Venezuelan Central Bank Opens Dollar Trade as New Exchange System Introduced

Santa Elena de Uairén, 25^th March 2014, (Venezuelanalysis.com) – On Monday morning Venezuela’s new SICAD II exchange rate system came into force, which authorities argue has helped to lower the value of the dollar on the black market.

On the first day of trading the Venezuelan currency sold for an average of 51.86 bolivars to the dollar, according to data from the Central Bank’s website. This is far higher than the government’s fixed exchange rate, but lower than the black market rate.

Companies and individuals were able to buy and sell dollars in cash and bonds for the first time in four years, under the new mechanism called SICAD II. People may now make bids through financial intermediaries, who then forward the bid to the central bank, which matches buyers with sellers and approves transactions.

This marks a new strategy to combat the rampant black market trade, which the government tried to reign in with stricter regulations at the end of last year. In February, the bolivar was valued at an all-time low on the black market, at nearly 90 to the dollar. The vast difference between the official and parallel rate made buying dollars through government systems the most profitable business in the country. 

Under previous systems, it’s been estimated that one in three dollars in the country was misused or stolen, Economy Vice-Minister Rafael Ramirez said.

Now, in a controversial change of policy, the government is trying a different tact; trade will be more open to the public, at a rate that so far values the bolivar 88 percent lower than before. It has already dealt a sharp blow to the speculative black market; the parallel dollar dropped from 74 to around 56 to the bolivar, just slightly above the SICAD II’s trade average.

The central bank will only intervene when “erratic” fluctuations appear in the exchange rate, according to the market rules published on March 11th.

Luis Vicente León, president of the market researching firm Datanálisis, was dubious of the government’s next move. He argued that it was normal that the parallel dollar dropped, because “people have expectations that the government will release a large amount of foreign currency, and that people will have access to it”.

Nevertheless, he warned that if the government then lowers the official SICAD II rate “in hope of preventing a subsequent devaluation, there won’t be a way to meet all the demand that will be generated, in which case the drop in the parallel market rate will be absolutely transitory and we’ll soon see it rise again.”

The government will maintain its official exchange rate at 6.3 bolivars per dollar. According to Venezuelan president Nicolas Maduro, more than 80 percent of Venezuela’s dollars will continue to be provided at the highly subsidized official rate, for use by public institutions and first necessity imports. This subsidy is expected to protect people from inflation in key areas, such as basic food products, medicine and transportation (petrol).

He said SICAD II will only cover 7 to 8 percent of Venezuela’s foreign currency needs.

Earlier this year Economy Vice President Rafael Ramirez estimated the government under SICAD II would sell about US$30 million every day. However, he recently announced that the system plans to “sell whatever it takes” to keep businesses from resorting to the black market.

“How much and how often…is something that will be determined by the behavior of the market,” he stated.

Ramirez said that anyone, including foreign residents and tourists, who wishes to trade may do so, as long as they meet the minimum requirements set by the bank or similar institution and the market rules. Currency exchange centers placed in airports will communicate directly with the SICAD II trade averages.

He also mentioned that the mechanism is one of a series of incentives the government is creating to prevent currency from leaving the country to be invested in off-shore accounts.

Venezuela’s largest business group Fedecamaras has said the system shows a step “in the right direction.” But some foreign companies, like Colombian airline Avianca and car company Chrysler, have continued to scale back operations in Venezuela, citing longstanding difficulties in accessing dollars.

On March 13th, while addressing a peace conference in Anzoategui, Ramirez again called for the private sector to work more closely with the government, reminding them that the current economic measures being set in place are the product of proposals made by both workers’ unions and private businesses.