Venezuelan Businesses, Starving for Dollars, May Get Some Relief

Photograph by Meridith Kohut/Bloomberg

Oswaldo Contreras is hoping that Venezuela’s third foreign exchange system will be the charm.

Contreras, who sells vitamins, shampoos, and accessories to pet stores, has been buying dollars on the country’s black market to pay for the products he sells, all of which are imported. Over the last year, the black market rate has soared to more than 90 bolivars to the dollar, or roughly 14 times the official exchange rate.

“What I import isn’t regarded as a priority,” says Contreras, explaining why he has no access to officially sanctioned mechanisms for procuring dollars. “I have no choice but to hit the black market. I am hoping that the new auction will make the dollar more affordable.”

Venezuela plans to kick off as soon as tomorrow the new SICAD 2 auction, which will enable companies and individuals to buy and sell dollars under the supervision of the Central Bank of Venezuela.

The new auction will complement, not replace, two exchange systems. Importers of priority goods such as medicines and some foodstuffs can buy dollars at the official exchange rate of 6.3 bolivars if their requests are approved by the government.

Other importers can buy dollars via the first SICAD system, which is a non-transparent auction of dollars for selected industries and tourists. There, the last auction established a rate of 11 bolivars to the dollar.

“The government is hoping that SICAD II will be a solution to their exchange problems,” says Cesar Aristimuño, an economist at Caracas-based Banca y Negocios. “But its success will depend on how many dollars the government allows to be auctioned.”

Vice President for Economic Affairs Rafael Ramirez said at a press conference yesterday that the government would sell what the economy needs without giving a concrete figure.

Aristimuño says that the government will need to offer about $20 million a day if the system is to drive down the black market rate, which is one of the government’s reasons for implementing the new system.

Venezuela’s economy is grinding to a halt amid a shortage of foreign currency that has curtailed imports. The country’s business associations estimate that companies owe overseas suppliers about $14 billion but have been unable to pay them as the government has reduced the amount of dollars being offered to protect its dwindling international reserves.

The problem is huge, given that Venezuela imports about 70 percent of the goods it consumes. The lack of dollars has meant that shortages of basic foodstuffs, spare parts, and medicines abound. And inflation is soaring as importers resort to the black market. Analysts predict that inflation this year could top 2013′s rate of 56 percent, which was the world’s highest.

The late President Hugo Chavez decreed exchange controls in 2003 to brake a run on foreign reserves during a nationwide strike that was intended to force him from office. Under the system he implemented, access to dollars is strictly controlled, and the dollar’s rate is fixed by the government, not the market.

An auction system similar to SICAD II was outlawed by Chavez in 2010. His decision only fueled the black market, which has also been stoked by the central bank’s non-stop printing of bolivars.

The black market is already bracing itself for volatility as SICAD II starts operations. After hitting a high of 90, the black market rate for dollars has eased to about 80 as businesses bet that the new system will offer cheaper access to hard currency.

“I think the black market dollar rate could fall to between 45 and 50 [bolivars per dollar] if the new system is successful,” says Aristimuno. “But then you’ll see a rebound. As the black market rate weakens, dollar demand is going to grow and that will push the dollar’s price higher again.”

Ramirez warned that the Central Bank could intervene in the market to prevent “erratic fluctuations.”Contreras is just hopeful that the new system—which has been repeatedly delayed—will work. “What they should do is lift exchange controls,” he says. “But until they do, this will make things a little easier.”

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