Caracas Chronicles

The other day a friend of mine went to CCCT — Caracas’s fashionable mall, as of 1983 — looking for a couple of cellphone chargers. It’s not hard: everywhere you look in CCCT there’s a cellphone store.

Soon he noticed something peculiar: in some stores, they wouldn’t give him the price straight-away. The clerk would first discretely  check the Dolar Today app for the current black market rate, make a few taps into a spreadsheet, and only then give him a price.

He ended up paying Bs.15,000 for each charger. More than half the basic monthly minimum wage or a social security pension. Some were going for 90,000. I paid 4,000 for a charger in August thinking I was getting ripped off. Actually, at the black market rate, we both paid a reasonable $4.

It’s the kind of real-time pass-through you read about in stories about the Bolivian hyperinflation.

That hyper-fast pass-through of the black market rate was already common for some kinds of stores and transactions; mainly for relatively expensive items like appliances, cellphones or jewelry. It’s now making its way into even the simplest imported goods.

It’s the kind of real-time pass-through you read about in stories about the Bolivian hyperinflation. Clerks in every kind of store would be constantly on the phone, getting new prices from their suppliers or asking for exchange rates.

It’s oddly fitting that my friend told me his story during a coffee-break at Ecoanalitica’s end of year conference last Tuesday. As a joke, the host would give out the most recent DolarToday rate in-between speakers, worrying and bumming the shit out of everybody. It’s also fitting that just a few minutes after that coffee, Ásdrubal Oliveros told the audience that consumer prices are adjusting faster and faster to changes in the black market rate.

The thing to worry about is not the DolarToday rate. Even though it’s driving prices higher by the hour, it’s really a lagging indicator: more consequence than cause.

The real culprit is the mostly ignored DIPRO rate, at a delectable 10 Bs/$. Of all the numbers shown in the Ecoanalítica conference —  and there were tons of scary numbers — the ones that scared me the most where 88.7%, and 64.9.

They are giving away dollars for what in the streets would only buy you two sips out a can of Coke.

Ecoanalítica estimates that the government is transacting 88.7% of public sector imports at 10Bs/$. They put the average rate at which the government sells its own dollars, the fiscal exchange rate, at 64.9Bs/$. Compare that with the exchange rate for private imports, which they estimate at 714Bs/$, or the rate for the whole economy, at 310Bs/$.

Those gaps are criminally insane. They are giving away dollars for what in the streets would only buy you two sips out a can of Coke.

As long as the government keeps selling its dollars at insane asylum prices — or, if we’re honest, just giving them away — they’ll need to print ever more money to cover the fiscal gap. It’s a death spiral. And that’s the real source of the high inflation: monetization of the fiscal deficit.

This is not news.

As we have written before, Venezuelan economists first started to worry about hyperinflation in January 2014, when Maduro announced that the CENCOEX rate would stay at Bs.6.30 for the whole year, which was akin to telling the Central Bank to “keep the printing presses well-oiled and working 24/7. It’ll soon be two years of that, and we’re more than ever firmly on the hyperinflation path.

A minimally-sane government would close that gap, sell their dollars at a more realistic level and reap the benefits of the devaluation in higher revenues. (An actually competent one would just lift the exchange controls, but let’s not get carried away, let’s work with what we have; the leprechauns won’t give away their pots of gold.)

But this government can’t even do the devaluation part right, not even after two tries.

Some economists see devaluations as a sort of huge vacuum cleaner that would suck up billions of bolivars out of the economy by virtue of the Central Bank taking more bolivars for each dollar, and that vacuum cleaner would balance money demand and supply.

I think a devaluation by itself would do little if it doesn’t reduce the gap between the different rates. Reducing the gap would not solve all our problems, of course, but it would at least allow the government to print less money, and slow down the rate at which we add fuel to the hyperinflationary fire.

But this government can’t even do the devaluation part right, not even after two tries.

First, they created the SIMADI rate and parked it close to 200Bs/$ in 2015. Then they moved it to the current 650Bs/$ in 2016. Both times they kept giving away the bulk of their dollars at 6.30Bs/$ and later at 10Bs/$.

Prices in the economy rose along with the SIMADI rate, but the government didn’t see a corresponding increase in its revenues. All pain, no gain.

Between 2015 and 2016, the fiscal exchange rate tracked by Ecoanalitica devalued by 47%, while the exchange rate of the whole economy devalued a lot more, by 74%. After the devaluations, the government was left with less money — in real terms — to pay for stuff. The gap grew larger with each try.

A devaluation in an oil economy that hurts the domestic fiscal balance: unheard of.

A devaluation in an oil economy that hurts the domestic fiscal balance: unheard of. Somehow they managed it, though. A thing worthy of a “special case” box in a basic economics textbook, or at least a very long and sad footnote.

Oliveros said they’ve heard rumors the DIPRO rate could be devalued to 50Bs/$ in early 2017. That would still be too low, and so would 100.

But the nominal rate doesn’t really matter. Within the government’s stupid framework, what matters is the gap between the lowest rate and other rates in the economy, the proportion of dollars the the government sells at the lowest rate, and how much the lowest rate lags the others.

I don’t have hopes for this government to change course. They’re intimately convinced that what they’re doing is working. No, really. “We’ve survived two tough years doing this, kept the party going. Why not a third? We can hang on until oil prices recover”.

As for you and me, ease up a little on the morbid and masochistic habit of checking Dolar Today every other minute. Whether they announce it tomorrow or in January, when they make changes to the exchange controls the one to watch is the other one, the DIPRO.