Economic variables point to another devaluation of the Venezuelan bolivar

El Universal: Angel Garcia Banchs, a researcher at the Center for Development Studies (Cendes) and professor at the Central University of Venezuela, considers that the Venezuelan bolivar remains overvalued and therefore a "devaluation is very likely next year."

Between 2005 and January 2010, Hugo Chavez' administration had a fixed rate despite the fact that the country underwent throughout the period an inflation rate well above its trading partners. As a result, the Venezuelan currency is extremely overvalued, that is, imported products were much cheaper than domestic goods.

The Venezuelan government, cornered by the economic imbalance, devalued the currency on January 8, 2010, when the overvaluation, according to Angel Garcia, stood at 86%.

"We had a 60% devaluation that did not fully correct the imbalance. If we add the expected inflation rate in 2010, at the end of the year the Venezuelan bolivar will be overvalued by 57%," estimated Angel Garcia Banchs who participated in a forum hosted by the Venezuelan Federation of Trade and Industry Chambers (Fedecamaras) to assess the domestic economy trends.

From his point of view, the exchange crisis that has led to a closure of the foreign exchange parallel market and put up additional barriers to the purchase of foreign currency is due to the fact that the inflow of US dollars is not enough to offset the outflow of capital transfers, money transfers to the National Development Fund (Fonden) and growing dependence on imports.

After making the necessary adjustments for a proper comparison, the Venezuelan economist said that when the government of former President Luis Herrera Campins decided to devalue the Venezuelan bolivar in 1982 (a day that has been called the Black Friday) there was a capital flight amounting to US$800 per capita; during the days of a popular uprising in February 1989 in Caracas, known as the "Caracazo," capital flight totaled $360 per capita; during the banking crisis in 1995, it was of $200 per capita, and in 2009 the capital outflow stood at $1,200.

Based an analysis of foreign reserves, Angel Garcia said that at this time Venezuela's international reserves are sufficient to cover all the needs of the economy, not only imports, for four months, one month less than when the government devalued the Venezuelan currency in January 2010.

In his opinion, during the period 2004-2008 the price of the Venezuelan oil basket increased at a rate higher than the inflation rate. Therefore, the economic imbalances were not so obvious, but the cycle came to an end.

"We created an economy which is highly dependent on imports, 70% of the demand for tradable goods is supplied by these means, and at the same time we have a heavy capital outflow; there are not enough US dollars. Things have ended in a stalemate," Angel Garcia says.

According to his projections for this year, the Venezuelan economy -- which fell 3.3% in 2009 -- will decline between 6 and 7%.