Venezuela devalues bolivar exchange rate

The BBC is reporting that Venezuela is devaluing its currency. The devaluation of the bolivar is on an “official” exchange rate that can be used for certain “priority” imports.

Venezuela essentially has a dual-currency policy – an official exchange rate for imports that are prioritized by the government (to-be about 2600 bolivar per dollar, up from 2147), and an unofficial exchange on Forex (at about 6000 bolivar per dollar). The basis for the policy of maintaining a “priority” exchange rate versus a traded exchange rate is to promote Venezuela’s exporting industry.

According to the article, Venezuela is facing 25% inflation. Decreasing a rate of exchange fixed to foreign currencies increases the amount of foreign currency obligations — e.g. if Venezuela had $47 billion in foreign denominated debts at 2147 bolivar per USD it would have had obligations of ($47bn x 2147 bolivar/USD = ) 100,909bn bolivar. Its debt in bolivar after the change in exchange rate would be $47bn x 2600 bolivar/USD = 122,200bn bolivar.

However, while Venezuela’s debt may have gone up, the failure to lower the fixed exchange rate so as to acknowledge the perceived value of the bolivar based and over-supply and under-demand (i.e. roughly what a hypothetical floating bolivar would probably trade at), Venezuela risks an unsustainable foreign exchange reserve to preserve the USD-bolivar exchange rate.

Incidentally, the dual-currency system is probably contrary to the principle of national treatment of the WTO – which principles are founded in part on observable economic phenomenon of growth.

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