What Caused Venezuela’s Currency to Fall So Far?

The official exchange rate of Venezuela’s Bolivar to the US dollar is 10.1075 to 1 but this is misleading. The real rate at which anyone will buy the Bolivar with the dollar is on the black market and there it takes 5,100 to purchase one greenback. Once upon a time the Bolivar was on par with the US dollar. What caused Venezuela’s currency to fall so far?

The Historic Slide of the Bolivar

The Bolivar has been Venezuela’s currency since 1879.  It was fixed to the US dollar in 1934 at 3.914 bolivares to one dollar. That exchange rate was corrected downward over the years but the Bolivar was generally considered to be the most stable and internationally accepted currency in Latin America until Black Friday in 1983. By 2003 exchange controls were instituted and it took 1600 to buy a US dollar. Much is made of the current situation and of mismanagement and corruption by the Chavez and then Maduro regimes but part of the fall of the bolivar began long before Hugo Chavez took power. Nevertheless how is the bolivar doing today?

Free Fall

The fact of the matter is that there was some degree of control of the bolivar until the last few years but not anymore. Bloomberg Markets writes about Venezuela’s 99.5% currency plunge.

President Nicolas Maduro has overseen an unprecedented depreciation in his country’s currency since taking office, with the bolivar now down 99.5 percent to 5,100 per dollar in the black market that everyday Venezuelans use. The sharp decline has wiped out savings and made buying imported goods all but impossible, helping fuel the anger directed at the government in street protests that have turned deadly in recent weeks. While Maduro has raised the minimum wage almost 20 times during his tenure, it’s still the equivalent of just $40 a month.

The most recent cause of the fall of the bolivar is the fall in the price of oil. Venezuela has the world’s largest proven oil reserves and is an oil exporter. When oil prices fall, so does the bolivar. However Russia is an oil and gas exporter and so is Colombia, the country next door to Venezuela. Colombia’s peso is about 40% weaker than when oil was at its peak and Russia’s ruble is down about 50% and remember that Russia is dealing with sanctions levied by the EU and USA because of its annexation of Crimea and meddling in Ukraine. Why are things so much worse in Venezuela?

From Economic Star to Sub-Saharan Conditions

Exporting a lot of oil is not enough to keep a nation’s economy going, especially when the price of oil falters. CNBC notes that nobody cares that Venezuela just announced a new exchange rate.

“Ultimately, this is a fool’s errand, because the government fails to address the major economic issues facing Venezuela,” said Jason Marczak, director of the Latin America Economic Growth Initiative at the Atlantic Council’s Adrienne Arsht Latin America Center. “Venezuela has launched a number of exchange rates over the years, and none of them have kept pace with the black market.”

Business activity in Venezuela has virtually collapsed, with many companies and skilled workers leaving the country, Marczak said. “This is a country that was an economic star in the region, and now we have a country with sub-Saharan conditions in our hemisphere.”

What has caused Venezuela’s currency to fall so far in the last twenty years as opposed to the previous twenty years has been the willful destruction of private business and industry by strong men bent on retaining power at all costs. The situation is likely to continue to worsen, if that is possible, until changes occur at the top and private investment and initiative are rewarded again.