By Agency Reporter

Monday, 3 Jan 2011

Venezuelans are worried on Friday that a second devaluation of their currency in 12 months would make life even harder as the socialist government of President Hugo Chavez struggled to turn the economy around.

Already suffering one of the world‘s highest inflation rates and the only major Latin American economy still in recession after the global financial crisis, they fear that the New Year devaluation could hit their livelihoods more, Reuters said on Friday.

”It is a blow against the pockets of the workers, against the poorest people,” Robinson Calua, a 50-year-old security guard in downtown Caracas, said.

Officials, however, said that the devaluation announced on Thursday would increase spending and boost growth in South America‘s biggest oil producer, while easing the pressure on foreign reserves and freeing up dollars for imports.

The move scrapped the lowest rate of a complex, multitiered forex system that few Venezuelans or outsiders properly understood and even taxed the brains of Wall Street experts.

With a handful of different exchange rates for everything from medicines to factory machinery, not to mention an active currency black market, analysts said the structure encouraged corruption and inefficiency and was prone to collapse.

The elimination of the strongest rate of 2.6 bolivars to the dollar should improve the government‘s balance sheet and could please bondholders, but will make goods like medicines and some food items more expensive.

In the near future, that is likely to feed an inflation rate that the central bank estimates was 26.9 per cent in 2010.

Chavez, who had inherited Fidel Castro‘s mantle as Latin America‘s leading critic of the United States during his nearly 12 years in power, has increased his government‘s role in the economy through regulations and a wave of nationalisations.

He had accelerated efforts to entrench his self-styled ”21st century socialism” in recent weeks, and apparently chose to order the devaluation as soon as possible before seeking re-election at the next presidential poll in December 2012.

That way, his government takes any economic pain and inflationary pressure -and possible social consequences – in 2011 and hopes to have more funds for the election campaign.

It is a gamble, though, because the president draws his core support from Venezuela‘s sprawling barrios and poor rural areas, where any price rise will be felt most.

A legislative vote in September showed the electorate split down the middle, but the charismatic Chavez remains by far the country‘s single most popular politician.

The outgoing parliament gave Chavez special decree powers for the next 18 months, which he said he would soon use to increase the country‘s sales tax from its current 12 per cent.

 

Source: Punch