- By Juan Cristóbal NagelJuan Cristóbal Nagel is a professor of economics at the Universidad de los Andes in Santiago, Chile, editor of Caracas Chronicles, and co-author of the book Blogging the Revolution.
The U.S. dollar is facing competition from other currencies, but there is still one place, ironically, where the greenback is king: the streets of socialist, anti-imperialist Caracas. Everyone here wants dollars — from the importer looking to stay in business, to the mid-level professional wanting to save his Christmas bonus.
Venezuela has had a fixed exchange rate of 4.3 Bolivars (BsF) per dollar for years. By selling dollars in exchange for so few Bolivars, the local currency was severely overvalued. Propped up by oil exports (hence the term "petrodollars"), the government was effectively subsidizing imports and travel abroad. A few weeks ago, the government decided to devalue to 6.3 BsF per dollar.
But devaluation was not the only thing rocking the market. The official dollar is only available for procurement if you are buying some imports — food, medicine, airplane tickets, and the like. You can’t get them unless it’s for one of those approved purposes, leaving out many people who need them. The artificially low prices, combined with the scarcity of dollars, creates the perfect opportunity for a black market where you can buy USD at the official rate, and then sell them underhandedly at a jacked-up price for an easy profit. In the last few weeks, following the devaluation, the price of the dollar in the black market has shot up to BsF 22 per dollar, up from BsF 18 the week prior to devaluation.
Stroll through the streets of this chaotic capital, and it is not difficult to figure out how both of these events are affecting people.
I stop by a local café and order some breakfast. The owner, Aída, in her mid-50s, is in a mood to talk. She says that she doesn’t have "pastelitos," a local pastry, because she cannot find the flour to make them. Flour, you see, is imported, and given the differential between official and black market rates, flour vendors would rather take their subsidized dollars and make money by selling them in the black market instead of using them to buy the flour they’re intended for. Economists I’ve spoken with estimate that roughly 50 percent of the dollars approved to import basic staples end up in the black market instead.
I ask Aída if there is a black market for flour. She says she doesn’t know of any. The price of flour is controlled, so flour vendors can’t really use the black market for dollars to import flour and sell it a profit. The end result is that Aída, like thousands of other small business people, can’t sell her pastelitos. The flour is simply not there.
Devaluation supposedly means that flour prices will have to go up, as local businesses have to pass the cost increase to their customers, but the government has already signaled that prices will remain fixed. It may be weeks before flour is on the shelves again. And even if it is, there is no guarantee that the government will allow Aída to transfer the increase in the cost of flour to her customers.
Everyone who imports something has been affected. Everything from the wrappers that you use to store potato chips to the metal linings you put on the coffins you sell is affected by the government’s decision. Vendors lucky enough not to be under the government’s magnifying glass are simply jacking up prices to reflect the black market rate. Some furniture vendors, for example, will quote prices in dollars, and then will whip out a calculator to translate it to local currency at the day’s black market rate.
Ordinary chavistas say that devaluation doesn’t affect them since they do not use dollars. This, however, ignores the reality that the dollar plays in the distribution channel of most consumer goods in the country.
In effect, when the value of the U.S. dollar goes up compared to the BsF, what people are able to buy for their money (i.e. their wage value) goes down. The less ideologically pure are already seeing the effect of devaluation when they go to stores.(As seen in the photo above, Venezuelans are making a run to electronics stores, to buy what they can before already expensive goods become unaffordable.)
Using the black market, of course, is not an easy proposition. Selling small amounts revolves around people you trust — relatives, or friends. Selling dollars to people on the street could lead to a mugging or getting counterfeit money in return.
Finding dollars in small amounts is easier than finding them in large quantities. Multinational companies wishing to repatriate dividends, for example, have a difficult time finding people willing to sell large amounts of dollars. There are stories of "shadow traders," companies who are able to illegally exchange large amounts of dollars at the black market rate via a complicated scheme of international transfers. Local economists say that the supply of those dollars comes from two main sources: importers with access to official dollars, and the government itself.
The dollar may be losing luster in other parts of the world, but in Venezuela it remains the benchmark for price-setting and the preferred means to store wealth. Here, green still rules.
Juan Nagel is the Venezuela blogger for Transitions. Read the rest of his posts here.