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Venezuela Devalues "Bolivar Fuerte"

A Venezuelan consumer-protection agent checks for price increases as troops look on. (AP Photo)

January 12, 2010

Venezuelans flocked to stores over the weekend after President Hugo Chávez announced a devaluation of the bolivar. Faced with declining oil revenues and a recession, the Venezuelan government said the currency’s value would drop by 50 percent for non-essential products. The third devaluation since Chávez set currency controls in 2003 sparked a rally on Venezuelan debt. But it also caused inflation concerns and questions about the sustainability of Caracas’ fiscal policy.

Two years ago, Chávez’s government gave the Venezuelan bolivar a facelift when it lopped three zeros off the currency and renamed it the “Bolivar Fuerte.”  As of Friday’s announcement, the bolivar is half as strong, with its value shifting from 2.15 to 4.3 to the dollar. But the devaluation is two-tiered; for essential goods such as food and medicine, the currency’s worth would only decrease by to 2.6 per dollar. Meanwhile, the bolivar’s black market rate stands around 6.25 to the dollar.

The move boosts state coffers by increasing bolivar revenue for each barrel of oil exported. As Maiel Bello of Caracas-based research firm told The Wall Street Journal, the devaluation allows “more room to increase public spending as a way to spur economic activity.” Such public spending has been the cornerstone of Chávez’s popularity and could help his political allies heading into Venezuela’s congressional elections in September.

The devaluation appeared to cause jitters over the weekend when shoppers turned out in droves in hopes of beating rising prices. Chávez warned companies against price increases and announced that the government will map out a plan to counter speculation. Officials backed by security forces closed dozens of stores charged with raising prices in recent days.

Venezuelan consumers have cause for concern: the 2009 inflation rate of roughly 25 percent was the highest in the Americas and the devaluation may bring more of the same. Finance Minister Ali Rodriguez predicted the move would increase inflation by 5 percent. “[D]evaluation is the modern equivalent of the medieval habit of shaving silver and gold off coins,” says The Economist’s Buttonwood blog. “[T]he internal purchasing power of its citizens has already been reduced; now the external purchasing power has been cut as well.” Venezuelans will also experience widening power outages. The government announced this week that it plans to implement scheduled power cuts in an effort to ration electricity.

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