Venezuela said it is devaluing its currency by 32 percent against the US dollar on the orders of cancer-stricken Venezuelan President Hugo Chavez, in part to trim a bloated budget deficit.
The bolivar will go from 4.3 to the US dollar to 6.3 at the official exchange rate. The move was announced on Friday at a press conference by Venezuelan Planning and Finance Minister Jorge Giordani. He said it will take effect on Wednesday.
The goal is to “minimize expenditure and maximize results,” Giordani said.
One effect of a devaluation is to make a country’s exports cheaper and thus more enticing to buyers, but another effect is to cut the deficit, which in Venezuela last year was estimated to be nearly 10 percent of GDP.
The economy grew 5.5 percent last year and inflation was 20 percent. That was down seven points from the previous year and hit the government target, but was still the highest official inflation rate in Latin America.
Venezuela is South America’s largest oil exporter and has the world’s largest proven reserves. Its oil transactions are US dollar-denominated, so the bolivar value of those sales will now be higher, boosting state revenues on paper.
The change had been widely expected by analysts and business leaders since last year. It is Venezuela’s fifth currency devaluation in a decade.
Giordani said the government would honor US dollar purchase requests made before Jan. 15 at the old exchange rate.
Venezuelan Vice President Nicolas Maduro, who visited Chavez this week, said at the same press conference on Friday that Chavez was concerned about the Venezuelan economy and called for a “major effort” to maintain its pace of growth.
Chavez established currency controls in 2003 and the government sets the rate to curb capital flight.
However, the existence of a strong black market for the US dollar shows the continuing desire for hard currency.
Economist Jesus Casique said the devaluation would have a major inflationary side effect and the government should not see it as the main tool for trimming the deficit.
Rather, it should take other steps such as clearing away red tape that makes it hard for businesses to obtain dollars and encouraging Venezuelan non-oil exports.
“The measure should come hand in hand with others,” Casique said.
Out on the street, there was little enthusiasm for the devaluation.
“This is bad news,” said businessman Jorge Martinez, walking past the Venezuelan central bank with his wife. “We have been number-crunching because in a month we are going to travel to Spain, and now we do not have enough money.”
The devaluation comes amid growing uncertainty in Venezuela over the future of Chavez, who is convalescing in Cuba, where he underwent a fourth round of cancer surgery on Dec. 11.