Venezuela’s Latest Currency Devaluation

Venezuela is South America’s forth largest economy. Many people forget that it was one of the founding countries of OPEC. By the early 1990s Venezuela was the third largest oil producing  nation in the world. These facts get lost in the never-ending debate over the effects of President Hugo Chavez’s push towards socialism.

The late Hugo Chavez was considered a defender of the poor. He was admired by many of his contemporaries because of his ability to stand up to Western imperialism. The left-leaning South American presidents supported President Chavez’s efforts to lead Venezuela down a path to socialism. In my opinion no head of state of any South America country have Chavez’s political sophistication or ability to manipulate public opinion. For years President Chavez convinced his supporters that their lot in life had improved because of his leadership. Without Chavez’s imposing personality and fiery rhetoric it is likely that Venezuelans will start to question the nation’s economic health. The Venezuelan community be surprised to learn that President Chavez ruined the nation’s oil industry by using its revenues like a piggy bank to fund his socialist experiment. It is time for Venezuelans to ask where the government gets the money to fund so many expensive social programs.

After waging a long battle with cancer Hugo Chavez died on March 5, 2013. According to a statement released by the military he died of a massive heart attack. Most commentators believe that he had returned from Cuba because no further treatment would arrest the progress of his disease. If is safe to assume that Chavez knew that his time was up. I do not believe that Chavez was actually in charge of the country’s daily operations during his last few weeks. The late president was probably consulted on major policy decisions and actions.

On February 8, 2013 the government devalued its currency by 32%. At that time it was suggested that this action was designed to clear the decks for a new economic regime. Most economists concluded that the devaluation by itself would not lead to an appreciable improvement in the economy. I think that the devaluation was part of a strategy to give the President’s presumptive successor a political advantage in the soon to be held elections.  I do not believe that this monetary action was taken to improve the lives of poor Venezuelans. 

Generally speaking the value of a given currency is determined by its relativity to the value of another currency. This exchange rate is normally based upon the amount of the home currency which is needed to purchase one unit of the foreign currency. It is common for countries to base their currencies upon the U.S. dollar or Eurozone euro. Currencies rise and fall depending on movements in the financial markets. Today major currencies are said to “float” along with market conditions.

Many third world nations have elected to fix the value of their currencies. The New York Fed. Reserve Bank explains how this method of evaluating a country’s currency works:

 “Under a fixed exchange rate system, only a decision by a country’s government or monetary authority can alter the official value of the currency. Governments do, occasionally, take such measures, often in response to unusual market pressures. Devaluation, the deliberate downward adjustment in the official exchange rate, reduces the currency’s value; in contrast, a revaluation is an upward change in the currency’s value.”

Venezuela’s national currency is the bolivar. Its exchange rate is fixed to the US dollar. Many of the world’s Third World Nations’ currencies are fixed. In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves to purchase all offers of its currency at the established rate. Because of the Venezuela’s political and economic isolation the country has always had problems maintaining an adequate amount of foreign reserves. Over the last few years Venezuela has not been able to support (defend) its currency. The country has devalued the Bolivar numerous times the last decade. Most commentators and financial experts believe that Venezuela’s economic problems cannot be addressed by constantly devaluing the Bolivar.

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