Chavez's snap devaluation sparks panic in the aisles

Pre-election move designed to revive economy, but consumers fear prices will soar

The Venezuelan president Hugo Chavez promised to send soldiers into shops to seize businesses from owners who raise prices in the wake of the country's steep currency devaluation.

People had crowded into shops over the weekend to snap up imported televisions and electrical appliances, fearing that the devaluation of the bolivar was about to send inflation soaring.

"Right now, there is absolutely no reason for anybody to be raising prices of absolutely anything," Mr Chavez said on his weekly TV show. "I want the National Guard on the streets with the people to fight against speculation. Publicly denounce the speculator and we will intervene in any business of any size." To audience applause, the president added that the government would take over shops and give them to their workers if price rises were discovered.

The move to devalue by half the currency against the US dollar is a major political gamble ahead of tough elections this year. At a stroke, the devaluation will give the government more local currency for potentially popular spending programmes. But economists warn the country could be locking itself into an inflationary spiral that could ultimately hit the poor, Mr Chavez's staunchest backers.

Shoppers in Caracas chanted "Buy, buy, the world is going to die" as word spread of the devaluation. "I've been lining up for two hours to buy a television and two speakers, as by Monday everything is bound to be double the price," said Miguel Gonzalez, a 56-year-old engineer outside one store. State-run television avoided the word devaluation, preferring to call it an "adjustment", and critics were pilloried on a pro-Chavez radio station, which played the popular Argentine song Imbecile as a retort.

The move is nonetheless a humiliation for Mr Chavez, who changed the official name of the currency to the "strong bolivar" three years ago, promising an end to devaluations. While the government had used gushing oil revenues to pay for social programs during the boom years, the falling price of oil after 2008 and the global financial crisis have sent the economy into recession. Away from formal currency controls, the value of the bolivar had already collapsed on the black market to about one-third of its official level.

The move is also a big political gamble. Mr Chavez will be able to make the country's foreign-exchange reserves and future oil revenues go further in local currency. Some $7bn (£4.4bn) is being transferred from reserves to spend on government development programs, it was also announced, signalling an aggressive push to win support for the President's socialist allies in congressional elections. Opposition parties are making greater efforts this year to dent the standing of pro-Chavez politicians, after previous years in which they have boycotted elections. They have been emboldened by public dissatisfaction at frequent blackouts and water shortages and a 2.9 per cent economic contraction in 2009, and hope to strip the President of his legislative majority in September.

Mr Chavez's popularity has fallen from a 60 per cent approval rating a year ago – when he said the global financial crisis would not touch "a hair" of the Venezuelan economy – to 50 per cent now."The quality of life for Venezuelans is automatically devalued," said Caracas mayor Antonio Ledezma, a Chavez opponent. "We now have half the money we had before." The President was also taking flak for announcing the devaluation while much of the population was watching a critical baseball game late on Friday.

There will be an unusual two-tier system designed to keep down prices of essential imports such as food and medical supplies. So-called "priority" transactions will be priced at 2.6 bolivars to the dollar, with the rest at 4.3 to the dollar – from a previous uniform level of 2.15 bolivars.

"This is going to generate greater productivity in Venezuela, Chavez said. "Last year we imported 90 million pairs of shoes, for the love of God. We can make all of that ourselves – shoes, clothes, almost everything is imported."

For Mr Chavez and his congressional allies, the outcome of the gamble will depend on the effectiveness of the government-spending programs versus the impact of inflation. Prices are certain to jump because of the Venezuelan economy's reliance on imports.

Mr Chavez's presidency, 11 years old in February, has been characterised by increasing state control of the economy, including the nationalisations of key industries. Inflation was already at 25 per cent in 2009, one of the highest rates in the world, and the government predicted that the devaluation could add another 3-5 per cent to that. Some economists argued it could be even more.

Devaluing the currency: What happens next ...

When Harold Wilson, the British Prime Minister, devalued sterling in 1967, he told the public that "the pound in your pocket" would be worth the same. He was being a bit disingenuous. It depends what you are buying with it.

A weaker currency means that buying goods from abroad is suddenly more costly – but politicians routinely hope there will be compensating benefits. If imports are more expensive, the reverse is true: exports are cheaper, something which can boost the export sectors of an economy.

That happened when the pound was devalued again in 1992, crashing out of the Exchange Rate Mechanism. Since then, the value of sterling has fluctuated according to trading on global financial markets.

Venezuela, by contrast, runs a system that fixes the exchange rate of its currency, the bolivar. And like Britain in 1992, it has found that global economic realities eventually catch up.

A country cannot go forever with an exchange rate that is out of sync with the balance of its economic interactions with the rest of the world. So while Venezuelans last week needed only 2.15 bolivars to buy one US dollar's-worth of goods from abroad, this week they need 4.3 bolivars. That means that imported goods suddenly cost more – something that will inevitably hit the pockets of consumers, but Hugo Chavez has his eye on a specific offsetting benefit. The US dollars that his government makes from selling Venezuelan oil will go further inside the country. Whether they go into infrastructure investment or straightforward giveaways to the poor, Mr Chavez now has more bounty to spend ahead of September's elections.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Tradewind Recruitment: English Teacher

Negotiable: Tradewind Recruitment: My client is an excellent, large partially ...

Tradewind Recruitment: Science Teacher

£90 - £140 per day: Tradewind Recruitment: I am currently working in partnersh...

Tradewind Recruitment: Year 3 Primary Teacher

£100 - £150 per day: Tradewind Recruitment: Year 3 Teacher Birmingham Jan 2015...

Ashdown Group: Lead Web Developer (ASP.NET, C#) - City of London

£45000 - £50000 per annum + Excellent benefits: Ashdown Group: Lead Web Develo...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee