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  HOME | Venezuela (Click here for more Venezuela news)

TalCual: How free is Venezuela’s Foreign Exchange Market?
Many believe that the access to foreign currency will not get any better in Venezuela despite the fact that now local banks are allowed to open foreign currency trading platforms as part of a loosening of the nation’s exchange controls

By TalCual

The idea of freeing the foreign exchange market is, today, on everyone’s lips in Venezuela, but sadly not everyone understands the same thing with those words. It is worth recalling that in recent times of the economic history of Venezuela, every citizen was able to buy and sell dollars at the rate of Bs.4.30 per each unit of the American currency. There were, of course, the necessary differences – very marginal, by the way – between buying and selling, in order to cover administrative costs as a result of the intermediation of the exchange rate. But there was total access to the foreign exchange market, and people were able to buy or sell the amounts of dollars they each deemed necessary, and for the purposes they deemed appropriate.

If the demand for dollars was very high at a given time, outstripping supply, the Central Bank of Venezuela (BCV) intervened by selling dollars, so that the market remained balanced, and all economic agents of the country – importers, exporters, producers, consumers, savers, etc. – could plan their present and future operations without having to worry that the exchange rate would not suffer circumstantial alterations that would ruin their plans in the end.

But all that was possible because the BCV oversaw the substantial amount of dollars coming into the country via its oil exports and, hence, their sale in the foreign exchange market could be measured out so that the rate would not suffer alterations. The BCV could sell everything the market demanded at Bs.4.30 and, in addition, accumulate reserves, which provided more security because monetary policies and the exchange rate would be maintained over time. But that is no longer possible today.

Today, and in the near future, neither the oil activity nor the BCV will be able to assure the country that there will be sufficient dollars to maintain a certain exchange rate, by way of selling – or eventually buying – on the relevant market. The exchange rate will have to be determined, more than ever, by the supply and demand of private economic agents, which has some drawbacks and major hazards.

In a relatively small market – such as the one that will necessarily emerge from the ruins of the current economic situation – unexpected dollar supply and demand dynamics – for speculative reasons or not – can make the exchange rate suffer large alterations, even overnight, which can generate big gains or losses to some economic agents, and do more harm than good to the economy as a whole.

 

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