Depending on who you are, the price of one US dollar in Venezuela may range from 6.3 to 13.5 to 200 bolivars (Bs), according to the government, or even more on the black market where 1 USD is estimated to cost roughly 830 Bs. The first two official rates – referred to as the Cencoex rate and the SICAD rate, respectively – are reserved for government approved entities and intermediaries for transacting in staple goods such as food, medicine, and car parts. The third rate, referred to as the SIMADI rate, is offered to civilians. It was recently introduced to compete with the aggressively devaluing black market rate. To put these rates into perspective, the minimum wage in Venezuela is 7,421 Bs per month, equating to less than $10 on the black market (Neuman). And price inflation is only rising.
Although the government stopped reporting official figures in December 2014, when annual inflation was estimated at a mere 68.5 percent, implied estimates put the current inflation rate at around 700 percent (Hanke) while the IMF estimates this year’s rate to be around 159 percent (Neuman). In an attempt to stem inflation, the government has instituted price controls on gasoline and many of the goods imported at the more favorable Cencoex and SICAD exchange rates. However, rampant inflation and an ineffective multiple exchange rate system have led to mass confusion and inconvenience for both Venezuelans and foreign multinational corporations with assets and revenues in the country. Since the range of exchange rate values is so wide, the government has refrained from issuing a note in denomination larger than 100 Bs. One can imagine the stack of bills necessary to pay for a month’s worth of food for a family of five, estimated to cost roughly 50,625 Bs (Neuman). The capital market inefficiencies associated with a multiple exchange rate system has also led to ample arbitrage opportunities for civilians and companies, with many people quitting their day jobs to engage in currency arbitrage by buying goods or other currencies priced at government official rates and selling them at black market rates to those who cannot afford to wait in the long lines to do so.
President Nicolás Maduro insists that Venezuela’s economic woes stem from meddlesome foreign corporations, governments, and opportunistic investors in the country’s national debt, which is increasingly at risk of default. In reality, the prolonged bear market in world oil prices has drastically reduced government holdings of US dollars due to reduced dollar-denominated oil revenues, negatively impacting the government’s ability to satisfy obligations associated with its out of control national debt while simultaneously driving up demand for dollars as capital flees to safety. As a result, Venezuela’s official fixed exchange rates massively overvalue the currency. Many U.S. corporations have pulled operations out of the country altogether or written off massive losses due to changes in exchange rate conditions that do not show any signs of improvement.
Even as the supply of bolivars in circulation has increased by 97 percent to date this year (Soto), banks struggle to keep enough cash in ATMs as the population rushes to conserve savings in other ways. While the government is contemplating issuing notes in larger denominations to alleviate this issue, it remains to be seen how it will address the root causes of its national debt and exchange rate crises.
