Trouble in paradise: Venezuela devalues the Bolivar

The Venezuelan government has announced a devaluation of Venezuela’s bolivar currency in response to the consequences of the economic crisis caused by the fall in oil prices, an annual inflation rate of around 64%, and a shortage of many basic goods across the country.

p.15 venezuela Agência Brasil
Venezuela’s troubled President, Nicolas Maduro

Finance Minister Rodolfo Marco Torres declared “We are going to optimise the current exchange system in order to attend all the markets”. The government is taking on an “Economic Recovering Programme” (Programa de Recuperación Económica) that will last until 2019.

Under Hugo Chávez government, Venezuelan currency exchange was divided into three highly-regulated markets with differing exchange rates. The current Venezuelan government has announced the open-up of a third new totally free system where there will be selling and buying of hard currency. According to the Central Bank of Venezuela, the dollar will be exchanged between 125 and 140 bolivars causing a devaluation of the bolivar by 95%. The devaluation will depend on the amount of dollars the government allows to pass through the free market exchange.

The 6.3% exchange rate established so far would remain in place for imports that are deemed essential, such as food, medicine and agricultural supplies. Marco Torres added “70% of the needs of the economy is guaranteed at 6.3%.” In addition to a primary exchange rate of 6.3%, some businesses will be invited to buy dollars at an existing intermediate exchange rate of 12%. The free market currency exchange will boost the entry of new currency that do not necessary come from the oil market, reduce Venezuela dependence on imports and ease the government’s budget deficit.

However, this policy has been heavily criticised for exacerbating distortions in the economy, leading to high inflation and shortages of basic goods. Venezuela is facing a severe economic crisis aggravated by the fall in oil prices. According to The Economist, the “Venezuelan economy is the worst-administrated economy in the world.” Venezuelans are suffering on a daily basis due to the dramatic increase in prices. Luis Vicente León, President of Datanálisis, and a fierce opponent of Nicolas Maduro government, declared in El País that “Venezuela is the country with the highest inflation in the world, there is severe scarcity, people are constantly queuing in the supermarket and there has been a fall in foreign investment”. This was clear in the 2014 protests demanding an effective response to the economic situation in the country and high insecurity.

Due to the political and socioeconomic crisis, the government’s new plan has been regarded with scepticism. Marco Torres has not specified how much money would flow through the free market platform and what the new exchange rate will exactly be. Some investors see the effective devaluation as cosmetic, which cannot prevent the reality of runaway inflation and swelling supermarket queues. “For the most part, the market’s view is that things will be horrendous in Venezuela for quite a while,” concludes David Whiston, a senior equity analyst at Morningstar Inc.

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