Caracas, May 10, 2019 (venezuelanalysis.com) – The Venezuelan Central Bank (BCV) announced the elimination of currency exchange controls on Monday and the creation of “exchange tables” to be run by Venezuelan banks.
The BCV resolution from May 2nd states that the goal is to “deepen liberalization of currency exchange controls” in order to “boost” the purchase and sale of foreign currency in Venezuela.
Public and private banks are now allowed to set up “exchange tables” (mesas de cambio) through which people, companies or other banks can engage in transactions of foreign currency. Banking institutions are subsequently required to report at the end of the day the volume of transactions and the average exchange rates.
The Central Bank will then publish, on a daily basis, the average exchange rate reported by the different exchange tables. Further details on how supply and demand of foreign currency will be regulated are yet to be released, as well as when the exchange tables will begin operating.
Venezuelan political economy professor and former minister Luis Salas told Venezuelanalysis that despite there being no official explanation from the BCV yet, the measure is in line with recent policies.
“The comments we’ve heard from some government officials are along this line that exchange controls were meant for another context and that this move will boost foreign investments in the country,” he explained.
While the BCV resolution makes no reference to DICOM, the state-run currency exchange system, Salas believes that it will become “irrelevant.”
“The quantities being exchanged were extremely low, even more so after the recent sanctions against the BCV. With the competition from the exchange tables, one assumes starting next month, it will become even more irrelevant,” Salas added.
Salas went on to explain that the move essentially “legalizes” the parallel exchange market, which was decriminalized in August. “Historically banks have been major operators in the currency black market.”
While stressing that the move could increase the “transparency” of forex operations, Salas warned that “there a few very powerful actors with the capacity to manipulate the exchange rate.”
Venezuela’s oil sector has traditionally been the source of over 90 percent of the country’s foreign currency, with the private sector buying US dollars from the government, often at a highly subsidized cost. A continued fall in oil revenues, as a result of depressed prices, deteriorating infrastructure, and US sanctions, has seen the government increasingly promote private sector investment by removing the foreign exchange control mechanisms set up to prevent capital flight in the aftermath of the 2002-03 oil lockout.
The Venezuelan government unveiled a comprehensive set of economic reforms last August, which included a monetary reconversion, a devaluation of the currency exchange rate, and pegging the currency to the Petro cryptocurrency. Nevertheless, the measures failed to deter hyperinflation, forcing the government to raise salaries by devaluing the Bolivar-Petro exchange rate.
The latest salary increase took place before May 1st, with the minimum wage and food bonus now totaling 65,000 Sovereign Bolivars (BsS) (roughly US $11 at the black market rate), up from around 20,000.
The Venezuelan Central Bank changed course in December, aggressively devaluing the Bolivar with respect to the dollar in the official DICOM foreign currency auctions until it overtook the black market rate in late January, at around 3,300 BsS per dollar. Both rates hovered around this value until late April, when the black market surged and the official exchange rate followed suit, being set at 5,200 BsS per dollar.
This BCV policy, along with measures to restrict the amount of Bolivars, has been credited for slowing down the economy’s inflationary spiral, with inflation registered at 18,1 and 44,7 percent in March and April, respectively, according to the opposition-controlled National Assembly’s finance commission. Venezuela had been in hyperinflation (monthly inflation above 50 percent) between November 2017 and February 2019. However, economists have warned that reduced inflation has come at the expense of contracting demand, risking longer-term economic stagnation.
Edited by Lucas Koerner from Caracas.