Transitions

Living through Venezuela's currency madness

The U.S. dollar is facing competition from other currencies, but there is still one place, ironically, where the greenback is king: the streets of socialist, anti-imperialist Caracas. Everyone here wants dollars -- from the importer looking to stay in business, to the mid-level professional wanting to save his Christmas bonus.

Venezuela has had a fixed exchange rate of 4.3 Bolivars (BsF) per dollar for years. By selling dollars in exchange for so few Bolivars, the local currency was severely overvalued. Propped up by oil exports (hence the term "petrodollars"), the government was effectively subsidizing imports and travel abroad. A few weeks ago, the government decided to devalue to 6.3 BsF per dollar.

But devaluation was not the only thing rocking the market. The official dollar is only available for procurement if you are buying some imports -- food, medicine, airplane tickets, and the like. You can't get them unless it's for one of those approved purposes, leaving out many people who need them. The artificially low prices, combined with the scarcity of dollars, creates the perfect opportunity for a black market where you can buy USD at the official rate, and then sell them underhandedly at a jacked-up price for an easy profit. In the last few weeks, following the devaluation, the price of the dollar in the black market has shot up to BsF 22 per dollar, up from BsF 18 the week prior to devaluation.

Stroll through the streets of this chaotic capital, and it is not difficult to figure out how both of these events are affecting people.

I stop by a local café and order some breakfast. The owner, Aída, in her mid-50s, is in a mood to talk. She says that she doesn't have "pastelitos," a local pastry, because she cannot find the flour to make them. Flour, you see, is imported, and given the differential between official and black market rates, flour vendors would rather take their subsidized dollars and make money by selling them in the black market instead of using them to buy the flour they're intended for.  Economists I've spoken with estimate that roughly 50 percent of the dollars approved to import basic staples end up in the black market instead.

I ask Aída if there is a black market for flour. She says she doesn't know of any. The price of flour is controlled, so flour vendors can't really use the black market for dollars to import flour and sell it a profit. The end result is that Aída, like thousands of other small business people, can't sell her pastelitos. The flour is simply not there.

Devaluation supposedly means that flour prices will have to go up, as local businesses have to pass the cost increase to their customers, but the government has already signaled that prices will remain fixed. It may be weeks before flour is on the shelves again. And even if it is, there is no guarantee that the government will allow Aída to transfer the increase in the cost of flour to her customers.

Everyone who imports something has been affected. Everything from the wrappers that you use to store potato chips to the metal linings you put on the coffins you sell is affected by the government's decision. Vendors lucky enough not to be under the government's magnifying glass are simply jacking up prices to reflect the black market rate. Some furniture vendors, for example, will quote prices in dollars, and then will whip out a calculator to translate it to local currency at the day's black market rate.

Ordinary chavistas say that devaluation doesn't affect them since they do not use dollars. This, however, ignores the reality that the dollar plays in the distribution channel of most consumer goods in the country.

In effect, when the value of the U.S. dollar goes up compared to the BsF, what people are able to buy for their money (i.e. their wage value) goes down. The less ideologically pure are already seeing the effect of devaluation when they go to stores.(As seen in the photo above, Venezuelans are making a run to electronics stores, to buy what they can before already expensive goods become unaffordable.)

Using the black market, of course, is not an easy proposition. Selling small amounts revolves around people you trust -- relatives, or friends. Selling dollars to people on the street could lead to a mugging or getting counterfeit money in return.

Finding dollars in small amounts is easier than finding them in large quantities. Multinational companies wishing to repatriate dividends, for example, have a difficult time finding people willing to sell large amounts of dollars. There are stories of "shadow traders," companies who are able to illegally exchange large amounts of dollars at the black market rate via a complicated scheme of international transfers. Local economists say that the supply of those dollars comes from two main sources: importers with access to official dollars, and the government itself.

The dollar may be losing luster in other parts of the world, but in Venezuela it remains the benchmark for price-setting and the preferred means to store wealth. Here, green still rules.

Juan Nagel is the Venezuela blogger for Transitions. Read the rest of his posts here.     

Photo by GERALDO CASO/AFP/Getty Images

Transitions

Libya's year to come

In last week's post, I mentioned how Libyans were planning to use the second anniversary of their revolution to exercise their democratic right to peacefully protest and hold their elected government accountable. For the record: There was no second revolution, no apocalyptic violence, and no jihadi takeover.

On the contrary, the scenes throughout Libya were more like one big wedding, organized by the people for the people. The celebrations were spontaneous; there was no government budget set aside for events. The scenes were a striking contrast to what Libyans were used to under Gaddafi's rule, when public occasions were orchestrated and people forced to take part.

On February 15, Benghazi's Freedom Square witnessed huge crowds chanting anti-government slogans and calling for action from officials. Their demands included greater security, investment in the local economy, employment opportunities, and recognition of Benghazi as Libya's second capital. The city's citizens spoke out for the transfer of institutions such as the National Oil Corporation (the body in charge of the oil and gas sector in Libya) and the Central Bank, which were located in Benghazi until Gaddafi moved them to Tripoli after his 1969 coup. Demonstrators also called for the sacking of Army Chief Yousef Almangoush because of his lack of progress in rebuilding the army.

But Libyans also observed the second anniversary with euphoria and joyful celebrations, in stark contrast to the violent events in Tunisia and Egypt that accompanied the second anniversaries of their revolutions. The Libyan police and army succeeded in maintaining law and order -- this is one more bit of evidence that security structures in the country are developing in the right direction.

