Venezuela's new foreign exchange mechanism will likely lead to a minor devaluation of the bolivar, but it will not be enough to address the country's worsening economic crisis. The Marginal Foreign Exchange System, which was announced Feb. 10 and will take effect Feb. 19, will complement the country's low exchange rate, 6.3 bolivars to the dollar, and the existing Sicad mechanism, which trades at 12 bolivars to the dollar. According to an unconfirmed report, the new mechanism could trade the currency at around 130 or 140 bolivars to the dollar, figures more in line with the black market rate of nearly 190 bolivars to the dollar.
Still, the mechanism likely will not be sufficient to address the country's pent-up demand for dollars, which declining oil prices and the resulting cutoff of the Sicad I mechanism have exacerbated. The new mechanism will initially allocate only $7.5 billion — a figure similar to the amount the Sicad II mechanism disbursed. Of those funds, Petroleos de Venezuela will supply $2 billion, oil firms will supply $1.5 billion, debt sales will account for $3 billion, and off-budget funds such as the National Development Fund will contribute the remaining $1 billion. Once the new mechanism is implemented, Venezuela will have three foreign currency allocation mechanisms: one disbursing at 6.3 bolivars to the dollar, another at 12 bolivars to the dollar, and a third at a yet-unspecified rate. Though the third measure could significantly devalue the bolivar, the relatively small amount of tradable currency it will offer will likely limit its impact.
Venezuelan President Nicolas Maduro has few options with which to conclusively address the country's economic crisis. Given the declining popularity of Maduro and his ruling party, it is unlikely he would have the political capital to push through dramatic changes in the country's foreign exchange systems, such as unifying Venezuela's three exchange rates to achieve a major devaluation of the bolivar — especially since there are elements within the government and armed forces that probably benefit from the low exchange rates resulting from the currency arbitrage. Additionally, economic problems such as inflation and food shortages pose long-term threats that cannot be addressed through currency devaluation alone. If Maduro wishes to finish his term without facing significant social unrest, slow action on politically controversial measures like devaluation pose less of a threat to his rule than direct action.
Still, the primary political threat to Maduro this year will not be currency devaluation but legislative elections, which are tentatively scheduled for the fourth quarter of 2015. The worst electoral outcome for the ruling United Socialist Party of Venezuela would be the loss of its majority in the Venezuelan congress — a scenario that is becoming increasingly plausible. Inflation, which has reached nearly 70 percent year-on-year, alongside growing food shortages resulting from the reduced availability of the dollar, have left Maduro's approval ratings around 20 percent. If the opposition manages to take control of the congress, it would have the power to reject or modify the government's requests for additional spending. This would put the ruling party's ability to implement domestic policies without resistance in jeopardy. But the elections also pose a threat to the very unity of Maduro's government. The fractious United Socialist Party of Venezuela has maintained its political cohesion thus far because of its ability to win elections. If it loses, factions could begin to withdraw their support for Maduro, spurring a wider competition among the party's elites for control of the party and the government.