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Venezuela's New Currency Exchange System Based on “Supply and Demand”

A third currency exchange system has been introduced in Venezuela in efforts to stabilise the value of the bolivar, called Sicad II, which will facilitate daily currency auctions at prices determined by “supply and demand”, according to Vice President for the Economic Area Rafael Ramirez.

State-owned companies will be permitted to trade currency and bonds below the official exchange rate of Bs. 6.30 to US$ 1. However, the government will continue to preside over all transactions.

Sicad II was created by presidential decree last Wednesday. However, its implementation was held up by necessary changes to Venezuela's currency law to allow public entities to trade below the official rate.

According to the government, the system is based on a long shelved bond swap mechanism known as “permuta”.

The permuta system was introduced with the initial round of currency controls in 2003, and allowed bolivar denominated bonds to be exchanged for dollars. The system was in effect until 2010, when it was suspended due to concerns it was fanning currency speculation.

However, according to Ramirez the revived system wont have the same weaknesses as its predecessor. “It will be more transparent and would allow different public and private players to participate and bring foreign currency in,” Ramirez stated.

Maduro first hinted at a possible re-establishment of the permuta system last September, and the government aims to have Sicad II running this week.

Like it's forerunner – Sicad I, both public and private companies will be able to participate. Sicad I was introduced as part of Venezuela's currency control policy last year, and also provides currency at a rate below the bolivar's official value. It was initially intended as a parallel system to the now defunct Commission for the Administration of Currency Exchange (Cadivi). However, amid a slew of economic reforms last month, Cadivi's operations were folded into the newly created National Foreign Trade Center (Cencoex).

Among other changes to Venezuela's economic policy in January, non-essential currency exchanges such as travel allowances and foreign investment earnings were moved from the official rate to a rate set at the Sicad auctions – currently Bs11.80, according to the latest publicly available figures.

However, unlike Sicad I, buyers at Sicad II auctions won’t have to explain what they need foreign currency for, and are widely expected to receive fewer dollars for their bolivars.

“The private sector should be able sell its foreign currency so that our economy can function. With our public funds from oil we’re going to guarantee what we consider essential to our priorities,” Ramirez stated when he confirmed permuta's revival earlier this year.

On Monday, Ramirez pledged that the new system would deliver on easing access to foreign currency and “bring down” the black market.

Over the past 12 months the value of the bolivar has collapsed on the parallel market. This time last year the bolivar was trading on the street for around Bs. 20 to US$ 1. Now, the unofficial rate is closer to Bs 80 per US$ 1.

The official value of the bolivar was last devalued in February 2013 from 4.30 to the dollar to the current rate of 6.30. However, the restrictions imposed on non-essential transactions last month have been widely interpreted as a partial devaluation.

Sicad I Lives On

Ramirez had stated that Sicad I will continue to function alongside Sicad II. Last week Sicad returned to offering US$ 220 million in its weekly auction, after a double auction had been planned for the previous week.

US$ 440 million was on offer on the week ending 14 February, with businesses looking to import products such as spare mechanical and auto parts, industrial chemicals, paints, plastics and other industrial needs invited to attend.

The double auction a fortnight ago came after a last minute cancellation of the previous week's auction. The Central Bank of Venezuela (BCV) announced the cancellation of this month's first auction via a press release, stating the decision was made in response to a “series of anomalies and noncompliance with required procedures, which were detected after an exhaustive review of the orders”.

However, during the double auction to make up for the missed week, only US$222 million was sold; 785 companies were turned away. In total, almost half of applicants failed to qualify for the auction; falling short of requirements mostly aimed at preventing misuse of government issued foreign currency.

Following the lower than expected payout, Attorney General Luisa Ortega announced that 942 investigations into irregularities in currency purchases had been opened. The investigations relate to exchanges made through Cadivi prior to its dissolution.

The government has been aiming to have the auctions take place weekly since last October, with different sectors of the economy being invited each week.

The Maduro government has previously pledged to pump at least US$42.5 billion into the economy this year; US$11.4 billion of which will pass through the Sicad auctions.

Last Saturday, Maduro reaffirmed his government's commitment to providing dollars “to develop the industrial and production base of our country”. He accused the “parasitic bourgeoisie” of accruing dollars for personal gain at the expense of productivity.

“We’re not going to give them a single dollar more, even if they cry, yell and kick,” Maduro stated.

“The homeland’s dollars are for producing,” he said, comparing the “bourgeoisie” to “a vampire without blood at six in the morning”.

This is an updated version of an article which appeared in Correo del Orinoco International on 21 February 2014.

Published on Feb 26th 2014 at 9.22pm