Economy & Trade, Headlines, Latin America & the Caribbean

Tougher Exchange Rules Breed Unease in Venezuela

Estrella Gutiérrez

CARACAS, May 26 2010 (IPS) - The Venezuelan government put a chokehold on the foreign exchange system by closing down the “parallel” currency market, which in a country so heavily dependent on imports may stifle an economy already plagued by recession, inflation and shortages of certain products.

The unofficial “permuta” market, in which stocks and bonds could be traded for dollars in stock exchanges and brokerages, was closed May 17 and will be replaced by a system of exchange rate bands under the control of the Central Bank (BCV), due to become operational in the first or second week of June.

“A police-style clampdown is being imposed on an economic problem, and that is no solution at all,” economist Eduardo Semtei told IPS, commenting on the raids and closures of a score of brokerages after leftwing President Hugo Chávez’s blanket accusation of speculation and money laundering.

While the “permuta” market is closed, only a trickle of dollars will be available from the Foreign Exchange Administration Commission (CADIVI), which trades currency on the legal market. In 2009 CADIVI only covered 65 percent of the 38.4 billion dollar cost of imports. The only alternative will be the black market.

In 2003 stiff exchange rates controls were introduced in Venezuela, and were tightened in 2009, when any distribution of information about the parallel “permuta” market was made illegal. That year, GDP contracted by 3.3 percent, but that did not assuage the appetite for dollars.

Semtei, a university professor belonging to the traditional left who supported the government until 2007, said that the problem is that the administration does not have enough hard currency income or international reserves to meet its own obligations in 2010, let alone to satisfy demand from private companies and individuals.

The government must pay out some 18 billion dollars this year, to service a new short-term loan taken out for arms purchases worth close to 30 billion dollars, to repay accumulated debts owed to external contractors for major infrastructure works and to fund its new oil partnerships, among other commitments.

Given this situation, Chávez and his cabinet further toughened the law on illegal exchange of dollars, making the BCV the exclusive agent for the parallel market, and increasing fines and prison sentences for illegal trading and for reporting unofficial exchange rates, even over the internet.

The president blamed firms exchanging bonds for dollars on the parallel market for this year’s 25 percent rise in the relative value of the “permuta” dollar against the bolívar, the local currency.

“We’re going to hit them with everything we’ve got,” Chávez said, accusing “those bourgeois” of criminal speculation. High-ranking officials added that this oil-producing South American country was facing “a financial coup.”

But in fact, swapping bonds for “permuta” dollars was a mechanism created by the government itself to supply the demand CADIVI could not meet. And the chief source of dollars was the state oil company PDVSA, which obtained more bolívars to the petrodollar to pay for its overheads.

In 2009 the “permuta” market traded 22.3 billion dollars to importers and others unable to get them from CADIVI. This contributed to a 25 percent hike in prices last year which put the Venezuelan economy into stagflation, a combination of recession and high inflation.

In January the government devalued the bolívar to partially correct its overvaluation. Instead of the single fixed official exchange rate of 2.15 bolívars to the dollar, two new exchange rates were introduced, at 2.60 for state imports and medicines, and 4.30 for other purposes.

But CADIVI was still a bottleneck for getting hard currency, so “permuta” dollars had a greater effect on the real economy. During Chávez’s 11 years in office, Venezuela has become heavily dependent on imports from abroad even for basic food supplies, because of the decline in domestic agricultural and manufacturing production.

Dependence on oil revenue also increased. Crude contributed 68 percent of government income in 1999, compared to 94 percent last year, when oil exports totalled 54.2 billion dollars.

Since April, the dollar on the parallel market has climbed to twice the official exchange rate of 4.30 bolívars, while in the first quarter of this year GDP fell by 5.8 percent, compared to the same period last year. Accumulated inflation to April 2010 was 11 percent, and foreign reserves were depleted by 7.8 billion dollars, down to a level of 27 billion dollars.

“The government is just pressing on with more of the same, and the rigid exchange rules will only worsen the distortions in the economy,” like unemployment, said Semtei.

Shortages of basic food items like milk, cereals, flour and meat “are going to become more acute under the new system,” said Semtei. In local shops, average stocks last no more than 45 days, partly because owners are afraid of being accused of hoarding.

According to José Manuel Puente, a professor at the Institute of Higher Administrative Studies, the soaring cost of the dollar is “an expression of serious macroeconomic imbalances,” and the exchange rate will stabilise only when these are corrected.

“The government is reaping the consequences of a very inexpert and ideologically dogmatic economic plan,” which heightens the perception of risk so that the dollar becomes a shelter for everyone, from small savers to companies, Puente told IPS.

The quandary is that “whatever it does, the government does not inspire confidence,” said Domingo Zavala, the head of BCV until 2007 and a renowned leftwing economist who is critical of the government.

Semtei recalled that Chávez has repeatedly said that economics is not politics, and what is important is politics, “but now economics has caught up,” just in time for the parliamentary elections due this year on Sept. 26.