Maduro’s Constituent Assembly approved a landmark measure this afternoon ending currency exchange restrictions in the country. While details on the measure are scarce, it could allow anyone in the country to exchange Bolivares for foreign currency at independent businesses instead of requiring that those transactions take place only through regime offices.
News of the impending reform came this morning from vice president for the economy Tareck El Aissami, who said this morning that he was asking the Constituent Assembly to make changes to the country’s currency exchange system.
The measure will come into effect on August 20 of this year, and constitutes the most significant shift in the country’s exchange system in over 15 years.
National Assembly deputy Jose Guerra warned that the measure did not mean an end to currency controls in Venezuela. He tweeted:
Don’t get confused. Exchange control is still in effect, the difference is that there will apparently be an official market with a preferential exchange rate only for the government and an exchange rate for citizens. This is the same as under RECADI, during the Lusinchi government.
Guerra’s tweets suggests that Venezuelans will now be able to purchase foreign currency at independent business rather than directly from the government, but that the price of the exchange will still be dictated by the government. Crucially, Guerra also says that there will be two rates–one lower than the other–which, if true, is a move that is sure to perpetuate corruption.
The RECADI currency exchange system was in place from 1983 to 1989, and was widely criticized for breeding corruption.
Under the now-defunct exchange system, the regime exercised complete control over currency exchange, even setting the price across two tiers. The first tier, called DIPRO, was set at Bs. 10/USD; the second, called DICOM, was free-floating within a set of parameters, and is currently trading at Bs. 114,423.85/USD. To buy foreign currency, Venezuelans had to apply directly to the regime.
The black market rate has typically been much higher than the regime-set exchange rates. The current black market rate is Bs. 3,629,543.31/USD.
Since its inception, the currency exchange system was vehicle for massive corruption. For example, a person with the right regime connections could exchange Bs. 10 for $1 US, and then sell that dollar at the black market rate for a profit of 3.6 million percent.
Speaking at the Constituent Assembly shortly after the measure was approved, El Aissami said:
What is fundamental here is to overcome and defeat the illegal markets that have done so much harm to the country. The essence of this decree will allow us to ratify our sovereign and irrevocable policy, which is that the resources generated by the Venezuelan state should be used for social investment.
Guerra Skeptical, Calls Move Illegal
Guerra also pointed out that the measure was illegal prima facie, since the Constituent Assembly is an illegal body that is usurping the powers of the National Assembly, the country’s legitimate legislative branch.
The economist also pointed out that the heart of the problem with currency exchange controls in Venezuela–a multi-tiered exchange rate–would still be present under the new regime starting on August 20.
Dual foreign exchange markets do not work, they are unstable and all the more so in Venezuela where a gigantic monetary financing of the fiscal deficit reigns. The [black market exchange rate] will depreciate and there will be a significant gap with the price of dollar that is only for the government.
US Purchases 45% of Venezuelan Oil
An article published in S&P Global Platts today revealed that the United States purchases 45% of all oil produced in Venezuelan, suggesting that despite fiery rhetoric Caracas and Washington have an interest in getting along.
According to the article, US imports of Venezuelan oil in June “accounted for more than 45% of the country’s total production”, and that the dynamic is likely to remain “relatively stable” into the future.
Joe McMonigle, an analyst at Hedgeye Risk Management, said of the relationship:
The US is currently the ATM cash machine for Venezuela.
Joan Auers, an executive with Turner, Mason & Company, told the publication that while it was possible that US imports of Venezuelan oil would decline, he was skeptical that this would be the case.
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