CARACAS, Wednesday February 13, 2013 | Update

Forex controls fail to prevent economic distortions in Venezuela

Massive devaluations began in 1983 upon the incorporation of the Differential Foreign Exchange Regime (Recadi)

Foreign exchange controls have failed to bring stability to the Venezuelan currency (File photo)
Wednesday February 13, 2013  10:42 AM
Foreign exchange controls have been in force in Venezuela in 17 out of the last 30 years. However, restrictions to buy US dollars have not prevented the emergence of a parallel market mirroring the real US dollar domestic demand, which has evidenced the Venezuelan currency overvaluation.

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
The end of a cycle

Hundreds of thousands of demonstrators took to the streets of Brazil on March 13 to demand the ouster of embattled President Dilma Rousseff, carrying banners expressing anger at bribery scandals and economic woes. A banner read "We don't want a new Venezuela in Brazil."

fotter Estampas
fotter Estampas