It was reported that Venezuelan is devaluing their currency. Initially I thought it means that it is now going to peg its currency to another (lower) value relative to the dollar. But as I read in Bloomberg HERE, I almost wanted to laugh at what the government was trying to do.

Apparently there are two FX rates. The original FX is 2.15 per dollar. Now the devaluation will put the FX to 2.6 for imports of items including food and medicine and a rate of 4.3 for “non-essential” products. I never come across a case in which a country has two FX rates! Goodness, are they from Mars or from Venus?

Unfortunately the “black market” FX is 6.48 which probably is reflecting the fair value of the currency.

What does devaluation means? It means that for the same unit of currency, it can now buy less things. Or given the same item, more units of the currency is required to purchase it. In other words, the purchasing power of the currency has deceased. Changing the FX from 2.15 to 4.3 is about 50% decease in purchasing power.

However, currency devaluation does not decease the value of goods and services especially for items that are imported because the value of the import is not within the control of the government – it is set by exporters. Naturally this will cost the prices of these imports to surge. Apparently the government is making it illegal for stores to increase their prices. What happen if these stores do not increase their price especially for import? Since FX has fallen by 50%, not increasing their price means giving a discount of 50%. Apparently this is what Venezuelan government is trying to do – forcing stores to give the discount!

It is dangerous to have government that do not understand FX and economics. It is also very dangerous for individuals who do not understand these as well.