President Hugo Chavez has announced a currency devaluation for the first time since 2005, setting a two-tiered exchange rate designed to help Venezuela's oil earnings go farther domestically while holding down prices of priority imports like food to counter soaring inflation.
Chavez said Friday the bolivar will now have two government-set rates: 2.60 to the dollar for transactions deemed priorities by the government, and 4.30 to the dollar for other transactions. The devaluation dropped the currency's value by 17 percent or 50 percent, depending on the tier.
The higher rate, which he called the "oil dollar," will double the paper value of Venezuela's petroleum 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.
Chavez said the priority exchange rate will be allotted for food, health care products, school supplies, machinery and equipment for economic development, among other things.
He said the new rates aim to boost the economy — which fell into a recession last year after five years of oil-fueled growth — while also "braking imports that are not strictly necessary and stimulating export policy."
Imports that will fall under the less favorable rate include automobiles, telecommunications goods, computers, appliances, alcohol and tobacco.
The currency's official exchange rate has been held steady by the government at 2.15 bolivars to the dollar since 2005.
Abelardo Daza, an economist and professor at Caracas' IESA business school, said he believes the government is seeking to make up for lost income due to declining oil production, and also to offset the larger amounts of fuel that will need to be dedicated to oil-fired power plants after water levels in the country's main hydroelectric dam plunged to dangerous lows amid a drought.
Chavez will also be looking spend more this year to help boost his allies' chances ahead of congressional elections, Daza said.
"The diminished (oil) exports together with the need to obtain more bolivars for an election year are the two big motivations for the government to adjust the exchange rate," said Daza, who predicted that government income would be about 30 percent higher than budgeted, allowing more spending that will in turn boost the economy.
The country is currently struggling with 25 percent inflation, the highest in Latin America.
And while the devaluation will spur even higher inflation, the government apparently decided it was convenient to do it now rather than closer to the 2012 presidential elections, Daza said. The government also apparently decided a two-tiered rate would be easier to administer than keeping a single rate and trying to subsidize priority imports, Daza said.
The currency devaluation is expected to have a mainly domestic impact, and limited effect internationally. The government has maintained strict currency exchange controls during 2003 to try to contain capital flight, and has set a fixed exchange rate that overstated the bolivar's value on the black market and in bond trading.
Chavez also said the government and the Central Bank will intervene in the lucrative parallel bond market, where the rate has been hovering at about 6 bolivars to the dollar, nearly one-third the official rate. He did not give details about what actions the government would take.
Economist Pedro Palma, founder of the Caracas consulting firm MetroEconomica, said the government was forced to accept that such a large disparity between the official exchange rate and the parallel trading rate was no longer viable.
"Inflation is going to shoot up, but it's a necessity to correct a tremendous accumulated imbalance," Palma said. "I think what the government has had to accept is that the currency distortion can't be sustained anymore. It's absurd."
He likened the situation to a pressure cooker, saying the government opted to let out some steam to prevent an explosive result later on -- even as the new rates still inflate the bolivar well above market rate.
Venezuela previously tried a two-tiered exchange rate in the 1980s, long before Chavez's presidency, but later returned to a single, fixed rate after currency-trading corruption soured public opinion.
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