Venezuela's foreign reserves and foreign exchange restrictions

<a href=www.vheadline.com>Venezuela's Electronic News Posted: Wednesday, May 14, 2003 By: Jose Gregorio Pineda & Jose Gabriel Angarita

VenAmCham's Jose Gregorio Pineda (chief economist) and Jose Gabriel Angarita (economist) write: Venezuelan government spokesmen have recently said the duration of the exchange control system inaugurated on January 21 is directly related to the volume of foreign reserves held by the Central Bank of Venezuela (BCV). They have specifically indicated that a reserve level in the US$18-20 billion range would be considered adequate, and the government expects that level to be reached by December of this year."

This volume of foreign reserves held by the Central Bank would seem to reflect a goal of having reserves equivalent to one year's imports, but that target is unquestionably satisfied and then some by the current stock of reserves. So there must be another reason for wanting to accumulate the aforementioned amount, which was last held in 1997 following the maxi-devaluation that following the elimination of the previous exchange control system.

Going to the figures, we find that Venezuela's foreign reserves grew by $3.593 billion between January 21 and May 12, and that growth has apparently led the authorities to believe the target level will be reached or exceeded by December.

What the government does not seem to understand is that there are pressing un-met needs for foreign exchange to import and pay private debt service costs, not to mention covering the cost of the government's food import plan.

Hence, the authorities' foreign reserve build-up target is practically impossible to achieve without an indefinite continuation of the current dearth of dollars ... but that would provoke a total paralysis of productive activity that would make a foreign reserve accumulation that much harder to achieve.

So far this year there has been intense conflict surrounding CADIVI, in view of its operating problems and refusal to authorize foreign exchange distributions to sectors "not considered top priority" even though they have repeatedly asserted that companies meeting the requirements would have access to dollars.

For all these reasons, we cannot expect major changes in the control system to occur, and every day's marginal contribution of foreign exchange restriction further weakens national industry, drives up unemployment and forces more companies to close their doors.

In a nutshell, the likelihood of accumulating the amount of foreign reserves the authorities believe will allow them to lift the controls becomes more and more remote with every day the current policy remains in force.