Political Risk Latin America Blog @PolRiskLatam

Venezuela economy: Partial devaluation, partial solution

Posted in News and Articles, Political Risk by politicalrisklatam on January 6, 2011

by The Economist Intelligence Unit, January 5th, 2011.

Venezuelans started the New Year with a partially devalued currency, following the government’s decision to eliminate the most preferential exchange rate in the multi-tier exchange-rate system. The move will have an inflationary impact, as basic products move to a higher exchange rate and this feeds through to prices. At the same time, unification of the two official rates does not eliminate supply-demand imbalances that continue to put downward pressure on the currency in the parallel market, nor address the economic distortions engendered by the multiple-rate system.

The government of President Hugo Chávez announced at the end of December that it would eliminate the BsF2.6:US$1 fixed exchange rate. Since January 2010, this rate has applied to so-called essential imports only, and a second rate of Bs4.3:US$1 has applied to all other products. However, because access to dollars at these rates has been tightly controlled, importers and others have had to resort to buying foreign exchange on the parallel market, where the rate in 2010 averaged BsF5.74:US$1.

Unification of the two rates combined with a somewhat greater influx of foreign currency thanks to higher oil prices this year means that it will probably be easier for the authorities to maintain the BsF4.3:US$1 peg in the short term. At the same time, they are likely to keep access to this rate tightly restricted, while also controlling trading in the parallel market. In mid-2010 the government banned bond swaps co-ordinated by brokers (which had until then functioned as a parallel currency market) and ordered that these previously unregulated operations be directed by the Central Bank (BCV). This came to be known as the Sitme system, and it created, in effect, another implicit fixed exchange rate, as the BCV has targeted a specific rate (BsF5.3:US$1) for this parallel market. (continue reading… )



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