Venezuela’s Attempted Currency Cure

| Mar. 28, 2014 | New York, USA

Published by New Yorker

For years, visitors entering Venezuela through the Maiquetía airport, near Caracas, have been met with the same call from money traders: “Dólares, dólares?” The hawkers are after visitors’ American money—or any hard currency, for that matter. Hard currency has been in such short supply in Venezuela that it can be sold on the black market for more than ten times the primary exchange rate set by the government. The value at which the hawkers trade has come to define life for Venezuelans, and is an indicator of many of the country’s economic ills. But now the government has a plan to diminish the role of the black market. On Monday, authorities launched a new, supply-and-demand-based exchange system for the dollar, in what some analysts see as a radical shift from socialist policy and an admission that currency controls enacted by Hugo Chávez more than a decade ago—which pegged the bolivar, the local currency, to the U.S. dollar, and limited exchange—have failed.

Those currency controls led to shortages of many basic goods—cooking oil, flour, even toilet paper—partly because importers didn’t have the dollars required to bring them in. Those with access to dollars could change them on the black market and live unusually well. These distortions are a major factor in the protests that have swept the country in recent weeks, the biggest test yet faced by President Nicolás Maduro.

Rather than the single exchange rate that we’re accustomed to when buying foreign currency, Venezuela now has a three-tier rate, in which the bolivar is worth a different amount in dollars based on the method of exchange. The primary rate, at which essentials such as medicine and food can be purchased, is just over six bolivars to the dollar. A secondary rate, known as Sicad, is defined by a weekly auction (sometimes cancelled) that values the bolivar at around eleven per dollar. The newest system, launched Monday, is known as Sicad II. Individuals and businesses can approach authorized brokers with bids for currency, which are then passed on to the country’s central bank for approval.

The idea is that Sicad II helps to close the gap between the official rates and the one used on the black market. In the weeks leading up to the launch of Sicad II, the black-market value of the dollar plunged, as those seeking foreign currency anticipated that they would soon have a legitimate way of obtaining it at a better price. On the morning of Sicad II’s launch, a dollar bought around fifty-eight bolivars on the black market; a month earlier, it would have bought eighty-eight bolivars. (This is according to data from DolarToday, a Web site that tracks the black-market rate on the country’s border with Colombia.) On Monday evening, the central bank announced that the average rate of exchange through Sicad II on its first day was just under fifty-two bolivars per dollar; because the strongest official exchange rate was just over six bolivars per dollar, this represented an eighty-eight-per-cent devaluation. Still, this was the closest any official exchange rate had come to matching the black-market rate in recent years.

But it didn’t last long. In trading later in the week, though people continued to exchange using Sicad II at around fifty-two bolivars per dollar, the black-market rate jumped to more than eighty bolivars per dollar. That appears to indicate that the Sicad II market is not providing enough dollars, and that people are still willing to pay a premium on the black market in order to obtain them. Authorities have not revealed how many dollars are being sold through the new exchange, stoking worries that there is simply not enough foreign currency available to meet demand.

Meanwhile, the unrest is entering its seventh week; at least thirty-seven people have been killed in protests around the country. People are angry about the economic problems and high murder rate. Barricades, tear gas, and petrol bombs have become commonplace. On Twitter, Henrique Capriles, a two-time Presidential candidate who leads the country’s political opposition, decried the launch of Sicad II as a “mega-devaluation,” adding that it represented a “Black Monday” for Maduro. Silvana Lezama, a twenty-year-old communications student in Caracas, has attended and helped organize the protests since they began. She is slightly disillusioned by the lack of a clear aim, but she intends to stay on the streets. The Sicad II mechanism is “not going to solve the insecurity and the shortages,” she said.

The country’s annual inflation rate remains high, and economists are expecting further price increases as businesses swap at a devalued exchange rate and pass on any raised costs to consumers. “We are currently at a very unstable equilibrium,” Alberto Ramos, a senior Latin America analyst at Goldman Sachs, told me. In the meantime, Lezama and her friends, along with thousands of others, will stay on the streets. As long as there is profit to be made, the hawkers will continue to greet visitors at Maiquetía airport.