Development & Aid, Economy & Trade, Headlines, Latin America & the Caribbean

ECONOMY-VENEZUELA: Buying Frenzy Follows Devaluation

Humberto Márquez

CARACAS, Jan 12 2010 (IPS) - Tens of thousands of shoppers in Venezuela practically stormed businesses selling home appliances and other consumer products after the government cut the exchange rate of the bolivar against the dollar by half.

On Tuesday lines continued to form outside stores in Caracas and other cities, as managers allowed in small groups of shoppers at a time.

The shopping frenzy began Saturday morning, after President Hugo Chávez announced Friday that the exchange rate of 2.15 bolivars to the dollar, in place since 2005, was being adjusted to 4.3 to the dollar for most economic transactions.

However, an exchange rate of 2.6 bolivars to the dollar will apply to “priority” imports like food, medicines and some “capital goods” – machinery, tools or equipment used to manufacture other goods and services – as well as state expenditure abroad and remittances to relatives, students and pensioners overseas.

The bolivar has been known as the “fuerte” (strong) in Venezuela since 2008, when the government lopped three zeros off the national currency, one of the most stable and internationally recognised in Latin America until 1983, when the first major devaluation occurred.

“Everything will cost double in a few weeks. We have to move fast, so I pulled some money together and bought what I was thinking of purchasing later, in the middle of the year,” bus driver José Velásquez told IPS outside of a store in the central Caracas neighbourhood of La Candelaria. He had just bought a TV set, blender and microwave oven.

On the northeast side of the city, teacher Damelys Duarte remarked to IPS – as her two sons loaded an air conditioner into her car – that “I was going to buy this when the heat started (after March), but it’ll be more expensive then, or maybe air conditioners will have run out and new ones won’t have come in.”

“Some bourgeois are saying that because of the measures that were announced, they will have to raise prices. But we are not going to accept that under any circumstances! I am urging them not to do so, and I am calling on the people not to allow it. There is no reason for anyone to raise prices,” the president said.

“I want the National Guard (a military corps with police functions) to hit the streets to fight speculation,” he added, warning that “we will seize the business of anyone who speculates, and hand it over to the workers” – a reference to the overpricing that has been practiced by some butcher shops and other companies.

“We have been selling dollars cheaply for a long time, so many sectors prefer to import, because it’s less expensive for them, rather than making a bigger effort to produce here,” said Chávez, who also announced a one billion dollar fund to boost exports.

Former finance minister Rodrigo Cabezas said “the fixed exchange rate of 2.15 bolivars to the dollar became unsustainable in the context of four years of moderate, but recurrent, inflation, which led to a drop in purchasing power of the national currency against the dollar.”

Inflation dropped from 31 to 25 percent between 2008 and 2009.

Oil revenues in Venezuela have grown steadily since 2003, to 90 billion dollars in 2008. But non-oil exports stood at just five billion dollars in 2003, and fell to three billion in 2009. GDP growth averaged 7.6 percent between 2003 and 2007, and the poverty rate was reduced from 50 percent in 1998 to 24 percent in 2009.

Imports, meanwhile, reached a record 48 billion dollars in 2008, although they shrank to 37 billion last year. That total included seven billion dollars in imports of basic food products. In fact, two out of three kg of day-to-day food items were purchased abroad.

José Guerra, director of the School of Economy at the Central University in Caracas, said “devaluation cannot bring about an increase in exports overnight, especially when economic policies over the last few years have destroyed a large part of the productive apparatus.”

Guerra, a critic of Chávez, told IPS that “this devaluation will simply mean more money for the government and less for the people – who, especially the poor, will finance the state with more inflation.”

Economist Orlando Ochoa said “it is rare to see anywhere in the world an exchange system that so greatly favours the public sector; the state imports at 2.6 bolivars to the dollar but is going to receive 4.3 bolivars for every dollar in exports,” thus amassing the large difference in bolivars.

The new exchange system means that the state oil giant PDVSA will receive 4.3 bolivars for every export dollar delivered to the Central Bank. But like the rest of the state sector, dollars for its purchases abroad will cost it 2.6 bolivars.

Not only is PDVSA in debt to suppliers and subcontractors that have been nationalised in recent years, but it also has large investment commitments in Venezuela and abroad and a collective wage agreement with over 70,000 workers costing some eight billion dollars.

In addition, it plays a major role in running the Chávez administration’s social programmes or “missions”, which include literacy training, primary health care in the slums, food for the poor at subsidised prices, soup kitchens for low-income women and children, free eye operations, dental care, microbusiness loans, support for cooperatives, scholarships at all educational levels, and stipends for the unemployed who take training courses.

According to Ecoanalítica, a Caracas-based economic consulting company, the devaluation will bring the government an additional 100 billion bolivars (23 billion dollars at the 4.3 exchange rate) over and above its normal budgeted income of 159 billion bolivars.

Economists point out that the budget was calculated on the premise of oil sales at 60 dollars a barrel, whereas the price of oil on the international markets has now rallied to between 70 and 80 dollars. Furthermore, the Central Bank is going to hand over to the executive branch seven billion dollars of what it regards as surplus reserves.

Nearly all opposition leaders therefore consider that the devaluation is not only for revenue but also for electoral purposes, because the government will command resources 50 percent in excess of its budget, that can be used practically at its own discretion this year. Parliamentary elections are due on Sept. 26.

The 166-seat single-chamber parliament was left entirely in pro-government hands in 2005, when the opposition boycotted the elections, alleging a lack of transparency, although no international observers found any signs of fraud. Later, a handful of lawmakers broke with the government.

Consequences

According to Caracas-based firm Datanalisis, the president’s popularity slid from 61 percent in February to 52.8 percent in September. Since his first election in 1998, he has won a number of elections with over 55 percent of the vote, and he remains by far the most popular leader in the country.

The fragmented opposition hopes to win a significant number of seats in the late September legislative elections.

Chávez has already started campaigning at the head of his United Socialist Party of Venezuela (PSUV), warning that if the opposition gains a majority in parliament it will repeal statutes and laws undergirding his political project, which he calls “21st century socialism.”

On the economic front, the tens of thousands of consumers crowding stores selling domestic appliances left no doubt that they expect prices to rise significantly, as has happened in the past whenever there has been a sudden devaluation. “It would be foolish on my part to deny that this measure will have an impact on prices,” said Finance Minister Alí Rodríguez, who calculates that the devaluation will drive up the forecast for inflation this year, which was between 20 and 22 percent, by an additional three to five percentage points.

In contrast, Domingo Maza, a former head of the Central Bank who has taught several generations of economists, said that due to the new measure, inflation in Venezuela “may be between 50 and 60 percent” in 2010.

Maza, along with other economists and members of the business community, says the impact of the devaluation will depend on whether there are continued restrictions and delays by the government in providing hard currency to private operators.

In recent years, the government has permitted a secondary currency exchange method, known as the “permuta,” that uses offshore corporations to swap debt bonds acquired in bolivars but denominated in dollars. The exchange rate on this parallel market is two to three times higher than the official rate.

Many importers and travellers resort to these “permuta” dollars to finance their expenses abroad, but exchange controls are very strict and, by law, the “permuta” exchange rate cannot be publicly mentioned in Venezuela, on pain of a prison sentence.

Governing party lawmakers are examining the possibility of repealing this law to enable the Central Bank to operate in the “permuta” market, which would ease the pressure of demand for dollars at 2.6 and 4.3 bolivars.

Finally, the devaluation will affect the repatriation of profits by transnational companies with enormous incomes in bolivars. For example, the Spanish company Telefónica was intending to take home two billion dollars, but is likely to be able to send only half that amount.