Venezuela: Currency Depreciation Through Back Door

Caribbean Net News had the story on Jan. 2, and today Bloomberg has it: Venezuela Begins Stealth Devaluation After Oil Price Plunge: In a move to preserve foreign currency reserves, Venezuela's government reduced by half the amount of of dollars it will let people spend when traveling abroad to $2,500. The Venezuelan Foreign Exchange Administration Commission, known as Cadivi, reduced the amount of cash at the fixed exchange rate that Venezuelans can withdraw from foreign banks by half, from $500 to $250 a month. The new rules require that travelers have airplane, bus or ship ticket abroad; new Cadivi cardholders can't get Cadivi dollars for six months.

Since Venezuelans need government permission to purchase dollars at the official rate, which was established in 2005, and the government is cutting down on its sales of dollars, Venezuelans increasingly are buying dollars in a a parallel, unofficial market where the US dollar trades at a 61% premium.

Call it a de facto devaluation.

The price of oil peaked at $147/barrel last July. As of the writing of this post, it is trading at $37.70. Venezuelan oil, which is of lesser quality, has dropped below $30 a barrel.

According to The Economist,

Venezuela is more dependent on oil now than it was when Mr Chávez took power. Oil brought in 92% of export revenues in the first nine months of 2008, compared with 64% in 1998.

Because of this, the government cannot subsidize cheap dollars.

Adding to the economic ills is the rampant inflation, which last year reached 31.9% for consumer prices. Venezuela has the highest inflation out of the 82 world currencies tracked by Bloomberg.

There is talk of reducing the amount of dollars allotted to importers by limiting foreign currency to food, medicine and machinery, and other "priority goods". That would have the effect of cutting imports.

While to the foreign observer devaluation appears to be inevitable, rest assured that Chavez will struggle to avoid it, at least in the near future, since he's pushing for another constitutional referendum to remove the limit on further presidential terms.

Back in the early 1980s Venezuela's economy crashed after the oil boom of the 1970s. Sadly, it may happen again.

Fausta Wertz also blogs at faustasblog.com.