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Venezuela’s Magic Number

Venezuela's bizarre system of currency controls makes no economic sense. Yet President Nicolás Maduro is determined to keep it.

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On Wednesday, Jan. 21, Venezuelans anxiously listened to President Nicolás Maduro give his yearly address to the National Assembly. Much was riding on his performance. The economy is reeling from the drop in oil prices, and massive lines at supermarkets and convenience stores are beginning to boil over in anger. (The graffiti on the wall in Caracas shown above reads “A country with hunger will not last.”)

While Maduro acknowledged a certain need to change and made a few vague announcements, he emphasized that one thing would remain put: Venezuela’s absurd, multi-tier fixed exchange rate.

There are several important reasons for his unwillingness to dismantle the currency controls, and all of them have to do with his own political survival at this treacherous moment.

Maduro plans to double down on the failed economic policies he inherited from the late Hugo Chávez. In his speech, he conceded that the price of gasoline in Venezuela — the lowest in the world, a major drain on the country’s public finances — will eventually have to go up. But he held back from providing a timetable.

More importantly, he suggested changes in the insanely complicated exchange rate system while preserving its core: the “official” rate of 6.3 bolivars per dollar for “basic” imports such as food and medicine.

Venezuela’s exchange rate system resembles something out of a dystopian Terry Gilliam movie. The government controls the sale and purchase of all foreign currency in the country. The price it sets varies according to the needs of the buyer. In practice, this usually depends on whom the person in question knows inside the government.

In theory, “basic” imports such as food and medicine can be financed with dollars purchased using the 6.3 rate, which has been in place for several years. Dollars for travelers and other imports are sold at higher rates, depending on what the purchaser wants them for.

Since the government is slow to sell at the different official rates, and because the paperwork required can take weeks of work, there is a thriving black market rate of about 180 bolivars per dollar. This is almost thirty times the official rate.

According to Barclay’s, the government sold $11.4 billion at the 6.3 rate last year, and is on course to sell another $8 billion this year. All of this come from oil exports. Since these are petro-dollars sold below their market price, the effect is to create a huge subsidy. Yet in spite of Venezuela’s large budget deficit, Maduro left the “preferential” 6.3 rate intact. There are two important reasons why.

The first is that the 6.3 rate allows for comfortable arbitrage in Venezuela. This is a useful tool to keep powerful chavistas happy amidst the maelstrom.

Few importers, even those bringing food and medicine into the country, can actually get access to the 6.3 rate. The worst-kept secret in Caracas is that this gimme is available only to high-ranking military officers and businesses connected to the Revolution.

The way this distortion feeds scarcity can be illustrated with the following example. Someone — a socialist businessman, say, or a general — files the paperwork saying they need dollars to import $100,000 worth of diapers. They pay 630,000 bolivars. They then import, say, $5,000 worth of diapers, and the rest they sell in the black market, where $95,000 fetch 17,100,000 bolivars.

Shortages ensue, and in the process the purchasing chavista has made a nice return of about 2,600 percent. Doing away with the 6.3 rate would risk alienating powerful people inside the chavista movement, which is rapidly devolving into a classic kleptocracy.

The other reason the 6.3 rate is kept in place is that it allows for great publicity about the “achievements” of the Revolution. Here’s an example of how this works:

In his state of the nation speech, Maduro also announced that he was jacking up the minimum wage by 15 percent, to 5,622 bolivars per month. This spurred the Spanish news agency EFE, among others, to crow that Maduro was setting the monthly minimum wage “at $892 using the official exchange rate,” a story that was printed all over Latin America. This is pretty generous in Latin American terms. In Mexico, for example, the monthly minimum wage is about $400.

Maduro has continuously boasted that Venezuela has “the highest minimum wage in Latin America” — something that is only true when you change the minimum wage into dollars at the nearly unobtainable 6.3 rate. Yet this completely mischaracterizes the economic reality in Venezuela.

To illustrate the point, if one were to use the official 6.3 rate for everything, and not just for boasting about the minimum wage, then after translating local prices into dollars you would conclude that Venezuelans are paying $28 for a kilo of tomatoes, $23 for a bottle of ketchup, and $317 for a routine visit to a family doctor. Yet details like these do not fit into the propaganda of the Revolution or the fiction-filled stories that news agencies such as EFE write about it.

The fixed exchange rate of 6.3 to the dollar is a massive drain on the country’s finances. The dollars that the government sells at this heavily subsidized price represent billions of bolivars in foregone income. Furthermore, the subsidy does little to keep the shelves stocked and prices low.

Like so many things the Venezuelan government does, its purpose is not grounded in policy but in politics. If the artificial rate helps keep the people in power happy, and score cheap PR points abroad, then that is all the justification that the country’s leaders need to keep it in place.

JUAN BARRETO/AFP/Getty Images

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