[A-List] Venezuela: forex problems

["Michael Keaney" <michael.keaney@xxxxxx>]

Central bank seeks easing of forex controls
By Andy Webb-Vidal in Caracas
Financial Times: June 24 2003

Venezuela's central bank on Monday appealed to the government to relax its
draconian foreign exchange control regime to prevent the country's troubled
economy from deteriorating further amid a prolonged hard currency drought.

Tobias Nobrega, finance minister, said at the weekend that the finishing
touches to a dual exchange rate system, with a floating rate running in
parallel to an existing preferential fixed rate for importers of essential
goods, would be agreed this week with the bank.

But central bank officials said no such plans were in place, despite the
urgent need to amend the rigid system imposed in February.

Domingo Maza Zavala, a central bank director, said the bank has called on
the finance ministry to ease the controls because the restrictions were
serving only to deepen existing distortions in the economy. "The [external
accounts] situation is more favourable now than when the controls were
imposed, and these circumstances suggest there is a need to make
modifications to the exchange rate control regime," said Mr Maza.

Daily central bank dollar auctions were suspended in January following a
two-month stoppage in the oil industry, and replaced with a fixed exchange
rate and dollar sales administered by Cadivi, the foreign exchange control
agency.

Cadivi has been slow in its allocation of hard currency, disbursing just
$165m since its creation, a fraction of importers' requirements.

Although oil exports have recovered and foreign reserves have climbed, the
authorities have resisted releasing dollars, suggesting to many that the
government is punishing businesses that oppose it by depriving them of hard
currency.

Venezuela faces probably the deepest economic recession in its history this
year, with the government expecting a collapse of 10.7 per cent, and the
International Monetary Fund forecasting a contraction of 17 per cent. The
economy shrank 8.9 per cent last year.

Meanwhile, the dollar drought has allowed a black market to blossom, in
which dollars cost around 2,500 bolivars, a 56 per cent premium over the
official rate.

Economists say the black market rate is set to rise further because of
Cadivi's ineffectiveness, but also because the finance ministry is using the
dollar bottleneck and resultant surge in bolivar liquidity to help it
borrow.

"The minister is allowing this to continue to permit it to finance its
fiscal deficit. Banks have no choice but to buy government debt," said
Orlando Ochoa, a private economic consultant.

The thriving black market is expected to push inflation up to about 50 per
cent this year, and some economists warn that the government may be forced
to devalue later in the year.