The WSJ reports tha Venezuela’s socialist dictator, Hugo Chavez, has, with the stroke of a pen, cut the value of his nation’s currency, the bolivar, in half, relative to the U.S. dollar. This is the fourth time in his ten year reign that Chavez has devalued Venezuela’s currency. The article states:
- “-Venezuela’s devaluation of its currency and the imposition of a dual-rate foreign exchange system will certainly give a short-term boost to the fiscal situation of President Hugo Chavez’s government.
The government, of course, is assured of immediately getting the VEF4.3 rate, which means that starting Monday the tens of millions of dollars oil-rich Venezuela earns on a daily basis from its petroleum sales – mostly to the U.S. – will be worth double when converted into bolivars.
The extra money will allow Chavez to restore spending on social programs that saw cutbacks last year as oil prices plummeted. He said Saturday that more spending was indeed a key reason for the devaluation.
Critics say Chavez’ strategy is clear: the extra cash will allow him to essentially buy votes from the poor ahead of September congressional elections, where the president’s socialist party hopes to retain a majority.
Chavez saw his popularity ratings dip under the crucial 50% level a few times last year, a rarity during his 11 years at the helm of this South American nation. A grinding recession and rising power and water shortages that many blame on him are also hurting.
Some say his support could suffer if the currency measures spark more inflation, which devaluations often do. The government is betting that the potential benefits will outweigh the risks.”
So, in an effort to stem inflation brought about by such an action Chavez now says he’ll seize any business that raises prices after this currency move. Bloomberg reports:
- ” Jan. 10 (Bloomberg) — Venezuelan President Hugo Chavez said that businesses have no reason to raise prices following the devaluation of the bolivar and that the government will seize any entity that boosts its prices.
Chavez said he’ll create an anti-speculation committee to monitor prices after private businesses said that prices would double and consumers rushed to buy household appliances and televisions. The government is the only authority able to dictate price increases, he said.
“The bourgeois are already talking about how all prices are going to double and they’re closing their businesses to raise prices,” Chavez said in comments on state television during his weekly “Alo Presidente” program. “People, don’t let them rob you, denounce it, and I’m capable of taking over that business.”
Chavez devalued the bolivar as much as 50 percent on Jan. 8 for the first time in almost 5 years, as last year’s decline in oil revenue caused the economy to contract an estimated 2.9 percent, its first recession since 2003. The government set a multi-tiered currency system that Chavez says will stimulate national production by making imports more expensive.
Inflation Outlook
The devaluation may add to inflation by 3 percent to 5 percent this year, Finance Minister Ali Rodriguez said. The government forecast an inflation rate of 20 percent to 22 percent this year, after consumer prices rose 25 percent, according to the National Consumer Price Index.
The government also will “attack” the so-called parallel exchange rate, which Chavez called “illegal.”
Venezuelans turn to the parallel rate when they can’t get government authorization to buy dollars at the official exchange rate. The bolivar traded at 6.25 per dollar on Jan. 8, traders said.
“They put the value of the dollar at more than 6 in an arbitrary and illegal manner,” Chavez said. “We have to organize to reduce and attack that speculative, illegal dollar that hurts the Venezuelan economy so much.” “
I guess it’s good to be the king…but, as usual, its his subjects that will suffer. Inflation will be much worse than the government forecasts, he may keep prices from doubling with his threats but, like Cubans (who have the added challenge of our embargo), Venezuelans will not be able to import anything, as the government has not allowed the purchase of dollars in the multi-tiered system that Chavez has operated previously. So the black market or “parallel rate” becomes the going rate. Having been at 6 to 1 that rate will go to 12 to 1 and will be the only way businesses and ordinary citizens can get dollars. So the official rate goes from 2.15 bolivars to 1 dollar to the new rate of 4.3 bolivars to 1 dollar. But the rate at which you can actually get dollars goes from 6 to 1 to 12 to 1. This is a disaster for Venezuelans. However, Chavez will shower social programs on the large numbers of poor in the hopes of getting re-elected in the fall.
Did I mention talks of more stimulus are heating up in Washington?
