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  HOME | Venezuela (Click here for more Venezuela news)

Chávez Devaluation to Cause Even Higher Venezuela Inflation

By Jeremy Morgan
Latin American Herald Tribune staff

CARACAS -- Reaction to President Hugo Chávez' abrupt devaluation of the national currency last Friday evening wasn't slow in coming and the general conclusion among ordinary folk was that keeping body and soul together was going to cost them more. Venezuela's inflation rate, already the highest of any country in South America, was under the spotlight -- and so, too, it would seem, was the government's record.

"Inflation," blurted a middle-aged housewife and mother, "this is going to mean more price rises, with us paying God knows what for everything, it's all going to go through the roof, it's the end." At the street corner, the local mini-market hadn't opened for business that Saturday morning; the gossip mill had it that employees had come in but were busily changing prices behind closed doors.

The housewife's simple reaction might have been a bit over the top, but she wasn't alone -- and more than one economist agreed at least with the bit about about inflation. "We always end up paying the bill," said one of her elderly neighbors who usually just about manages to get by on a meager state pension. "There goes my beer. Why is it always us who end up making the sacrifices?"

The old gent is well-known in the district for his distinct and sometimes scathing lack of sympathy for the president and his cause. And he, too, wasn't on his own.

"Look, all these food prices are supposed to be under government control, right?" noted a rather younger man who, to judge by what he then went on to say, wasn't a storekeeper. "So why are the prices going up all the time?" he asked out loud, without pausing for an answer. "And now this. It isn't going to work, he's given them an excuse to jack everything up. Couldn't stop them before, won't now."

Down on the avenue, in the queue for the cash-point machine at a bank, devaluation was inevitably on the tip of most everybody's tongues. "I'm taking out the rest of my pay and going out to stock up while I can, even if it takes all day" explained a middle-aged man who looked like he'd got a penny or two.

Evidently, he'd heard about the queues that were already starting to stretch out. But maybe he hadn't heard about what was allegedly going on inside the store barely a block away.

Economy and Finance Minister Alí Rodríguez Araque had said that the devaluation -- which includes a new rate of BsF2.60 for food and other imports deemed essential, and BsF4.30 for everything else -- would translate into between three and five percent on shop prices.

But this didn't seem to win much credence at street level. Neither did it appear to have persuaded the professionals -- and nor, quite predictably, the Opposition.

Pedro Palma, president of the Academy of Economic Sciences, didn't buy the minister's version of the near future: he thought the knock-on effect on prices was going to be considerably higher than the upper range of the minister's forecast. And he warned it could be a rough ride.

Venezuelans' purchasing power was going to be affected severely and the population would become poorer, and this would have an impact on consumption, Palma said. Until now, business organizations such as Consecomercio, which claims to represent wholesalers and retailers, have forecast that consumption should rise this year after stagnating last year.

Palma calculated that prices for goods subject to the higher of the two new exchange rates would cost suppliers around 60 percent more. He pointed out that Venezuela has long been heavily dependent on imports -- unofficial estimates have it that at least half the food is brought in from abroad, along with a lot else besides --and that this would work through into an "important inflationary adjustment" in coming months.

Other observers were talking in terms of weeks. "Suppliers are going to have to re-stock at the new rate, they're not going to make up the difference from their own pocket," said an economist who works in the state sector and prefers to remain nameless. "They'll pass it on, or as much as they reckon they can, as quickly as possible. It's simple economics. A devaluation on this scale simply can't be absorbed, and it's going to hurt one and all."

What this individual -- who two years ago was then saying that a devaluation was more or less inevitable -- couldn't understand was why the government had waited so long. Throughout the course of last year, officials repeatedly insisted that the exchange rate, set at BsF2.15 to the dollar for the last five years, wasn't going to change.

"Well, they were right about that, but what did it achieve in the end?" the economist asked.

Palma agreed that the longer it was put off, devaluation was always going to be all the more painful.

"This is a shocker, and it's going to affect everybody, don't be in any doubt about that," declared the state sector economist. "The president has spoken of goods now on the higher rate as if they're luxuries for the rich. Well, listen: the poor buy refrigerators and washing machines, too, and they like to watch television. We're not talking about Cadillacs and Swiss watches."

There was, however, a silver lining in all this, at least from the government's point of view. El Universal, a conservative newspaper that makes no secret of its dissapproval of the Chávez regime, said that the new exchange rate structure would translate into more bolivars in state revenues from oil export prices set and paid in dollars.

The contribution from oil to the national coffers was initially put at the equivalent of BsF39.4 billion based on an exchange rate of BsF2.15, but the government then fixed state spending at BsF195 billion, the newspaper noted on its website Monday. Government income from the oil industry levy is now set to zoom to at least double the original target on the new exchange rate of BsF4.30.

In effect, the argument continued, devaluation would double the local currency value of transfers to the Treasury this year from the state oil corporation, Petróleos de Venezuela (PDVSAS) -- as well as profits tax, royalties and other payments due from other oil companies -- to the point where the spending target could be met.

In addition, higher bolivar revenues would offset an offset in revenues from other forms of taxation (not least value added tax) in the wake of lower demand and consumption, while providing funds to meet interest and amortization falling due on state bond issues, it added.

Chavez had explained that devaluation would enable the government to maintain public spending, which was enough for his critics to claim that all this was linked to the parliamentary elections scheduled for September this year. At present, the president's ruling United Socialist Party of Venezuela (PSUV) and its minor allies wield an unchallengeably massive majority at the one-chamber National Assembly, leaving only a few seats for dissident voices.

The mainstream Opposition, which boycotted the last parliamentary elections in 2005 and has vowed to return to the legislature and holds out hope of doing so with a majority of its own for the first time since Chávez reformed the constitution and won re-election a decade ago, pounced on the devaluation.

The Social Christian party, Copei, one of two old warhorses that used to dominate the political scene until Chávez came along one decade and one year ago, said the bigger consequences of the measure would be felt in "the pockets of the Venezuelans, principally the most poor" -- and the government was lying to the country when it said the inflationary impact would be five percent.

Copei Party President Luis Ignacio Planas was in no doubt that "all the Venezuelans" were going to foot the bill for the PSUV's election campaign this year. He called on the National assembly urgently to revise the 2010 budget in the light of the devaluation, given that this was going to give the state a massive boost in revenues.

The conservative party, Primero Justicia, condemned the measure as being intended solely to allow the government to pursue its policy of granting funds and other help to other countries, as well as its arms purchase program and state takeovers. Chávez is unofficially estimated to have placed orders worth at least $4 billion and perhaps half that again with Russian arms suppliers.

"While the government doubles its riches, the people double their poverty," said party national coordinator Julio Borges, pointing to continuing electricity and water shortages. "Never before has a president had so much power and so much money at his disposition and yet, the country's on a bad road."

Chávez, he said, had "gifted" $60 billion to 40 countries during the last five years, and spent $12 billion on nationalizations and $8 billion on arms purchases. Borges wanted to know why these sums had not been "invested in Venezuela" and went on to list a string of problems facing people every day in different parts of the country: years of waiting for a water pipeline in Cojedes state; or a university hospital in Monagas; or queueing for gasoline in Táchira; or 164 new houses completed in Zulia state, out of a promised 12,000.

Caracas Metropolitan Mayor Antonio Ledezma -- who has seen his powers and resources slashed on a huge scale since Chávez decreed a new city executive, Jacqueline Faría, over his head after he'd won the municipal elections in November 2008 -- accused the government of devaluing the lives of the Venezuelans.


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