Paper: Houston Chronicle
Date: Sun 12/23/2007
Edition: 2 STAR
Venezuela works on confidence as currency loses some zeroes / Circulation of the strong bolivar also aimed at collaring inflation
By JOHN OTIS, Houston Chronicle South America Bureau, JOSE OROZCO
CARACAS, VENEZUELA - It's getting easier to become a millionaire in Venezuela: A mere $200 will buy 1 million bolivars, the troubled national currency.
For an oil-producing nation that views itself as a potential economic juggernaut, the bolivar stands as a glaring symbol of weakness. But on Jan. 1, the Venezuelan government will start phasing out the bolivar and phasing in a new currency with a muscular name: the strong bolivar.
The freshly minted bank notes and coins are designed to boost consumer confidence and bring down the 20 percent annual inflation rate, the highest in Latin America. The move also could make bookkeeping easier because three zeroes will be lopped off the old denominations. A thousand bolivars will be worth one strong bolivar.
"This is the bolivar of the new Venezuela, which is set to become an economic power," President Hugo Chavez said in a speech earlier this year when he announced the currency switch.
The move comes amid growing stress to Venezuela's rapidly expanding economy. Inflation and shortages of chicken, beans, milk and other basic foods appear to be eroding some of the Chavez government's support.
Poor and working-class Venezuelans have long backed Chavez because his government has spent billions to build schools, clinics and subsidized food stores in their neighborhoods while poverty and unemployment have fallen. But these constituents have been hit hard by rising prices.
On Dec. 2, voters narrowly rejected a referendum on constitutional reforms that would have given Chavez more control over the economy and accelerated his drive to turn Venezuela into a socialist nation. It was Chavez's first defeat at the ballot box after nine years in office, and some analysts believe that many of his traditional supporters stayed home.
"With the food shortages and inflation out of control, these were not favorable conditions for the president," said Ronald Balza, an economics professor at Andrés Bello Catholic University in Caracas.
Once known for stability
The bolivar, named after South American independence hero Simón Bolívar, once was among the world's most stable currencies. For decades, it traded at 3.3 to the U.S. dollar, and it was one of the currencies used by the International Monetary Fund.
But starting in the 1970s, a cycle of oil booms and busts and economic mismanagement provoked inflation - the annual rate hit 100 percent in 1996 - and a long, steady decline in the value of the bolivar.
Under Chavez, record-high oil prices have fueled four straight years of economic growth, including an 8.5 percent expansion of gross domestic product in 2007. But massive government spending has pushed up the inflation rate. Meanwhile, Chavez's move to nationalize some utilities and parts of the oil industry has sparked capital flight, causing the bolivar to fall even further against the dollar.
The official exchange rate is now 2,150 bolivars per dollar. But to restrict capital flight, the government limits the number of dollars that businesses and individuals can buy, leading to a thriving black market. On Caracas' streets, the dollar trades for 5,000 to 6,000 bolivars.
That has led to price distortions, especially for goods imported with expensive dollars purchased on the black market. Jorge Acosta, manager of the Arbiter men's clothing store in Caracas, says an imported leather jacket in his shop now sells for 7.5 million bolivars (about $3,500 at the official rate of exchange) up from 3.2 million (about $1,500) just a year ago.
"Nothing justifies that a country that is so rich has a currency that is so devalued," Acosta said. "The problem is that our governments have mismanaged the wealth."
Several other Latin American nations also have turned to new currencies as part of wider efforts to battle inflation and stabilize their economies.
Calling Mexico's devalued currency a national disgrace, then-President Carlos Salinas de Gortari sliced three zeroes off the peso in the early 1990s and called it the "new peso." Peru scrapped the inti for the new sol, while Brazil replaced the cruzeiro real with the real around the same time.
Part of the strategy is to shape people's perceptions. New bank notes with smaller denominations - allowing for single- and double-digit price tags rather than rates in the thousands and millions - can have a positive psychological impact, said Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington.
The switch to the strong bolivar "will close a cycle of instability that Venezuela has suffered for the past 25 years and generate positive expectations," Finance Minister Rodrigo Cabezas told the Caracas daily El Nacional.
But the currency makeover won't make much difference unless the policy is combined with other measures to cut inflation, such as a slowdown in government spending, said Domingo Maza Zavala, a former director of Venezuela's Central Bank.
"The government keeps on spending," Maza Zavala said. "The inflationary factors are increasing."
During a transition period of about six months, both the bolivar and the strong bolivar will circulate, and Venezuelan shopkeepers must list prices in both currencies. A kilogram of powdered milk costing 28,000 bolivars will also carry a price tag of 28 strong bolivars.
Some Venezuelans believe that the new system could make their lives easier.
"The numbers won't be so big anymore," said Orangel Suarez, a Caracas social worker.
Others see the move as another sweeping - though mostly symbolic - gesture by Chavez, who already has changed Venezuela's flag, national seal and time zone.
Oscar Trejo, co-owner of a Caracas construction company, called the strong bolivar "a way of cheating the people into thinking that inflation is down and the value of their money is up."
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