On October 3, 2024, the dollar exchange rate reference price the Central Bank of Venezuela (BCV) was marked at a rate of 36.98 bolivars per U.S. dollar, and its counterpart, the “parallel” dollar, was priced at 45.29 bolivars. This difference of 8.31 bolivars is 18.35%, whose advantage over the unofficial price in Venezuela has been on an upward trend for weeks.
By: Walter Obregón | Correspondent lapatilla.com
Between August and September of this year, both the BCV and parallel dollar rates continued to rise. Taking into account the current situation, the official price has advanced to peak of 35 cents (Bolívar cents), while the quote on the black market has risen 3.12 bolivars, in an evident difference that makes citizens tremble when making purchases, doing business or investing, and where the government control system does not apply.
To define a little the Venezuelan economic panorama with this marked gap between the official dollar and the parallel one (unofficial, black market), lapatilla.com consulted the economist Adán D´ Lima, university professor with a master’s degree in Economic Theory at the UCAB (Universidad Católica Andrés Bello), a master’s degree in Economics, mention in Fiscal Policy at ULA and a doctorate in Economic Sciences in Malaga, Spain.
Knowing that there is a very large differential between the BCV and parallel exchange rate, which has been causing a distortion in the economy and problems at the level of trade, which could also be happening in productive sectors. What is your analysis of this situation?
In the exchange market we are seeing a great distortion, with a differential of almost 10 points, or 22%, which although it is a manageable percentage, it still has pernicious and negative effects, both in the real economy and in the monetary economy, because when the market is intervened with a policy of regulation or control for a long time, the consequence is the appearance of a black market, as exists in Venezuela.
Those who have access to the official exchange rate or formally BCV rate, obviously take advantage of the situation in the parallel market, in search of some speculative gain that has widespread consequences.
Since the 60s and 70s, this has been a practice of the governments in Venezuela, not only the current one, where the fixed exchange rate was 4.30 bolivars per dollar. This was dismantled on the famous Black Friday during the presidential term of Luis Herrera Campins (1983). From this moment on, when a major devaluation occurred erratic inflationary processes began, allowing the dollar to insert itself and participate as a fundamental variable in the national economy, despite the fact that the term ‘devaluation’ was almost unknown among Venezuelans.
From then on inflation and devaluation began to have a significant presence in the markets, which move in a bidirectional sense, that is, devaluation produces a spiraling impact on inflation and this in turn feeds the exchange rate, which is how devaluation is encouraged, among other things, because economic agents seek to protect themselves in the short term with hard currency, which in this case is the dollar.
Different exchange rate regimes have been applied in Venezuela. From 1970 to 1983 it was fixed, but after this last year there have been schemes of controlled, flexible rates derived from a market of supply and demand, the economic package of Carlos Andrés Pérez, and the one anchored from 1994 to 1998 with Rafael Caldera, which worked to control inflation. However, all of these, far from benefiting the people only favor those who have closeness or control and access to the official dollars.
The large exchange differentials and exchange gains originate speculation and price gouging.
What consequences could this bring in the short and medium term?
Very serious consequences, quite important problems, because this would lead to a large devaluation of the bolivar, obviously impacting on the level of internal prices in Venezuela and thus we could reach an imbalance that could include inequality or anarchy due to the liquidity or quantity of money against the production of goods and services.
When there is a significant differential between the official and parallel exchange rates, the most immediate consequence is that, unless a policy of gradual correction is not applied to this accumulation in order to try to reduce it, at any moment we are close to the significant devaluation that we mentioned before.
If monetary liquidity, defined by the amount of money circulating in the economy, is not controlled, the few goods and services that are produced will go after a large number of monetary units that lead to inequality and economic anarchy.
If we compare 2024 with respect to 2023, we have a growth of almost 199% of monetary liquidity, and it has been growing in relation to: real productivity and availability of goods and services, which represents a serious problem.
