CARACAS (Reuters) – Venezuela devalued its bolivar currency for the second time in 12 months yesterday, abolishing the lowest exchange rate to the dollar as the OPEC member battles to revive its economy.
The announcement followed a central bank estimate that the economy contracted 1.9 per cent in 2010, Venezuela’s second straight year of recession.
The central bank said it would eliminate the exchange rate of 2.6 bolivars per dollar, which has been available for essential imports such as medicines and some foods, accounting for about 30 per cent of all forex transactions.
Economists had forecast a devaluation given the parlous state of Venezuela’s finances despite high global oil prices. Crude and products account for about 90 per cent of Venezuela’s exports.
They expected that President Hugo Chavez, who trumpets his “21st century socialism” policies as a model for the world, would want to take the political pain of a devaluation as early as possible before seeking reelection at the presidential poll in December 2012.
Venezuela’s economy shrank by 3.3 per cent last year, but Chavez’s socialist government says the country is now pulling out of recession and will grow by 2.0 per cent in 2011.
“Politically, it is the right thing to do. They are devaluing now so as to avoid it in 2012 and take the inflationary hit in 2011,” said local analyst Miguel Octavio, of BBO financial services. “It’s brutal for the ordinary Venezuelan because it will affect food and medicine prices.”
