Venezuela: Parallel dollar experiences sharp volatility amid government efforts to stem soaring inflation
January 13, 2017
The government was forced to postpone the 100 bolivar note withdrawal multiple times since the shock announcement on 11 December. The deadline was most recently moved to 20 February as the shipments of larger denomination bills—up to 200 times larger than the 100 VEF—were delayed. The measure, supposedly aimed at targeting organized crime groups hoping to destabilize the economy, was postponed from its original 72-hour period as logistical difficulties and social unrest struck the country. The VEF 100 banknote, which constitutes over 75% of the country’s money supply in Venezuela’s mostly cash-based economy and is currently the largest bill in circulation, has become virtually worthless due to ballooning inflation. The collapse in value of 100 VEF bills reflects in part the structural imbalances plaguing the Venezuelan exchange rate system and the economy at large.
Taking a look at exchange rate movements since the start of the year, on 13 January, the bolivar traded in the parallel market at 3,511 VEF per USD. The result marked a 1.7% appreciation from the same day of the previous month but the parallel dollar has lost 9.9% of its value since the start of the year. In addition, the figure represents a massive 75.3% depreciation over the same day last year. The bolivar traded in the parallel market has experienced extreme volatility since October and saw a stark depreciation in Q4 2016 due to a reduction in the Central Bank’s reserves requirement, an increase in monetary financing to PDVSA and various political developments.
Panelists participating in the LatinFocus Consensus Forecast see continued pressure on the parallel dollar and project a non-official exchange rate of 5,281 VEF per USD by the end of 2017. In 2018, the panel sees the non-official exchange rate depreciating further to 6,274 VEF per USD.
Meanwhile, the Dipro exchange rate—the first tier of the exchange rate system—remained unchanged at 10.00 VEF per USD on 13 January. According to the government, the Dipro is used exclusively to purchase essential goods such as medicine and food products and can face devaluations when authorities deem it necessary.
The free-floating Dicom—the second-tier of the system—has remained broadly stable since early July, after having depreciated continuously since its introduction in March 2016. On 13 January, the Dicom traded at 676.2 VEF per USD, depreciating 0.7% from last month and 0.3% since the start of 2017.