Archive for January 25th, 2007

A picture is worth 10,000 words #23: How relevant is the parallel market?

January 25, 2007

Government officials, from the new Minister of Finance to members of the Financial Commission of the National Assembly have been arguing that the “parallel” or “swap” rate is irrelevant for setting the price of imports because 95% of all imports are made at the official rate of Bs. 2,150 per US$.

Is this true? The answer is no and it comes from official sources.

Unfortunately for the Government control is not yet total over information, so you can find the plot below in the CADIVI (the Foreign Exchange Office) website of dollars approved on average each month by that office. Then you can go to the Central Bank website (under External Sector) and find that for the first nine months of 2006, a total of US$ 24.2 billion were imported. Well, from the plot below, you can add month by month (including taking account holidays) and you come up with the fact that CADIVI approved in those nine months a total of US$ 18.38 billion.

What this means is that the difference implies that at least 25% of the imports, not the 5% claimed by the Government, went through the parallel market. Why at least? Because the amount given by CADIVI is for everything, travel, dividend and repatriation and the like, so not all of the US$ 18.38 billion is for imports. Thus, the percentage is even larger.

Thus, these guys are either ignorant or are trying to deceive us with their 95%. You can even calculate the inflationary impact of the spike in the parallel market recently (It reached Bs. 4,450 today):

Last year, the average parallel rate was approximately Bs. 2,700 to the US$ , thus the weighted average cost of imports was Bs. 2287, given the 25% that was purcchased at the parallel rate. If we assume a parallel rate of Bs.4,000 to the US$, this weighted average would become Bs. 2,612, an increase of 14% over 2006. Of course, not everything is imported, but neither are products stamped with a label saying “Bought with CADIVI dollars”, which allows merchants to increase prices pretty much at will. As I said in October: The seams are beginning to show some rips…much faster that some people expected.

And the parallel market is indeed quite significant, despite all of the Government’s claims to the contrary.

From the CADIVI website on Jan. 24th. In blue: The total amount of foreign currency approved daily on average each month since 2004. In red: The total amount actually purchased or given out by the Venezuelan Central Bank. Days are banking days in a month.