This is an important trigger or cause of inflation in Venezuela, because if you add to this the situation of the exchange market, where we see that if there is no correction of the differential, there will inevitably be a leveling of the official rate with the parallel rate, with an impact on price levels in Venezuela fueling the inflation that already exists, taking it to galloping levels.
If this distortion is not regulated, could we fall into a hyper-inflationary spiral?
If this phenomenon is not controlled, we are not far from returning to hyperinflationary processes, which we do not want to return precisely because we know the great social damage caused by this type of phenomenon with increasing price levels in the country, which mostly affect the popular sectors, those who receive fixed incomes or those who are tied to salaries every 15th and last day of the month.
The same does not happen for those who are benefiting from variable incomes, who are the owners of means of production, who protect themselves in hard currencies or strong currencies, all those who with hyperinflation become even richer.
Currently in Venezuela we are seeing that this distortion, caused by the exchange rate differential between the BCV dollar and the parallel dollar, is generating great uncertainties in the economy and, fundamentally, in the economic agents who are dedicated to commerce and to producing goods and services, because they are losing a high percentage of profits.
Currently, merchants claim that sales are on the floor, what could be influencing this case?
In the industrial sector and in small and medium-sized companies, many are making purchases at the parallel dollar rate to manufacture and produce goods and services, and once they have completed their production process, they have to sell to the national market at the BCV dollar rate.
This situation is increasing production costs that a businessman should rationally transfer to the prices of goods and services, and the one who pays the effect of this devaluation is the final consumer, generating a decrease in their purchasing power, in their income, generally in the most deprived sector of the population.
We are seeing then that the cash flow of companies is losing value, because as much as the businessman tries to transfer the negative impact of this exchange rate differential to the prices of goods and services, he cannot transfer the full 100% because he would be losing competitiveness in the national market.
The businessman is forced to resort to the parallel market to acquire the foreign currency that he cannot get in the official exchange market, because the Government does not offer or does not have enough dollars to satisfy the internal demand.
What is your analysis of the fall in consumption?
It is important to note that of every 10 dollars that enter the country, nine dollars come from oil exports, so the international reserves in the country, which do not reach 10 million dollars in Venezuela, come from almost 99% of these oil sales.
If we compare the oil production we had in 2013, from which 2,400,000 barrels were produced daily, today we do not reach 800,000 barrels daily, this means that production is very low This could improve right now with the war between Iran and Israel, that could have repercussions towards the rise in oil prices, and this could be used to generate a positive effect that Venezuela can enjoy.
Essentially, we see a reduced oil production, of course that means that the Government’s public spending is reduced, because there is not enough income to generate profitability for its financing, and in some way it affects internal consumption because this reduces the fiscal income (tax revenue).
We are facing a significant impact on this differential that distorts the exchange market, which if not corrected could inevitably lead to an eventual mega devaluation in Venezuela, representing at least approximately 22% to 30%, and that will be immediately transferred to internal prices due to this close relationship between devaluation and inflation.
What do you think can improve or reduce the differential between exchange rates?
Correct, control and stimulate investment. Because if we do not do so, I insist, it will have a huge impact on the price level. Therefore, it must be controlled through a consonant exchange policy. We could fall back into hyperinflation if we are careless.
With the stimulation of investment in the country productivity would increase and in this way the dollars would come in with greater force, where there is great confidence in the economic agents who really come to produce and stay to generate added value, which is the generation of jobs. Tax collection would increase, which would help improve public services, including education and health, which are policies with multiplying effects from the point of view of social welfare.
What would you recommend to the common citizen to improve the management of their finances?
First of all, family units have to review their expenses and eliminate those that are superfluous to try to minimize what in some way does not generate productivity, which over time are diluted because they are inorganic.
With efficiency in spending, we must find a way to increase income with important investments, generating that every bolivar that enters the family economy can be used for productive expenses.
Encourage saving of income, for example, with 10% of what is earned, because part of what is earned goes to consumption and the other part must be invested.