# Chavez Devalues Venezuela’s Currency

By JOHN LYONS and DARCY CROWE CARACAS – President Hugo Chavez, harried by recession and declining popularity, announced a major currency devaluation late Friday to shore up government finances and stimulate economic growth before key elections this year. The move cuts Mr. Chavez's two-year-old "strong bolivar" currency by half – to 4.3 per dollar from 2.15 per dollar – for most imports and transactions. The central bank will also subsidize a stronger 2.6-per- dollar rate for imports of food, medicine and other essential items, Mr. Chavez said. The staunchly anti-U.S. leader is gambling that the benefits of a weaker currency will offset faster inflation, which threatens the purchasing power of his mostly poor backers. Finance Minister Ali Rodriguez said devaluation, which makes the price of imported goods more expensive in local currency terms, may add 5 percentage points to the 27% inflation rate – already among the fastest in the world. In Mr. Chavez's favor, the measure helps narrow a growing budget shortfall, could provide limited relief to a moribund local industry, and instantly gives his oil-rich government more local currency to spend per barrel of oil exported by the state petroleum company, PDVSA. That's a key consideration with Congressional elections looming in September. Devaluation brings "more room to increase public spending as way to spur economic activity," says Maikel Bello, an analyst with the Caracas-based research firm Ecoanalitica. For years, Venezuela has been able to defend an overvalued currency thanks to currency controls. Venezuelan citizens and companies can get dollars at the official rate only with government permission. That has led to a thriving black market, where those who don't get government permission buy the U.S. currency. Even the Venezuelan government uses the black market to some degree, economists say. On Friday, that black market rate stood at about 6.25 per dollar – well below the former official rate of 2.15 and still below the new rate of 4.30. Economists say one of the reasons for the move was an attempt to deflate the black market, a catalyst for inflation that has also spawned a frenzy of schemes to defraud the central bank of dollars. To dent the dollar's strength, the government will have to dip into the central bank's foreign reserves, which amounted to $35 billion two weeks ago, and sell more dollars. Devaluation "will give a boost to the productive economy, will stop imports that are not strictly necessary and will stimulate exports," Mr. Chavez said. However, by keeping a subsidized dollar rate for importing food, medicine and essential items, Mr. Chavez removes any incentive for Venezuelans to produce what they need most. It will almost certainly remain cheaper to import beef from Brazil, for example, than to produce it. Mr. Chavez is returning Venezuela to an official dual-exchange rate last tried during the economic turmoil of the 1980s. Dual exchange rates around the world are associated with corruption by bureaucrats who decide which businesses get the preferential rate, and by importers who have an incentive to falsify import invoices. —Dan Molinski contributed to this article