Venezuela Devalues Currency By 37% As Maduro Announces 62-Fold Increase In Gasoline Prices
Maybe because between the specter of defaulting in under three months, the threat of handing over its gold to Deutsche Bank, or the reality of rampant hyperinflation and a collapsing society, the already crushed population of Venezuela did not have enough things to worry about, moments ago Venezuela's Nicolas Maduro unveiled a double whammy of "shock and awe" when the socialist president not only announced the latest devaluation of the country's official currency, but also presented his countrymen with the first gasoline price increase since 1996.
These moves represent the latest attempt to stem a widening economic crisis, though critics of the socialist leader quickly dismissed the moves as insufficient.
On the devaluation side, the latest measure of desperation will lower the strongest official exchange rate by 37% to 10 bolivars per dollar from 6.3, and streamline the previous three-tiered system into a dual exchange rate mechanism. The weaker of the two rates will be a "free float" based on an existing system that currently sells dollars at around 200 bolivars, Maduro said.
As Reuters reports, critics immediately questioned the latter claim, noting that the government has repeatedly announced "free-floating" systems that withered away precisely because authorities never allowed them to be determined by demand.
Meanwhile, Venezuela's true "free floating", market-clearing currency, the black-market "dolar today" recently plunged to over 1,000 per dollar, and was at 1,045.90 as of today. It is this currency that Maduro has sought to eliminate by actually suing the website that reports what it is on a daily basis.
That was the largely irrelevant awe, especially since virtually nobody transacts at the official exchange rate which is over 100 times stronger than Venezuela's true currency level.
As for the shock, it came in the form of 62-fold increase in the price of 95-octane gasoline to 6 bolivars/liter.
The price of premium gasoline will rise by 1,329 percent, but fuel is so heavily subsidized that fueling a small car will still cost about half the price of a soft drink, or about $0.23 based on the black market exchange rate. 91-octane gasoline will cost 1 bolivar per liter
Putting these prices in perspective for western readers should result in laughter: the new price for 95-octane is equivalent to $0.11/gallon using weakest official Simadi FX rate of about 203 VEF/USD, and 5 times less using the black market FX rate. The price previously was 0.097 bolivar/liter or about one-fifth of a U.S. cent per gallon.
And while the price is indeed laughable to western readers, price increases such as this one are all too tragic to the local population which is paid in local currency terms, and for whom this is merely the latest checkmark on the hyperinflationary wall.
Maduro's attempt to make the price increase more palatable failed: "The time has come for a system that guarantees access to oil products but that covers the cost PDVSA pays to produce it,” Maduro says during a national TV broadcast. "Venezuela has the cheapest gasoline in the world. The cost is almost nothing,” Maduro said before announcing new price.
But if it's almost nothing then why do it, aside from antagonizing your already miserable people?
The reason is that the measures are meant to help shore up the OPEC nation's finances as plummeting oil prices and a collapsing state-led economic model have left the country with a severe recession, triple-digit inflation and chronic product shortages.
"This is a necessary measure, a necessary action to balance things, I take responsibility for it," Maduro said, in reference to the fuel hike during a combative four-hour speech in which he insulted opposition leaders and occasionally used foul language.
The reforms risk fueling triple-digit inflation at a time when millions are struggling to make ends meet, and comes two months after the ruling Socialist Party suffered a blistering defeat in parliamentary elections due to anger over the crisis.
The package will likely be seen by Wall St. investors, who are increasingly concerned about a potential default, as mildly positive but still vastly insufficient to help Venezuela make some $10 billion in debt payments amid a major cash crunch.
"Bottom line is no change to cashflow for this year and hefty year end debt payments," wrote Siobhan Morden of Nomura in an email.
"The devaluation from 6.3 to 10 will not have a relevant impact," wrote economist and pollster Luis Vicente Leon on Twitter. "With respect to the gasoline, the only way to consolidate is to adjust (the price) regularly, otherwise it will be pulverized by inflation."
Critics say the only solution to Venezuela's economic problems is to entirely dismantle the 13-year-old currency system created during the government of late socialist leader Hugo Chavez.
Which will happen, but not before Maduro first sells all the country's gold, and then proceeds to obliterate the domestic economy, formerly known as the "socialist paradise" of Latin America.
We hope Bernie Sanders is paying close attention.
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