Venezuela Government hopes to cash in on bolivar devaluation

People wait to buy electrical appliances in Caracas. Devaluation of the bolivar will add pressure to an already soaring inflation rate. (AFP)

Venezuela's first devaluation of its currency since 2005 should come as a boon to the massive public sector, while adding pressure to an already soaring inflation rate, experts said on Saturday.

Venezuela's inflation rate, which topped 25 per cent in 2009, is Latin America's highest. President Hugo Chavez devalued the bolivar on Friday for the first time since 2005, creating a dual exchange rate system.

The move aims to favour some sectors of the economy the government considers priorities, with the bolivar pegged at 2.6 per dollar, down from 2.15 per dollar.

The leftist leader said that the health, food imports, machinery, books and technology sectors, as well as public sector imports and remittances would benefit from the preferential rate.

Meanwhile, non-essential imports were to be subject to a rate of 4.3 bolivars per dollar. The higher exchange rate would apply to items such as automobiles, telecommunications, tobacco, beverages, chemicals, petrochemicals and electronics.

The government acknowledged that inflation would remain a concern.

"It would be foolish on my part to deny that this measure will have an impact on prices," said Finance Minister Ali Rodriguez.

Economist Orlando Ochoa said that was the understatement of the year, and that Venezuelan consumers would pay big for the dual rate move. The measures really are "throwing gasoline on a fire" as far as inflation is concerned, he said.

"Prices are going to go up, but the government needs more income and it will be getting more for its exports," said Ochoa.

Indeed "it is very 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 get 4.3 bolivars for every dollar in exports" mainly in oil, he said.

 

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