Foreign exchange drought threatens supplies of products
<a href=www.vheadline.com>Venezuela's Electronic News Posted: Tuesday, April 29, 2003 By: Jose Gregorio Pineda & Jose Gabriel Angarita
VenAmCham's Jose Gregorio Pineda (chief economist) and Jose Gabriel Angarita (economist) write: More than three months after the exchange controls went into force, first in response to a contraction of oil revenue and then to maintain an adequate stock of foreign reserves (which had fallen to 11.031 billion dollars on January 21, the day the measure was taken), reserves had climbed back to US$14.321 billion as of April 25, regaining $3.290 billion.
When the reserves held by the Central Bank of Venezuela (BCV) are reinforced by the oil industry's recovery and that of oil exports, a total absence of access to foreign exchange is no longer justified because the reserves are on the mend.
What has not improved are the distortions provoked by the exchange and price controls, which put pressure on the supply of goods in the economy. Some industry organizations are deeply concerned over the depletion of inventories and the impossibility of replacing them, because no foreign exchange is available.
The continuity of food supply depends on the speed with which the Foreign Exchange Administration Commission (CADIVI) approves the dollars needed by the processing industries to import raw materials. According to the president of the Venezuelan Food Industry Chamber (CAVIDEA), many companies have shut down production lines and laid-off personnel. Unemployment in that industry is estimated at 26%, and could reach 30% by the end of this year. And similar conditions prevail in other sectors, which have already seen their products disappear from supermarket and grocery shelves ... that is the case for chicken, eggs, and hard white cheese, among other items.
The foregoing does not mean that we will experience supply problems in the very near future, but, if the dollar drought continues over the coming months, the situation for businessmen will become unbearable. They will not be able to keep their companies running and large numbers of jobs will be lost. When the State's emergency import plan to supply the domestic market is added to that prospect, the Venezuela's industry will be even more severely depressed.
The government may have many reasons for keeping the controls in force, but one of the most important barriers to their removal are the fiscal implications such a move might have. The dilemma centers on the combination of interest rates (dependent on the level of liquidity in the economy) and the exchange rate.
The Treasury's massive need for financing requires liquidity to be kept high, in order to put downward pressure on interest rates and make it easier to sell government bonds to the banks ... but in that case, it will be very difficult to return to free currency convertibility.
If, on the other hand, the authorities devalue the exchange rate, that will have a positive effect on the fiscal accounts with which Venezuelans are quite familiar ... but everything will depend on the recovery of oil invoicing and production, which, though quite far along, may not be sufficient to produce a substantial improvement in the government's near-term cash flow.
Article in Spanish