Caracas, Venezuela : The Venezuelan government stripped its national oil company of the power to control hard currency sales as part of an overhaul that will allow banks and individuals to buy and sell dollars at a “single, fluctuating rate.”
The new rules published around midnight Caracas time on Friday cover transaction procedures for banks, foreign oil explorers, individuals, international organizations and foreign government representatives.
Finance Minister Simon Zerpa foretold the new rules in an address on state television Friday. The system “will allow the Venezuelan population to buy and sell hard currency in small transactions and satisfy their personal needs,” he said.
While Zerpa insisted the rules will be “free and clear,” there is still doubt about their impact. “These rules might imply the dismantling of current foreign currency controls or at least a major easing,” Econometrica director Henkel Garcia said in a phone interview.
The government will create a new platform determining currency prices. There was no mention in the new rules of the existing thrice-weekly auction known as DICOM, nor of President Nicolas Maduro’s cryptocurrency, the petro.
The currency controls, which require businesses and individuals to buy dollars via the state, are frequently identified as one of the main drivers of the crisis that includes hyper-inflation and product shortages.
Economists noted that the central bank remains in charge of determining the exchange rate.
The government had previously sold greenbacks through the central bank although many transactions routinely took place on the black market.
“The exchange controls are being maintained, though they are a bit more flexible,” said economist Asdrubal Oliveros of local consultancy Econanalitica, responding to social media commentary suggesting that the controls had been lifted.
Legislator and economist Jose Guerra said the measure was the furthest the government has gone in easing the controls, but that it would depend entirely on how it was implemented.
President Nicolas Maduro during five years in office has repeatedly promised to create market-based systems to improve access to hard currency.
However, each attempt has fallen apart because the systems were unable to provide steady access to dollars.
The government currently sells dollars for around 62 bolivars, while the black market rate is around 90 bolivars.
The late President Hugo Chavez established currency controls in 2003 in a bid to stem capital flight. The efforts to regulate the sale of hard currency backfired as the state struggled to supply dollars amid crashing oil prices and rampant corruption, giving way to a thriving black market for greenbacks.
The new regulations reinstate central bank controls over greenbacks from oil revenue and prohibit PDVSA from holding onto foreign currency for more than 72 hours. The company, formally known as Petroleos de Venezuela SA, oversees the nation’s only significant export and almost of its cash inflows.
PDVSA’s partners in oil ventures will also be obliged to sell foreign currency to the central bank, under the new rules. No additional details on that requirement were provided.
Both Chavez and his successor Maduro have re-jigged currency controls multiple times but have so far stopped short of lifting them completely even as inflation spiraled and basic foods and medicines have gone scarce. Officially, dollars sell for around 61 bolivars. They currently fetch around 100 on the street.
Despite tight regulations and occasional raids by police, most prices in Venezuela are set by the black market as business owners and importers struggle to obtain dollars on official exchanges. While Maduro regularly takes to the airwaves to denounce “criminal” and “mafia” dollar rates, his administration has tacitly embraced free market prices this year.
Last month, the ruling socialists devalued the currency 95 percent and lopped five zeros off the bolivar as they tried to rein in hyperinflation. The government also repealed portions of laws governing foreign currency sales, enabling businesses and individuals to swap money at authorized trading houses.
In an effort to curb soaring inflation in Venezuela, President Nicolas Maduro shaved five zeros off the value of the bolivar and raised the minimum wage by 3,500 percent. But analysts are saying the measures won’t do much until Venezuela makes some deep, institutional reforms.
The International Monetary Fund has warned that Venezuela’s inflation could top 1 million percent this year. Venezuela is “in a state of economic collapse,” Maurice Obstfeld, economic counsellor and director of the research department at IMF said in July. “We’re seeing a hyperinflation that is rivaled only by Zimbabwe.”
Venezuelans, struggling with skyrocketing prices and food shortages, are pouring into neighboring countries to survive. Since 2016, almost 2 million people have fled the country and 87 percent of families reportedly live below the poverty line. In Ecuador alone, more than 500,000 Venezuelans have arrived since the beginning of the year in “one of Latin America’s largest mass-population movements in history,” according to the United Nations.
Venezuela’s economy is heavily dependent on oil – it accounts for about 95 percent of the South American country’s export earnings and 25 percent of its gross domestic product (GDP). When oil prices dropped in 2016, Venezuela’s economy also plunged.
All of a sudden, Venezuela didn’t have the resources it once had, and it had lots of bills from previous imports. Venezuela also was sending billions a year in oil and cash to Cuba and other countries in South America, buying arms from Russia, and trying to develop trade relations with China. “In other words, it was operating on a strong ideological basis,” using its capital and oil revenues.
In order to pay the bills and its government employees, Venezuela began printing more money. When you print money and there’s nothing behind that money – international confidence, national confidence – prices begin to rise. Venezuelans scaled back to two meals a day and began bartering food and other goods for services, such as haircuts.
The moves are meant to restore people’s confidence in the new currency and signal to business owners that they do not have to keep raising prices to make sure they cover the costs of their imports and workers, Hakim said.
However, it does not put any more real currency into the hands of the people of Venezuela. It doesn’t put more money in the hands of the government,” he continued. “They still have to purchase most foodstuffs, most medical supplies, most spare parts, etc. from abroad, and they don’t have the money to do that.
Once hyperinflation begins, it takes off quickly, and requires drastic measures to brake. Zimbabwe, which experienced record hyperinflation in 2008, only brought its inflation under control when it got a package of international assistance from the IMF and World Bank, undertook deep reforms and abandoned its own currency in favor of the dollar, because nobody believed in the Zimbabwean currency anymore.
Maduro has not indicated that any similar package of deep reforms is in the works, and the analysts said they expect him to continue announcing measures aimed at buoying the bolivar but not addressing the institutional failings that led to the erosion of the currency’s value in the first place.
Venezuela also has enormous debts to China and other countries, and at some point will be unable to pay those debts.
Even if the currency stabilizes, the economy is crumbling due to decimated infrastructure, the inability to find basic parts and products, and the exodus of millions of Venezuelans from the country.