The government of Venezuela announced the devaluation of its currency, the Venezuelan Bolivar, amid a broad range of decisive steps it has taken to rebound from the impacts of the year-long drought that has forced the enactment of water and energy rationing, and the persistent economic challenges of the global financial crisis. President Hugo Chavez explained the benefit for his country that he expects to derive from the devaluation. “This is going to mean more economic and financial strength for the government, for the oil industry, which belongs to us all, and therefore fiscal strength. We are going to have more resources for social investment.”
Substantial losses have occurred this year due to failed crops and livestock that succumbed to high temperatures and unavailability of sufficient water. This had a ricochet effect on local and export businesses dependent upon those products.
Due to the severity of the drought-induced water/energy dilemma, a plan was devised to cut energy production at the largest hydroelectric dam near Caracas, Venezuela’s capital, and to ration electricity by cutting power for 4 hour periods every 48 hours. Large factories, shopping malls, and other massive power consumers are affected. President Chavez said to BBC News, “We’re going to continue to apply a rigorous energy saving plan.” The Venezuelan government is using the media to present tips and advice on conserving water and electricity in daily usage such as shortening shower time, and turning off unneeded lights – similar to consumer education programs in the United States.
The energy cuts were prompted by precariously low water levels at the nation’s largest dam, the major source of electricity production in Venezuela, in efforts to prevent water levels too low to produce electricity. The blackouts began around mid-January, but were halted until errors in the coordination of the cut-off system could be corrected.
The exchange rate of the Bolivar, which has held steady at 2.45 to the U.S. dollar since it was devalued in 2005, will be a dual rate: 2.60 to the dollar for foods, medicines, and essential items, and roughly double that – 4.30 to the dollar, for non- essentials and imported items.
The exchange rate adjustment was decisively planned, taking into consideration the financial climate of the entire region. “Devaluation will give a boost to the productive economy, will stop imports that are not strictly necessary and will stimulate exports,” President Chavez said, according to the Wall Street Journal.
For the people of Venezuela, the devaluation should reduce the overall cost of living, making necessities cheaper, and thus causing increased sales. Consumers flooded stores to buy electronics and appliances, expecting prices for imported items to skyrocket. However, President Chavez strongly urged retailers not to raise prices unduly, mimicking capitalist investors; the devaluation was also intended to turn consumers more towards the purchase of domestic goods. For businesses who deal in imports, and international businesses that operate in Venezuela, it was a grim forecast. “We see no light on the horizon in terms of trade with Venezuela. Our exports were already being impacted. Now, on top of that, they’re about to become super expensive,” commented Tulio Zuluaga, the head of Colombia’s Asopartes automotive export group. Some American companies operating in Venezuela that will be effected by the devaluation are Colgate-Palmolive, Kimberly-Clark, Avon Products Inc., Proctor and Gamble, Dupont.
