Venezuela's Currency Plunges as Controls
Caracas, Venezuela, Feb. 13 — Venezuela's currency plunged against the dollar today as President Hugo Chávez abandoned exchange controls to try to stem capital flight and restore investor confidence. The bolívar fell by 19 percent, closing at 980.50 to the dollar, compared with 792.50 Friday, the previous trading day. Economists have said the bolívar was overvalued as much as 30 percent.
Reopening after a holiday weekend, several Caracas exchange houses and banks postponed dollar sales today to wait for the price to stabilize.
Late Tuesday Mr. Chávez announced the surprise decision to abandon a controlled devaluation scheme and let the currency float. He also announced a 7 percent cut in government spending to help close a projected $8 billion budget deficit.
The measures reflect a new economic reality of low oil prices, capital flight and investor nervousness about Latin America after Argentina's financial crisis and the slump of the global economy since the Sept. 11 terrorist attacks in the United States, Mr. Chávez said.
Thomas Dawson, spokesman for the International Monetary Fund, praised Venezuela's decision to abandon exchange controls as a step "in the right direction."
Venezuela had spent more than $3 billion to prop up the bolívar since November. Business groups had wanted the currency devalued to make exports more competitive.
Mr. Chávez, a former paratrooper who once led a failed coup, was elected in 1998 with a mandate to throw out the discredited political elite and help the poor. Critics accuse him of alienating investors by fighting with business leaders, the Roman Catholic Church and the news media.
Domingo Maza Zavala, director of the central bank, said today that the bank would not sacrifice its reserves to defend the bolívar but would intervene if needed to stop the free fall. Currency turmoil is likely to ease in a few days, he said.
Some experts said the moves would stop the drain on foreign reserves but would generate inflation that Venezuelans, 80 percent of whom live in poverty, can ill afford. One of Mr. Chávez's chief aims was to tame the rate of inflation, which was 10 percent in 2001.
"This is actually a devaluation, and Venezuelans now should get used to higher prices," said Janet Kelly, professor of public policy at the Caracas Graduate Institute of Advanced Management.
Some called the measures too little, too late.
"I think the adjustment should be much more ambitious," said Francisco Rodríguez, head of the National Assembly's economic advisory office. "This is a first step, but it's not enough." He said he foresaw a "substantial" devaluation.
Capital flight has been fueled in part by a volatile political situation.
Venezuelans lined up at banks Friday to buy dollars after two military officers demanded that Mr. Chávez resign, accusing him of threatening civic freedoms. Their demands prompted thousands to protest in Caracas for and against the president. The military assured the nation that there was no unrest in its ranks, and protests calmed over the weekend.
Mr. Chávez said the announced budget cuts would focus on administrative costs at the federal, state and local levels, and would not touch social programs.
The new $25 billion budget, down from the original $33 billion, is based on an average oil price of $16 a barrel, instead of a forecast $18.50. Venezuela loses $1 billion in income for each $1-a-barrel drop in the price of oil.
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