Published by Economist Intelligence Unit

Event

On November 28th a decision by the president, Nicolás Maduro, that paves the way to legalise US-dollar exchange in the black market was published in the official gazette.

Analysis

The new law lays the groundwork for the government to make the three-tiered currency system more flexible, if and when it decides to do so. It does not immediately legalise the black market, but instead gives the Banco Central de Venezuela (BCV, the Central Bank) the option to do so without seeking the approval of Congress.

Currency controls, first implemented by the former president, Hugo Chávez (1999-2013), in 2003, have made dollars scarce in Venezuela, causing widespread shortages of basic goods and pushing up consumer price inflation (which stood at 63% in August, the last month in which the BCV published inflation figures). This has driven the growth of the thriving black market for hard currency. The local currency has plummeted on the black market in recent weeks—a drop that accelerated in the wake of OPEC's decision to maintain global oil production levels—dropping by 30% in one month to BsF155:US$1, around 25 times the strongest official exchange rate of BsF6.3:US$1. Venezuela operates three official exchange rates; the strongest rate is reserved for what the government deems to be "essential goods." Importers complain increasingly about the difficulty of obtaining hard currency through official channels and must often resort to purchasing dollars on the black market.

The parallel market acts as a safety valve for the country's economy, although currently it is not able to satiate demand for dollars, leaving supermarket shelves empty, a major political issue for the already-unpopular Maduro administration just before Christmas. Legalising the black market would make it more attractive to importers, narrowing the gap between the black market rate and the government's official rates.

Impact on the forecast

We have made no changes to our exchange rate forecasts at this time and will await further action by the BCV before doing so.