Devaluation is insufficient; further adjustments will be needed
Overvaluation and the parallel forex market will continue, according to analysts
The Government had kept the foreign exchange rate to the US dollar unchanged for two years. While the prices of products and services skyrocketed quickly, the US dollar became a very cheap item, which pushed imports up to unsustainable levels. This is technically known as overvaluation.
Now, the devaluation announced on February 8 by Venezuelan authorities fails to heal the ailing Venezuelan economy. The equilibrium exchange rate, that is, the rate at which the dollar would no longer be cheap and imports would return to normal levels, is VEB 9 per US dollar. Therefore, economic research firm Ecoanalítica believes that overvaluation is still present, as it was only cut from 52.8% to 38.3%.
Luis Vicente León, economist and director of Datanálisis, explains that "with the exchange rate at VEB 6.30 per US dollar, demand for foreign currency will continue to be huge. Consequently, the Government has two choices: either burning a lot of international reserves by selling cheap US dollars or causing shortages."
According to the statements of Finance Minister Jorge Giordani, the Higher Agency for Upgrade of the Exchange System will be able to "steer the quality and quantity of imports." Additionally, Central Bank of Venezuela (BCV) President Nelson Merentes said that they will sell dollars for "imports that help us bring down inflation and foster more welfare and growth."
Can a government agency replace the market's role of deciding how much of everything has to be imported?
León believes that this amounts to "play God; no such type of measure has suceeded ever, as corruption and inefficiency inevitably come up."
Since overvaluation remains, the lack of competitiveness of Venezuelan companies remains the same, as imports are much more profitable than non-oil exports.
According to the central bank, non-oil exports recorded a fall of 20% in 2012, while oil exports provide USD 96 of every USD 100 entering the country.
Further, the Government has failed to take steps to intervene in the parallel market, where the US dollar has soared and pushed up the price of a large number of items. According to Datanálisis, in 2012 between 12% and 15% of imports were financed through the parallel market. One might think that it is not very high, but it includes parts and supplies, such as covers, packagings and other items necessary for a large amount of products to appear on the shelves.
Banking sources believe that the Government needs to create a legal parallel market. In this way, it could quickly supply foreign currency to the companies that will not be allowed to buy dollars through the Foreign Exchange Administration Commission (Cadivi) and cut the parallel dollar price. Otherwise, shortage of staples, which according to the central bank is currently at 20% -the highest level since December 2008, will continue as high as inflation.
"This is a forex "corralito," as the money coming in cannot get out. Who will bring new money to the market? How will the issue of investment be solved?" wondered León.
Translated by Maryflor Suárez R.
The story could have been different. On April 12, 2014, university students led a march to the Attorney General Office in order to submit concrete requests in regards to security and to demand the release of a group of youngsters detained in Táchira state.