Google Ads

Showing posts with label Venezuela Currency Devaluation. Show all posts
Showing posts with label Venezuela Currency Devaluation. Show all posts

Tuesday, February 12, 2013

Venezuela Debates Currency Devaluation while Impact Remains Unclear

By Ewan Robertson:





Mérida, 11th February 2013 (Venezuelanalysis.com) – There has been much debate in Venezuela over the causes and likely consequences of last Friday’s currency devaluation, while the concrete political and economic impact remains to be seen.

The Venezuelan government’s decision to devalue the Bolivar by 32%, from 4.3 to 6.3 Bolivars to the dollar, was a measure seen as inevitable by many economists after the Bolivar fell to under a quarter of its official value on the black market.

Alongside the decision, the fifth devaluation since currency controls were introduced in 2003, the government also announced the establishment of a new body to oversee the allocation of dollars to citizens and businesses.

Analysts in Venezuela have argued that the political impact of the devaluation will depend on the success of the media campaigns of both the government and the opposition, which are attempting to communicate their interpretations of the currency adjustment to the country.

However, economic factors will also determine the political impact of the devaluation, such as its effect on imports and domestic production, increases in inflation and prices, and complimentary government measures such a rise in the minimum wage and the effectiveness of price controls.

Opposition criticisms

The opposition has launched a campaign maximising the possible negative effects of the devaluation, partly in an attempt to erode support for Vice President Nicolas Maduro in the event of fresh presidential elections if Hugo Chavez is unable to continue in office on health grounds.

Ramon Aveledo of the opposition MUD coalition blamed the government for the devaluation, saying, “It’s due to the government’s irresponsibility and worrying incoherence”.

Opposition leaders and supporters alike nicknamed the move a “red” or “Cuban package” in an attempt to associate the devaluation with an IMF-style neoliberal structural adjustment package.

Julio Borges, a leader of right-wing party Justice First, said of the devaluation: “The only ones affected are the Venezuelan people, from whose pockets the government keeps taking money”.

He pointed to a rise in inflation and prices over the last two months, blaming this and the devaluation on high public spending. “Now they [the government] are going to make us pay for the consequences of their inability, waste and poor administration,” he declared.

A short-term rise in inflation is possible after the devaluation, because imports will be more expensive, with a concomitant effect on prices. On the other hand, since so many imported products are sold at prices that reflect the black market exchange rate, which is unlikely to change as a result of the devaluation, inflation might not rise much after all.

However, while sources such as Reuters have described a “spike” in annual inflation to 22.2% so far this year, a rise in inflation during and after the Christmas period is not unusual in Venezuela, and annual inflation is still below the annual rate experienced a year ago.

Government stance

Meanwhile, the government has highlighted the possible benefits of the devaluation, such as bringing in more oil revenue for social spending, helping boost domestic production, and potentially combating capital flight.
Foreign minister and former vice president Elias Jaua argued that the adjustment was made necessary due to the activities of a “speculator class” within Venezuela, who acquire dollars at the official exchange rate and then use those dollars for black market sale or to sell imported products at black market prices.

As such, Jaua defended the devaluation and the establishment of the government’s new currency exchange body as combating speculation and capital flight.

He also described the measures as part of “economic actions taken to protect our wealth in currency exchange, avoiding that it falls into the torrent of capitalist voracity, and to preserve our monetary resources for the sustainment of our socialist system of social benefit that our President Chavez has been constructing”.
Economist and pro-government legislator Jesus Faria further argued that the devaluation would make imports more expensive and exports cheaper, thus making domestic production more competitive.

He said that before last Friday’s devaluation there had existed “an exchange rate lag produced by the excessive cheapening of imports and the over-pricing of exports, which had to be corrected”.

US economist Mark Weisbrot also predicted the devaluation would have a positive impact. “The devaluation…by making imports more expensive [will] provide a boost to import-competing industries. For this reason, and because it reduces the black market premium and reduces capital flight, the move will overall be good for the economy,” he wrote.

Accusations that the devaluation represents an IMF-style “package” were widely dismissed outside opposition circles given that the move was not accompanied by any measures associated with neoliberal economics, such as privatisations, salary freezes, or the removal of subsidies.

However there have been criticisms of the move from within the pro-Chavez camp, where some activists have argued that currency devaluations contradict the movement’s political economy and that other measures could have been taken to address speculation on the Bolivar.

Leftist political scientist Nicmer Evans said that the move was “not very socialist”, because it is a measure “which affects the poorest and the richest equally”.

“Neither devaluation nor the Value Added Tax (VAT) are socialist measures, because they are regressive” he added on his Twitter account.

Venezuelanalysis