Bad Habits: The Case of the Bolivar’s Overvaluation

All governments have incentives to avoid depreciating the bolivar. But this habit harms our export capabilities and keeps Venezuela uncompetitive and vulnerable

The Venezuelan crisis isn’t new. Neither is our oil-dependent economy nor its low export profile outside hydrocarbons. And yet, while many of our export insufficiency’s causes are structural and complex, there’s one that never ceases to be contemporary: our currency’s overvaluation.

Overvaluation is a macroeconomic imbalance that occurs when real exchange rate appreciates: namely, when local currency becomes artificially strong in terms of a foreign one, making domestic goods more expensive compared to the imported ones.

In 2023, the bolivar’s overvaluation closed out between 500% and 600%, depending on the criteria used to calculate it, like purchasing power parity (PPP). PPP is based on the idea of converting one nation’s currency into another to purchase the same amount of products and see how they are priced in both countries. Simply put, it’s a measure that determines a currency’s real value by taking into account the exchange rate –the one you can see in Venezuela Central Bank´s Instagram account–, foreign inflation and national inflation.

Regardless of the case, in Venezuela imports are encouraged and exports are discouraged. Competition in the domestic market is difficult for products made in Venezuela. If other factors are added to this imbalance, it becomes practically impossible for Venezuelan products to compete in international markets, which is why only approximately a 11% of the country’s companies report that they’re exporting on a sustained or occasional basis, according to Escenarios Datanalisis’ Encuesta Multisectorial Empresarial.

Paradoxically, the average Venezuelan tends to have the bad habit of accepting or cherishing this imbalance. According to several studies we’ve conducted at Datanalisis, consumers show greater confidence as overvaluation persists. For example, it’s not a surprise that Venezuela se arregló (“Venezuela is fixed”) feeling came with the establishment of the pax bodegónica, a term dubbed by political scientist Guillermo T. Aveledo to describe the relative peace that the mild economic liberalization built in Venezuela in recent years. Similarly, the deep effects of the crisis have awakened nostalgia for the past and mystified the era that precedes the 1983 Black Friday devaluation. People yearn for Saudi Venezuela; for the tá barato, dame dos, the shelves full of imported products and the 4.30 exchange rate.

This is one of the reasons why many governments have prioritized exchange rate stability, at the expense of further overvaluation. In 2023 alone, the Venezuelan Central Bank allocated $4,799 million to avoid an increase in the exchange rate. The outlook for 2024 won’t be so different, with the easing of economic sanctions and the resources it entails. This has been demonstrated in the first weeks of the year, in which the Venezuelan Central Bank has already allocated more than $200 million.

It would be a mistake to believe that this policy is recent or that it began in 1999. Chavismo has only accentuated tendencies, albeit quite profoundly, that have existed for over a century. Venezuela has no economic policy but an electoral one: with the exceptions of the governments of Isaías Medina Angarita (1941-1945), Carlos Andrés Pérez in his second term (1989-1993) and Ramón J. Velásquez (1993). That’s why our insufficiency in diversified exports predates democracy. And it worsened: according to Harvard economist Ricardo Haussman, Venezuela’s recent loss of its already dwarfish economic complexity is only comparable to that of Chad, Eritrea, Djibouti and Timor-Leste – all which experienced war in the 1990s and 2000s. 

The crisis isn’t new. A crisis can’t start if you already are into another one.

But Venezuela never misses an opportunity to miss an opportunity. Our oil revenues’ severe drop in the last decade opened a restructuring window that no one took advantage of. It’s not impossible to grow with overvaluation, as long as it’s used intelligently. The clear example is the so-called Asian tigers –South Korea, Hong Kong, Singapore and Taiwan– which took advantage of overvaluation to acquire foreign machinery at lower costs and, with their high productivity levels, were able to boost their domestic industry to become what they are today.

The Asian experience leads us to think that Venezuela should sembrar la sobrevaluación, to use some familiar words. But the reality is that when these countries are analyzed, the focus should be on productivity and not on overvaluation. Our business productivity levels are far from outstanding, close to only 40%, according to the latest edition of Escenarios Datanalisis’ Encuesta Multisectorial Empresarial.

With almost non-existent financing possibilities, the country’s companies have learned to survive like feral children. In Escenarios Datanalisis, we’ve observed that, in recent years, the main source of financing in Venezuela has been cash flow or the net cash that enters into a company. This means that investment in productivity improvements isn’t accessible, becoming more an exception than the norm, unlike the rest of the world.

The credit outlook for 2024 will be more favorable, although concentrated in large companies of specific sectors. Had there been an expanded credit availability before the easing of sanctions, Venezuela could’ve started to sembrar la sobrevaluación. But this is speculation, because as we know this isn’t the current case. 

Currently the healthiest option is to reduce overvaluation via small devaluations, until the bolivar finds its equilibrium rate above Bs./USD 200. Among economists’ circles, this option is usually discarded because it would entail –they say– inflationary costs. What is usually ignored is that, as in many other cases, the problem lies more in the forms rather than in the substance. Venezuelan inflation responds to changes in exchange rate volatility, rather than to depreciation per se. If depreciations are small and constant, there’s no uncertainty in the exchange market –i.e., volatility is close to zero– and its inflationary impact is nil. It’s quite simple.

But the healthiest thing won’t happen. The overvaluation won’t be reduced for political and electoral reasons.

Political reasons because reducing it implies diversification of exports and economic democratization of the private sector, reducing the effects of rentism and thus both the power of a small group of powerful businessmen and the government’s control over most of the private sector. Although Venezuelan governments vary in their speeches, they’ve all followed this philosophy, from General Juan Vicente Gómez to Chavismo, including the 1950s military dictatorship and the AD-Copei democracy. 

And electoral reasons because it has never been convenient. Historically, the Venezuelan consumer has never wanted it. Therefore, paraphrasing Fiódor Dostoyevsky, on average every Venezuelan is really responsible for overvaluation to all men, for all men and for every consequence. It’s possible that just now there’s a greater public rejection of overvaluation’s reduction. Nostalgia is accentuated. This is no surprise if in the last few years our economy has contracted by 75%. It used to be better, yes. In a test, 04 is better than 01. What we usually don’t see is that both grades are failed grades. Probably at its historical peak, Venezuela had 05. Failed. Insufficient to develop.