The country is on the verge of hyperinflation and T[h]ugo Chavez is proposing to introduce new currency to deal with the mess of his own creation.
Venezuela President Hugo Chavez's plan to curb inflation by lopping three zeros from the currency may backfire because the move fails to address production bottlenecks that are pushing prices higher, economists said.None of this alters the fact that Chavez's economic policies have been disastrous and caused the hyperinflation and food shortages.
The government will cut three zeros from the bolivar's exchange rate by February 2008, Chavez said last night in a televised speech, citing rising consumer prices. He also will cut the value-added tax rate and clamp down on ``speculators'' to halt last month's 4 percent increase in the cost of food.
The steps aimed at slowing inflation and boosting local output miss the root causes exacerbating imbalances in South America's third-biggest economy, according to economists at Goldman Sachs Group Inc. and Bear Stearns & Co. Flush with oil money and government spending, which jumped about 50 percent last year, economic growth and inflation are both surging.
``He has a funny understanding of the problem,'' Alberto Bernal, a Latin America economist with Bear Stearns & Co., said in an interview. ``Cutting a number of zeros from the bolivar is irrelevant in the end.''
Chavez, who won a third term in December, was granted decree powers last month by Congress in his drive to seize key industries and put the country on the path of socialism. The president said he plans in ``coming hours'' to decree a law that allows the government to expropriate any business that sells food products higher than government-set prices.
The annual inflation rate rose to 18.4 percent last month, the highest in Latin America, from 10.4 percent in May.
Price regulations and other controls, including a crackdown on businesses buying currencies outside official government channels, have helped to make food production unprofitable, leading to a decline in supply and spurring inflation.