“The boom is over” in the face of high inflation: Venezuelans regret fleeting dollarization

When the economy of Venezuela Showing tentative signs of recovery in 2020, Enrique Perrella thought it was time to open a cafeteria in eastern Caracas serving coffee, desserts, and breakfast.

In January of this year, and although he had a clientele, he closed his premises due to high rents, higher taxes and financing limitations.

“the boom is over“, said perrella. “There is no investment protection”.

After a brief recovery after de facto dollarization, Venezuela’s economy is slowing down due to high inflation, wage lags and a decline in sales and production, said businessmen, merchants and analysts consulted.

The government of President Nicolás Maduro in 2019, and under Washington sanctions, took a turn in its policy by easing controls on the private sector and allowing greater foreign currency transactions, which favored an economic recovery between 2021 and 2022, after eight years of profound collapse that led to the migration of 7.3 million people.

Maduro in January highlighted that economic activity grew by 15% in 2022 and in August he assured that growth would continue.

But industrialists, merchants and analysts consulted pointed out that dollarization has been insufficient because credits are still limited, the local currency has depreciated more, taxes rise, public spending is restricted by lower oil revenues, failures in services persist. audiences and sales have fallen.

Economic activity fell 7% in the first half of this year, according to estimates by the non-governmental Venezuelan Finance Observatory. Year-on-year inflation to July stood at 398%, according to data from the Central Bank.

In August, Yaner Fung closed his small supermarket that had existed for 15 years in Barquisimeto, a city in western Venezuela.

“I had to close that because in the last two months sales have been falling due to lower purchasing power (…) and above all due to the increase in taxes and services“, said.

Fung now works for another similar business. “I went from owner to employee”, he added.

“There is no purchasing power”

Faced with the adverse context, small businesses and businesses lower product prices, adjust profits, and reduce payroll and branches to stay afloat.

“To maintain operations we had to reduce the payroll and work fewer days a weeksaid the owner of a small food factory in the industrial city of Valencia, in the center of the country, who asked not to be named. “There is no purchasing power”, he added.

Industrial production fell 7.6% in the first half of 2023, according to the latest report from Conindustria, the union that brings together the country’s main industries. Commercial sales fell 9% in the same period, according to calculations by local firm Ecoanalítica.

The central bank, which has not updated growth figures since 2019, did not respond to requests for comment.

“In the first half of 2022, we saw growth facilitated by the decrease in controls and the greater use of the dollar, which later slowed down.”, said Jesús Palacios, Ecoanalítica economist. “The structural problems of the economy such as scarce credits, absence in the recovery of public services, among others, were not resolved”.

On avenues and shopping centers in Caracas, where there is still a flow of visitors, businesses from various areas offer discounts on merchandise to stimulate consumption. Consulted merchants said that despite the sales, not everyone can buy due to low wages.

“Years ago I felt like a millionaire, today my salary is not enoughsaid Migdalia Uviedo, 58, a retired teacher who now tutors children and is a seamstress. “To survive I look for cheaper food and sometimes a whole chicken is chopped into several parts to yield it.”

Uviedo’s retirement payment is equivalent to 9 dollars a month and with extra jobs he can earn about US$20. Meanwhile, a kilo of chicken costs US$3, a carton of eggs US$4 and a liter of milk US$ $1.8.

52% of Venezuelans earn less than US$100 a month, according to calculations by Ecoanalítica. And although there are families that receive some income in foreign currency, that money is not enough for basic expenses such as food, much less for other luxuries.

After dollarization, old bakeries were reformed and restaurants and cafeterias like Perrella’s flourished. This year in Caracas 25 restaurants have closed, said Iván Puerta, president of the Chamber of Restaurants.

“The Government seeks more tax revenue and there are tax burdens that discourage private activity”, said Héctor Orochena, a lawyer specializing in taxes.

The restaurants or cafes that are still standing since May offer cheaper menus. A lunch that at the beginning of 2023 was at 20 dollars, today is around 10 dollars. But sales are still slow, restaurant owners said, while input costs have quadrupled in the past year.

“An executive menu is created so that less is spent on lunch. Offer a fair price-value”, said Giulio Gallucci, partner of a Mexican restaurant in Caracas. In an inflationary economyyou have to keep reinvented”, he added.

Source: Reuters