The Dual Exchange Rate Shell Game

In announcing a sharp currency devaluation alongside a dual exchange rate, the Venezuelan government confirmed its longstanding M.O. of periodically regularizing entrenched but previously illegal governance practices. To seasoned observers, it’s anything but news that the government expects to receive more bolivars per dollar of oil exports than they are willing to pay bolivars per dollar of official imports. The official announcement merely makes a longstanding practice explicit.

For years, PDVSA has been selling oil dollars in the semi-legal parallel market and then the government – and its cronies – have been turning around and using the corresponding bolivars to buy dollars at the cut-price official rate. Now, it’s official.

On the margin, therefore, you have to say it’s a positive step: not in the sense that this has somehow become a sane exchange policy regime, but in the sense that they’ve added a measure of transparency and predictability to the pre-existing, batshit crazy arrangement.

An exchange regime that used to implicitly and covertly discriminate against the embattled private sector while generating structural advantages for an already hypertrophied public sector will now explicitly and overtly discriminate against the embattled private sector while generating structural advantages for an already hypertrophied public sector. That’s all.

To see why, lets follow the trail of a dollar as it snakes its way around Venezuela’s political economy. Say PDVSA sells $1 worth of gas to a gringo up north. That dollar enters Venezuela as a "Dólar Petrolero" and the government gets Bs.4.30 for it. If the government then wants to turn around and spend those Bs.4.30 abroad to import stuff for the public sector, it goes out at the preferential rate, Bs.2.60:$, so the same Bs.4.30 magically buy the government $1.65! Those 65 cents are a kind of officially sanctioned arbitrage margin, a windfall only available to those with official connections.

Say, on the other hand, that you’re a private entrepreneur crazy enough to want to sell the stuff you make in Venezuela abroad. When you try to turn $1 worth of widgets into bolivars, the government isn’t going to give you Bs.4.30 for them, it’s going to give you Bs.2.60. But if you then need to buy dollars to import Widget-making machinery with them, you’ll have to buy it at…Bs.4.30! Your Bs.2.60 buys you just 60 US cents…and the 40% gap is a tax in all but name.

The really funny part is that this is a regime Chávez defended, in his speech yesterday, partly on the need to diversify Venezuela’s export basket! But we should be clear: officializing the pre-existing two-tier exchange rate doesn’t do anything to help non-oil exporters. It just makes the structural disadvantages they face visible, that’s all.