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Feb 11, 2013 | 18:47 GMT

Venezuela: The Downside of a Devaluation

Venezuela: The Downside of a Devaluation
LEO RAMIREZ/AFP/Getty Images
Summary

The devaluation of Venezuela's currency on Feb. 8, supposedly the first of many impending economic reforms, will be unpopular and will engender considerable opposition. Although social unrest is an ever-present concern in Venezuela, especially considering the health of President Hugo Chavez, these economic measures will be piecemeal and are not likely to trigger immediate political upheaval. Still, if the government is compelled to take more politically sensitive economic action, such as increasing the price of gasoline, unrest will become increasingly likely.

Economy and Finance Minister Jorge Giordani and Central Bank President Nelson Merentes announced late Feb. 8 that the bolivar would be devalued from 4.3 to 6.3 bolivars per U.S. dollar. This devaluation is significant, but the new exchange rate is still considerably below the parallel, black-market exchange rate. The decision was expected but is controversial nonetheless. Economists praised the decision, which they say will address Venezuela's economic distortions, such as food shortages, diminishing foreign reserves and plummeting non-oil exports, caused in part by the artificially overvalued bolivar. Similarly, the Venezuelan government claims the devaluation will reduce its debt burden, improve the competitiveness of Venezuela's exports and enable the government to better control the costs associated with high social spending.

Yet devaluation is socially and politically risky because it implies an additional burden on the Venezuelan consumer, it threatens to undermine Venezuela's tenuous stability. As a country dependent on imports for household consumer goods, the devaluation has an immediate impact on price inflation. Venezuela already suffers from high inflation (around 20 percent in 2012, according to official estimates), and prices of imported goods are almost guaranteed to rise. People already are flooding supermarkets and stores to buy goods that were imported before the devaluation was unveiled. Compounding the problem, port tariffs, which are dollar-denominated, will spike 46.5 percent unless adjusted downward, making imports even more expensive. Venezuelans have lived through five devaluations over the past 15 years, and they know what to expect. The government will try to limit the burden by maintaining price controls on basic goods and potentially increasing the minimum wage, but it may prove incapable of preventing inflation from rising to the official inflation rate of 30 percent it experienced in years past. 

Already the inflation issue is sparking dissent from within the ruling party and among some of its allies. Giordani himself has long been rumored to oppose devaluation because of its inflationary tendencies, and Venezuela's pro-Chavez Communist Party came out publicly against the devaluation. Others within Chavez's ideological camp are equating the devaluation with the neoliberal reforms that led to Chavez's rise in the first place.

Lastly, the government may feel compelled to raise the subsidized price of gasoline. Venezuelan gasoline is the cheapest in the world, and if it is held constant amid more generalized inflation, it will become comparatively even cheaper. This will continue to drive rising domestic consumption and put additional pressures on the balance sheet of Petroleos de Venezuela, known by its Spanish acronym, PDVSA. The subsidy currently costs the government and PDVSA between $8 billion and $15 billion annually. Imports of refined products from the United States — which have sharply increased in recent years due to decreasing refining capacity alongside increasing domestic demand — will drain dollars from the economy. Indeed, Venezuelan newspaper Globovision recently reported that Giordani is considering a plan to increase the price of gasoline. In 1989, Carlos Andres Perez's government began to crumble when it cut subsidies and raised the price of gasoline, sparking the bloody Caracazo riots. This measure is highly controversial and would be received much more critically than the devaluation itself.

Devaluation is unlikely to set off massive unrest in Venezuela, but it is a preview of the hard economic choices to come. The government will continue to use Chavez's legacy to take controversial but necessary economic measures. But with leaks over the weekend suggesting that Chavez's health is precarious, it is becoming clearer that he will not be returning to govern Venezuela. As a result, the interim government will be on its own as the economic challenges continue to mount.

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