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- The Saga of t*rs llemezuelan Belivar Fuerte Una economia fuerte, un bolivar fuerte, un pats fuerte. Tianslation: A strong economy, a strong...

This question was answered on Jan 21, 2013. View the Answer
CASE Q{.IESTIONS
L Why must a country's currency be devalued? What is
failing in the economy?
2. What benefit did the Venezuelan regime in power
gain from the repeated devaluation of the bolivir?
3. By the time you read this you will know whether the
analysts predicting the future of the bolivar were correct.
How did they do?
- The Saga of t*rs llemezuelan Belivar Fuerte Una economia fuerte, un bolivar fuerte, un pats fuerte. Tianslation: A strong economy, a strong bolivar, a strong country. TheVenezuelan bolivar dropped in the country's parallel currency market Monday afier the government's official devaluation late last week. The value of the bolivar fell to VEF9.25 to the dollar, according to LechugaVerde.com, a website widely used by locals to track the rate of the Venezuelan currency in the black market. -"Venezuela Bolivar Falls In Parallel Market After Devaluation," by Kejal Vyas,Wall Street Journal, January 3,201t. Unfortunately for the Venezuelan people, their currency, the Venezuelat bolivar fuerte, had proven anything but strong. On January 1,,201,1, President Hugo Chiivez devai- ued the bolivar fuerte-the "strong bolivar"-again, the fifth time in the past decade. Current Regime This last devaluation was more of an adjustment.The previ- ous devaluation, January 1, 2008, had fixed the bolivar fuerte (BsF) at BsF4.30/$ for general economic and exchange purposes, but a preferred rate of BsF2.60/$ for food, medicine, and heavy machinery imports considered essential.l The 2011 devaluation eliminated the preferred rate, moving all import transactions to BsF4.30/$.This was not a minor elimilation, as many analysts believed that in 2010 alone roughly 40o/o of. all dollar-transactions were aI the 2.6 rate. Even with this magnitude of change the boli- var fuerte is still considered overvalued; the black market rate of BsFS/$ was the current exchange as the devalua- tion occurred.The bolivar's history is detailed in Exhibit 1. -il$fEII The Venezuelan Bolivar's Decline, 1 996-201 1 Venezuelan Bolivars fuertes/U.S. dollar (VEF/USD) 4.50 4.00 3.50 January 1, 201 1 elimination of prefened rate for import essentials January 1,2010 > devaluation to BsF4.30/$ March 2008 bolivar renamed bolivar fuerte and 3 zeros eliminated to BsF2.15/$ 3,00 2.50 2.AO 1.50 1.00 0.50 February 2004 devaluation to Bs],920/$ March 2005 devaluation to Bs2, l50/$ \ CADlVl, and fixing of botivar at 8s1,600/$ Hugo Chavez takes office as President of Venezuela in February 1999 Two weeks of capital controls in January 2003, creation of _______--* \ 0.00 *"$"$"$.$.$"1\.,1".$-3r$.$'$s$"$*$.*.$$ t"Venezuela to Devalue Currency," by Keial Vyas and David Luhnow, Wall Street Journal,December 31,2070.
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Even this fixed exchange rate was subject to significant restrictions. CADIVI (Comisi6n de Administraci6n de Divisas), the official govemment agency for the exchange .rf currency, limited Venezuelan residents to an annual total of $3,000 when traveling abroad, and $400 for Internet- rased electronic purchases.Although the country had man- €ed to go a number of years between devaluations, the 1008 and 2010 devaluations were clear losses for the pur- ;hasing power of the richest oil exporting country in South .\merica. The fight by the Venezuelan government and the Venezuelan Central Bank (BCV) to assert its indepen- lence from the manipulation of the outside world, specifi- :ally the United States, knew few bounds. When Hugo Chitvez signed into law the currency reform measures in \lay 2010 to stop speculation of any kind, including foreign .