Political Risk Latin America Blog @PolRiskLatam

Venezuela’s economy: Disappearing dollars

Posted in News and Articles, Political Risk by politicalrisklatam on September 20, 2010

by The Economist, September 16th, 2010.

An oil producer’s strange foreign-exchange squeeze.

With the price of oil at record highs over the past few years, oil-exporting countries have enjoyed a bonanza. So the last thing you might expect to be scarce in Venezuela is foreign exchange. But for mysterious reasons, dollars are in short supply—and that threatens slowly to strangle the economy.

Hugo Chávez, the country’s left-wing president, imposed exchange controls back in 2003, during a crippling strike by the management and workers of Petróleos de Venezuela (PDVSA), the state oil company. But he also fixed the exchange rate, from 2005 at 2.15 to the dollar even though inflation has since ranged from 14% to 31% a year. This triggered an import boom.

The exchange-control board, known as Cadivi, never supplied all the hard currency the economy required (of the $38.4 billion spent on imports in 2009, only $22.3 billion came from Cadivi, for example). But until recently, the government tolerated a parallel foreign-exchange market known as the permuta, which involved trading government bonds. These could be bought in bolívars and sold for dollars, or vice versa, through brokerage houses. The relation between the two prices became the free-market exchange rate. (continue reading… )

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