Venezuela prices up after new devaluation

Jan. 3, 2011 at 3:10 PM
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CARACAS, Venezuela, Jan. 3 (UPI) -- Consumer prices soared in Venezuela as the government of President Hugo Chavez devalued the bolivar and the currency fell further against the U.S. dollar on traditional unofficial markets.

It was the second Venezuelan devaluation in 12 months and follows the second Central Bank annual report in the same period confirming the Latin American country's economy continues to shrink despite its oil wealth, international trade and recovery from severe drought last year.

The problem, analysts said, was that the effects of the economic contraction in 2009-10 was continuing and was complicated by further slow productivity in the past 12 months.

Venezuela is an OPEC member and pressed for higher crude oil prices when the oil group met in Ecuador last month.

Consumer imports from neighboring countries are on an unstoppable spiral as Venezuelans struggle to find substitutes for domestic goods that are simply not available or have become scarce.

Severe drought caused hydroelectric power generation to drop sharply in 2009 and early 2010. Rain returned to Venezuela in the second half of last year but wasn't enough to help recovery.

Power shortages forced many businesses to cut production or shut down. Many businesses haven't reopened and restrictive government measures, some aimed at punishing employers who bypassed water rationing, are a major disincentive for some companies, analysts said.

The Central Bank said it estimated the economy shrank by 1.9 percent in 2010 -- the second year of shrinkage for the country.

Venezuela's economic troubles contrasted with the economic performance of neighboring countries, most of which recorded moderate to record growth.

The government was urged by critics to take urgent measures to control inflation, already one of the world's worst at 26.9 percent.

The government hopes the devaluation will make Venezuelan exports more competitive and draw new investment from outside Venezuela, especially from neighboring Latin American countries.

Only 10 percent of Venezuelan exports are non-oil. Despite the country's dependence on dollar earnings, unofficial dollar trade continues. Individuals or businesses unable to get government authorization for buying dollars for imports resort to the illegal trade in the U.S. currency.

Last year Chavez shut down privately run brokerages that operated a currency market parallel to the government's currency exchange commission or the regulated -- but restrictive -- currency market administered by the central bank, Sistema de Transacciones con Titulos en Moneda Extranjera.

The SITME is now operating the bond market under its own control.

Investors from other regions have also been discouraged by a wave of nationalizations over the past several years. Although Chavez has made clear his economic measures represent "21st-century socialism," critics say growing public discontent may affect his chances at the 2012 presidential elections.

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