The Venezuelan economy was forecast to contract six percent in 2016; following a 5.7 percent contraction in 2015, the latest period for which official government data is available. Inflation is expected to reach 720 percent this year, rivaling Zimbabwe in the 1990’s and Bolivia in 1985. Unemployment is at six percent (but 34 percent of working age people are out of the workforce). Yet the indicator that best captures Venezuela’s grim economic picture is the value of the Bolívar Fuerte (BF), the local currency. According to the Bank for International Settlements of Basel estimates, the Bolívar Fuerte is the most overvalued currency in the world. Currency overvaluation is perhaps the biggest economic problem affecting Venezuela, and there is no easy solution, because the currency exchange regime in the country is complicated, and any attempts to address it would be painful.
Venezuela, like most other oil-exporting countries, has a fixed exchange rate system where the government determines the value of the currency and the Central Bank uses open market operations to maintain that target price. Former President Hugo Chávez introduced currency controls and a fixed exchange rate in 2003. At the time, the rate was set so that one dollar equaled 1.6 BsF. In the 13 years since this measure was enacted, the currency has been devalued 11 times, though the devaluations have so far not been effective.
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