Dollar Horror

By Adriaan van Ginkel

Finally, after more than  a month waiting for announcements that would be announced announcing what was to be announced concerning the salvation of the Venezuelan economy (not my words but president Maduro’s), details came out yesterday afternoon about the new official exchange system for the bolivar. Called SIMADI, or Marginal (!) Currency System. Ain’t kidding, that’s the baby’s name. 

Now a “quick” explanation for those who don’t really know what is going on with the economy in Venezuela. Which I can’t blame because the government sort of tried to find new paths in the land of economics, and became hopelessly lost. Take a seat; it will take a time to read what is coming.

Since 2003, free exchange of currencies is forbidden in the country. From that year on, there exists an exchange rate that is fixed and controlled by the state. Hugo Chávez at that time said it was a measure to stop capital flight, putting the state as the only one allowed to receive and spend foreign currency. Since more than 90% of the nation’s income comes from oil, and oil can be exploited only under direction of the state oil company PDVSA, the system seemed rather watertight. The US greenback was bolted at a fixed exchange rate, the central bank was the only institution allowed to have foreign currency (and under control of the president himself). Companies had to ask for permission to buy dollars to be able to import goods. Travelers had to do the same to exchange their bolivars into a fixed amount of foreign currency. Wages and prices of most basic goods, including that of gasoline, were fixed for years to come, and the impression was created that the economy was stable, prices stayed the same, and a score of stable years followed during which the Bolivarian Revolution, with its planned economic system, had time to impose itself on society in a peaceful, orderly way. 

Or so it seemed. The bolivar in fact became an overvalued currency, and the underpriced goods became the source for a booming smuggler trade right into neighboring Colombia. But when I arrived in 2006, Venezuela seemed a rather cheap country where you could live fairly well without spending too much. I was impressed by the full shelves in supermarkets, and the low pricing of it all.

In 2007, pushed by zealous leftist advisers, Chávez decided to rock the boat. A transformation of the capitalist economy into a “socialist” one was announced shortly after the president was reelected with an ample majority of votes. The first distortions and shortages appeared that were answered to by the government with an iron fist. In- and exportations became the sole privilege of the state. All ports, sea and air, were militarized. Wave after wave of expropriations and confiscations of private enterprises and estates followed. The result was a steep decline of domestic production, as most confiscated factories and estates simply stopped producing. But that didn’t deter Chávez from continuing smashing the “capitalist bourgeois” economic structures with his red sledge hammer. ¡Exprópiese! became the war cry of the Revolution. And meanwhile, the economy became more and more dependent on oil revenues that reached a staggering 97% of the nation’s income. With soaring oil prices, Chávez apparently felt invincible. And he went on with his transformation of the economy into a socialist paradise.

The straw that apparently broke the proverbial camel’s back, in 2010, was the sudden prohibition by the government of the broker companies that had till then made their business buying and selling a “grey” dollar, or permuta, that acted as a tolerated, not permitted way of buying unlimited amounts of dollars at a rate slightly higher than the official one. It was the only escape valve for countless Venezuelan companies to keep importing from abroad and keeping the shelves full of goods. When that valve was closed down – and the brokers disappeared behind bars – the black currency market was born almost immediately. The first serious shortages of goods became visible, as well as increasing distortions between wages and prices. The difference between official and black exchange rates grew and grew. Minimum wages were increased to appease the Venezuelan worker, and the state attempted to knock prices down by force and subsidies, initiating yet another wave of expropriations and jailing, as well as rising inflation. But with goods getting scarcer and scarcer – from car parts and machinery maintenance to milk and

butter – pricing was answering to market mechanisms. So, if anything of quality was available, it was expensive, of course. The state tried to answer by importing cheap goods from China on a massive scale, but of notoriously bad quality. Try driving your car with spare parts that have to be replaced every 6 months, like I did. 

Are you still reading? OK, don’t blame me for the monstrously complex problem Chávez put his country in, having no clue what economics are about.

Thus, many shop keepers, in order to avoid getting sanctioned by the state, simply stopped selling certain goods. If you have to resort to the black market dollar to get goods (since Venezuela now produces squat, really), you have to price them higher than allowed, or else sell them at below the cost, generating losses and causing bankruptcy or expropriation. I will let your imagination work to picture the heyday desolation in many streets and shopping malls in the cities. Too many shops are closed down by their broke owners or the authorities, or show empty shelves and employees with nothing to do. 

The state started the printing press to flood the streets with money and counter the incontrollable rise of prices. You can probably guess what that did to inflation. In 2011, Chávez was steadily losing popularity and many consciences had to be bought back into the revolutionary folds with cheap goods and free social housing in order that the opposition didn’t win the elections. Chávez did in fact win the elections, shortly before dying of cancer, but it was clear that the Chavist movement had lost millions of votes that kept the Bolivarian government in place for years. As well as billions of dollars from the national treasury, many of which ended in unauthorized pockets – rampant corruption became visible. A rising number of Venezuelans have grown disappointed with the course of the Revolution – you cannot make a revolution on an empty

stomach and purse – and although the opposition does not convince being the alternative to the current regime, and Chávez keeps being a rallying point for his followers even after death, it has become less and less clear what the future of the Bolivarian Revolution would be. Venezuela needs dollars, urgently. It is again nearing a default in her payments coming March, and doesn’t know how to fill in the gaping holes left by overspending and plain thievery.

Now, what has this all to do with me, as a common resident in this country? Scarcity hasn’t receded a bit. Chávez’ successor Nicolás Maduro has again taken out the red sledge hammer of his predecessor and taken to confiscations, incarcerations, sanctions and expropriations. He throws dirt at the US in the best Fidel fashion. He tries to appear big and strong. Only thing is, he stands alone. His new monetary scheme is already heavily criticized by renowned economists. Although the black market dollar hasn’t really risen, as details about the new exchange rate for the grey dollar have yet to be published – money changers are holding their breath – it is already apparent that whatever success the new scheme of (again) three different exchange rates to the dollar will have, it might be too little too late to stop the hyperinflation, the price spiral and the scarcity of everything. The coming days might become crucial for the fate of the Chavist regime and for the near future of Venezuela. 

The only real advantage for me as an average Foreign Joe in this country, is that I can now legally exchange my bolivars in euro’s and keep my bank account in Europe at a level. For which I am grateful, to be frank. Now, Maduro has to be a good boy for once, and publish the starting exchange rate of SIMADI as soon as possible. 

Just for once, Nicolás, show the world that you are a president of some weight. Just for once. I need to survive in this country for a while more. 

Have a great week and till next Wednesday!

© Adriaan van Ginkel 2015