Imagine a country which needs to maintain a dual market where US dollars--admittedly pretty crappy pieces of paper--have to be rationed in such a way that the government maintains an official rate which it gives to favoured entities and another which pervades the unofficial market. Yes, this situation describes Venezuela, where the official rate and the parallel market rate are showing even greater signs of
divergence:
Venezuela will allow a free-floating parallel currency market to continue but is preparing measures to ensure the exchange rate remains within a "rational" range, a senior government source said on Tuesday. President Hugo Chavez's government has promised action to control the parallel market after the bolivar currency plunged to a historic low of more than 8.0 to the dollar last week.
Volumes have dropped as traders await the measures, and there has been speculation Chavez would outlaw the market all together. "We are working on a methodology which will help to keep the runaway parallel exchange price at a rational rate," the source, who asked not to be named, told Reuters. "But there are no plans at all to eliminate the parallel market. That is totally false."
The source said one option might be some sort of price band for the parallel market, linked to the price of local bonds traded abroad. The president of the Venezuelan parliament's finance commission said on Monday that lawmakers would soon create tougher currency exchange rules to help slow the bolivar's depreciation.
Chavez also declared war on currency and price speculators at the weekend. The bolivar currency has lost about 25 percent in value on the free-floating market since a January devaluation fixed two official rates of 2.6 and 4.3 per dollar. Because of restricted access to officially-priced dollars, more than half of imports rely on the parallel market, local economists say. The convoluted system causes macroeconomic distortions, creates opportunities for making money from the different rates and fuels inflation.
Hugo, what does it say for your brand of socialism when (a) people prefer something as pathetic as the dollar to your currency and (b) exchange rates that prevail in the real world indicate that the currency named after the great Simon Bolivar is dropping like a rock?
Imagine a country which needs to maintain a dual market where US dollars--admittedly pretty crappy pieces of paper--have to be rationed in such a way that the government maintains an official rate which it gives to favoured entities and another which pervades the unofficial market. Yes, this situation describes Venezuela, where the official rate and the parallel market rate are showing even greater signs of divergence: