New forex controls for Venezuela

www.news24.com 23/01/2003 09:13  - (SA)  

Caracas, Venezuela - President Hugo Chavez announced on Wednesday that new foreign exchange controls would be imposed within five days to protect the bolivar currency from plummeting further amid a 52-day-old general strike that has crippled the economy.

Speaking during a military ceremony, Chavez did not elaborate on exactly what limits the government would impose on currency trade.

"We've made a decision that we didn't want to take," Chavez said. "But the situation is serious and there is a persistent speculative attack against the national currency."

The decision means that Venezuelans will be limited in the amount of foreign currencies they can buy per day. The decision is meant to stem a run on the bolivar, which has lost a quarter of its value this year.

Business leaders had widely expected and feared such a decision.

Earlier on Wednesday, the Central Bank had suspended foreign exchange trading altogether for five days - meaning that Venezuelan won't be allowed to buy any foreign currencies for that time. The move was seen as an attempt to protect the bolivar until the government announced the permanent controls.

Exchange controls will help protect the bolivar and the government's depleting foreign reserves. But it will hurt businesses that depend on dollars to pay for imported goods.

"This restriction is going to hurt businesses, which depend heavily on imports, especially industry," said Albis Munoz, vice president of the Fedecamaras business chamber.

Venezuela's economy largely relies on imports - about 50% of food is imported. Soft drink producers buy sugar abroad, newspapers import paper pulp and the automobile industry depends on foreign-made parts to keep assembly lines moving.

All of those materials would be harder to get as a result of the suspension and forthcoming restrictions on currency trading.

Ruling party member Rodrigo Cabezas, president of the legislature's finance committee, said earlier on Wednesday that any exchange controls would be "temporary" - until the nation's oil industry, weakened by the work stoppage, returns to normal. Total recovery for the industry could take several months, analysts have said.

The last time Venezuela imposed foreign exchange controls was in 1995 during an economic crisis that saw the collapse of 17 banks. The controls lasted almost two years.

Cabezas said a team of economists may fix a rate of 1 500 bolivars to the US dollar. The fixed rate could go into effect next week. Previous to Chavez's announcement, the government had allowed the bolivar to float.

The bolivar reached a record low of 1 853 to the dollar on Tuesday. It has lost 25% of the its value since the beginning of the year, after losing 46% of its value in 2002.

Traders said the Central Bank has been injecting up to $70m on a day to protect the currency. Venezuela's foreign reserves stood at $11.05bn Monday, down from about $12.5bn before the strike began. Venezuela also has about $2.9bn in a rainy day fund that absorbs excess oil revenue.

B usiness representatives said the establishment of exchange controls would further restrict industrial production, which is already down - or paralysed - due to the strike.

Ricardo Tinoco, a spokesperson for Ford Motor Company, said exchange controls, "depending on the complexity" of the system, could affect the company's access to car parts used to assemble cars at its plant in Valencia.

"It would limit how many parts we import and that, obviously, will dictate our production levels," said Tinoco.

Venezuelans have been coping with severe fuel and food shortages resulting from the strike, which has slashed oil production by more than two-thirds, and crippled an industry that provides 70% of export revenue and half of government income.

Oil production stands at about 714 000 barrels a day, compared to 3 million before the strike, according to strike leaders. The government claims production is at least 800 000 barrels a day. - Sapa-AP