• Previous
• Next
• Latest Americas view
• Latest from all our blogs

HOW many bolívares does it take to buy a US dollar? That question, which in a normal economy would get an over-the-counter answer, has everyone scratching their heads in Venezuela. It depends, they might say, on what you want it for. Or how well connected you are. Or even on the day of the week.

In late March, after a year of unfulfilled promises, the government of President Nicolás Maduro finally put in place the third (sic) tier of its byzantine foreign-exchange apparatus. But how “Sicad II” will affect the economy is still unclear.

Here’s a simplified outline of the country’s foreign-exchange system. A dollar will cost you 6.3 bolívares if you are the government, or if you can persuade Cencoex (the government’s foreign-trade body) that you intend to import vital goods such as food or medicine. Then there’s the Sicad I rate, currently just over 10 bolívares to the dollar, but contingent on irregular, “auctions” (which are nothing of the sort). The new Sicad II process, which is as close to a free market as the government will allow, opened at a whopping 50 bolívares to the dollar. But even that is a bargain compared with the unofficial exchange rate, which at the time of writing stands at almost 68 bolívares.

In an economy that exports little but petroleum and refined products, and imports just about everything else (including most food), the exchange rate is a crucial factor in domestic prices. Many of these are set by the government, in a rather futile bid to control inflation, which last year stood at over 56%. The result of these controls has been ever-increasing scarcity. The central bank’s monthly scarcity index hit 28% in January, meaning more than one in four of the goods it tracks was missing from the shelves. Nelson Merentes, the bank’s governor, says the index will no longer be published since it has become “political”, a euphemism for “too damaging to release”.

Perhaps because scarcity is even more toxic than inflation, the government is now hiking many food prices. A kilo of sugar, for instance, which previously cost 6.3 bolívares at a subsidised government shop, will now set you back 18 bolívares. Rice has gone up from 7.5bolívares to 22.5. Food minister Carlos Osorio has spoken of “gradual” increases “to combat contraband” (cheaply priced Venezuelan goods can be sold for a hefty profit elsewhere, mainly in neighbouring Colombia). Consumers are livid, and queues still stretch around the block.

Whether the government is able to iron out some of these distortions depends in part on how freely the currency is allowed to float and what portion of its dwindling supply of dollars (either from central-bank reserves or direct from PDVSA, the state oil corporation) the government will devote to feeding Sicad II. Too few, and it will be unable to bring the unofficial exchange rate down, or improve the massive fiscal deficit (currently at least 15% of GDP) by depreciating the average exchange rate. Too many, and reserves will dwindle still further and there will be another inflationary spurt.

So far, trading volumes have been modest. But once teething problems are fixed, Sicad II could prove a boon to importers wanting to avoid the expensive parallel market and relieve some currency uncertainty. Investors too—including foreign oil companies whose projects in the crucial Orinoco heavy-oil belt have been held up for lack of funds—should welcome being able to obtain bolívares at around 50 to the dollar instead of 6.3. Amid all the confusion, though, one thing is absolutely certain: no amount of fiddling with the exchange rate will fix the economy. Sicad II is incompatible with prices-and-profits legislation governing the private sector, for example. Venezuela requires comprehensive policy reform, and there is no sign of that yet.