Is the exchange rate fixing really a big risk?

Posted: Sunday, February 09, 2003 - 3:14:09 AM By: Robert Rudnicki

The government's decision to fix the bolivar's exchange rate at Bs.1,600.00 / Bs.1,596.00 could turn out to be a big gamble in the government's fight against the effects of the Coordinadora Democratica work stoppage, particularly if they drag on for several months. 

The government claims it had no choice but to impose trading restrictions, and this opinion has been supported by Central Bank of Venezuela (BCV) directors, as capital flight was spiraling and international reserves were falling by around $60-70 million per day as the BCV fought in vain to support the plummeting currency. 

The value of the bolivar was also hit by rumors of an imminent devaluation as the government was allegedly looking at options to balance its budget after huge losses of revenue due to Petroleos de Venezuela's (PDVSA) low production levels since the work stoppage began on December 2. 

So few can argue that something needed to be done, but the question is will the new measures just mean the nation's economy falling out of the frying pan and into the fire?

Opposition leaders argue that the controls will lead to inflation, corruption, black market trading and possible shortages, and this seems at least partially true as the US dollar is now buying as much as Bs.2,500.00 on the black market.

However, faced with such serious economic problems, inflation and corruption are likely to be risks the government is prepared to take. 

• As for shortages, they already exist in most Venezuelan towns and cities, so will they get any worse?

It seems unlikely at this stage, but it is obviously too early to say. At least if the bolivar is kept at a lower level then Venezuelans will still be able to buy the imported goods that they can lay their hands on, as if the bolivar shot up to around Bs.2,000.00 to the dollar many wouldn't be able to afford even the most basic of supplies.

The imposition of fixed prices on food, fuel and medicines also seems a solid enough tactic for making sure the poorer Venezuelans can weather out the storm, providing it doesn't last too long.

So all in all the measures look to be stacking up pretty positively for the government, but the threat of restricting the supply of dollars to the supporters of the opposition strike remains troubling. As the Venezuelan-American Chamber of Commerce (VenAmCham) pointed out this week, this could turn into a witch hunt. If this were to happen then the repercussions for the economy could be huge.

• Punishing the owners of businesses that supported the stoppage is also punishing their employees and their families. 

Many businesses are already on the brink of bankruptcy and such pressures could push tem over the edge, costing many their jobs. Hopefully this threat is just hot air and not something that the President will seriously be pursuing, if not the consequences could be grave.