Venezuela weakens currency for 1st time in 5 years

A customer opens a a refrigerator at an electronics store in Caracas, Saturday, Jan. 9, 2010. Venezuela's President Hugo Chavez said Friday the bolivar will now have two government-set rates: 2.6 to the dollar for transactions deemed priorities by the government, and 4.3 to the dollar for other transactions. Imports now falling under the less favorable rate include automobiles, telecommunications goods, computers, appliances, alcohol and tobacco.

AP Photo/Fernando Llano
Published: Saturday, January 9, 2010 at 10:11 p.m.
Last Modified: Saturday, January 9, 2010 at 10:11 p.m.

CARACAS, Venezuela — President Hugo Chavez's decision to devalue Venezuela's currency for the first time in nearly five years aims to stretch oil earnings further and counter a recession by increasing government spending.

The devaluation of the bolivar lessens a wide gap with the black-market exchange rate for dollars and will unavoidably push inflation — already the highest in Latin America at 25 percent — to even higher levels.

Opposition leaders on Saturday called the devaluation a blow to Venezuelans that will make them pay through inflation while letting the government instantly convert its oil revenue into more cash domestically to boost spending ahead of congressional elections.

"Venezuelans' standard of living has been devalued," said Caracas Mayor Antonio Ledezma, a member of the opposition.

Finance Minister Ali Rodriguez said the devaluation announced by Chavez on Friday night should add to inflation by 3 percent to 5 percent this year. Some economists predicted a much bigger leap.

Dozens of Venezuelans lined up in Caracas on Saturday outside stores that sell electronics and appliances, trying to buy items that they fear soon will be considerably more expensive.

"When I heard about the dollar, I didn't think twice about it. I got some of the last cash out of my account and I came to buy my washing machine," said Iraima Rodriguez, a 31-year-old secretary. "Whenever they devalue, the prices go sky high."

The currency's official exchange rate had been 2.15 bolivars to the dollar since a devaluation in March 2005. Chavez set a new two-tiered exchange rate to lessen the impact on prices for priority imports like food, medical products and machinery for economic development. The bolivar will trade at 2.6 to the dollar for priority transactions and 4.3 to the dollar for other transactions.

The higher rate, which Chavez called the "oil dollar," doubles the paper value of Venezuela's oil earnings when converted to local currency. Oil accounts for about half the government budget, but that income has been squeezed by lower world oil prices and declines in output in the last year.

The president — a self-described Marxist and former paratroop commander — said the adjusted currency rates aim to boost the economy by encouraging local manufacturing of items such as clothing and shoes, which Venezuela mostly imports.

"This is going to generate greater productivity in Venezuela," Chavez said in a televised speech after inaugurating a new subway line. He said the former exchange rate encouraged imports.

Venezuela slid into a recession last year after five years of oil-fueled growth, and Chavez said the country should produce more non-oil products and refrain from unnecessary imports.

"Last year we imported 90 million pairs of shoes, for the love of God," Chavez said. "We can make all of that ourselves — shoes, clothes, almost everything is imported."

Imports now falling under the less favorable rate include automobiles, telecommunications goods, computers, appliances, alcohol and tobacco.

The government has maintained strict controls on the amount of bolivars that can be exchanged for dollars since 2003 in an effort to diminish capital flight.

It also kept a fixed exchange rate that varied widely from the bolivar's real value on the black market and in bond trading. Lately the bolivar has fetched little more than one-third of its official rate in market trading, hovering at about 6 bolivars to the dollar.

Chavez called that rate a "product of speculation" and said "we're going to combat it with a strong intervention by the Central Bank and the government" in the parallel bond market. He didn't elaborate, but the aim is apparently to further narrow the gap between official and unofficial rates.

Economist Pedro Palma, of the Caracas consulting firm MetroEconomica, said the government was forced to accept that a large disparity between the official and unofficial rates was no longer viable.

"Inflation is going to shoot up, but it's a necessity to correct a tremendous accumulated imbalance," Palma said.

Noel Alvarez, president of the country's largest business chamber, Fedecamaras, called the new rates "a positive measure" but criticized the currency controls still in place, saying they have been inefficient in controlling inflation and weakened both national and foreign investment.

Chavez said the new exchange rates will benefit government coffers for spending on development projects. Saying the country's reserves of foreign currencies stand at about $35 billion, he said the Central Bank will soon transfer $7 billion of that to a government development fund for domestic spending.

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