Chavez Orders Currency Devaluation

Sources:

NY Times – Chavez Devalues Currency Amid Oil Fall / WSJ - Chavez Devalues Venezuela’s Currency / Reuters – Devaluation ups stakes in Venezuela election year / wtop.com (AP) - Venezuela shutters stores in price-hike crackdown

Venezuelan President, Hugo Chavez, ordered the devaluation of Venezuela’s currency by 50% on January 8th. President Chavez created a new dual system for the fixed rate bolivar. The dual system will devalue the currency to 4.3 from 2.15 against the dollar for most imports and transactions. For imports of food, medicine, and other essential items the change will be from 2.15 to a new rate of 2.6. President Chavez set the 2.15 rate for basic goods to limit the impact of the devaluation on consumer goods. The move is an abrupt turn from President Chavez’s declaration 3 years ago of a “strong bolivar.” President Chavez also declared that the government would take further measures to attempt to decrease the size of the black market.

The Venezuelan economy has failed to recover from the credit crisis and lower oil prices. Other economies in the region have already exited the recession and have growing economies. The Venezuelan economy contracted by 2.9 percent during 2009. Furthermore, President Chavez faces growing unrest from continued blackouts and water shortages. President Chavez’s current popularity rating is hovering at around 50 percent. President Chavez hopes that the move will boost his popularity for the upcoming legislative election at the end of 2010. President Chavez has said that the policy would increase the competitiveness of exports of coffee and cocoa while also increasing domestic production. Some economists have concurred, finding that the policy could provide some relief to local industry and help close the budget deficit. President Chavez hopes that the benefits of a weaker currency will offset the faster rate of inflation.

Venezuelan citizens flooded to the markets following President Chavez’s announcement to purchase items before the price rise. One sales associate stated, “It was Black Friday, tinted red.” Individuals shopped at retailers, such as electronic stores, out of fear that prices would rise significantly in the coming weeks. Chavez ordered stores not to raise prices and threatened to shut down stores that did so. On Saturday, government inspectors, accompanied by soldiers closed 70 stores for raising prices in violation of the order.

Venezuelan finance minister projected that the devaluation will increase inflation from 27 percent to between 30 and 32 percent. Venezuela’s 27 percent inflation rate already was the highest in the region. Venezuela’s citizens rely heavily on imports for everything from beef and milk to automobiles. Economist Pedro Palma predicts that the move will further erode Chavez’s popularity due to the inevitable rise in the prices of imported goods. Furthermore, Economist Pavel Gomez stated that the two tiered exchange scheme creates incentives for corruption. Other economists fear that the policy could push inflation to 50% this year. Over the weekend the cost of dollars on the black market increased by 18 percent.

President Chavez also announced on Friday that the Central Bank transferred $7 Billion of foreign reserves to a fund used to finance investment projects. Traditionally, President Chavez’s popularity has risen with increased public spending.

Discussion Questions:

Is Venezuela capable of curbing the black market exchange rate?

Do the opposition parties have a realistic shot at gaining legislative control this fall?