CARACAS (Reuters) - Venezuela devalued its bolivar currency by 32 percent on Friday in a widely expected move that will shore up government finances after ailing President Hugo Chavez’s blowout election-year spending in 2012 but will also spur galloping inflation.
The country’s fifth devaluation in a decade follows two months of silence from the famously loquacious Chavez, who remains in Cuba after surgery for cancer that has threatened to end his 14-year rule and self-styled socialist revolution.
The move slashes the official bolivar exchange rate to 6.3 per dollar from 4.3 under currency controls Chavez created in 2003, which require importers and travellers to apply for hard currency through a state agency.
Chavez, 58, has not been seen or heard from in public since his operation on December 11, but aides visit him often and say he is signing papers and issuing instructions.
The devaluation will ease a shortage of greenbacks that has crimped imports and left many supermarkets barren of staples such as flour.
It also provides more bolivars for each dollar the government receives from crude exports. That takes the pressure off state finances stretched last year by social spending, from a massive home-building campaign to cash payments to poor mothers, which helped Chavez win reelection.
But it pushes up prices for imported goods crucial to the oil-dependent economy, fuelling inflation. That could dent the government’s popularity at a time of uncertainty over whether Chavez’s cancer will force him to step down.
Announcing the devaluation at a late afternoon news conference just before the start of Venezuela’s long-weekend Carnival holiday, Finance Minister Jorge Giordani said the move would stimulate growth.
It would also help manage import levels and the cash flow available for the OPEC nation’s economic plans, he said.
“The president ... has demanded efficiency, increased efficiency by the government in the sense of minimizing spending and maximizing results,” Giordani said.
“Of course, we have taken this as a presidential order.”
Dollars on Venezuela’s illegal black market had for weeks been fetching nearly four times the official rate, which economists cited as a sign an exchange rate adjustment was imminent. Businesses frequently have to tap this market because they are unable to acquire dollars from the government.
“It’s positive not only because of the magnitude but because they decided not to wait until a later date despite lingering political uncertainty and all the issues around the health of president Chavez,” said Alberto Ramos of Goldman Sachs.
He added that future devaluations were likely given the overall imbalances in the economy.
The government is also scrapping an exchange system based on bond swaps known as SITME, which functioned in parallel to the state currency board.
Giordani denied local media reports that SITME would be replaced by a similar mechanism on a government stock exchange. He said a new currency authority was being created that would help oversee the proper use of foreign exchange.
Chavez’s popularity dipped noticeably after a 2010 devaluation that pushed up inflation to 27 percent that year, and helped the opposition win almost half the seats in Congress amid growing complaints about his government.
That devaluation affected the earnings of major consumer goods companies with operations in Venezuela, including Avon Products Inc and Colgate-Palmolive, whose earnings in bolivars were worth less after the adjustment.
It also triggered a shopping spree in the capital Caracas as consumers stocked up on imported goods such as washing machines and refrigerators, prices of which are linked to the exchange rate.
The central bank earlier on Friday reported that consumer prices rose 3.3 percent in January, the second-highest monthly increase in three years. It was higher than the inflation rate in neighbouring Colombia for all of 2012.
‘MORE WITH LESS’
Vice President Nicolas Maduro urged Venezuelans to be more austere and efficient - a rare call in a nation accustomed to flashy oil wealth.
“We have to learn to do a lot with a little, more with less,” Maduro said during a televised speech about Venezuela’s satellite program earlier on Friday, before the announcement.
“We need to overturn the culture in which historically, because of oil, we’ve done little with a lot.”
Critics of Chavez’s administration responded angrily.
“The lying government was hiding a shock treatment package, and just minutes ago Mr. Maduro was talking about space!” opposition leader Henrique Capriles said on Twitter.
Others likened it to the “Black Friday” devaluation in 1983 often seen as the definitive end to a decade-long era of free-flowing oil wealth during the 1970s and early 1980s.
Devaluations generally make local industries more competitive in export markets abroad by lowering the cost of production in respect to other countries.
But critics say the move is unlikely to contribute to a significant expansion of domestic industry because of the government’s confrontation with the private sector, extensive price controls and frequent unpaid expropriations.
Venezuelans on the streets of Caracas were frustrated but resigned. The country has a long history of devaluing to finance state spending, creating chronic monetary instability and leaving citizens seeking hard currency.
“It increases inflation and quality of life will suffer,” said publicity worker Maria Gonzalez, 30, at a supermarket in the capital. “It’s irrelevant whether or not Chavez comes back. He’s an ideological icon of a socialism that doesn’t exist.”
Additional reporting by Girish Gupta, Deisy Buitrago in Caracas, and Krista Hughes in Mexico City; Editing by Andrew Cawthorne, Kieran Murray and Todd Eastham