However, Libyans also understand that huge problems remain unresolved and could potentially derail the democratic transition process. The year 2013 will be a very busy year for Libya, and the country will need to see significant progress in the transition process on at least four different fronts.

First, Libyans need to complete the process of drafting a permanent constitution. On February 13, the General National Congress (GNC), the country's national legislature, set up a three-man committee representing Libya's three old regions (Tripolitania, Cyrenaica, and Fezzan) that is supposed to draft an election law for the 60-member strong Constitutional Drafting Committee. (This comes after Libyan leaders decided to allow for popular election of the drafting committee.) The 60-member committee will consist of 20 members from each of the three regions. Experts anticipate that a referendum on the draft constitution could take place by the end of 2013.

The writing of the constitution will be a huge test of Libyan national unity on many different levels. Establishing a system for political governance and the distribution of national wealth will be one of the trickiest areas. This has much to do with the vocal calls for federalism in Cyrenaica, where around 80 percent of the country's oil is produced. At the same time, there is equally vocal opposition to federalism in Tripolitania, where the majority of Libya's population resides. The reasons for Tripolitania's opposition vary. Some say that a decentralized government will be the first step toward the country's partition, while others worry that Cyrenaicans are attempting to control the oil flow to the rest of Libya.

Then there's the issue of Libya's indigenous people, the Amazigh (commonly known in the West as "Berbers"). The Amazigh have been calling for their language to be officially recognized in Libya's constitution alongside Arabic. They would like their identity, culture, and language to be protected by the Libyan constitution, and are likely to reject any constitution that falls short of that.

Islamic sharia law promises to be another sticking point in the constitution-writing process. While the majority of Libyans agree that sharia law should be the main source of legislation, some Islamist groups would like it to be the only one. The same Islamist groups also insist that this topic should not be up to consideration in the referendum. They believe that this would break Islamic values by subjecting the holy word of Allah to a popular vote.

Second, after constitutional concerns, security remains a huge challenge. Under Qaddafi the entire security system was built around him, and it correspondingly fell apart after his capture and subsequent death in 2011. The current authorities are clearly doing their best to rebuild the security and armed forces from scratch. However, they face a number of obstacles, including the reintegration of ex-revolutionary fighters, the disbanding of all armed groups, and the recovery of weapons (heavy and light) from their members.

The ministers of defense and internal affairs have also produced a joint comprehensive plan to tackle the security situation. The plan has three stages. The first, which has already been completed, included recruitment campaigns for former revolutionaries, as well as increasing the police presence in major cities and raising the number of checkpoints. The second stage, which is now coming into force, entails a ban on all weapons in cities and towns unless authorized by the government, and voluntary campaigns for citizens to hand in their weapons. The third stage, scheduled for later this year, will bring a complete clampdown on private weapons of all kinds; those found in illegal possession of weapons will be arrested and prosecuted. According to the Ministry of Internal Affairs, these three stages are to be completed by the end of 2013. Yet the number of people in the security forces is still less than what's needed to meet these ambitious goals. Thousands of police and soldiers are currently undergoing training, both inside Libya and overseas.

Third, on the agenda is the revival of the economy. In 2013, Libya hopes to lure back foreign companies and investment as the security situation improves. Last October, the International Monetary Fund projected real GDP growth for 2012 at an astonishing 122 percent. Assuming an improvement in the security situation, growth is expected to remain robust. The IMF forecasts 17 percent GDP growth in 2013 and an average of 7 percent per year in 2014-17.

The economic situation in Libya is likely to remain precarious, especially until the end of 2013, by which time the new constitution should have been ratified and parliamentary elections held.

Meanwhile, the current authorities are responding to immediate post-revolution expectations and aspirations by raising salaries and making one-off payments to Libyan families to help with living costs. Although Libya can afford elevated levels of current expenditures during a transitional period, the increase in wages and subsidies is eroding the country's fiscal resilience and undermining prospects for fiscal sustainability.

Fourth, reconciliation and transitional justice are integral to Libya's progress. Despite the ongoing efforts by the authorities to kick-start the reconciliation process, not much has been achieved. Hundreds of thousands of alleged Qaddafi supporters are living in Tunisia, Egypt, and other countries throughout the world. There is fear that the situation could be exploited by the Qaddafi family and officials to destabilize Libya's transition.

During his address to crowds in Benghazi on February 17, the second anniversary of the revolution, de facto head of state Mohammed Magariaf stressed the importance of reconciliation, promised to launch a nationwide dialogue, and called upon Libyans who have fled to Tunisia and Egypt to return home.

Meanwhile, thousands of Qaddafi loyalists and those who fought on his side are still in prisons without any trials taking place. In his official response to the last Human Rights Watch report on Libya, which criticized Libya's human rights record, Minister of Justice Salah al-Marghani essentially concurred with the report's diagnosis, expressing his disappointment at the slow progress made so far. He said that the government is determined to make progress on transitional justice issues in Libya during 2013.

This is a long list of priorities for the Libyan authorities in the year to come. All of these tasks require serious work, and progress needs to be made on all of these fronts at once. Libyans will need to pull together to make 2013 a success.

Former United Nations Secretary-General Kofi Annan put it well: "We will not enjoy security without development, we will not enjoy development without security, and we will not enjoy either without respect for human rights."

Mohamed Eljarh is the Libya blogger for Transitions. Read the rest of his posts here. 

Photo by MAHMUD TURKIA/AFP/Getty Images