CARACAS / Bloomberg
Venezuela boosted gasoline prices for the first time in almost two decades and devalued its currency as President Nicolas Maduro attempts to address triple-digit inflation and the economy’s deepest recession in over a decade.
The primary exchange rate used for essential imports, such as food and medicine, will weaken to 10 bolivars per dollar from 6.3, Maduro said in a televised address to the nation. The government will also eliminate an intermediate rate that last sold dollars for about 13 bolivars and improve an alternative “free-floating, complementary” market that trades around 203 bolivars per dollar.
The devaluation will ease the drain on government coffers by giving state oil company Petroleos de Venezuela SA more bolivars for each dollar of oil revenue, while higher gasoline prices will reduce expenditure on subsidies. At the same time, the devaluation will probably force the government to raise the cost of staple foods such as rice and bread that most of the country now depends on to eat. “Faced with a criminal, chaotic inflation induced a long time ago, we must act with the power of the state to control and regulate markets,” Maduro said below a portrait of South American independence leader Simon Bolivar.
While Maduro’s measures may fall short of fully addressing Venezuela’s ailing economy, the announcements may “bring some relief that it’s something after months (years) of nothing,” Sibohan Morden, head of Latin America Fixed Income at Nomura Securities International, said in a note to clients published prior to Maduro’s speech.
Something had to change after the bolivar lost 98 percent of its value on the black market since Maduro took office in 2013. The government was hemorrhaging funds as it struggled to meet international debt obligations and maintain the supply of essential items amid the collapse in oil prices.
By long subsidizing the cost of fuel, the government has ensured that Venezuelans enjoy the cheapest gasoline in the world. Gasoline prices on Thursday will leap more than 60-fold to 6 bolivars a liter from 9.7 centavos. That’s equal to about 11 U.S. cents per gallon using the weakest legal exchange rate of 202.94 bolivars per dollar, up from about 0.2 U.S. cents per gallon. The price of 91-octane gasoline will increase to 1 bolivar a liter from 7 centavos. Even after these increases, Venezuela still has the lowest gasoline prices in the world.
Fuel prices in Venezuela hadn’t budged in almost 20 years. Food and gasoline price increases in February 1989 sparked nationwide protests and ultimately paved the way for the late President Hugo Chavez’s rise to power. Fearing a repeat of the so-called Caracazo riots, and labelling the measure typical of neoliberal economics, Chavez never raised gas prices during the 14 years he held office. “Venezuela has the cheapest gasoline in the world,” Maduro said before announcing the new price. “This is a necessary measure, I assume the responsibility.”
Venezuela’s economy is mired in its worst recession in more than a decade as the price of oil, which accounts for 95 percent of its export revenue, fell more than 75 percent since a peak in June 2014. While Maduro maintains his country’s hardships are the result of “economic war” waged by political foes, growing discontent over soaring prices and empty shelves allowed his opponents to sweep congressional elections last year.