Authors:
Luis Alberto López Rafaschieri and José Alberto López Rafaschieri
www.morochos.net
In March 2009, President Chavez announced an economic package and said proudly that he will not devalue the bolivar, presenting this decision as a heroic revolutionary act.
However, after listening to the Chavez's economic plan, many people in Venezuela are asking the same questions regarding the value of the bolivar:
Why did not the government devalue in March?
To answer this we must understand that Chavez is facing a huge dilemma: With devaluation, he acknowledges the failure of his foreign exchange policy, in addition to suffering the consequences that come with currency depreciation -like inflation- But without devaluation, he must cope with the losses of keeping a subsidy on the exchange rate.
This time President Chavez decided to go for the first option to hide his failure to maintain exchange rate stability. Certainly confident that he still has many dollars in international reserves and because he is convinced that oil will return to $100 a barrel soon.
How long the government will resist?
Unfortunately for Chavez, the option to cover up his failure on foreign exchange policy will lead to serious economic consequences that will be seen soon. Venezuelan government finances are incurring losses in subsidizing dollars allocated to travelers, importers and all others who have access to the preferential exchange rate.
By not adjusting the currency to its real value -such as the one reflected in the parallel market- the government has to exchange dollars for bolivars at a disadvantageous price, damaging even more the battered public finances of Venezuela. And the bigger the spread between real dollar - subsidized dollar, the greater the loss for the government. Thus, the Chavez's fixed exchange rate is increasingly becoming unsustainable.
The exact time at which devaluation will occur is impossible to predict. However, it is very likely to happen in the short term. There is no option for the Venezuelan government. The longer Chavez waits to recognize his failure to maintain exchange rate stability, it will be worse for the economy, because keeping a subsidized dollar is eroding the national budget.
Related articles:
- Defects of Chavist plan announced on March 21, 2009
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