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Economists Divided Over Venezuela's New Forex System

Economists Divided Over Venezuela's New Forex Systemi
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March 28, 2014 10:45 PM
In the midst of ongoing anti-government protests, the Venezuelan government has introduced a new currency exchange system to reduce the soaring black market for dollars, which has contributed to food shortages and high inflation in the country. VOA’s Brian Padden reports that both liberal and conservative economists support this move, but are divided over whether the measure is strong enough to stabilize the economy of this oil-rich but troubled country.
Brian Padden
In the midst of ongoing anti-government protests, the Venezuelan government has introduced a new currency exchange system to reduce the soaring black market for dollars, which has contributed to food shortages and high inflation in the country. 

Both liberal and conservative economists support this move, but are divided over whether the measure is strong enough to stabilize the economy of this oil-rich but troubled country.

Venezuela’s leaders have taken harsh measures against anti-government protests that began in February and have on occasion turned violent and deadly.  But the government has also taken a conciliatory step to address a key a demand of the protesters -  fix the ailing economy.
 
It has implemented a new market-based currency exchange system called “Sicad 2” to sell dollars for eight to 10 times the official government-controlled exchange rate of 6.3 bolivars per dollar.

While Venezuela is a rich country and claims to have the world's largest oil reserves, the economy has suffered from hyperinflation and shortages of basic goods, due in part to the restricted government exchange rate.  

Mark Weisbrot, with the Center for Economic and Policy Research, said in an interview from Peru that the new exchange system should help stabilize the economy by reducing the impact of  the illegal black market for dollars.   

“You had kind of a bubble in the black market for the dollar, people buying dollars because they thought it was a one-way bet and it was always going to, the dollar value would always go up, and now that is not going to be the case," he said.

Venezuelan opposition groups call this new system a currency devaluation, but the government says the new rate is only for nonessential goods.  

Owners of a gift shop in Caracas called Viqui, that imports products from China, told VOA they have submitted a Sicad 2 request to the Central Bank to purchase dollars.  But the bureacratic process could take weeks, and there is concern that the government will not provide enough dollars to make the new system work.  

Barbara Kotschwar, with the Peterson Institute for International Economics, says the lack of dollars does not address Venezuela’s main economic problem.  The country, including the oil industry, is producing less, and the government is printing more money to cover its growing debts.

 “The money supply has doubled since about December 2012. This is in an economy that has been growing at under two percent," said Kotschwar.

When Sicad 2 first debuted, the black market rate fell from about 90 to close to 50 bolivars to the dollar, but, since then, the rate has been rising - indicating to many that confidence in Venezuela’s economy remains low.

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