Venezuela’s government has responded to the eruption of violent protests in the country over the past month with yet another overhaul of its exchange rate system – the aim being to provide more foreign currency to the economy and thus ease the shortages of basic goods that have fuelled the unrest. However, while the decision has triggered a rebound in the bond market, it will not do anything to address the underlying problem, which is a fundamental shortage of foreign currency caused by large-scale capital flight and the gradual erosion of the country’s current account surplus. In the meantime, problems in the real economy are deepening. Output appears to have slumped in recent months, while inflation is running at over 55%.
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