MercoPress. South Atlantic News Agency

Venezuela Devalues Bolivar against Dollar

Venezuela devalued its currency by 17 percent against the U.S. dollar Monday, a surprise decision that could fuel inflation but help the government meet financing needs.

President Hugo Chavez's government pegged the Bolivar at 1,920 to the dollar ? a rate at which it had previously based its fiscal 2004 budget.

The fixed exchange rate had been 1,600 bolivars to the dollar since February 2003, when Chavez scrapped free convertibility and imposed strict currency controls to stem massive capital flight.

Venezuela's exchange system forces businesses and individuals to obtain government permission to buy U.S. and other foreign currencies.

While Venezuela's foreign reserves have reached a healthy $22 billion, red tape has driven many Venezuelans to buy dollars on the black market, where the bolivar has been trading at more than 3,000 per dollar.

Finance Minister Tobias Nobrega told the state news agency Venpres that the devaluation won't change the government's forecast of 26 percent inflation for 2004 because it had been planned.

But an abrupt devaluation was unexpected.

"This was a surprise," said Carlos Ochoa, an analyst with Venezuela's Mercantile Bank, adding that he had not thought to see such a move until August or September.

Business leaders said they expected a sharp rise in the price of imported goods in a country that gets about 60 percent of its raw materials abroad. Accumulated inflation was 27 percent in 2003, a 4 percent drop from the previous year.

"The new devaluation ... will dramatically increase inflation, and once again, consumers will suffer the worst effects of this decision," said Lope Mendoza, president of Venezuela's largest chamber of industries, Conindustria.

With the devaluation, the government can obtain more bolivars for each dollar it receives in oil income, making it easier to finance its $31.1 billion 2004 budget, Ochoa said.

Venezuela depends on oil for 80 percent of its export earnings and about half of government revenue.

But the move could prove unpopular ahead of a possible recall referendum on Chavez's rule, Ochoa said. "This will have a social impact."

Chavez has poured millions of dollars into social programs for the poor as opposition leaders seek the recall. The National Elections Council is verifying more than 3.4 million signatures opposition leaders say they have submitted, and is expected to announce within weeks whether a referendum will be held.