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Venezuela Announces Currency Devaluation

Monday, 11 January 2010 13:06

Source: Latin American Herald Tribune

Venezuelan President Hugo Chavez announced a currency devaluation and the introduction of a two-tiered official exchange rate as his government aims to boost a sagging economy.

The official exchange rate of 2.15 bolivars to the dollar, in effect since 2005, will be replaced beginning Monday with a dual-rate regime.

Importers of essential items such as food, medicine and heavy machinery will be able to buy dollars at a rate of 2.60 bolivars to the greenback. The school supply and science and technology sectors, as well as public sector imports and remittances, also will be favored by that rate, which will represent a 17 percent devaluation.

But a higher rate of 4.30 bolivars to the dollar – representing a 100 percent devaluation – will apply to most of the economy, including the automobile, chemicals, rubber and plastics, appliances, textile, electronics, tobacco, beverages and telecommunications sectors.

“Non-essential imports are going to get more expensive,” especially vehicles and shoes, Chavez said in a Cabinet meeting Friday that was partially televised by state-run VTV television.

The devaluation comes as the country seeks to dig its way out of a painful recession; the economy contracted 2.9 percent in 2009 and ordinary Venezuelans have been suffering the effects of high inflation.

The socialist president spoke first about a drought-induced national energy crisis before denouncing a new violation of Venezuelan airspace by a U.S. military plane that took off from the Dutch island of Curacao, a claim that U.S. Air Force officials have denied.

Chavez then announced the currency devaluation, saying “what we want with these measures is to stimulate (exports) so Venezuela is a country that exports and stops being exclusively dependent on oil,” the president said.

State oil company PDVSA’s revenues account for roughly 90 percent of the country’s export earnings and fund about half the national government’s budget, with the company’s contributions paying for health clinics for the poor and other social programs.

Venezuela, one of the world’s top 10 oil producers and exporters and a leading supplier of crude to the United States, imports much of its food, clothing and other basic goods.

Chavez, who was briefly ousted in a 2002 military coup that former U.S. President Jimmy Carter said enjoyed at least tacit support from Washington, has also used a portion of the country’s oil wealth to buy fighter jets, helicopters and assault rifles from Russia.

The president also said Friday that Venezuela’s Central Bank will “intervene” in the unauthorized parallel currency market, where importers unable to buy sufficient dollars from the government due to currency controls must pay three times the official rate.

He also announced a series of “incentives” for those companies that obtain “necessary imports.”

But Chavez opponents harshly criticized the devaluation, with opposition leader Gustavo Rojas saying the government’s decisions will “only translate into higher inflation for Venezuelans” at a time when, according to official figures, inflation stood at 25.1 percent at the end of 2009.

“When you go to the market tomorrow, you’ll surely see the effects of this announcement,” Rojas said.

“The president better not say this is to stimulate domestic production when he’s spent 11 years kicking around the private sector,” Rojas said, referring to nationalizations, price controls and other moves by Chavez since 1999.

“Don’t come with that story. This devaluation is to get more bolivars for the dollars received from (oil exports).”

“This is about having more bolivars to continue with ‘handouts’ to other countries, buying military toys and maintaining (a system plagued by) immense inefficiency and corruption,” Rojas said.