Venezuela’s Chavez Announces Currency Devaluation, Two-Tiered Exchange Rate

Caracas, January 8, 2009 (venezuelanalysis.com) – Venezuelan President Hugo Chavez announced a devaluation of the official exchange rate of the bolivar currency and the creation of a second rate denominated the “oil bolivar” for non-essential imports, in a nationally televised address on Friday.

The bolivar would be devalued from 2.15 per dollar to 2.6 per dollar, Chavez said, while the “oil bolivar” will be pegged at 4.3 per dollar. The measure represents a 17 percent and 100 percent devaluation respectively.

The Venezuelan government moved to regulate foreign currency exchange in 2003 after a two month long bosses lockout in the oil industry aimed at ousting the democratically elected Chavez from power caused an estimated $20 billion damage to the economy. The latest devaluation is the first since an 11 percent devaluation in March 2005.

The Central Bank of Venezuela (BCV) will also intervene directly into the unofficial dollar market where the bolivar is currently trading at approximately one-third the official rate in order to check capital flight, “This is a very firm resolution, the sectors that move in this economic ambit are well aware what I am referring to,” Chavez said.

The devaluation is aimed at revitalising the economy and strengthening national development after the country experienced a 2.9% contraction in 2009 due predominantly to lower oil prices resulting from the global economic crisis, he explained.

“This is to boost the productive economy, to reduce unnecessary imports and at the same time to stimulate exports,” he said, “We have to leave behind the oil rent model.”

The 2.6 rate will apply to imports from priority areas such as food, health, machinery and equipment, science and technology, books and education items as well as imports for the public sector, family remittances, Venezuelan exchange students, accredited consuls and embassies in Venezuelan territory, and pensions in some special cases.

The second rate will be applied to imports for the automotive, trade, telecommunications, chemicals, metallurgy, computing, and construction sectors as well as rubber and plastics, electrical appliances, textiles, electrical services, electronics, graphics, tobacco and alcoholic beverages, among others.

Economist Orlando Ochoa, from the Andrés Bello Catholic University told El Universal that  in particular the state-owned oil company PDVSA and the basic industries grouped in the Venezuelan Corporation of Guayana (CVG) would benefit from the measure because “they are going to import the inputs they need to produce at 2.6, but they will receive 4.3 for their exports. This gives them a huge break.”

Venezuela—the largest oil producer in South America, whose income from oil accounts for approximately half the country’s GDP and ninety percent of exports—experiences an economic phenomenon known as “Dutch Disease” where high oil revenues act as a disincentive for domestic investment and production in other sectors making the country heavily reliant on imports.

The devaluation will boost the government’s spending power, as it will receive double the amount of bolivars per dollar from oil exports. However, it will also affect the general population by increasing the cost of imported goods in the country where inflation reached 25.1 percent in 2009.

In order to offset the impacts of inflation the government maintains price controls on a range basic food items including meat, bread, milk and coffee among other things, as well as a network of subsidised supermarkets, and free health and education services. However, a heavily subsidised petrol [gasoline] price of approximately five cents per litre is viewed as unsustainable by many analysts.

Further economic measures are expected in the coming days, it is possible that Chavez could announce further subsidies.

During his address to the nation the president argued that the economy should be at the service of humanity and therefore socialism.

“Economics is a social science in the service of human development (…) In capitalism the economy is in the service of bourgeois elites, which through their neo-liberal capitalist laws and constitutions, institutions, place it at the service of a minority and it becomes a source of exploitation of the majority.”

“Venezuela is an example of this: in the 20th century, despite the oil wealth, we ended the century with more than half of the population living in poverty and misery,” he recalled.

He compared this situation with the past 10 years, during which the Bolivarian Revolution has dramatically decreased unemployment and poverty, and free health and education programs have considerably improved the life of the country’s poor majority as noted by the United Nations Human Development Index.

“We’ll do everything so that this global crisis does not affect Venezuela,” he said, recalling that in 2009, while the economies of northern Europe and the U.S. lost millions of jobs, in Venezuela the unemployment rate remained stable at around 7 percent.