Venezuela to Implement New Foreign Exchange System ... Again

Venezuela's government said that it would move to a floating exchange rate for non-essential imports and allow the state owned oil company PDVSA to sell dollars into the new market

Venezuela's government said that it would move to a floating exchange rate for non-essential imports and allow the state owned oil company PDVSA to sell dollars into the new market.

The primary "protected" exchange rate (Dipro) of 10 bolivars to the dollar will remain for the importing of food and medicines. Venezuela President Nicolas Maduro raised it from Bs 6.3 to the dollar last month.

A second ¨complementary¨exchange rate (Dicom) will begin at 206 bolivars and then "float" to meet market needs. Previously, travellers that could would get their dollars at a much more favorable exchange rate of Bs 12 per dollar.

¨That complementary rate will float¨, said Miguel Perez Abad, a former businessman turned economy minister. The idea, Perez added, is for state oil company PDVSA to sell dollars from exports at the ¨floating¨ or ¨complementary¨ rate, but he said that that was a decision entirely up to the oil company.

Venezuela's government has promised the rate would be free-floating previously, but that has never happened, and analysts point to the fact that PDVSA does not have that much cash to put into the market. Maduro, speaking on state television Wednesday afternoon said that FX income from oil fell from $77 million in January to $70 million in February.

Two weeks ago Venezuela weakened its exchange rate vis-a-vis the US dollar almost 60%. It was widely expected that the devaluation process continued, as it did today, since Venezuela's main export, oil, has seen weak prices since last year.

Venezuelans who wish to travel will have to buy their dollars at Bs 206 each, a steep increase form the previous rate of 12.

The Bolivar has devalued heavily since Hugo Chavez took over in 1999, in spite of stringent currency exchange controls, the launching of a new, restructured currency (the Bolivar fuerte) and a long period of record oil prices.

When Chavez took over, one dollar cost Bs. 0,06.

The black market rate for the dollar worsened in market reaction to the announcement, with it now costing Bs 1,183 to buy a U.S. dollar on the streets of Caracas. That is 118 times the official DIPRO rate of 10, which was previously called Cencoex and prior to that Cadivi.

In a note to clients, Caracas financial consultancy firm ODH said that while the recent measures will give the Maduro administration a modicum of solvency, they will certainly stoke the fires of inflation, Venezuela´s biggest economic problem. Venezuela has the highest inflation on the planet, according to the IMF, which says that Venezuela's inflation was 275% in 2015 and will hit 720% this year.

"With the devaluation, public finances will attain a certain temporary relief, diminishing the level of the fiscal deficit denominated in bolivars: the government will get more bolivars for each dollar (than before).... But this relief will depend, among other things, on the fiscal discipline the government can maintain," ODH writes. "The devaluation will impact the price of all of the imported products and even of locally produced goods which depend on imported raw materials. In this sense, the 58.7% devaluation in the Dipro rate will generate a generalized increase in the prices of goods and services."

Latin American Herald Tribune |By Carlos Camacho

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