The Saga of Venezuelan Bolivar Fuerte - Essay Example

 The Saga of Venezuelan Bolivar Fuerte Introduction Boliver Fuerte (Bs.F) has been the currency of Venezuela since it replaced the original Bolivar (Bs) at a rate of Bs.F.1=Bs. 1, 000 in 1st, January 2008. This change was a result of inflation that highly devalued Bs against the dollar. Boliver Fuerte, which is referred to as “strong boliver”, was adopted to mean a strong economy facilitated by a strong Bolivar hence giving a strong country (Moffett, Stonehill, & Eiteman, 2014, p. 181). However, the strength of Bs.F to date has been affected by black market and any other alternative payments that have been in use against the official Bolivar currency. Bolivar fixed exchange rate to the dollar has been increasing meaning it has been losing value to the dollar. This lead the government of Hugo Chavez to establish strict currency controls in efforts to counter budget deficits. The currency controls however have caused currency devaluation that has disrupted the economy. From 8th January 2010, the fixed exchange rate was Bs.F. 2.15= 1 dollar but by 13th February 2013, the fixed exchange rate was Bs.F. 6.3= 1 dollar (Trinkunas, 2014, p. 1). Between 2003 and 2013, there were a total of four devaluations of the Venezuela currency. Every devaluation generated more Boliver per dollar hence increasing more money to be spent by Venezuela government. A country will devalue its currency any time it cannot maintain the fixed market exchange rate (Boyes & Melvin, 2012, p. 408). To be able to maintain the market foreign exchange rate, a country utilizes its reserved foreign currency to acquire back home currency. Venezuela government was not able to buy back home currency since its value had dropped against the dollar. Devaluation enabled the government to buyback home country at affordable rate while at the same time promoting exports. By increasing exports, Venezuela was guaranteed of increased revenue since local monetary resources from oil exports increased significantly. This extended essay aims at explaining the timeline under which Venezuela currency has undergone devaluation. The essay will address issues on restriction, black market, increased prices, and devaluation effect on inflation. Timelines Hugo Chavez is the mastermind behind currency exchange controls. Hugo Chavez took office as the president of Venezuela in February 1999. While in office, crude oil prices plunged and four years later he was overthrown for at least 47 hours before fighting back for power through flaunting the constitution. Chavez was known for honouring and fulfilling Venezuela’s obligation to pay debts (Farzad, 2013, p. 1). To be able to meet his obligations, Chavez used devaluation to increase domestic monetary resources earned from oil exports. Venezuela’s economy is dependent on oil prices solely. During Chavez reign, the oil prices rose from double digit to $140 per barrel. However the country’s need for large volumes of dollars needed for imports caused a high economic imbalance that necessitated devaluation of the local currency (Farzad, 2013, p. 1). Devaluation was seen as the only way out in improving the country’s ability to service its foreign obligation as well as maintain a record of non-default on debts. Therefore in 2003 the Bolivar was fixed at Bs 1,600/$ and the government created GADIVI (Comision de Administracion de Divisas), the official government agency for the exchange of currency. This creation was intended to stem capital flight through exchange controls (CARACAS, 2013, p. 1). The currency control ensured that citizens and businesses were limited on the amount of foreign currency they can access. To be able to meet foreign currency needs above the allowed levels, the black market attracted more people than it had done before. The Bolivar traded at a fraction of its value in the black market thus making it favourable as a way to handle the shortage of essential goods imported into the country. The continued loss of Bolivar value to the dollar lead to the February 2004 Bolivar devaluation from Bs1,600/$ to 1,920/$ (Eiteman, Stonehill, & Moffett, 2011, p. 200). In March 2005, Venezuela experienced another devaluation, to Bs2,150/$. After 2005, there was no any major change in the currency till January 2008 when Bolivar was replaced by Bolivar Fuerte (BsF). The new currency deleted three zeros from the currency value; that is from Bs2,150/$ to BsF2.15/$. This forced all the business agreements and bank accounts to be adjusted into Bolivar Fuertes. The devaluation had fixed BsF at BsF4.30/$ for general