Venezuela Announces New Currency Exchange Mechanism Based on “Supply and Demand”
The Venezuelan Central Bank has announced the creation of a new currency exchange entity known as SIMADI, which will allow dollars to be sold and purchased legally according to “market rates”. The new mechanism will operate alongside SICAD I and SICAD II, which will continue to sell dollars at an exchange rate set by the government.
Caracas, February 11th 2015 (venezuelanalysis.com) All individuals living in Venezuela will soon be able to purchase and sell US dollars at a price set by the market, the government has announced, in one of the biggest changes to the country’s exchange rate system in years.
The creation of the new watershed FOREX system, known as SIMADI, or “Marginal Currency System”, was announced this Tuesday by the Minister for State Economy, Rodolfo Marco Torres and the President of the Central Bank of Venezuela (BCV), Nelson Merentes, at a press conference in Caracas.
Exchange rate controls were initially brought in under the Chavez government 12 years ago in a bid to limit capital flight. Despite the fact that access to dollars has only been legally available at a regulated price through government agencies, a flourishing black market means that US dollars now fetch a street price of 180 Bolivars or more.
The new system, which effectively legalises the black market rate, is aimed at managing speculation against the Venezuelan Bolivar and bringing the illegal sale of dollars under control.
During the press conference, Torres explained that the SIMADI will continue to operate alongside two already existing exchange rate mechanisms, SICAD I and SICAD II, which will both continue to sell US dollars at a state regulated price.
According to the BCV, SICAD I will maintain the rate of 6.3 Bolivars to the US dollar for private businesses importing what are considered to be “essential goods” such as food and medicine that are not produced in Venezuela. These goods make up around 70% of all imports.
“70% of Venezuelan needs are guaranteed,” stated the Minister.
An adjustment will also be made to the second tier exchange rate, known as SICAD II, which will be unified with the SICAD I rate. The agency will now begin to auction dollars starting at 12 Bolivars per US dollar for the import of non-essential goods, which amount to approximately 30% of all imports. It is also the rate for Venezuelans to buy foreign currency if they travel abroad.
The government has stressed that both SICAD I and SICAD II are insulated from all speculation.
New SIMADI System
Although the finer details of the new system are yet to be revealed, a rush of information about the SIMADI has been inundating internet news agencies throughout the day.
In order to participate in the new SIMADI scheme, individuals must have access to a national bank account in dollars and be over 18 years of age. Transactions will take place at over 3,790 different points, including private and public banks and currency exchange centres where individuals will be able to buy a maximum amount of $300 daily and US$10,000 annually. Private sellers will be able to offer a maximum of US$200 daily and family remittances from abroad will also be changed via this agency.
According to government statements, the system will be free of charge and totally unregulated by the state.
Reactions
So far the new system has received mixed receptions from both pro-government and anti-government camps.
According to Jorge Roig, President of Venezuela’s largest businesses federation, FEDECAMARAS, the move demonstrates that the government has “recognised that supply and demand must set price.” He described the announcement as an effective devaluation of the Bolivar.
“A bit of Liberalism is never a bad thing,” he stated to his Twitter followers.
Nonetheless, other financial experts such as Ricardo Montilla, President of the National Association of Currency Exchange are optimistic about the new measure.
“The parallel market as such will disappear, it all depends on the expectations of the users of this system. I for one think the (black market) rate should come down,” he stated.
Prices for dollars at the SIMADI are expected to open this coming Thursday at a rate of between 120-140 Bs to the US dollar.
“If the government wants to stimulate the private sale of foreign currency, currently being swindled on the parallel market, and transfer this across to the SIMADI, the logical thing to do is that this exchange rate, which wasn’t announced, should start at the same or a similar rate to the parallel market,” explained economist, Victor Alvarez, former Minister of Basic Industries.
Venezuela is currently experiencing a shortage of foreign currency due to a significant drop in oil prices, the country’s main source of US dollars.