The troubles that international airlines are having in Venezuela showcase how misguided economic policies can ruin a country, even one blessed with more oil than any on the planet.
Airlines have more than $3.5 billion trapped in Venezuela because of restrictive currency-conversion rules that block the carriers from repatriating the money. Some carriers have been unable to get dollars for the past year, according to the Venezuelan airline association, ALAV.
The restrictions make it hard for airlines to buy plane parts from international suppliers and pay operating costs. This explains why some carriers, such as Air Canada, are cutting flights to Venezuela despite recent threats by President Nicolas Maduro that he will punish companies that do so. "The company that leaves the country will not return while we hold power," Maduro said earlier this month.
The problem with Maduro's hard line is that the government he inherited from Hugo Chavez fostered the excess demand for plane tickets -- by offering cheap dollars to travelers to spend overseas -- and the lack of dollars that is crippling the airline industry today.
Imposing open-ended currency controls to prevent capital flight was the first mistake. Venezuelans have learned to convert their bolivar savings into dollars to protect them from runaway inflation and devaluations caused by unbridled government spending. Capital controls don't change that behavior; they tend to make it worse.
The result is a labyrinthine foreign-exchange system. The country has four exchange rates, each progressively weaker. The official rate is 6.30 bolivars per dollar, but only staple goods and medicine importers can buy dollars that cheaply. At the other extreme, a greenback in the black market fetches nine times as much.
The gaping exchange-rate differential fosters speculation. Many people bought plane tickets in bolivars just so they could pretend to travel and qualify for buying inexpensive dollars from the government to spend overseas. They would later discard the plane tickets and sell the dollars in the local black market for a profit. Currency speculation has become among the most profitable businesses in Venezuela, and air travel lies at the heart of it.
Airlines also play the currency game. Most carriers last year increased fares by roughly 40 percent as a type of hedge. They do this in case the government devalues the currency, as it has done five times in the last decade and did again in February, or chooses to limit the foreign exchange available for airlines, as it has done during the past year. This practice increases the amount of dollars airlines eventually demand from the state when they seek to convert bolivars accumulated from ticket sales.
The dollar shortage is so bad that Venezuela is now asking airlines to pay for airport services -- such as hangar space and landing fees -- using U.S. rather than local currency.
If recent history is any indication, airlines should expect to lose some money. In 2010 carriers took a 17 percent loss on their trapped revenues when they accepted a lower exchange rate for their bolivars. Airlines salvaged $260 million in ticket sales back then, a fraction of the billions that are now at stake.
Venezuela is struggling to cope with the consequences of its policies. It started a dollar-auction system on March 24 that prices bolivars close to the black-market rate. It also made it harder for Venezuelans to game the system and sell cheap dollars locally.
But the more rules Venezuela creates, the more loopholes people will seek to find and the more speculation will thrive. Only sound economic policies sustained over long periods that allow market forces to set the exchange rate will regain people's trust in the bolivar. If Venezuela's disappearing air travel doesn't prove that to the government, nothing will.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
(Raul Gallegos is a contributor to Bloomberg View. Follow him on Twitter @raulgallegos.)
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