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The Foreign-Exchange Crisis Plaguing Venezuela

by fffp12

Written By: Alessandra Yuan – Forex Focus

Venezuela’s political crisis is a deeply complex issue affecting nearly every aspect of everyday life. The country’s foreign-exchange reserves and trading have been quietly at the forefront of these issues for some time now, as reserves dwindle and the value of the Venezuelan bolívar falls. 2017 has seen a flurry of activity in the country’s foreign-exchange arena as both public and private developments drag down the embattled country’s currency. In an effort to curb the free-falling currency, Venezuelan President Nicolás Maduro and the country’s central bank introduced a new exchange rate through its DICOM currency auction system. The new exchange rate saw the value of the bolívar drop from 728 per one US dollar to 2,010 per one US dollar.

The new currency auction system has been used in an effort to curb the devastating effects that previous initiatives had effected on the bolívar—the previous system saw the per-US-dollar rate jump from 3,000 bolívars to 8,000 bolívars. The currency crisis has yielded numerous product shortages—from food to medicine—and fostered the world’s highest inflation rate of 720 percent this year.

Despite forceful efforts by the government to curb black-market activity in the dollar markets, product shortages and excessive price controls have increased the black market’s prevalence. Black-market prices for US dollars have skyrocketed in the past seven years—jumping from 8.38 bolívars per US dollar in 2010 to 8,790.84 in 2017. Despite Maduro’s efforts to curb inflation and limit black-market activity, the DICOM system introduced earlier this year has been wholly unsuccessful. Merely a month after the DICOM’s introduction, a 19.3 percent depreciation followed.

Grasping at straws to stymie the bolívar’s collapse, President Maduro has effectively drained the country’s foreign reserves to buoy the currency’s value. In doing so, Maduro has sold billions of the country’s foreign reserves, leaving them at record low levels. Peaking at $43 billion in 2009, Venezuela’s foreign reserves now sit at a meager $9.983 billion—a 77-percent drop that stands to only continue deteriorating. But these foreign-reserve selloffs have done little to stabilize the currency or to achieve their stated goals. The bolívar has only increased in volatility in recent years, and local shop-owners have adjusted their prices accordingly. Prices for imported goods have increased their upward trajectory—mostly due to the excessive price controls that are, oftentimes, far below production costs. The effects are hitting regular Venezuelans exceptionally hard. For instance, rice—a staple food in the South American country—rose 9,000 bolívars to 17,000 bolívars in under a week on one occasion.

While much of the crisis has to do with economic mismanagement, a great deal also stems from anemic global oil prices. Petroleum exports account for nearly 80 percent of Venezuela’s GDP (gross domestic product). The price collapse in 2014 saw the addition of the current economic crisis to the country’s ongoing political crisis. The deteriorating situation resulted in widescale protests that have left dozens dead and thousands injured.

The latest installment in this saga has seen Maduro doubly down on his contempt for the United States by announcing that the country will no longer publish its oil prices—or sales—in US dollars. The government states that the change was conducted so that it could circumvent US sanctions on purchases of Venezuelan oil by pursuing euro sales. However, the country is likely attempting to attract interest from Chinese and Indian buyers by signalling it is open to conducting sales in new currencies. However, the prevalence of the US dollar on oil markets suggests that this will only exacerbate an already crumbling situation for the South American OPEC (Organization of the Petroleum Exporting Countries) member.


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