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Venezuelan Currency Devalued by 41.4 Percent

December 11, 1995

CARACAS, Venezuela (AP) _ Venezuela devalued its currency by 41.4 percent Monday, bowing to reality after a 17-month freeze. But the government did not allow the bolivar to float, and critics said it would become overvalued again in short order.

The new rate was set at 290 to the dollar, down from 170. President Rafael Caldera froze the bolivar at 170 in June 1994 to curtail capital flight and daily devaluations _ and kept it there despite accumulated inflation of almost 100 percent.

The new rate covers most government and private transactions and takes effect as soon as it is published in the official gazette, probably Tuesday, said Decentralization Minister Jose Guillermo Andueza.

``We feel with these measures ... we are guaranteeing a rapid recovery of the economy in 1996,″ a glum Luis Raul Matos Azocar, the finance minister, said in a news conference at the Miraflores presidential palace.

The announcement was timed to coincide with a bank holiday. The Caracas Stock Exchange also was closed.

Some critics denounced the new freeze, saying the government should have allowed the bolivar to float freely against foreign currency.

``These people never learn,″ scoffed Hugo Faria, an economics professor at the Institute of Higher Management Studies. ``They keep believing in controls.″

Matos said the government would eventually remove the controls altogether, possibly during the first three months of next year.

There was little public reaction in downtown Caracas, where economic woes have in the past sparked angry demonstrations. That was probably because prices have been rising steadily in line with the bolivar’s unofficial rate, which closed Friday at about 320 to the dollar.

Venezuelans, anticipating devaluation, had shopped compulsively in the past few weeks out of fear that prices would rise even faster.

``Devaluation is terrible. We’re frightened,″ said Nubia Chavarria, a 38-year-old housewife. She was at a downtown electronics store eying a video cassette recorder that cost 56,000 bolivares last July. The price tag Monday: 105,000 bolivares.

The devaluation had been widely anticipated. Matos had said for weeks it would happen before next April 1.

Even while holding the bolivar to 170 to the dollar, the government had allowed the formation of a parallel rate based on the purchase of U.S. Treasury-backed Brady Bonds for bolivares, and their immediate sale outside Venezuela for dollars.

Foreign airlines and other travel companies switched to the parallel rate when the government could no longer afford to buy bolivares from them at the official rate.

The devaluation is part of a larger plan to arrange a $7.5 billion loan package from the International Monetary Fund and foreign banks, Matos said, and to shore up the economy by selling state companies, reducing the fiscal deficit and bringing inflation to below 10 percent.

It was 71 percent last year, when the bank sector nearly collapsed and had to be bailed out, and is projected to reach 60 percent this year. This oil-rich South American nation is suffering in its third year of recession.

The decision to devalue the bolivar was hastened by a 19 percent drop in foreign reserves this year, to $9.2 billion. Foreign investment also plummeted due largely to exchange controls and the recession.

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