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Can Venezuela Currency Devaluation End Black Market Trade?

Can Venezuela Currency Devaluation End Black Market Trade?

Venezuela’s government is planning to nearly double the fixed official exchange rate for the country’s currency. However, the move is unlikely to end the black market economy the fixed rate has created — an economy that has been capitalized on by a myriad of criminal groups. 

On January 22, the government of President Nicolas Maduro moved to increase the official dollar exchange rate for the bolivar by 45 percent, meaning it will rise from 6.3 to 11.3 bolivars per dollar for citizens who buy their dollars on an auction market, reported El Nuevo Herald. Only importers of essential products like food and medicine will continue to have access to “preferential” dollars at the previous exchange rate, reported the BBC.

The country’s oil minister, Rafael Ramirez, said the measure was aimed at containing the country’s economic crisis, which has involved rampant inflation and a scarcity of basic products, reported El Nuevo Herald. Receiving more bolivares per dollar will theoretically allow the government to begin paying back its debts, according to the BBC.

InSight Crime Analysis

With Venezuela’s fixed exchange rate, the official dollar value of the bolivar does not change, but the number of dollars available at this rate is not enough to satisfy demand. In this context, a parallel black market economy has sprung up, in which the exchange rate can be up to 10 times higher, giving the dollar extremely high purchasing power. Criminal groups have long capitalized on this black market and the discrepancies in exchange rates.

The high demand for dollars has given rise to criminal groups that falsify documents for access to dollars, as well as an influx of counterfeit dollars from Peru — the world’s largest producer of fake dollars — according to official sources who spoke with InSight Crime. While the recent government move will also double the number of dollars available in the auction system, this is unlikely to be enough to stem the illicit trade.

SEE ALSO: Coverage of Venezuela

The currency black market has also helped fuel a booming contraband trade, which provides criminal groups with a convenient way to launder drug money and generate new funds. A broad range of products are smuggled in this way, from petrol to alcohol and even contraband beef, which has been linked to the Revolutionary Armed Forces of Colombia (FARC), the Rastrojos and the Urabeños. Even with the devaluation, while the discrepancy in official and unofficial exchange rates remains, this contraband smuggling is also likely to continue.

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