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.

A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Have you tried new the Independent Digital Edition apps?
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
New Real Madrid signing James Rodríguez with club president Florentino Perez
sportColombian World Cup star completes £63m move to Spain
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs General

Sustainability Manager

Competitive: The Green Recruitment Company: Job Title: Scheme Manager (BREEAM)...

Graduate Sustainability Professional

Flexible, depending on experience: The Green Recruitment Company: Job Title: T...

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Project Coordinator/Order Entry, SC Clear

£100 - £110 per day: Orgtel: Project Coordinator/Order Entry Hampshire

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn