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Viewing cable 07CARACAS358, CHAVEZ TO LOWER VAT, "STRENGTHEN" CURRENCY AND

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Reference ID Created Released Classification Origin
07CARACAS358 2007-02-16 21:28 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Caracas
VZCZCXRO0736
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHCV #0358/01 0472128
ZNR UUUUU ZZH
R 162128Z FEB 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7887
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEHNSC/NSC WASHDC
RHEBAAA/DEPT OF ENERGY
RUCPDOC/DEPT OF COMMERCE
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