Currency Controls & The Venezuela FX Experience

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     Since 1999, Venezuela has been governed by the Bolivarian Revolution. Chavez came first, introducing socialism (hidden communism really) by nationalizing entire industries under the guise of saving the population from the “perils” of the global capitalist system.

In 2003, currency controls began and the government became both setter of FX prices and sole supplier. With notable political risk and a deteriorating economy, the demand for foreign currency swiftly outstripped supply and an unstoppable black market arose.

At first, black market rates were only slightly above official rates, but as presented in the coming paragraphs and charts below, this eventually skyrocketed out of control. Still, in the early days the population had foreign exchange “privileges” that worked for a while.

For example, citizens could use Credits cards could be used to spend foreign currency at the official rate, and students could apply for a “CADIVI” (administration commission of foreign currency) to pay for education studies abroad.

As shown on leading reference website: www.dolartoday.com , prices adjusted for bill denomination changes (3 “zeros” removed in 2008).

Cost of 1U$D increased by 2,787.00%.

Eventually, many saw these “privileges” as opportunities to exploit. Some (often politically connected) even built massively profitable illicit businesses around this. These “lucky few” had access to USD from the government at official rates as well as access to the tremendously higher rates in the black market. Worst of all for the economy, these persons faced little chance of legal repercussion due to either political connection or simply ineffective legal infrastructure. Demand for Bs and supply of FX dropped dramatically while the government held the official rates the same. This persisted somehow for years and because oil was high, strong revenues from the “newly acquired” state-owned enterprises somehow kept the system together. During this period, the cost of 1USD increased by 2,787%.

As shown on leading reference website: www.dolartoday.com. Cost of 1U$D increased by 350,914.00%.

After Chavez’s death in 2013, Maduro entered office and added further irrational practices. Unfortunately, Maduro’s rise coincided with falling oil prices and state enterprise revenues running dry. Naturally, FX reserves ran dangerously low due to all that was happening and the government stopped any last privileges (USD credit card spending and exceptions for education). The system could not go on as is and one of the most brutal currency crashes in history took place. During this period, the cost of 1USD increased by 350,914% from 64.10Bs/USD to 225,500 Bs/USD on February 2nd 2018.

Note, until last week the Venezuelan Central Bank listed the official rate at 10.00 BS/USD$.

As shown on leading reference website: www.dolartoday.com . Prices adjusted for bill denomination changes (3 “zeros” removed in 2008).

I took the time to write this to convey how currency controls paired with irresponsible governments can destroy a country. Black market opportunists are inevitable, especially with effective law enforcement breakdowns, but they only add to the fire. Looking back, Venezuelans that converted their assets to USD and other hard currencies early on, saved themselves in an immense way. Some found this unpatriotic and were highly critical at the time. None the less, those who didn’t convert are trapped with most if not all of their assets being worthless today. Millions of Venezuelan people that lost their life savings and their retirements in the fall out. The value destruction is nothing short of shocking and will likely take decades to fix.

UPDATE: On Monday January 29th , the government announced the creation of DICOM dollar auctions which they believe will help control the price of the Bolivar with regards to the dollar. Government officials did not give many details of the logistics, but what they announced that the new central bank reference price will be the DICOM price (Auctioned weekly). This means the 10Bs/$ rate will no longer be used as a reference. DICOM rates are expected to be between 3,000-10,000 BS/USD (Actual results à 31,987.50 BS/EURO) (The government switch to a Euro reference in protest of the sanctions imposed by USA). That being said, this supply will be minimal. The point is, the government effectively devaluated their 10.00 BS/USD non floating rate to a floating rate that will likely be many times higher.

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