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Venezuela’s Currency Controls: A Slow, Painful Death for the Economy

By: Carlos Garcia - Jan 27, 2014, 6:50 pm
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The market rate of inflation for Bolívares exceeded 300 percent in 2013.

For the past two weeks, Venezuela’s government has made contradictory announcements regarding new restrictions on the country’s exchange controls. They made their best effort to make it seem like there would be no economic reforms ahead. After all, President Maduro announced on January 15 that the 6.3 Bs. rate per US dollar would remain throughout the year, and he denied any upcoming devaluation.

If everything is so stable then, what’s wrong in Venezuela, and why is everyone desperately seeking greenbacks?

On Thursday 23, the newly appointed minister for economic affairs, Rodolfo Marcos Torres, contradicted the president. He explained that in fact the 6.3 Bs. rate would only be available for priority sectors: specific import goods and students abroad. The rest of non-priority sectors for the nation would have to pay a different rate.

So how different is this rate? Well, the rest of Venezuelan citizens and businesses will have to resort to a weekly government auction for US dollars. This bidding system will be made through SICAD (Complementary Currency Administration System), and it will determine the dollar rate for non priority imports, Venezuelan tourists, and airlines.

A Quick 101 Guide for Exchange Controls

Imagine that you work your tail off for a salary of “X” Bolívares. Now, bear in mind that Venezuela is a country with an official inflation rate of 56 percent. It’s only natural for you to want to preserve your capital and save your money in the most inflation-protected manner. So you turn to foreign currency, which is one of the only methods that can assure you some sense of economic stability.

But what if the government tells you that you cannot resort to foreign exchange? In fact, what if they make it illegal and decide how much of your own money — what you’ve worked for — you will be able to exchange. In fact, the Venezuelan government does have various conditions for you to access foreign currency, and they reserve the right to deny you the “privilege” without further explanation.

This control is not only for individuals, but for private businesses as well. Any company, domestic or foreign, must go through a tedious process to get the government approval to exchange their Bolívares into dollars. They need this for their operation, and most of them have been forced to shut down since they don’t have access to the most universal currency.

To add insult to injury, a government from an oil-country like Venezuela still doesn’t have the capacity to satisfy the demand for foreign currency, even with all the restrictions. It doesn’t matter how many times they say they do; their lame excuses and pathetic economic measures prove the contrary.

Up until now, the government’s solution for this economic chaos has been to play it by ear. In 2013, the annual quota for a Venezuelan tourist to access foreign currency was up to US$3,900 (24,570 Bs. at the official rate).

The latest measure, however, brings in stringent controls: each Venezuelan, 18 and older, can exchange up to US$3,000 per year. From this sum, only US$300 can be used for online purchases, and up to US$500 can be received in cash. Not everybody is worthy of this “privilege,” though. To qualify you must prove you will effectively travel by showing your airline ticket, have the equivalent Bolívares in your bank account to pay for the precious greenback, which at the SICAD exchange rate would be approximately 11.36 Bs. per dollar (34,080 Bs.)

But here’s the catch — as if it all weren’t already enough: Venezuelans are only allowed to use their annual quota if they have a credit card issued by a Venezuelan bank. I know what you might be thinking, but the answer is no, prepaid credit or debit cards are not sufficient. Still, even if you do fulfill these requirements, you still need the government’s approval.

All this hassle is only for tourism. Imagine how it is for imports, education abroad, health treatments, or sports competitions.

But where there’s a will, there’s a way, and when all of that fails, there’s always a black market. And that’s the answer for some people wishing to travel, and most businessmen trying to import goods. But the black market value of the Bolívar is just one tenth the official “exchange rate.”

The Airline Case in Venezuela

One of the instances to receive more international press coverage has been how the exchange controls have affected the airlines and their flights from Venezuela. It turns out the state owes airlines over US$3.3 billion. Airlines have charged their tickets in Bolívares, and they haven’t been able to exchange them either. And no, they won’t settle with having Bolívares, because for all practical purposes, it is like having Monopoly money — just useless.

But what has been a burden for some in Venezuela has proved to be a great business for foreigners wishing to travel around the world.

How? It’s a piece of cake. Airline ticket prices have been charged at the official rate of 6.3 Bsf. per dollar, so a ticket of US$2,000 would cost 12,600 Bs. If you, a foreigner, were to come to Venezuela and sell dollars at the black market rate, you would only be spending one 10th of the $2000. By selling 200 bucks you could pay for the same ticket in Bolivares! Isn’t that marvelous?

The only restriction would be that you would need to buy your ticket from Venezuela. Once you get here, though, you could then travel anywhere around the globe, for just a fraction of the ticket’s real value. And that my friend, is a bigger bang for your buck.

However, airlines haven’t been too happy about it. Most airlines have decided to halt their sales on tickets until the government puts a stop to the capital flight that plagues the nation and the currency market. They are asking for the Bolivarian regime to pay its debt, and they are demanding restrictions on foreigners buying tickets in Venezuela — although such negotiations have yet to come to any conclusion.

In the end, the government is destroying the economy with its constant stubbornness and need to control every aspect of our activities. Corruption levels are higher and inequality is growing, turning the middle class into an endangered species.

But that’s what happens when people with absolutely no professional background, common sense, or morals run a country. They will keep on passing the buck until there’s no one else to blame, and then it will be too late to do something about it.