Question

explain how the Central Bank of Venezuela could adjust its foreign exchange reserves to try to push the black-market bolivar-dollar exchange rate closer to the official fixed exchange rate?

Answer 1

Venezuela devalued its currency by almost 35 per cent to bring it into line with the exchange rate of the dollar on the black market.Although Venezuela is a significant petroleum exporter, almost everything else depends on imports. Consequently, dollars gained from oil exports are valuable as they are used to pay the import bill. The state has issued its petrodollars at artificially maintained subsidized prices, and this dollar "subsidy" has caused financial and social issues because the common person does not feel the advantages. Depending on the purpose, the Venezuelan exchange rate scheme provides distinct prices for distinct individuals. While giving a preferred rate for vital imports may be appropriate, issues occur when the preferred rates are only available by the influential. This, together with a scheme that promotes currency arbitration due to the distinct dollar prices in the nation, has destroyed the equilibrium

The overvaluation of the domestic currency is detrimental. In situations where the official exchange rate is fixed and devaluation is not uncommon, people tend to hold dollars instead of their own currency and sell those dollars when the currency undergoes devaluation (or they sell dollars in the parallel market to get more of the domestic currency). As more people start making easy money, there is a demand for dollars and, in cases where they are scarce, the black market price goes up

Venezuela is going through a significant crisis, evidenced by quadruple-digit inflation and food and medicine shortages. Many economists blame the dysfunctional trade and sector for the 15-year-old monetary control system.Early in 2018, the central bank of Venezuela announced it would devalue its formal exchange rate by more than 99 percent and launch a fresh foreign exchange platform called the DICOM. The first auction of its new DICOM scheme yielded 30,987.5 bolivars per euro, corresponding to approximately 25,000 per dollar, according to the central bank. Reuters noted that the change represented a devaluation of 86.6% of the prior DICOM rate and 99.6% of the subsidized rate of 10 bolivars per dollar, which had already been eliminated.

The government has developed foreign exchange systems comparable to DICOM repeatedly in the past, but they have failed to provide a constant hard currency supply. A black dollar market rose as Venezuelans would purchase usd on the cheap and sell them for a profit to solve the hard currency shortage. Next to the black market rate, most foreign exchange platforms of the government were unsustainable.