Venezuela Launches New Foreign Exchange to Plug Budget Deficits

Venezuela has launched a new foreign exchange in a desperate attempt to plug budget deficits amid the economic chaos created by the tumbling oil prices. The new exchange will …

The value of the Venezuelan bolivar has plummeted in the last year.

Venezuela has launched a new foreign exchange in a desperate attempt to plug budget deficits amid the economic chaos created by the tumbling oil prices. The new exchange will let the country devalue its currency the bolivar, although the extent of any devaluation depends on the amount of dollars the government allows to pass through the exchange.

Further devaluations of the local currency might worry some foreign multinationals, particularly those owned by Americans. According to CNN, PepsiCo took a US$126 million hit last year because of the sharp decline in the bolivar’s value.

It seems the sudden drop in oil prices has caught Venezuela off-guard. The socialist country is now turning to China and Russia to protect its economy. Another worry is rising inflation and the scarcity of consumer products on supermarket shelves.

The new exchange will increase the share of bolivars in government coffers, but it is premature to estimate how helpful this would be in terms of lifting the country out of the crisis.

According to Reuters, brokerage firms say the rate in the new exchange could begin at around 120 bolivars per US dollar, substantially lower than the black market rate but still more than double the lowest existing rate.

A year ago, the unofficial exchange rate of the bolivar was 84 bolivars for $1. Today, it’s 186 bolivars to the dollar, according to dolartoday.com.

Venezuela’s economic problems are blamed on its over-reliance on oil export and the expanding social welfare programs. Reports say the government needs oil to trade at around $120 a barrel to break even. At the moment, it is only just above $50.

Moody’s recently downgraded Venezuela’s government bond ratings to Caa3, one step above default. This came after President Nicolas Maduro toured the OPEC countries, calling on member states to cut back on production. But they refused, allowing oil prices to slide further downwards.

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