economic and exchange purposes and BsF2.60/$ for food, medicine, and heavy machinery imports considered essential (Eiteman et al. 2011, p. 201). Five years later, in 2010, a massive devaluation of Bolivar, from BsF2.15/$ to BsF4.3/$ happened. A government organization was set to establish rates used by businesses to access foreign currencies like dollars to pay for imports. Transaction systems for Foreign Currency Denominated Securities (SITME) set the rate at BsF. 30/$ for a commercial business to have partial access to foreign currency. However, devaluations of 2008 and 2010 weakened Venezuela’s purchasing power than it was estimated. To reduce the effect, in January 2011 the BsF. 2.6 rate for imports was eliminated to remain with BsF. 4.3 exchange rate for every exchange. On 8th February 2013 the government further devalued Bolivar from BsF. 4.3 to BsF. 6.3. This was even more devalued in December same year for many things including tourism to BsF. 11.3. Early this year on 15th February 2014, Bolivar devalued though increasing tourism rate to BsF. 11.7 (Devereux & Pons, 2013, p. 1). The value was stabilised on 12th April 2014 to BsF.10.0/$. This was facilitated by the need to ensure that staple foods that had practically disappeared for five years were accessible since during the five years before 2014 devaluation, food prices had increased by 11% meaning the poor could not afford food at the present prices (CARACAS, 2013, p. 1). Current regime The last devaluations from 2008 were more of adjustment to fix Bolivar Fuerte for common financial and exchange resolves. With 2011 devaluation removing preferred rate, many analysts believe that by 2010, 40% of dollar transactions were at 2.6 rates preferred for food, medicine, and heavy machinery imports. On 8th February 2013, Venezuela government announced a devaluation of the currency to replace SITME system and to be used for transactions not concealed by CADIVI (Comision de Administracion de Divisas) (Technical line, 2014, p. 2). The new system involved devaluation by 46.5% with adjustments of Venezuelan Bolivar Fuerte from 4.30 per dollar to 6.30 per dollar for exports and 4.29 per dollar to 6.28 per dollar for imports (PWC, 2013, p.1; Boesler, 2013, p.1). The new devaluation was expected to have an impact on the multinational corporations trading with Venezuela since it affected travel expenditures and internet purchases of Venezuelans. The impact was expected on the evaluation of inventory cost involved with imports and the related cost of sales of the imports. This devaluation between 2008 and 2010 substantially decreased the purchasing power of South America’s richest oil exporting country (Eiteman et al. 2011, p. 201). Commercial businesses accessed foreign currency at higher prices compared to the previous devaluation periods. Alternative markets With many restrictions in the economy, Venezuelan people have had to come up with alternative markets that guarantee continued profits and sustainability of business ventures. The people operate with two markets, the “black” or parallel market and alternative currency “Cimarón”. The “Black” or Parallel currency market An apparel currency market is unofficial trade of foreign currency with home currency (Khan, 2009, p. 171). This foreign exchange market is often marked by unfavorable exchange prices and it is facilitated by home country’s restrictions on foreign currency trade. With a big black market, the government faces challenges in meeting the budget expenses. The market thus forces the government to consider devaluation as the only way to automatically cover budget deficit plus recover more local currency against the foreign currency. In Venezuela, the black market was a restricted market that used brokers to trade (Montiel, 2011, p. 747). The market was highly regulated by the Venezuelan government though serving a major economic position in Venezuela. The government set official exchange rates that did not meet the market demand for dollars. Black market rates, that aided businesses to access dollars necessary for imports of goods and services, thus became the main indicator of value changes in meeting market demand and supply for dollar. These rates were used in setting prices in general merchandise like grocery stores and restaurants. While government threatened business owners that they will lose their companies if prices keep increasing, business owners continued increasing prices to make up for the value lost when receiving discounted Bolivars. Government restrictions have not been able to mitigate the leading power on black