presidente" on February 15, Chavez announced
that the VAT would be reduced from 14 percent to 9 percent in
a two phase process. The first phase will take effect March
1 and reduce the VAT by three percentage points. The second
phase will lower the tax two more points by July 1. Chavez
explained that the VAT was a regressive tax that burdened
low-income Venezuelans. He said that the VAT reduction is
part of his anti-inflationary plan and estimated that the 5
point reduction in the VAT would result in a 3 point
reduction in inflation. He conceded that this package would
cost the BRV approximately USD 3 billion per year in revenue,
which he claimed was greater than the budget of the Ministry
of Defense. He strongly urged SENIAT to more strictly
enforce income tax (ISLR) collection. Chavez said that the
revolution would reduce the VAT progressively, and ultimately
eliminate it entirely. The BRV would make up lost revenue
through measures to target the wealthy, such as property and
luxury taxes. "Those who have a lot of wealth need to pay
tax," added Chavez.

--------------
A Strong Bolivar
--------------


3. (SBU) Chavez announced a monetary "reform" (actually a
monetary conversion) plan to remove three decimal places from
the bolivar, to take effect February 4, 2008. "The bolivar
is going to recover all of the land that it lost to the
dollar and the euro and all of the monies in the world,"
proclaimed Chavez. Pointing to 13 trimesters of continued
growth in Venezuela, Chavez said that it was time for
Venezuela to have a strong currency that reflected its
economic muscle. He explained that the Central Bank was
currently reviewing the project and that legal measures and a
public information campaign would be underway in the second
trimester of 2007.


4. (SBU) Chavez placed the "strong bolivar" in the framework
of Venezuela's historic struggle against inflation, arguing
that the reform would reduce inflation to one percent. He
cited a study, presumably prepared by the Central Bank, that
this measure would reduce the average number of bills in the
hands of Venezuelans from 30 to 12, simplify transactions for
the public, and bring the currency within "international
standards." "Monetary reform will permit a more efficient
system of payments, consolidate confidence in the national
money and produce psychological effects in people's
expectations," said Chavez. He packaged the announcement of
the strong bolivar in typical rhetoric, saying he was tempted
to call the new currency "cachete," historically a strong
Venezuelan currency. He noted that the bolivar's decline in
value vis-a-vis other currencies began in 1983, the
bicentennial anniversary of Bolivar's birth, exclaiming, "the
strong bolivar, in honor of Bolivar, in our of our people, in
honor and in recognition to the great force that we have come
to achieve in these years!"

--------------
Law Against Hoarding and Speculation
--------------


5. (SBU) Chavez announced that on February 16 he expected to
sign, pursuant to the Enabling Law, the final version of "the
decree-law of popular defense against hoarding and
speculation, boycotts, and any other conduct that affects
food whose prices are regulated." This decree-law enables
Chavez to initiate expropriation proceedings in all levels of

CARACAS 00000358 002.2 OF 002


the production chain to "protect food security and
sovereignty." "From the land where the cattle are,
machinery, slaughterhouses and equipment, to the stores.
Everything is declared public utility and social interest for
this revolutionary law," proclaimed Chavez.

6 (SBU) A visibly emotional Chavez warned, "I implore the
cattle owners, producers, meat transporters for
example...everything that is regulated...big stores and
little ones too, I implore you to not give me reasons. But
if you give me them, I am going to expropriate everything
that I have to in defense of our people." Chavez responded
angrily to comments made by the president of CAVIDEA,
Venezuela's Food Industry Council, that if the government did
not allow the free sale of meat, it would close the
slaughterhouses. "Close the slaughterhouses? I will send the
army to take them," Chavez menaced.


7. (SBU) The decree-law enables the BRV to take preventive
measures, including occupying facilities, ordering operations
to continue that the owners had closed, seizing products, and
closures for 90 days with the obligation to pay employee
salaries. Penalties include fines and prison terms from 2 to
6 years.

--------------
Food into Petroleum
--------------


8. (SBU) Continuing on the theme of food security, Chavez
announced that he had set aside additional funds for Mercal,
the BRV's food distribution network. PDVSA's social fund
will provide approximately USD 237 million to Mercal.
"Petroleum converted into food, petroleum for the people,"
said Chavez.

--------------
Comment
--------------


9. (SBU) The return of Alo Presidente showed a Chavez who
appeared visibly emotional with respect to "food security,"
but this is mostly just an act. Chavez understands that his
continued support among low-income Venezuelans depends on
their ability to buy staple foods at low cost. The cosmetic
bolivar conversion may actually raise prices in the
short-term as sellers tend to round-up adjusted prices, and
is grounded more in Chavez' preoccupation with Venezuela's
world image than in economics, where it will have no effect
on underlying monetary policy. The proposed 5 point
reduction in the VAT means that the BRV will lose
approximately USD 3 billion with no clear program of how to
make up that lost revenue, worsening the BRV's fiscal
predicament. Though couched as an anti-inflationary measure,
reducing the VAT would only impact inflation in so far as it
would lower prices by sucking out government revenue. With
commitments to nationalizations within the past week already
over USD 1 billion, Chavez' pronouncements are pure populism
under the guise of economic reform. End Comment.


BROWNFIELD