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Global Economic Analysis: Foreign Exchange

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Describe about the Global Economic Analysis Foreign Exchange?
 
 

Answer:

Article: Venezuela Revises Foreign Exchange Rules

On last Tuesday, Venezuela has revealed that they are going to establish a new market in relation to foreign exchange, which will run via demand and supply. But experts said that it may not ease the economic crisis. The currency of Bolivar was devaluated which is implied by this change. This currency system may be quite complicated; it also includes three different exchange rates. The new currency market is known as the Marginal Foreign Exchange System. It allow general people and companies to easily purchase and sell dollars, until these access to dollars for companies and general peoples has been strictly rationed. After introducing this new market, the government of Venezuela said that it will help to keep the three tiered currency system in the same manner, which will include a 6.3 fixed rate and this will be used for most of the transactions. It suggests that the concern government don’t have required amount of money under its arms for supplying to the new market (Twomey, 2012). The currency control will remain in place. Like the previous one, this currency control system has three rates too. In case of importing critical articles, like food, medicine etc, 70% of the government transaction shall be used. Sicad is a kind of exchange rate in Venezuela, it includes combination of two existing system of dollar purchase and sale into one platform, which begins with @ 12/dollar. For luxury goods there will be another kind of rate of exchange. Earlier to this the currency was trading @ 186 per Dollar.  The new currency system gives impact depending upon the volume of the trade and its flexibility. The establishment of a market based currency exchange system may lead to a devaluation of the fixed rates, at least for quite a few times (Norris, Gaskill and Bell, 2010). That will facilitate many foreign companies conducting their business in Venezuela. Foreign companies have investments at around $11 Billions. This system may lead a large accounting write down. Venezuela’s economy has affected in a large manner by recession, the inflation rate was 68%, highest in the world. This suggests that they do not want to establish well economic phenomena. The government says that the new currency market will help a lot to develop the present economic condition of the nation. Venezuela’ economy affected most in the world by recession and its inflation rate was also very high. The new plan will change the figures for Venezuela’s government. The new plan of the government is to establish an exchange market where from any person can buy or sell foreign currencies specially US Dollars. For foreign organizations working in that country will have some upper hand as they will be able to purchase and sell dollars as per market but it may affect the economic strategies of the nation, as because dollars may be purchased when currency gap will be lesser but it will be sold when currency gap will get higher. It has some possibilities to cause damage to the economic condition of the country. Apart from that, this system will help out in industrialization to a good extend. Availability of foreign exchange is great beneficiary for commercial purpose. The new system will allow the trades as per market forces and it will definitely depreciate the current black marketing aspects in the nation. It will sharply hit the black market exchange rates. The gap between 6.3 and current black market rates may affect the plans of the government as an importer can buy it @ 6.3 bolivars while it can be sold in black market to a much higher level. In terms of gaining many fake import receipts may be emphasized. Many analysts think that approval level of 25% restricts the government to make sharper changes in the newly introduced plans, lack of political support restricted sharper adjustments. The government has taken a decision that most of its income in dollars shall be vested to buy foods, medicines and other valuable things from foreign countries and a very lesser part of the income in dollars shall be provided in the newly introduced currency market (Amodio, 2012). Economists thought that there is a free floating currency market but the government has revealed that this market shall be strictly governed by the government itself, and no entrepreneurs are going to invest in the currency market of any particular country, so the investments shall also be done by the government in a tight manner, specially to deal with the situation like recession and random inflation (Zeng, 2011).  

By introducing the new free floating currency market, the concern government has not set aside the three tiered rule as the investors considered this structure as the basic pillar for the economic growth of the country and they invested by taking into consideration the three tiered structure, a sudden change to the basic economic structure of the country may lead to major crisis for the economic development (Shamah, 2008).

The government by introducing new economic sketch intends to ease 12 years old economic structure which has been established by let socialist leader. But in present scenario the previous structure in strict manner is not compatible to deal with a major economic crisis like recession and high speed inflation (DeRosa, 2011).

Dollars is to be purchased and sold at the rate of 6.3 bolivars or 12 bolivars, in this case retailers may hold down prices for reflection of subsidies. The government revealed that a third price shall also be there which 52 bolivars is but all together this rates are going to be repealed for a better transparent system and it will depend upon the actual demand and supply.

The finance minister of the country Mr. R.M Torres said that the new currency control system is totally free and this market will set the exchange rates itself, but in this segment only those bank accounts can take part, which are dollar denominated.

 

References

Amodio, E. (2012). El detestable pecado nefando. Nuevo mundo mundos nuevos.

DeRosa, D. (2011). Options on foreign exchange. Hoboken, N.J.: Wiley.

Norris, J., Gaskill, A. and Bell, T. (2010). Mastering the currency market. New York: McGraw-Hill.

Shamah, S. (2008). A foreign exchange primer. Chichester, England: John Wiley & Sons.

Twomey, B. (2012). Inside the currency market. Hoboken, N.J.: Bloomberg Press.

Zeng, S. (2011). Foreign Exchange Reserves Demand Model Based on Chinese Government Utility Maximization and Analysis of Chinese Foreign Exchange Reserves. ME, 02(03), pp.354-370.

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