President Hugo Chavez felt obliged to apply exchange rate controls in 2003 against the financial attack Venezuela was suffering, especially the disproportionate capital flight clearly aimed at leaving the country without liquid reserves to be able to meet international commitments and buy goods and services in overseas markets.
This financial attack was the final blow following the private sector business strike and oil lock-out. What was clear from these three actions by the Venezuelan opposition was their attempt to weaken the Venezuelan state economically to the point where it could not meet international trade and finance commitments. Thus people in Venezuelan would be unable to meet their needs, leading to weakening the government’s popular support and provoking desperation among the population.
Regarding the specific subject of this article, we should understand exchange controls as an exchange rate policy tool enabling a country to officially regulate the buying and selling of foreign currency. In the context described above, it is understandable that such measures were necessary. But to evaluate how effective they may have been, we need to analyze why they were necessary, what they aimed to achieve and, above all, how they were implemented.
It is worth pointing out that exchange controls in themselves are neither good nor bad. That judgment depends on the criteria used to evaluate them. As an example of successful exchange rate controls we might take Barbados, a Caribbean island State which became independent of Britain in 1966. It has had exchange controls now for over 20 years and is one of the most prosperous economies in the Caribbean. Of course, it does not have an anti-patriotic opposition directed by the United States, promoting national and international action to overthrow the government.
President Chavez applied exchange controls to stem capital flight and to fix the price of Venezuela’s Bolivar against the U.S. dollar. That should have helped stabilize the price of imported goods, including national goods and services using imported inputs as raw material. 14 years after applying exchange rate controls it is clear that they have not achieved their objectives at all. They have not stopped capital flight. An informal foreign currency market has grown up driven by a web site that has won the confidence of economic agents, distorting exchange rate parity with the U.S. dollar and the Euro and affecting, too, the price of goods and services in the domestic market.
On the basis of these results we ought to evaluate the other two criteria that will tell us whether exchange controls should be scrapped or retained. The first of these criteria to review is the reason why exchange controls were originally introduced. On that score, we ought to be able to see if the conditions that obliged President Chavez to adopt exchange control measures still prevail.
As we have already said, in the first five years of the Chavez government, the opposition used the well worn war strategy of attacking the country’s economy to generate discontent among the population and thus destabilize the government’s bases of support. Dollar flight in 2003 was their final blow. How should this attack have affected the country’s reserves?
The Venezuelan State sells oil and gets paid in U.S. dollars. With these dollars the State meets its international debts, generated by trade or borrowing from international banks. These are also the dollars the government provides to its citizens for any international transactions they may carry out. This helps us understand that every dollar we buy from the government is a dollar less in the country’s reserves.
The strategy of the opposition was to create chaos and destruction in the country such that the government would feel it needed to use dollars from its reserves to make good the damage and meet the needs brought about by the opposition’s action. But precisely so as to prevent the government from repairing the damage the opposition planned to inflict on the economy, the opposition began buying millions of dollars every day from the State so as to send them to U.S. banks and thus make unavailable to the Venezuelan economy the dollars it needed to recover from the domestic onslaught.
This was the context in the middle of which President Chavez had to implement exchange controls. The questions now are : Have conditions changed favorably such that exchange control measures are no longer necessary? Have the U.S. and its local hit squads given up their attacks on the Venezuelan economy? Do we have enough reserves to be able to run the risk of another wave of capital flight? Self-evidently, the answer to all these questions is no.
The circumstances obliging President Chavez to implement exchange controls not only remain but have become worse. We have fewer international reserves today than the country had when President Chavez implemented the measure. If there has been capital flight even with exchange controls, without them the reserves would have been used up in just a few weeks, at the same pace as foreign exchange was being bought.
The terrorist actions and street blockades planned by the Venezuelan opposition between 2014 and 2017 destroyed public and private infrastructure, meant extraordinary costs in control of public order and also the murder of over 100 people. This forced the government to spend exceptional amounts of foreign currency to resolve a good part of the deliberate, criminal damage caused. All this happened in the context of a significant fall in the price of oil in the international market, which had direct repercussions on Venezuela’s ability to obtain enough foreign currency to cover its costs and meet international commitments. That in its turn had direct effects on the domestic economy.
On top of all this, the real Venezuelan opposition, namely the U.S. government, led by the current President, Donald Trump, has applied sanctions against the Venezuelan State to reduce even further the country’s ability to obtain U.S. dollars. That way they seek to to strangle Venezuela’s economy, suffocate the Venezuelan people and overthrow President Nicolas Maduro. In this, the current scenario, what can be expected to happen if exchange controls are removed?
Lastly, we need to evaluate the means used to implement the exchange controls. The reason to create two separate exchange rates for one currency (in this case the U.S. dollar) is so that the lower exchange rate can be used to obtain essential imported goods cheaply and enable the Venezuelan consumer to have ready access to those products domestically. The other, higher exchange rate is supposed to be used to obtain goods not considered essential.
The detractors of exchange rate controls regard this dual exchange rate for the U.S. dollar as a source of corruption, because it’s a good deal to get dollars at the cheaper official rate and sell at the higher official rate or, even better, to sell them on the informal market. This the detractors say is the cause of capital flight, of scarcities of essential goods and the price inflation of those same goods. With that argument, the opponents of exchange controls do indeed point to a real fault in the exchange control mechanism, namely the lack of control ensuring dollars are used for the purpose for which they were exchanged. But instead of proposing a solution to that fault, they propose the complete elimination of exchange controls, as if that decision depended on the mechanism of their application rather than on the real reasons for which they were introduced.
Those of us who believe exchange controls should be maintained because the reasons for applying them have intensified, observe that the main fault in their application has been the lack of transparency in the issuing of currency at the lower official exchange rate (currently the DIPRO protected rate). This being the exchange rate via which to acquire essential goods, these exchange transactions get priority and have access to a higher quantity of foreign currency for sale at that rate.
The basic problem is that people do not have access to information enabling them to know who receives foreign currency at this priority rate, or how much, when and for what purpose. Thus the Venezuelan people (the ultimate beneficiaries of the government’s exchange rate policy) have no way to audit or monitor to make sure this foreign currency is used for its stated purpose.
One can go even further. We ought to be able to trace the goods imported with foreign currency bought at the protected rate, from when they leave the supplier to their arrival at one of Venezuela’s ports, as happens with international delivery services which allow customers to track the delivered item in transit. That would also benefit honest business people by preventing their merchandise from being detained by some official either through inefficiency or through corruption, since people would be expectantly waiting for the opportune entry of that merchandise into the domestic market.
Venezuela has one of the highest rates of internet access in the American continent. The fact that Venezuelans would be able to check from their homes the kind of information described above, would give them tremendous confidence in the transparency of the government’s management of foreign currency administration and shine a light on foreign currency issuance so as to stop people who are corrupt and inefficient taking advantage of obscurity caused by lack of relevant information.
That transparency should be applied to the whole chain of distribution of both domestically produced and imported goods for the different points of sale, but that issue requires separate detailed treatment in another article that will deal with how to combat and defeat the unprecedented speculation afflicting Venezuela’s market for goods and services.
Wherever the people are able to keep watch, corruption and inefficiency will flee in fear.
First published in 15 y Ultimo on Sept. 11, 2017.