MADURO’S HEAVY HAND

Venezuela’s President Moves to Curb Black Market for Greenbacks

As this month’s report on Venezuela makes clear, a key element of the country’s economic woes is the overvaluation of the bolivar.  Venezuela imports 70% of the food it consumes, and is also dependent on imports for consumer goods and manufacturing inputs.  Strong demand for US dollars to pay for those imports has resulted in the rapid depletion of the country’s gross reserves, which decreased from slightly less than $30 billion at the start of 2013 to about $21.5 billion as of January 2014.  In a bid to slow the drain on reserves, the government makes available a limited amount of US currency, which is exchanged at the official rate of 6.3 bolivars to the dollar after being devalued by 32% in early 2013.

Facing restricted access to foreign currency, many importers turn to the black market, where currently a US dollar costs 87 bolivars, or nearly 14 times the official rate.  The widening of the spread between the official and black-market exchange rates for dollars translates into higher operations costs for businesses, which are then passed on to consumers, perpetuating the inflationary spiral.

The January 2014 appointment of a retired brigadier general, Rodolfo Marco, as finance minister suggested that Maduro was preparing to rely on a heavy hand, rather than counting on a deft touch, to manage the problem.  However, the move did not portend a renewed occupation of retail outlets by the military.  Instead, Maduro announced the creation of a new currency-trading platform.

Although there are some questions about the transparency of the new system, it includes a market component, as users can purchase bonds denominated in US dollars.  But the move amounts to a tweak of the current system, at best, and is unlikely to contribute to any significant narrowing of the discrepancy between the official and black-market exchange rates.