Devaluation of Venezuelan currency Bolivar – 8 January 2010

This was announced by the President of Venezuela on 8 January. Besdies devaluation, the President also introduced a two tier exchange rate system. 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.

The priority exchange rate of 2.6 Bolivar for a dollar will apply to imports of priority items such as food, machinery and equipment for economic development, health care items and books and supplies for schools, family and pensioner remittances as well as public sector imports. For all other imports and non essential items the exchange rate of 4.3 will apply.

Before this devaluation, the official exchange rate had been held by the government at 2.15 bolivars to the dollar after the last devaluation in March 2005. President Chavez imposed exchange controls in 2003 after the coup attempt against him. At that time the exchange rate was 1600 Bolivars to a dollar. In February 2004 the rate was changed to 1920 Bs for a dollar and later in 2005 it was further devalued to 2150 Bs to a dollar. In January 2008, the government changed the currency to a a strong Bolivar ( Bolivar Fuerte) and fixed the new rate at 2.15 to a dollar, eliminating three zeros from the old currency.

The black market rate in January 2010 is 6.25 Bs to a dollar. Because of the foreign exchange restrictions and complicated procedures to get foreign exchange, there has been a thriving black market in foreign exchange transactions since 2003.

According to observers, the new exchange regime is a reminder of a similar situation in 1983, when President Luis Herrera Campins devalued the bolivar and established a multi-tiered exchange system, known as Recadi, after oil prices plunged. Inflation soared to 40 percent in 1987 from 7 percent in 1983 as capital flight led Herrera Campins’s successor, Jaime Lusinchi, to devalue the currency further. By the time Carlos Andres Perez replaced Lusinchi in early 1989, the system had collapsed. The country was running out of foreign reserves and food shortages were mounting. Perez eliminated the multi-tiered system, unifying the currency at the free-market rate, and lifted price controls. Consumer prices soared 21 percent in one month alone, leading to the “Caracazo” riots that killed hundreds and spurred a military coup attempt.

Venezuela has the highest inflation in Latin America and one of the the highest in the world. The inflation was 29.5 % in 2009 and is expected to worsen and reach 30% in 2010. It may be noted that the average inflation of Latin America was 6.1% in 2009 and is projected to decline to 5.2% in 2010

The government of President Chavez sets retail prices on hundreds of products and threatens strong action against violations. The President announced this week that the military would monitor prices of essential items in shops.

There is an energy and water crisis in the country. President Chavez has advised the Venezuelans to shorten the shower time and not sing in the bathroom. The crime rate has reached unprecedented proportions.

Poor Venezuela... so rich in oil, minerals and natural resources...and yet so poor...