Connect to share and comment

Caracas: more expensive than London?

How can a city in a developing country be the world's 15th most expensive — and how do the poor get by?

A view of poor neighborhoods where residents live in ramshackle homes crowded onto hillsides surrounding the capital Caracas, Venezuela, Nov. 15, 2005. (Stringer/Reuters)

CARACAS — A two-minute taxi fare is $9.30, a can of Campbell’s mushroom soup will set you back $9.04, a McDonald’s Big Mac costs a whopping $9.76 and a 55-meter square, one-bedroom, downtown apartment fetches $1,395 a month.

Caracas, it would appear, is an expensive city.

A recent survey ranked it the world's 15th most expensive city, sandwiched between Oslo and London, and several places above U.S. cities such as Los Angeles, San Francisco and Chicago.

So how can a city in the developing world be so costly? It all results from the two different exchange rates in use at any point.

Foreigners can change their currency on the black market, so Caracas is not as expensive a vacation destination as the survey ranking would suggest. But for the middle class and the poor, who have little to no access to foreign currencies, their pockets are hurt each time they step in a supermarket or clothes store. The annual Worldwide Cost of Living survey by Mercer’s, which is conducted to help companies and governments determine the compensation package of their expatriates workers, was calculated using Venezuela’s official exchange rate, which has been fixed at 2.15 bolivars to the dollar since 2005.

But in reality Venezuela operates on two exchange rates. Ask a Venezuelan what the day’s exchange rate is and he will invariably quote the value of what’s known as the "dolar permuta," a black market exchange rate whose value the government forbids the local press from publishing and yet openly talks about controlling.

Here’s how it works: The Commission of Currency Administration controls how much foreign currency businesses receive to import foreign goods and administers how much Venezuelan travelers can get for foreign travel. The system strengthens the value of Venezuela's foreign reserves and increases buying power abroad, which is important for a country that relies heavily on imports. Controlling foreign currency allowances also prevents capital flight.

But plunging oil prices have severely limited the commission's funds, so more people are forced to purchase their dollars on this alternative market, where they're valued at more than three times the official rate.

Foreigners and Venezuelans with access to foreign currencies can use the parallel dollar market to change money at a far more favorable rate, which makes living more affordable. Therefore the Mercer’s report is not entirely reflective of real prices, said Asdrubal Oliveros, director of Econanalitica, a Caracas-based financial consulting firm.