market since black market trading is still estimated to me at $100 million per day (Eiteman et al. 2011, p. 201). To mitigate the effect of black market rates, the government responded to rapid decline in the Bolivar price based on black market operation by increasing controls and devaluations. The adjustments made life easier for struggling exporters hence increasing the currency purchasing power on oil sales. The alternative currency “Cimarón Cimaron was a round piece of stamped card board highly used in rural markets for exchange of goods and services (Eiteman, Stonehill, & Moffett, 2011, p.180). The idea was basically barter trade but Cimaron could not be exchanged with Bolivar Fuertes thus making Cimaron to have limited use. Devaluation and inflation In the case of Venezuela, a 31.7% devaluation was pushed by the growth in black market. The action aimed at claiming more Bolivares per dollar earned from oil as well as increase access to dollars necessary for purchasing imports. With a weaker currency, import cost was likely to go higher which meant the price of goods will go higher too. With high prices, cost of production in local industries was likely to increase thus forcing the country to depend more on imports. This could accelerate inflation rates and the only solutions remained putting more restrictions on the black market growth. Devaluation, which is the main regulation used by Venezuela government, is the main cause for the weakened currency. When Hugo Chavez ordered his Cabinet to announce devaluation from 4.3 to 6.3 Bolivares Foertes to the dollar, it was clear to Venezuelans that everything was going to be more expensive. People expressed their dissatisfaction in the government despite the fact that devaluation was more necessary at that time since black market exchange rate had grown four times the acceptable value. Black market is highly used by foreigners who want to buy local currencies as well as local who want to import goods into the country illegally. The goods traded in the black market are cheap thus affecting the economy more than devaluation itself. Conclusion Hugo Chavez considered devaluation as the only way out of increasing local currency value against foreign currency/ dollar. Through his leadership, the team worked to encourage exports while minimizing imports by encouraging local production. With devaluation, the commodities of Venezuela became cheaper for the countries and thus increasing local demand as well as international demands. Devaluation work to discourage imports by ensuring that other countries goods become more expensive to import. The locals thus reduced their demand for foreign goods thus remaining with the option of utilizing locally available goods only. Through Chavez regime, Venezuela got more near-term economic steadiness and more stability against dollars on oil revenues. This enabled the government in gaining more local Bolivars needed for local production. Through increased currency value, domestic spending for Venezuela government was increased based on increased social programs and state workers’ salaries. This trend needed to be sustainable through establishing a stable currency that can guarantee enjoyed social programs and workers’ salaries thus making analysis to predict in 2011 that the nation would devalue the currency further by weakening the exchange rates through Venezuela central bank. This prediction was confirmed by the 2014 devaluation that ensured tourism, a sector that yield more revenue for the government, valued at BsF.11.7, which was a good drive to a stable economy. References Boesler, M. (2013). Venezuela devalues its currency. Business Insider. < http://www.businessinsider.com/venezuela-Bolivar-currency-devaluation-2013-2>. Accessed 3 December 2014. Boyes, W., & Melvin, M. (2012). Economics. New York: Cengage learning. CARACAS, P. G. (2013). The not-so-strong Bolivar. 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Cambridge: Cambridge University press. PWC. (2013). Venezuela: Impact of currency devaluation and new exchange control regime. Pricing Knowledge Network Alert. < http://www.pwc.com/en_GX/gx/tax/newsletters/pricing-knowledge-network/assets/pwc-venezuela-currency-devaluation-exchange-control-regime.pdf> Accessed 3 December 2014. Technical line. (2014). Venezuela-reconsidering exchange rates used for remeasurement. 2014(05). 27 March 2014. Trinkunas, H. (2014). Toward a peaceful solution for Venezuela’s crisis. Brookings Education. < http://www.brookings.edu/blogs/up-front/posts/2014/02/20-venezuela-crisis-trinkunas> Accessed 3 December 2014. Read More