Venezuela Introduces ‘Free Exchange’ of Currency
by Paul Dobson - Venezuela Analysis
Sept 10th 2018
Despite authorising all banks and firms to trade in foreign currency, exchange rates will not float but remain fixed by the Central Bank.
Merida - Venezuela has taken a further step towards freeing up the exchange of its Sovereign Bolivar (BsS) currency this Friday, with the government authorising public and private firms and banks, as well as ordinary citizens, to trade in other currencies for the first time since 2003.
The latest shake up was announced by Finance Minister Simon Zerpa and Venezuelan Central Bank (BCV) President Calixto Ortega, who announced the “free exchange” of the national currency.
Central Bank President Calixto Ortega
and Finance Minister Simon Zerpa. (YVKE)
The move forms part of a series of economic reforms introduced by the Maduro government in the last 20 days which look to stabilise the economy and put the brakes on hyperinflation. Other measures have included the launch of a new Domestic Trade Ministry, a Gold Savings Plan, a monetary reconversion, and a change in fuel subsidies.
Critics, however, have argued that the new measures do not entail a lifting of currency controls, but rather a partial opening up of the spaces where foreign currency can be bought and sold, with exchange rates still remaining firmly under the control of the Central Bank.
“The free exchange of currency is being established across the national territory,” proclaimed Zerpa at a press conference Friday.
"The new exchange system in Venezuela is open, transparent and designed for the development of the economy,” he continued.
Under the new exchange scheme, public and private firms and banks will be able to legally trade in foreign currencies, marking an expansion of the August 20 announcement which saw three hundred exchange houses licensed to begin operations.
Now, Venezuelans will be able to purchase up to US $400 a day through the banking system ”for retail, to meet their personal needs,” Zerpa revealed.
Currency controls were implemented in 2003 by the late President Hugo Chavez in an attempt to limit capital flight out of Venezuela. A series of subsequent mechanisms have been rolled out, including assigning quotas of subsidised currency to every Venezuela, centralising the exchange mechanisms, and even a triple-tier pricing system, which have looked to block large-scale capital flight.
Pressure of currency controls and excess currency demand gave rise to an illegal parallel exchange market, largely guided by a Miami-based website, which currently orientes the sale prices of many basic goods.
Speaking to press, Zerpa also offered a balance of the reformed state-controlled DICOM exchange mechanism, which saw the price jump to 60BsS per US dollar with the monetary reconversion in August and the landmark overturning of the Law of Illicit Exchange. He indicated that US $4.3 million have been traded on the DICOM auction market since August 20, which he held up as a show of “confidence” in the new system.
At present, DICOM trades at 61 BsS per US dollar, whilst the illegal parallel market trades at 110BsS.
Under the new exchange scheme, all banks or companies will have to trade foreign currency at a “unified” price which will be set by the BCV rather than allowing for a free floating value based on supply and demand.
Currency exchange by all public entities, including the prominent PDVSA national oil company, will now be centralised and controlled by the BCV, whilst private sector export or tourism firms which trade in foreign currencies will have to hand over twenty percent of their currency income to the BCV.
Uncertainty remains about the impact of the new measures, with left-wing economist Manuel Sutherland describing them as “an advance” but “still too timid,” arguing that the nation needs “something much more radical.”
“The new measures of free currency exchange don’t have anything of free about them,” he told Venezuelanalysis.
“We still don’t know what the norms and agreements [which will establish the working of the mechanism] are,” he added.
For his part, opposition parliamentarian and economist Jose Guerra criticised the measures, echoing Sutherlands claims that they do not represent a lifting of currency controls.
He also observed that without the foreign currency earnings brought in by oil exports ─ now under BCV control ─ banks, exchange houses, and other firms will continue to suffer shortages of dollars needed to operate...
“A new exchange mechanism without the supply of dollars is like making rice with chicken without the chicken,” he tweeted.
Access to foreign currency has been further complicated by US financial sanctions signed into law by President Donald Trump last year, which prohibit US lending to the Venezuelan state, discentivizing both foreign and national firms from investing in the Caribbean country.
The sanctions have also caused significant problems for PDVSA, whose US subsidiary, CITGO, has been barred from repatriating profits, depriving the Venezuelan government of at least US$1 billion in annual revenue.