Venezuela suspends currency trading

www.globeandmail.com By PATRICK MARKEY Reuters News Agency Thursday, January 23, 2003 – Page B12

CARACAS -- Venezuela yesterday suspended foreign exchange trading in a desperate bid to stem capital flight and a slide in the bolivar as the government battled an opposition-led strike that has drained its oil-reliant economy.

The Central Bank said it would close the foreign exchange market for five trading days and prepare temporary currency exchange and transfer curbs to fend off the impact of the shutdown aimed at forcing leftist President Hugo Chavez to resign and hold new elections.

The measures were announced just hours before the country's Supreme Court delivered a blow to the opposition campaign by suspending a non-binding Feb. 2 referendum they were planning to hold on the president's rule.

Venezuela's bolivar currency has tumbled more than 28 per cent against the U.S. dollar during the seven-week-old work stoppage and its international reserves have dipped since the crisis began. The strike has slashed oil output in the world's No. 5 petroleum exporter to a fraction of its normal levels.

Economists said foreign exchange controls would give the government some short-term breathing room, but the economy would suffer the longer the controls were maintained.

"This looks more like a knee-jerk reaction of theirs to the currency weakness," said Jose Cerritelli, a Bear Stearns Andean economist. "But in the long term, people look to escape the controls by taking their money out."

Finance Minister Tobias Nobrega said the government planned also to slash its 2003 budget by 10 per cent, or $2.2-billion (U.S.), extend a temporary bank debit tax through 2003 and continue with a domestic public debt swap to counter the economic damage of the strike.

The economic crunch has raised fears that Venezuela may default on its foreign debt later this year. But the Central Bank said the government would maintain the necessary operations to make those debt payments.

Mr. Chavez, a fiery populist who was elected in 1998 and survived a coup last April, has branded his foes as "terrorists" who are trying to topple him again through an economic coup and by draining hard currency from Venezuela. He has refused to quit and vows to defeat the strike.

Venezuela's Trade and Production Minister Ramon Rosales said the suspension of the exchange market aimed to halt what he called the "attack against our international reserves."

Venezuela's international reserves have fallen to $11.05-billion, a drop of 7.5 per cent so far this year. The government also has $2.85-billion in a rainy-day savings fund and insisted recently that hard currency levels were sufficient.

The bitter stalemate has raised international concern after the strike helped drive world oil prices to two-year highs. It has also disrupted domestic fuel and food supplies. But negotiations to break the deadlock have been stalled over the timing of possible elections. Former U.S. president and Nobel Peace Prize winner Jimmy Carter on Tuesday proposed to the government and the opposition a blueprint for elections that would also end the strike.

The currency trading shutdown is the latest government measure to combat the strike, now in its 52nd day. Many private businesses are still closed and the fuel shortages have forced Venezuelans to wait for hours outside gasoline pumps.

Mr. Chavez, who led a botched coup six years before his victory at the polls, has fought back, sending troops to seize control of oil installations and refineries and importing food and gasoline to offset shortages. In a first sign of a crack in the oil shutdown, some tanker pilots in the key western oil and shipping hub of Maracaibo went back to work this week.