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Venezuela devalues currency 12% to Bs 2.150

By Veneconomy

04.03.05 | Suddenly and contrary to all of VenEconomy’s forecasts, today the government devalued the Bolivar by 12%, raising the exchange rate from Bs.1,920:$ to Bs.2,150:$. Events have proved the market right, when it anticipated the devaluation and implemented considerable price increases in January 2005, generating inflation of 1.9%, the highest since June 2004.

One of the consequences of this measure is that it will probably have a strong inflationary impact as a result of the increase in prices of imported products. It is unlikely that the low inflation posted in February will be repeated in the coming months.

Another effect is that Venezuelans will not now get the full relief that the 25% increase in the minimum wage decreed by the Executive should have brought.

It is probable that speculation will not be long in raising its head with its consequent impact on prices. At the time of writing, the parallel dollar is Bs.2,840:$, 3% higher than yesterday, March 2 (Bs.2,770:$). One of the reasons that could have prompted the Executive to take this decision is the gap in the budget and the increase in public spending, caused by the series of subsidies announced by the government this year, are greater than officially acknowledged.

Despite the fact that the branches of government now under his control guarantee his triumph in the 2006 elections, this early devaluation will give Chávez time for maneuvering so as to avoid the negative economic impacts implicit in a devaluation having any political cost in terms of popularity.

One could say that, in this case, a sure thing trumps trusting to fate.

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