Chavez's snap devaluation sparks panic in the aisles

Pre-election move designed to revive economy, but consumers fear prices will soar

(CARLOS RAMIREZ/AFP/GETTY)

The Venezuelan president Hugo Chavez promised to send soldiers into shops to seize businesses from owners who raise prices in the wake of the country's steep currency devaluation.

People had crowded into shops over the weekend to snap up imported televisions and electrical appliances, fearing that the devaluation of the bolivar was about to send inflation soaring.

"Right now, there is absolutely no reason for anybody to be raising prices of absolutely anything," Mr Chavez said on his weekly TV show. "I want the National Guard on the streets with the people to fight against speculation. Publicly denounce the speculator and we will intervene in any business of any size." To audience applause, the president added that the government would take over shops and give them to their workers if price rises were discovered.

The move to devalue by half the currency against the US dollar is a major political gamble ahead of tough elections this year. At a stroke, the devaluation will give the government more local currency for potentially popular spending programmes. But economists warn the country could be locking itself into an inflationary spiral that could ultimately hit the poor, Mr Chavez's staunchest backers.

Shoppers in Caracas chanted "Buy, buy, the world is going to die" as word spread of the devaluation. "I've been lining up for two hours to buy a television and two speakers, as by Monday everything is bound to be double the price," said Miguel Gonzalez, a 56-year-old engineer outside one store. State-run television avoided the word devaluation, preferring to call it an "adjustment", and critics were pilloried on a pro-Chavez radio station, which played the popular Argentine song Imbecile as a retort.

The move is nonetheless a humiliation for Mr Chavez, who changed the official name of the currency to the "strong bolivar" three years ago, promising an end to devaluations. While the government had used gushing oil revenues to pay for social programs during the boom years, the falling price of oil after 2008 and the global financial crisis have sent the economy into recession. Away from formal currency controls, the value of the bolivar had already collapsed on the black market to about one-third of its official level.

The move is also a big political gamble. Mr Chavez will be able to make the country's foreign-exchange reserves and future oil revenues go further in local currency. Some $7bn (£4.4bn) is being transferred from reserves to spend on government development programs, it was also announced, signalling an aggressive push to win support for the President's socialist allies in congressional elections. Opposition parties are making greater efforts this year to dent the standing of pro-Chavez politicians, after previous years in which they have boycotted elections. They have been emboldened by public dissatisfaction at frequent blackouts and water shortages and a 2.9 per cent economic contraction in 2009, and hope to strip the President of his legislative majority in September.

Mr Chavez's popularity has fallen from a 60 per cent approval rating a year ago – when he said the global financial crisis would not touch "a hair" of the Venezuelan economy – to 50 per cent now."The quality of life for Venezuelans is automatically devalued," said Caracas mayor Antonio Ledezma, a Chavez opponent. "We now have half the money we had before." The President was also taking flak for announcing the devaluation while much of the population was watching a critical baseball game late on Friday.

There will be an unusual two-tier system designed to keep down prices of essential imports such as food and medical supplies. So-called "priority" transactions will be priced at 2.6 bolivars to the dollar, with the rest at 4.3 to the dollar – from a previous uniform level of 2.15 bolivars.

"This is going to generate greater productivity in Venezuela, Chavez said. "Last year we imported 90 million pairs of shoes, for the love of God. We can make all of that ourselves – shoes, clothes, almost everything is imported."

For Mr Chavez and his congressional allies, the outcome of the gamble will depend on the effectiveness of the government-spending programs versus the impact of inflation. Prices are certain to jump because of the Venezuelan economy's reliance on imports.

Mr Chavez's presidency, 11 years old in February, has been characterised by increasing state control of the economy, including the nationalisations of key industries. Inflation was already at 25 per cent in 2009, one of the highest rates in the world, and the government predicted that the devaluation could add another 3-5 per cent to that. Some economists argued it could be even more.

Devaluing the currency: What happens next ...

When Harold Wilson, the British Prime Minister, devalued sterling in 1967, he told the public that "the pound in your pocket" would be worth the same. He was being a bit disingenuous. It depends what you are buying with it.

A weaker currency means that buying goods from abroad is suddenly more costly – but politicians routinely hope there will be compensating benefits. If imports are more expensive, the reverse is true: exports are cheaper, something which can boost the export sectors of an economy.

That happened when the pound was devalued again in 1992, crashing out of the Exchange Rate Mechanism. Since then, the value of sterling has fluctuated according to trading on global financial markets.

Venezuela, by contrast, runs a system that fixes the exchange rate of its currency, the bolivar. And like Britain in 1992, it has found that global economic realities eventually catch up.

A country cannot go forever with an exchange rate that is out of sync with the balance of its economic interactions with the rest of the world. So while Venezuelans last week needed only 2.15 bolivars to buy one US dollar's-worth of goods from abroad, this week they need 4.3 bolivars. That means that imported goods suddenly cost more – something that will inevitably hit the pockets of consumers, but Hugo Chavez has his eye on a specific offsetting benefit. The US dollars that his government makes from selling Venezuelan oil will go further inside the country. Whether they go into infrastructure investment or straightforward giveaways to the poor, Mr Chavez now has more bounty to spend ahead of September's elections.