-urency bonds in the form of equity securities on the Venezuelan stock exchange, it was made very clear what :he objective was:2 Whoever, in one or multiple transactions, within one calendar year, without intervention of the BCV, buys, sells, or in any way offers, transfers, or receives foreign currency between an amount of 10,000 dollars to 20,000 dollars, of the united States of Ameica or their equivalent. ' ' will be sanctioned with a fine valued at double the amount of the operation, in bolivars. ChAvezhad repeatedly devalued the bolivar during his reign in office. In 2A03, after the imposition of currency ;ontrols, the bolivar was fixed at Bs1,600/$. In February 1004, the bolivar was devalued from 8s1,600/$ to Bs1,920/$. In 2005, it experienced another devaluation, to Bs2,150/$. In January 2008, the bolivar was replaced with rb,e bolivar fuerte (BsF) and re-denominated, knocking off three zeros from the currency value, from Bs2,150/$ to BsF2.15/$. All bank accounts and business agreements and contracts were instantly re-denominated into bolivar tuertes by decree. January 1,2010, a full five years later, saw the bolivar devalued massively, from BsF2.15/$ to BsF4.3/$. Of course this did not eliminate a third exchange rate in effect, the Tiansaction System for Foreign Currency Denominated Securities (SITME). another government organization established to set the rate used by businesses to gain access to critical hard currency like the U.S. dollar in order to pay for inputs and other imported components. That rate, set at ar even more costly BsF5.30/$, allowed commercial business to gain limited access to foreign currency-at a very high price. Alternative Markets TheVenezuelan people had struggled so long with an arti- ficially valued currency that they had become some of the most adept in the world at working through black markets and altemative markets. The "black" or parallel market was a semi-legal market that used brokered desk trading, yet was still not formally authorized much less regulated by the Venezuelan government. The black market for bolivarq quoted in newspapers until recently, served a major purpose. Although the gov- ernment set the official exchange rate, it still did not meet alt of the demand for dollars even at that rate. As a result, the black market rate became the key indicator of value changes from supply and demand. Grocery stores, restau- rants, merchants of all kinds used the black market rates to base their prices and price changes.When the black market rate started rising rapidly, business owners started increas- ing prices to make up for the loss in value of receiving what they considered discounted bolivars. Ch{vez and the Venezuelan government then, repeatedly, chastised busi- ness and threatened business owners raising prices with los- ing their companies. Despite all official efforts, black market trading was estimated at an astounding $100 million per day.3 One of the most innovative developments in this dys- functional marketplace had been the selective use of alter- native currencies throughoutVenezuela. One such example was the cimar6n, a round piece of stamped cardboard, introduced in a number of rural markets in exchange for goods.The principle was that someone coming to the coun- try markets with goods for barter could exchange them for cimar6no then the cimar6n for other goods. What the cimar6n could not be exchanged for was bolivar fuertes. According to Jos6 Guerra, the former head of research at the country's Central Bank, the cimar6n was a relic from Venezuela's past in which landowners paid their peasant workers, their serfs, in tokens which could only be used for goods on their own estates.4 Although promoted by the government as another step in being "freed" from capitalist ways, the alternative currencies had seen only limited use. The Ch6vez Objective Venezuela's constant battle with inflation has been the underlying economic force driving official devaluation and black market depreciation. Averaging anywhere between 20"h and 35% per year over the past decade, inflation has undermined all attempts by the government to reign in the value of its own currency. The devaluations alone contribute to inflation, as more and more domestic :-Venezuela Temporarily Closes Parallel Currency Market," by Tamara Pearson, Venezuelanalysis'com, May 18, 2010. -l'.Currency Woes Dog Venezuelans After Devaluation," by Darcy Crowe,Wall Street Journal, May 10, 2010. r..Venezuela's Alternative Currencies," The Economist, December 18,2008, print edition.
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The countries whose trade deficit become too much goes for devaluation. Majority of the times, only those countries devalued their currency which export more and import less as it help them to earn...

This question was asked on Jan 21, 2013 and answered on Jan 21, 2013.

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