The real exchange rate stood at VEB 7.8 per US dollar at the end of January
Booming oil prices have allowed the Venezuelan government to stick to its strategy of using a fixed official exchange rate (at VEB 4.30 per US dollar) despite high inflation. This policy exacerbates the economic imbalances and heralds a larger devaluation in the future.
The combination of a fixed exchange rate and an inflation rate that exceeds by far that of the United States and the rest of Latin American countries leads to overvaluation of the Venezuelan currency. In this unbalanced scenario, imported products are cheaper than the goods manufactured in Venezuela, which has resulted in skyrocketing imports.
Over time, this imbalance becomes unsustainable and financial authorities cannot meet the high demand of foreign exchange; production declines in the face of cheap imports and the government has no choice left but to devalue the currency.
Although the economic cabinet is aware of this “disease,” political goals prevail over wise decisions particularly in an election year. Everything suggests that devaluation will be implemented after the presidential vote in October this year.
The Venezuelan currency will reach high levels of overvaluation. According to a paper drafted by economic research firm Ecoanalítica, the real exchange rate at the end of January was VEB 7.8 per US dollar.
Ecoanalítica forecasts that the exchange rate will amount to USD 9.4 per dollar in December 2012, as a result of the inflation rate and based on the inflation rate of Venezuela’s five major trading partners. This is more than double the current exchange rate of VEB 4.30 per US dollar.
Translated by Gerardo Cárdenas