Venezuela Hikes Gas Price, Devalues Bolivar as Economy Tanks

President Maduro Considers Raising Prices On Cheapest In The World Gasoline

Customers refuel their vehicles at a Petroleos de Venzuela SA (PDVSA) gas station in Caracas, Venezuela on Feb. 11, 2016.

Photographer: Wilfredo Riera/Bloomberg
  • Gas price increases in 1989, 1996 triggered popular unrest
  • Primary exchange rate for essential imports devalued 37%

Venezuela hiked gasoline prices for the first time in almost two decades and devalued its currency as President Nicolas Maduro attempts to address triple-digit inflation and the economy’s deepest recession in over a decade.

The primary exchange rate used for essential imports, such as food and medicine, will weaken to 10 bolivars per dollar from 6.3, Maduro said in a televised address to the nation. The government will also eliminate an intermediate rate that last sold dollars for about 13 bolivars and improve an alternative “free-floating, complementary” market that trades around 203 bolivars per dollar.

The devaluation will ease the drain on government coffers by giving state oil company Petroleos de Venezuela SA more bolivars for each dollar of oil revenue, while higher gasoline prices will reduce expenditure on subsidies. At the same time, the devaluation will probably force the government to raise the cost of staple foods such as rice and bread that most of the country now depends on to eat.

Criminal and Chaotic

“Faced with a criminal, chaotic inflation induced a long time ago, we must act with the power of the state to control and regulate markets,” Maduro said below a portrait of South American independence leader Simon Bolivar.

Following Maduro’s announcement, the central bank unexpectedly released inflation and growth data for 2015 on Thursday, showing the extent of the economic crisis. Inflation surged to 180.9 percent by the end of the year and the economy shrank 5.7 percent.

Maduro also announced a 20 percent increase to the country’s minimum wage effective March 1.

60-Fold Increase

Something had to change after the bolivar lost 98 percent of its value on the black market since Maduro took office in 2013. The government was hemorrhaging funds as it struggled to meet international debt obligations and maintain the supply of essential items amid the collapse in oil prices.

The jump in gasoline prices will push up costs 60-fold, while still ensuring that Venezuelans enjoy the cheapest fuel costs in the world. As of Thursday, the gasoline price will rise to 6 bolivars a liter from 9.7 centavos. That’s equal to about 11 U.S. cents per gallon using the weakest legal exchange rate of 202.94 bolivars per dollar. U.S. consumers pay about $1.71 a gallon, according to the American Automobile Association.

The Caracas-based state oil company Petroleos de Venezuela SA spends about 2.7 bolivars a liter to produce gasoline domestically, ex-company President Rafael Ramirez said in late-2014 prior to his departure from PDVSA, as the company is known.

‘Necessary Measure’

Fuel prices in Venezuela hadn’t budged in almost 20 years. Food and gasoline price increases in February 1989 sparked nationwide protests and ultimately paved the way for the late President Hugo Chavez’s rise to power. Fearing a repeat of the so-called Caracazo riots, and labeling the measure typical of neoliberal economics, Chavez never raised gas prices during his 14 years in office.

“Venezuela has the cheapest gasoline in the world,” Maduro said before announcing the new price. “This is a necessary measure, I assume the responsibility.”

Venezuela’s economy is mired in its worst recession in more than a decade as the price of oil, which accounts for 95 percent of its export revenue, fell more than 75 percent from a peak in June 2014. While Maduro maintains his country’s hardships are the result of an “economic war” waged by political foes, growing discontent over soaring prices and empty shelves allowed his opponents to sweep congressional elections last year.

The only measures that could reduce a fiscal deficit that is now almost 25 percent of gross domestic product include a “sharp” currency devaluation, a hike in gasoline and electricity prices and spending cuts, Barclays Plc wrote in a note to clients last month.

“You can’t continue to sell gasoline at a loss, which is the current scenario. The gasoline subsidy is a huge financial burden on the company, so from the point of view of PDVSA and its cash flow situation, any type of relief is important and positive,” Luisa Palacios, managing director at New York-based consultant Medley, said by phone.