Caracas Chronicles

The head of Venezuela’s economics team, Miguel Pérez Abad announced, a new foreign exchange system with two official rates. If you love weird new acronyms, the minister has a treat for you.

The stronger rate will be called DIPRO, which Pérez Abad explained stands for Tipo de Cambio Protegido (don’t ask why it’s DIPRO and not TIPRO, we don’t know either). This rate will start at 10 VEF/USD, so basically it’s just a new name for the old Cencoex rate. Except this one “will be progressively adjusted over time”. Or, um, so they said.

In theory, DIPRO will be the prevailing rate for imports of essentials goods such as food and medication, and the raw materials for their production; social security pensions for Venezuelans abroad; imports related to sports, health and culture; and Venezuelan students abroad. (In practice, we know what these extra-cheap dollars really get used for. )

The second and weaker rate it’s called DICOM, for Tipo de Cambio Complementario (just… don’t). This will be a floating rate, and will open around 206 VEF/USD.

No, really, it will float, free. Free as a bird. The minister said it would!

DICOM will be used for everything not included in the DIPRO: imports of non-essentials goods; foreign currency for Venezuelan travelers (the cupos remain the same); currency sales for diplomatic missions; proceeds from exports; basic industries and other non-oil entities; foreign oil companies and sales of hydrocarbons.

We will know more once the Convenio Cambiario between the government and the Central Bank is published tomorrow. Several important details were missing from the announcement. We don’t know, for example, at what rate will PDVSA sale the bulk of it’s dollars.

In the next few days we’ll see if the DICOM really floats. And then, for how long. Remember how SITME, SICAD 2 and SIMADI were all supposed to float freely? The government has a big credibility hole to climb out of on this stuff.

The first indications are that Pérez Abad took one look at the broken windows in the house of a guy going bankrupt to pay heating bills and…decided to change their names.

With price and exchange controls in place, having two rates with one floating and the other anchored at a level 95% lower is simply suicidal. It “legalizes” a massive increase of controlled prices, and large price distortions. And because the government continues to sell the bulk of its dollars at a rate much lower, it does nothing to address the enormous deficit that drives central bank money printing and, with it, runaway inflation.

As it stands right now, this does the opposite of what economic textbooks say about devaluations in oil-rich economies: a devaluation that increases the fiscal deficit. It’s quite an achievement.