petroleumworld

VenEconomy: Cadivi, a bad start to the year

On Friday, January 8, in a televised Council of Ministers, Hugo Chávez announced the devaluation of the bolivar and the implementation of a multiple exchange rate.

The foreign exchange measure, which went into effect this Monday, January 11, contemplates three exchange rates: the first level raises the official rate from Bs.F.2.15:$ to Bs.F.2.60:$ for health products and services, food, machinery and equipment, science and technology, books, remittances to family members, pensioners abroad, and diplomatic missions.

The second level, dubbed the “petroleum dollar,” has been set at Bs.F.4.30:$ (a devaluation of 50%, doubling the price) and applies to the automotive, trade, telecommunications, chemical, metallurgical, computer, and other sectors still to be specified. And the third level will be the swap exchange rate.

According to the government, the purpose of the foreign exchange measure is to “put a break on nonessential imports, substitute imports, and promote and encourage production for export.” Despite this, logic dictates that the result will be quite the contrary, as the revival of the entire productive sector, whether for export or not, requires not only a local currency that is competitive on international markets, but also respect for property rights, freedom of enterprise and freedom to invest, legal certainty, and the rule of law. And, as is common knowledge, if something the Chávez administration lacks it is precisely these qualities.

Under normal circumstances, devaluation would be a response to a balance of payments crisis. But that is not the case of Venezuela today. The Central Bank closed the year with $35.83 billion in reserves and oil prices at an 18-month high. The reasons for this devaluation were purely fiscal!

The rapid deterioration of PDVSA’s production capacity has meant that the company has been unable to meet the levels of public spending needed in this crucial year of parliamentary elections. The point is that PDVSA will now receive twice the amount it has been receiving for each export dollar, which conservative calculations put at some Bs.F.100 billion, sufficient to increase the budget by more than 50%.

Of course, the downside is that the private sector and the man in the street will have to cope with a significant hike in today’s prices.

The irony of this cataclysmic measure is that, even though the devaluation is 50% and this will unleash rampant inflation, the parity that has been established still leaves the bolivar undervalued. According to analysts, a competitive parity is estimated at Bs.F.5:$. Assuming that 40% of imports will be at Bs.F.2.60:$, 40% at Bs.F.4.30:$, and the remaining 20% at the swap dollar, the average parity will be Bs.F.4:$ versus an estimated competitive parity of Bs.F.5:$ or more.

In the short term, the worst aspect of measures such as these is their impact on the import sector. Importers who brought in –and sold- merchandise calculated at the exchange rate of Bs.F.2.15:$ will be very hard hit, as their applications to Cadivi for foreign currency will be paid at Bs.F.2.60:$ and Bs.F.4.30:$. Many of them will not even be able to offset this loss against their 2009 taxes because the devaluation came in January. Assuming that delays at Cadivi for these sectors amount to some $10 billion, we would be talking of losses that could be between Bs.F.26 billion and Bs.F.43 billion.

No doubt about it, this is a bad start to the year for Venezuelans, as, once again, the government has taken an economic measure that, while necessary, has come late (at least four years late), is badly implemented, and is, moreover, incomplete, confusing, and unaccompanied by essential complementary economic measures. In short, it is a measure that will result in a catastrophe for the country: further deterioration of the productive and business sectors and more poverty and unemployment for the Venezuelan population.

VenEconomy has been a Venezuela's leading specialized publisher on financial, political and economic data since 1982. VenEconomy's Points of View on the issues of the day, as seen by VenEconomy during the last week. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by VeneEconomy on 01/11/2010. Petroleumworld reprint this article in the interest of our readers .

All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.

Fair use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.

All works published by Petroleumworld are in accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.Petroleumworld has no affiliation whatsoever with the originator of this article nor is Petroleumworld endorsed or sponsored by the originator.

Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld articles provided that any such reproduction identify the original source, http://www.petroleumworld.com or else and it is done within the fair use as provided for in section 107 of the US Copyright Law.

If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. Internet web links to http://www.petroleumworld.com are appreciated

Petroleumworld welcomes your feedback and comments,
share your thoughts on this article, your feedback is important to us!

We invite all our readers to share with us their views and
comments about this article, write to editor@petroleumworld.com

Petroleumworld News 01/12/2010

Copyright© 1999-2009 Petroleumworld or respective author or news agency. All rights reserved.

We welcome the use of Petroleumworld™ stories by anyone provided it mentions Petroleumworld.com as the source.Other stories you have to get authorization by its authors

Send this story to a friend

Any question or suggestions, please write to:
editor@petroleumworld.com

Best Viewed with IE 5.01+
Windows NT 4.0, '95, '98 and ME +/ 800x600 pixels