Venezuela Cenbank chief dismisses dual forex rate

Reuters, 06.25.03, 6:21 PM ET CARACAS, Venezuela, June 25 (Reuters) - A Venezuelan Central Bank director on Wednesday dismissed the possibility of establishing a dual exchange rate as the government reviews changes to the nation's strict currency control regime. Armando Leon, one of the seven central bank directors, said the government and bank officials are evaluating reforms they would make soon to ease the flow of dollars. But he rejected the option of setting another exchange rate parallel to the current single fixed rate. "The modifications are only operational," said Leon, a frequent critic of the state currency board, Cadivi, for its sluggish release of hard currency since establishing the controls in February. "There is nothing about dual exchange rates," Leon told reporters after an event at Miraflores Presidential Palace. Local news reports have suggested the government is considering an additional exchange rate, as well as a tax on the purchase of foreign currency. Officials are also considering placing the currency board under the direct control of the Finance Ministry. Analysts and private businesses have warned that without a sharply increased flow in dollars the battered Venezuelan economy will slide deeper into recession. The gross domestic product shrank 29 percent during the first quarter of this year after a two-month opposition strike cut into oil output from the world's No. 5 crude exporter and the currency curbs further squeezed the private sector. A scarcity of greenbacks has created a thriving black market where the U.S. dollar trades at 2,600 bolivars compared with the official fixed rate of 1,600 bolivars. Government officials say the currency controls have allowed them to bolster international reserves and brought down interest rates. But opposition leaders say the forex regime is choking economic growth and increasing unemployment. Another Central Bank director Domingo Maza Zavala also criticized the government's fiscal policies for sharply increasing domestic debt to cover a revenue shortfall. "It's worrying that a good part of the local debt is being used to cover budget deficit and not for investment and social development as it should be," he told reporters. Venezuela's state revenues have fallen steadily since 2002 when leftist President Hugo Chavez survived a brief coup and the nation slipped deeper into recession. The government is now forecasting a 10.7 percent economic contraction this year though private analysts expect the gross domestic product to shrink between 12 percent to 17 percent after a record 8.9 percent fall last year. Domestic public debt stood at 15.4 trillion bolivars or $9.6 billion in 2002 up 4.8 trillion bolivars from a year earlier and 13.1 trillion bolivars compared with the end of 1998, when Chavez was first elected. The increase means about 25 percent of the budget now goes toward paying internal debt. Maza said the government needed to reorganize public finances because the accumulation of obligations exceeded the immediate capacity to pay them and forced successive swaps of internal debt.