Venezuela's low foreign exchange rate fuels imports

With the official exchange rate at VEB 4.30 per US dollar since January 2011 and an inflation rate significantly higher than that in some of its trade partners, in Venezuela, imported products are cheaper than those made at home.

While Venezuelan entrepreneurs face a 20% increase in costs, inflation in the countries where Venezuela buys food, raw materials, and a wide selection of products does not exceed 6%.

As a result, according to the Central Bank of Venezuela (BCV), from January to November this year, the wholesale price of imported products swelled 11.4% due to the fixed exchange rate. Meanwhile, the price of domestic products jumped 16.8%, a 5.4-point gap. 

When imports are cheaper than domestic products, this phenomenon is technically known as overvaluation. According to a study conducted by the United Nations' Economic Commission for Latin America and the Caribbean (ECLAC), overvaluation has attained a substantial level in Venezuela. 

For measuring such variable, ECLAC relied on the real effective exchange rate index, which measures variations in competiveness taking into account inflation and the foreign exchange rate of Venezuela's main trade partners. The higher the index, the better the country's competiveness; the lower the index, the lower the country's competitiveness.

From late 2010 through the second quarter of 2012, Venezuela's index fell 20 points, which means that the local currency was the most appreciated across Latin America and the Caribbean in such a period. Hence, imports are very attractive on the market.

vsalmeron@eluniversal.com

Translated by Jhean Cabrera