Venezuelan Currency Reform: Pragmatic Policy or Misguided Gamble?

Predictions about Venezuela’s economy spawn prolifically. In light of Venezuela’s major oil reserves and president who is increasingly outspoken against the U.S., many wait impatiently to see how the country will far in the wake of its ongoing recession. Will Chávez lead the economy downward to disaster, or will he surprise all with economic resilience?
On Wednesday, June 9, Venezuela’s bond market reopened after President Hugo Chávez had shut it down on May 19. Chávez blamed the bolívar’s fall to almost half its previous value on currency speculation in the parallel market for dollar bonds, which he proceded to suspend until a new market system could be put into place. Newly reopening with a devalued bolívar, the new bond trading market will give the government full control of the exchange rate by requiring that companies buy dollar-denominated bonds rather than conduct direct sales of bolívars for foreign currency. This system follows the trend of Chávez’ leftist recession-fighting policies such as nationalization of industries, controls on prices, and high rates of government spending on social programs. Lauded by some and assailed by others, Chávez’ policies are often seen as indicative of a worldwide trend against the 1990s’ globalization, market economics, and neo-liberalism. The question that now remains to be answered is: what does this new policy portend for Venezuela’s economy?

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This analysis was prepared by COHA Research Associates Stephanie Lloyd & Sara Nawaz