The move by Venezuelan President Hugo Chávez to steeply devalue the nation’s currency has generated anxiety among citizens, who rushed to stores over the weekend to purchase goods they expect will rise in price.
But for economists and analysts, it also underlies the dire economic straits of the oil-rich nation, which already suffers the highest inflation rate in the region and will face a tough recovery ahead.
“The timing of the decision surprised many in Venezuela, mainly because this year is a crucial year politically,” says Pedro Palma, founder of the economic consulting firm MetroEconomica and president of Venezuela’s National Academy of Economic Sciences. “We were sure that the devaluation would come. But we thought the government could postpone it until after elections [in September]. The oxygen of the government is shorter than we expected.”
Late Friday, President Chávez announced that the currency will be devalued to 4.3 per dollar from 2.15 currently for the majority of imports. A subsidized rate of 2.6 bolivars per dollar will also be used for essential imports, such as food and medicine.
The move is a boon to the state-run oil company PDVSA, which will now receive double the amount of bolivars per barrel of oil. That in turn will help the government boost spending for popular programs in poor areas that have been threatened by declining oil revenues. The new rates will help exporters, Chávez says, and he also expects it to encourage domestic production of items such as food.
“This is to boost the productive economy, to reduce imports that aren’t strictly necessary and to stimulate exports,” Chávez said on state television in announcing the measures. “We need to stop being a country that only exports oil.”
The immediate benefits are clear.
In a research note today, he wrote: “Although the accounting and other important details are not yet clear, we believe that the announcement is enormously positive for Venezuelan assets prices, since it provides a further signal from President Chávez of his willingness to pay, while improving considerably the capacity to pay. For us, it is a new demonstration of his flexibility and the capacity to adjust whenever is required.”
Still, Mr. Grisanti says, the measures do not tackle the sources of economic trouble in the country, such as inflation.
Chávez placed currency controls in 2003. And while this is not the first devaluation he has introduced, the exchange of 2.15 had not been touched in nearly five years, since 2005.
The shock to many citizens could hurt the president politically, even as the devaluation will boost government expenditures.
Media outlets reported shoppers lining up at stores over the weekend to buy electronics and other non-essential items ahead of expected price increases.
Some economists have predicted that the inflation rate, currently at 25 percent, could shoot up to 33 percent now, with some even saying it could reach 40 percent.
No 'bourgeoisie speculation'
Chávez said the moves should not spur price increases, and on his Sunday radio and television address promised to punish those who do.
“There is no reason for anybody to be raising prices,” he said, calling on citizens to “publicly denounce the speculator” and promising to “take over any business, of any size, that plays the bourgeoisie speculation game.”
Many viewed the threats, including calling out the National Guard if necessary, to be part of a blame game.
“The population is going to suffer cuts in purchasing power…. That will have a political impact,” says Mr. Palma. “That is why Chávez is trying to blame the private sector…. He is going to exploit that.”
In 11 years in office, Chávez has sought to make a more equitable society with his brand of "21st-century socialism," which has often put him at odds with the private sector. He has nationalized banks and other foreign firms. Many blame his policies for the economic woes that Venezuela, which also contends with an unofficial black market rate currently at about six bolivars to the dollar, faces today. Chávez said that another reason for the devaluation is to reign in speculation on that market.
Venezuela went into recession last year, with GDP contracting 2.9 percent, which has put pressure on the still-popular president ahead of crucial National Assembly elections in September. Already his opposition has jumped on the devaluation as a measure that will hurt the poorest Venezuelans.