Guess Who Likes the Dollar?

Hugo Chávez regularly gets ripped by international economists for his interventionist and abrupt economic policies. Yet the Venezuela president's latest move to devalue the national currency has a certain logic. It might help stabilize the nation's finances and boost domestic producers, which have been hit by competition from imported goods subsidized by an artificially pumped-up currency.

A devaluation was long overdue, even though Chávez had repeatedly denied one was in the works. Years of 20% inflation rates caused by government overspending has eroded the value of the bolívar in international currency markets. The current black market exchange rate is more than 6 bolívars for 1 U.S. dollar. Officially, though, the exchange rate has been stuck at 2.15 bolívars to the dollar since 2005.

As a result, anyone who could buy dollars at the official rate was able to import, say, Japanese wide-screen TVs relatively cheaply and resell them at a tidy profit. The artificially low price for dollars also created a shortage of them inside Venezuela, crimping domestic manufacturers that need dollars to buy critical components.

By bringing the bolívar closer in line with its market value, "the government is reducing a distortion," says Alejandro Grisanti, a Venezuelan economist at Barclays Capital (BCS) in New York.

Devaluation Distinctions

Devaluations are never popular, because no one likes to lose purchasing power. So Chávez made some distinctions. He announced a 21% devaluation, to 2.6 bolívars to the dollar, for essential imported goods, such as food and health-care items, but a 50% devaluation, to 4.6 bolívars to the dollar, for nonessential items. Anticipating price increases, consumers in major cities such as Caracas rushed to buy electronic goods and appliances. The hope, however, is that exchange rate adjustments will cause a one-time reset of consumer prices rather than exacerbate long-term inflation. Once import prices rise to reflect the new exchange rates, their contribution to inflation will end.

None of this means Chávez has suddenly embraced free-market capitalism. He sent inspectors, accompanied by soldiers, to shut down stores that raised prices, even though price increases on imported products are probably needed. "The bourgeois are already talking about how all prices are going to double," he said on state television during his weekly Aló Presidente program. "People, don't let them rob you."

More worrisome was an announcement by Chávez that Venezuela's central bank will transfer a higher-than-expected $7.8 billion of international reserves to cover the government deficit. Such transfers will enable more deficit spending, causing higher inflation—and inevitably, more devaluations to come.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE