February 09, 2013
Venezuela devalued its currency today, from 4.3 bolivares fuertes to 6.3 at the official exchange rate. As with most economic news from Venezuela, it was not well reported. A Reuters news article stated, as though it were a fact, that the move will “spur galloping inflation.” But the biggest devaluation during the Chávez years, in January 2010, produced no increase in the core rate of inflation, and only a temporary increase in the headline rate; it then fell for more than two years, even as economic growth accelerated to more than 5 percent in 2012. Annual inflation was 19.5 percent in 2012. At the time of the devaluation in January 2010, there were reports in the Washington Post predicting 60 percent inflation as a result of the devaluation.
Of course we would expect some temporary increase in inflation from a devaluation, as there was in 2010 – because the devaluation will increase the price of imports – but how much and how long it lasts depends on other government policies as well.
The devaluation will increase the cost of capital flight, and by making imports more expensive, provide a boost to import-competing industries. For this reason, and because it reduces the black market premium and reduces capital flight, the move will overall be good for the economy.
It is widely reported, as in the Reuters article, that the devaluation will help with government finances because each dollar in oil export earnings will now exchange for more domestic currency; in fact this is often stated as the reason for the devaluation. But government spending in domestic currency is not dependent on the exchange rate.