Why Does A Country Like Venezuela Impose Capital Controls?
1. Why does a country like Venezuela impose capital controls?
Capital control is an action taken by the government, central bank or other regulatory bodies to limit the inflow and outflow of foreign capital in the domestic economy. These controls include outright legislation, tariffs, restrictions on volume, taxes and market-based forces. These actions allow a country to preserve a fixed rate of exchange for its currency without risking its holdings of foreign currency reserves or hard currency. The problem, however, is that this control or preservation comes at a substantial cost, as many investors will not willing to invest the same levels of funds in that country.
Capital controls allow a country, whether Malaysia, China or Venezuela, to …show more content…
Although it is legal, the gray market trading is often considered inappropriate and may be politically dangerous by the participants. However, the black market is the trading of currency through unrecognized or unauthorized organizations or institutions, which is illegal in Venezuela.
In our case, the gray market was when the investors use the Caracas stock exchange to avoid the foreign exchange regulations. Venezuelan investors could purchase local shares of the leading telecommunications company, CANTV, and then convert them into dollar-denominated American Depositary Receipts (ADRs) traded on the New York Stock Exchange (NYSE). Therefore, the share price of CANTV became the method of calculating the gray market exchange rate. However, the black market used the services of stockbrokers and bankers in Venezuela who held US dollar accounts offshore. If someone wanted to purchase dollars on the black market, he or she would have to first deposit Bolivars in their brokers account. The black market exchange rate was set by the day of the deposit. The investor would then be given access to dollar-denominated bank account outside of Venezuela, in the agreed amount. In sum, the gray market is a legal market where the implicit rate is Bs 2952/$. In contrast, the black market is an illegal and unseen market where the unofficial rate is at Bs 3300/$. …show more content…
In short, the first $10, 000.00 he managed to obtain from CADIVI is with the cost of (Bs 1920/$ + Bs 500/$) x $10, 000.00 = Bs 24, 200, 000.00. Santiago left with two options other than CADIVI, which is the gray market (with the implicit rate of Bs 2952/$) and the black market (with the unofficial rate of Bs 3300/$). If he raises the $20, 000.00 through the gray market, the cost will be Bs 2952/$ x $20, 000.00 = Bs 59, 040, 000.00. In contrast, if he raises the $20, 000.00 through the black market, the cost will be Bs 3300/$ x $20, 000.00 = Bs 66, 000, 000.00. In comparison, raising the dollars through gray market is less costly by Bs 6, 960, 000.00 (Bs 66, 000, 000.00 – Bs 59, 040, 000.00). Therefore, the solution to Santiago’s problem is that he should choose the gray market because it is less costly as it is able to save him Bs 6, 960, 000.00 compared to raising through the black market and the gray market is less risky as well. In conclusion, the total cost of $30, 000.00 will be Bs 24, 200, 000.00 + Bs 59, 040, 000.00 = Bs 83, 240, 000.00 by raising $10, 000.00 from CADIVI and the rest $20, 000.00 through the gray market. The table below shows the type of the costs involved in raising those
Capital control is an action taken by the government, central bank or other regulatory bodies to limit the inflow and outflow of foreign capital in the domestic economy. These controls include outright legislation, tariffs, restrictions on volume, taxes and market-based forces. These actions allow a country to preserve a fixed rate of exchange for its currency without risking its holdings of foreign currency reserves or hard currency. The problem, however, is that this control or preservation comes at a substantial cost, as many investors will not willing to invest the same levels of funds in that country.
Capital controls allow a country, whether Malaysia, China or Venezuela, to …show more content…
Although it is legal, the gray market trading is often considered inappropriate and may be politically dangerous by the participants. However, the black market is the trading of currency through unrecognized or unauthorized organizations or institutions, which is illegal in Venezuela.
In our case, the gray market was when the investors use the Caracas stock exchange to avoid the foreign exchange regulations. Venezuelan investors could purchase local shares of the leading telecommunications company, CANTV, and then convert them into dollar-denominated American Depositary Receipts (ADRs) traded on the New York Stock Exchange (NYSE). Therefore, the share price of CANTV became the method of calculating the gray market exchange rate. However, the black market used the services of stockbrokers and bankers in Venezuela who held US dollar accounts offshore. If someone wanted to purchase dollars on the black market, he or she would have to first deposit Bolivars in their brokers account. The black market exchange rate was set by the day of the deposit. The investor would then be given access to dollar-denominated bank account outside of Venezuela, in the agreed amount. In sum, the gray market is a legal market where the implicit rate is Bs 2952/$. In contrast, the black market is an illegal and unseen market where the unofficial rate is at Bs 3300/$. …show more content…
In short, the first $10, 000.00 he managed to obtain from CADIVI is with the cost of (Bs 1920/$ + Bs 500/$) x $10, 000.00 = Bs 24, 200, 000.00. Santiago left with two options other than CADIVI, which is the gray market (with the implicit rate of Bs 2952/$) and the black market (with the unofficial rate of Bs 3300/$). If he raises the $20, 000.00 through the gray market, the cost will be Bs 2952/$ x $20, 000.00 = Bs 59, 040, 000.00. In contrast, if he raises the $20, 000.00 through the black market, the cost will be Bs 3300/$ x $20, 000.00 = Bs 66, 000, 000.00. In comparison, raising the dollars through gray market is less costly by Bs 6, 960, 000.00 (Bs 66, 000, 000.00 – Bs 59, 040, 000.00). Therefore, the solution to Santiago’s problem is that he should choose the gray market because it is less costly as it is able to save him Bs 6, 960, 000.00 compared to raising through the black market and the gray market is less risky as well. In conclusion, the total cost of $30, 000.00 will be Bs 24, 200, 000.00 + Bs 59, 040, 000.00 = Bs 83, 240, 000.00 by raising $10, 000.00 from CADIVI and the rest $20, 000.00 through the gray market. The table below shows the type of the costs involved in raising those