AFTER years of postponing the inevitable, the Venezuelan government made a modest concession to economic reality on February 8th by cutting the price of the national currency, formally known as the “strong” bolívar, by 32%. In the seventh devaluation during the presidency of Hugo Chávez, the official rate weakened from 4.3 bolivares to the dollar to 6.3. Since he took office in 1999, the cost of the dollar in bolívar terms has risen more than tenfold—though even the new rate is still around three times stronger than the value of the currency on the black market.
The collapse of the bolívar is perhaps the most striking statistical indicator of Mr Chávez’s economic mismanagement. His constant stream of expropriations without fair compensation has caused Venezuela’s private sector to wither, and his transformation of PDVSA, the state energy company, into a vehicle for patronage has led oil production to plummet. As global petroleum prices have soared during Mr Chávez’s presidency, Venezuela has become ever-more dependent on imports.
In 2003 the government tried to stem capital flight by imposing stringent exchange controls. Since then, ordinary Venezuelan citizens and businesses have faced limits on the amount of foreign currency they can acquired at the heavily subsidised official rate, while the well-connected have made fortunes by exploiting the system. To meet the rest of their foreign-currency needs, many Venezuelans have had to turn to a flourishing black market, where the bolívar has traded at a fraction of its official value. These restrictions have contributed to ever-worsening shortages of essential goods.
The government has responded to sharp declines in the price of the bolívar on the black market with a series of belated, incremental official devaluations and ever-tighter controls. These adjustments have made life slightly easier for the country’s beleaguered exporters, and increased the local purchasing power of PDVSA’s oil sales, the government’s primary source of revenue. However, they have also produced jolts of short-term inflation.
In recent months pressure has been building on the government for a fresh devaluation. Many staples have practically disappeared from supermarket shelves, and food scarcity is at its highest in five years. In the past two months alone food prices have risen by more than 11%, causing particular suffering to the poor, who are the government’s main supporters. As the central bank has become stingier in doling out dollars at the official rate, demand for greenbacks has grown on the black market, leading the street price of the bolívar to fall by half in the past six months.
Moreover, Mr Chávez launched a spending spree on subsidised food and social programmes last year, in a successful bid to build up support for his re-election. That generated economic growth of over 5%, but caused the budget deficit to soar. Now it appears that the ruling United Socialist Party may need to shower its base with cash all over again, since a new presidential election campaign seems imminent. Mr Chávez has spent the past two months in Cuba receiving treatment for what appears to be terminal cancer, though his exact diagnosis remains a secret. If he dies, the Venezuelan constitution requires new elections to be held within a month. Nicolás Maduro, the vice-president and Mr Chávez’s chosen successor, lacks his boss’s charisma and authority and may have a harder time holding off the opposition.
Whoever winds up replacing Mr Chávez will face a daunting economic test. GDP is expected to stagnate in 2013, while inflation continues to rise. Even though exporters will benefit from a slightly cheaper bolívar and the right to keep a greater share of their foreign-currency revenues in dollars, the government still thwarts their efforts with a thicket of red tape.And the bolívar will face even more downward pressure now that the government has announced it will end a scheme in which it borrowed dollars abroad in order to provide them locally at a price slightly higher than the official rate for “non-priority” goods and services.
The authorities insist that this devaluation, which they had denied was in the offing for months, will be the last significant change in policy for some time. But deteriorating economic conditions are likely to force further adjustments, regardless of who winds up leading the country.
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