Venezuelan Central Bank Scrambles to Control Soaring Exchange Rate

Mérida, August 27, 2022 (venezuelanalysis.com) – The Venezuelan economy had a week of turmoil with a sharp devaluation of the national currency.

The ratio between the US dollar and Venezuelan bolívar registered unofficially by a number of exchange operators soared from 6.95 on Monday to 9.33 on Thursday, forcing the Venezuelan Central Bank (BCV) to take emergency measures.

With a wide gap opening between the official exchange rate published by the BCV and the parallel, or “black market” one, the country’s main financial institution held extra foreign currency auctions with public and private banks in an effort to supply more dollars and contain the bolívar depreciation.

According to unofficial reports, the Central Bank provided US $300 million in two separate operations. While the parallel rate fell by 8.2 percent on Friday, the official one was steadily devalued during the week, from 6.18 bolívars per dollar on Monday to 7.85 on Friday, a 27 percent difference.

Financial authorities lifted forex controls in 2019 as part of a program of liberal measures aiming to stabilize the Venezuelan economy under punishing US sanctions. Rather than set the official marker, the BCV has been supplying foreign currency to exchange tables operated by banks and then establishing a “reference” rate based on the volume of transactions and average buy/sell prices.

The bolívar continued to devalue before stabilizing in late 2021, but the official and parallel markers were virtually on par. The exchange rate hovered between 4.5 and 5 for several months before the sudden spike in recent weeks. However, the stability has required an ever larger supply of foreign currency from the BCV, with so-called “forex interventions” totaling a reported $3 billion this year.

The currency devaluation has had an immediate impact on living costs. The Maduro government raised the minimum wage in March to around $30, but purchasing power, measured in USD, has fallen by 44 percent since. Recent events raised fears of a new inflationary spiral after monthly inflation was measured in single digits for 10 of the past 11 months.

The sudden exchange rate hike this week likewise drew controversy as customers began denouncing businesses for setting prices in US dollars and using the parallel marker.

Venezuelan Attorney General Tarek William Saab urged “speculators” to adhere to the figure published by the BCV and promised “exemplary sanctions” against private actors operating with the black market figure. However, retailers could avoid any issues by simply adjusting prices in bolívars.

Social media users shared evidence during the week of shops closing or withdrawing merchandise to adjust prices.

For his part, President Nicolás Maduro called on the people to “not allow businesses to rob them with the parallel dollar.” He also warned traders to stick to the official exchange rate, reminding them that “it follows the rules of the market” and “has been working well.”

“There are some who want to sabotage Venezuela’s economic recovery,” Maduro said during a televised address on Thursday. “Enough with the speculation, let us fight for macroeconomic stability.”

The Caribbean nation registered an estimated 4 percent GDP growth in 2021, bucking a seven-year trend during which the economy contracted by more than 70 percent according to unofficial measurements. The crisis was triggered by plummeting oil prices before being heavily compounded by US sanctions.

The Central Bank revealed this week that the Venezuelan economy has registered four successive quarters of double-digit growth, with the first trimester of 2022 registering a 17 percent rise compared to the same period last year.

Several financial institutions have forecast double-digit GDP growth for the South American country this year, with Credit Suisse predicting a 20 percent rise.

However, economic prospects remain heavily constrained under the weight of a wide-reaching US blockade targeting virtually all sectors and especially the oil industry. Analysts have pointed out that a recovery in retail activity has widened the inequality gap.