Venezuela, the Country With Four Exchange Rates

Government Subsidized Grocery Store in Venezuela
A man shops at a government subsidized grocery store in the state of Guarico, Venezuela, on April 12, 2014. Photographer: Meridith Kohut/Bloomberg

Venezuela can simultaneously be the world’s cheapest and most expensive country because of its multiple exchange rate systems. A dinner at an upscale restaurant, including drinks, can cost as little as $6 per person or as much as $160, depending on how you do the math. Figuring out the tip isn’t any easier.

The creation of a new alternative exchange rate this month, which led to a 70 percent devaluation, has left foreign companies operating in Venezuela with a dilemma. Do they try to pull their money out at the new weaker exchange rate or hold on, waiting for the stronger rate they were promised by the government.

Q: How long has Venezuela controlled the exchange rate?

A: Former President Hugo Chavez introduced currency controls in 2003 to stem capital flight. Since then, the country has devalued the main official exchange rate four times and alternated between single and multiple exchange rate systems. When Chavez first introduced currency controls, one dollar bought 1.6 bolivars. That same dollar today buys 172 bolivars at the government’s weakest legal exchange rate.

Q: How many exchange rates does Venezuela have now?

A: Four, if you count the illegal black market. Venezuela’s government sells dollars for 6.3, 12 and 172 bolivars per dollar. The first two rates are used for imports of government-authorized priority goods including food, medicine and car parts. The third rate, introduced on Feb. 12, can be used by anyone who doesn’t receive authorization to buy dollars at the first two preferential rates. On the black market, one dollar currently fetches about 190 bolivars.

Q: What kind of problems are caused by the multiple rates?

A: Because the first two primary rates overvalue the bolivar, demand for dollars is insatiable. The multiple exchange rates also create many opportunities for arbitrage...or corruption.

Some people and companies have been accused of buying dollars for 6.3 bolivars and then turning around to sell them for 180 or more on the black market. It’s also tempting for companies that receive preferential dollars to turn around and sell their products based on the black market rates. Critics of President Nicolas Maduro allege that billions of dollars have been spirited away from the country in scams related to the multiple rates.

Q: Why does the government keep the two weaker, overvalued rates and not just move to a single rate?

A: Besides currency controls, Venezuela also regulates the prices of many basic goods including food, medicine and household products. Those controls are maintained through importing goods at the preferential exchange rates. In a country where annual inflation is already 69 percent, moving more sectors to the weaker rate could quickly push inflation higher. Venezuela’s minimum wage is 5,600 bolivars a month in Venezuela, and most Venezuelans can’t afford items priced using the weaker rate.

Q: Why would someone still use the black market?

A: The third rate of 172 bolivars is still new, and analysts will be watching to see how much volume flows through the new market. Government officials have said that it will account for around 5 percent the country’s dollar sales, with the first two stronger rates accounting for the rest. The government will only allow individuals to purchase up to $10,000 a year at the new rate.

It remains to be seen how well the new market will work for businesses. For the time being, anyone who needs to buy dollars in a pinch may still need to turn to the black market.

Q: Why does it matter?

A: It’s not just foreign tourists who follow the changing currency rules in Venezuela. International companies that operate in the country have to decide what exchange rate they use to value their Venezuelan assets and cash. Airlines have about $3.6 billion in bolivars that they want to repatriate at the exchange rates used when the tickets were sold (6.3 or 12 bolivars per dollar). If they agree to repatriate their cash at the new weaker rate, they cold lose as much as 96% of what their balance sheets show is held in the country.

Spain’s Telefonica SA, which operates the Movistar mobile phone system in Venezuela, took a $3.2 billion hit this month when it switched from the stronger rate of 12 bolivars per dollar to 50 (a rate that no longer exists). Ford Motor Co. also took an $800 million charge to revalue its Venezuelan assets this year, while Kimberly-Clark Corp. said the declining currency cost it $462 million. Clorox Co. pulled out of the country in 2014.

Q: So how much should I tip at dinner tonight?

A: 10 percent.

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