Forex controls fail to prevent economic distortions in Venezuela
Massive devaluations began in 1983 upon the incorporation of the Differential Foreign Exchange Regime (Recadi)
- Venezuelan Government formalizes changes in foreign exchange policy
- Devaluation raises Venezuela's debt burden to 70% of GDP
- Devaluation is insufficient; further adjustments will be needed
- Venezuelan gov't establishes Higher Agency for Upgrade of Exchange System
- Venezuela devalues currency by 46.5%; VEB at 6.30 per US dollar
Large devaluations in Venezuela began back in 1983 upon the creation of the Differential Foreign Exchange Regime (Recadi), which was dismantled in 1989. The forex rate that began at VEB 4.30 per US dollar in 1983 ended six years later at VEB 43 per US dollar.
At that time, the parallel market was not illegal in Venezuela; therefore, individuals and enterprises could resort to it to buy US dollars. Based on data compiled by think tank Ecoanalítica, the official forex rate averaged VEB 14.5 per US dollar in said six-year period, while the parallel forex rate was VEB 39.3.
The gap between the official rate and the parallel rate led to an average overvaluation of 171%. By the time the forex control was dismantled, inflation jumped from an average of 20% to 81% as economic imbalances escalated.
Later, in 1994-1995, authorities created the Technical Office for Foreign Currency Administration (OTAC). When the office was incorporated, the forex rate was VEB 142 per US dollar, and climbed to VEB 290 during the two-year term of the OTAC.
Meanwhile, the US dollar in the parallel market averaged VEB 500, a 72% gap with respect to the official rate. The forex control also pushed inflation up to an average of 57%. Upon the dismantling of OTAC, in 1996 inflation spiked 103%. However, the parallel forex rate went down to VEB 475 per US dollar.
One more time
Forex controls were enforced again under the Government of President Hugo Chávez. Since 2003, Venezuela has been dealing with another foreign exchange control, and with a parallel market that was legal until 2010. Additionally, in 2007, a monetary reconversion was set in place, which removed two zeros from the Venezuelan currency. From 2003-2007, the gap between the official forex rate (VEB 2.15 per USD) and the parallel forex rate averaged 88% and inflation stood at 19.7%.
Five years later, the gap hit 99% and inflation 23.9%. One again, forex controls have proven unable to stabilize the currency. Today, the Venezuelan currency continues losing ground against the US dollar, a fact that encourages savings in US dollars. Further, most citizens are hit by the fact that two exchange rates are used to set the prices of products, which continues to fuel inflation.
Translated by Jhean Cabrera
A group of some 60 Venezuelan economists from across the country and from different generations and backgrounds, has met regularly in the past couple of years and now has brought forth a document explaining the reasons of the current emergency and outlining specific proposals on how to address the serious economic crisis the country has plunged into over the last three years.