Jorge Giordani, Venezuela’s Minister of Finance announced the devaluation of the “lower” official exchange rate of Bs. 2.6 per US$ to unify it with the Bs. 4.3 rate, essentially devaluing the exchange rate for all essential items by 65%. This decision affects the whole structure of subsidies (except energy) created by the Chavez Government in the last seven years, which was based on direct imports of food and pharmaceuticals at the lower rate, which was kept at Bs. 2.15 per US$ since 2005, increased to Bs. 2.6 per US$ in January 2010 and now increased again to Bs. 4.3 per US$.
The move is, in my opinion, a political one, it is a brutal devaluation which will have a huge inflationary impact in 2011, but whose effects will dissipate in 2012 and by making it so large now, removes the need for an additional devaluation before the 2012 elections. It removes partially the distortion that the multiple exchange rates cause, but it only goes half way and does not include additional measures.
The move does nothing for exports, all exports (except PDVSA changing its foreign currency, part of it had to be exchanged at Bs. 2.6) had been receiving Bs. 4.3 per US$ since January of 2010.
In terms of inflation, this will certainly contract demand and the Government is likely to postpone price increases until shortages appear, but the overall impact in the next few months is certainly going to be quite dramatic, particularly for the poor.
The announcement does signal that Minister Giordani is in charge, despite the terrible performance of the economy under his guidance. Perhaps nothing exemplifies his ability for deceit as saying that “this measure is adopted to place the citizens at the center of economic decisions”.
What he did not say is that he is aiming at them with a fully loaded inflationary gun.