Will foreign reserve recovery bring an end to exchange controls?

<a href=www.vheadline.com>Venezuela's Electronic News Posted: Tuesday, May 20, 2003 By: Jose Gregorio Pineda & Jose Gabriel Angarita

VenAmCham's Jose Gregorio Pineda (chief economist) and Jose Gabriel Angarita (economist) write: A controversy has recently sprung up about whether a foreign reserve recovery to the US$18-20 billion range might lead to a lifting of exchange controls, or at least a relaxation of them. But economic analysts consider such a scenario very difficult to achieve, in view of the economic conditions currently prevailing in Venezuela.

Central Bank officials have made it clear that the suspension of the exchange controls will occur at some time in the future and that the current system will be replaced by something else. One of the most important constraints on the adoption of any new foreign exchange system is a normalization of the foreign exchange inflow from oil exports, and that depends entirely on the behavior of international oil prices.

Though this could happen in the second half of the year, it will still be necessary to overcome a variety of problems, including excessive macroeconomic and political volatility which encourage capital flight, and the impact a lifting of the exchange and price controls could have on the economic variables, especially when those effects gain strength the longer the controls remain in place.

One of the options the authorities are examining is the introduction of a tax on foreign exchange transactions and a determination of which transactions would be subject thereto, on the understanding that imports of goods needed by national industry to operate would not be taxes; this arrangement would be accompanied by a monitoring of all transactions taking place in the foreign exchange market.

The feasibility of implementing a system of this kind is directly contingent on the favorable expectations it could generate. And expectations would surely improve if the supply of foreign exchange to the private sector in significant amounts and on a steady basis gets under way, and if the political and social conflict is overcome. All that would make it possible to stimulate national production, which is now deeply depressed by the controls, while minimizing their negative impact and speeding up the control system's relaxation or complete elimination.