Venezuela's exchange control headaches
By Brian Ellsworth <a href=www.upi.com>UPI Business Correspondent From the Business & Economics Desk Published 5/12/2003 1:07 PM
CARACAS, Venezuela, May 12 (UPI) -- In the midst of the shacks and slums of southern Caracas, bakery owner Daniel de Sosa says he may have to shutter his business. Like everyone else in Venezuela, de Sosa has been hit hard by the economic crisis, but he has a much more immediate problem: The price of flour has doubled. "The government isn't handing over the dollars, so the flour mills aren't running," says de Sosa. "Now I have to buy imported Colombian flour that costs me twice as much. I'm barely keeping the business running."
De Sosa's case represents a prime example of how Venezuela's currency controls are affecting average citizens across the country. Since over 60 percent of products consumed in Venezuela are imported, exchange controls decreed in January have led to supply chain bottlenecks, creating shortages of basic goods such as flour, chicken, and eggs, as well as many imported medicines. The government is trying to make up for shortages by importing products, enraging local producers and increasing costs. Many merchants have maintained their usual inventories, and widespread product shortage is unlikely. But the exchange controls continue to cause headaches for many.
President Hugo Chavez ordered a halt of all dollar sales early this year at the height of a strike by Venezuela's oil industry meant to remove the president from office. The Finance Ministry locked the Venezuelan bolivar at Bs. 1,600 to the dollar to prevent continued hemorrhaging of the government's dollar reserves, 80 percent of which come from hydrocarbon exports. Reserves have climbed considerably after four months of controlled exchange, but the government shows no sign of lifting exchange controls.
Private sector leaders insist that the exchange controls represent a government plan to destroy businesses that joined last December's national strike. Julio Brazon, president of the Venezuelan Trade and Services Council, has openly accused the firebrand left-wing populist Chavez of trying to shut down private industry and have the government assume the role of the private sector. "I don't believe this situation can be maintained much longer," Brazon told local media.
Since the start of currency controls in February, the government has approved $104 million in dollar sales, when it previously auctioned an average of $45 million per day. In addition, many products are subject to price controls that business leaders say are below production costs, which makes it impossible to sell them. The combination of the two measures has forced some businesses to shut down.
To buy dollars, a business must file an official request with the government currency exchange board, but can only receive them if they have paid all their taxes. Since Venezuelans are known for ignoring tax obligations, few businesses in the country are likely to qualify.
"We are simply asking that businesses be up to date on their tax payments if they are going to buy dollars," says pro Chavez legislator Ricardo Sanguino. "It's the same thing that any other government would do." In addition, the government accuses industries of hoarding goods to be able to sell at higher prices, and claims to have found 100,000 kilos of chicken at one domestic producer.
The exchange control has also exacerbated the tensions between Chavez and the private sector, which in the last two years has joined the opposition in demanding the president's resignation. When Chavez was briefly removed from power in a brief coup on April 11, 2002, business leader Pedro Carmona was briefly installed as president until Chavez was restored, increasing government anger at private enterprises.
Since then, the government has been openly antagonistic towards the business sector, at times indicating that the government will take over the functions of private enterprise. Many say the government's plan of importing products and selling them to the poor at subsidized prices threatens to close off markets to private businesses. Chavez has created a program of massive imports of basic products chicken and eggs from Brazil and wheat flour from Italy. Opposition leaders say Venezuelan businesses could just as easily provide these products, and that the president's import plan will cost the country over 140,000 jobs.
Venezuela's exchange controls have also caused friction with the Andean Community of Nations, which has been highly critical of the measure. Without access to foreign exchange, Venezuelan businesses have developed mounting debts with suppliers from neighboring nations such as Peru and Colombia. Colombia and Venezuela recently developed an agreement have central banks pay off hard currency debts, but Peru has announced that it will levy a 5 percent tax on all Venezuelan products to protest the exchange measure.
The current exchange control plan is the fourth in Venezuela's history, the most recent of which was created in the mid 1990s after a banking crisis rocked the nation's economy.
Opposition leaders have done their best to exaggerate claims that widespread starvation will ensue if the government doesn't end the restriction. The government, for its part, continues to insist that there are in fact no shortages of any products, only mild inconveniences in the supply chain as a result of recalcitrant business leaders not following government orders.
While it would be unwise to take either one at face value, local merchants like Caracas bakery owner de Sosa will have to struggle, literally, for their daily bread.