Venezuela - Economic Briefing February 2003

Nationwide Strike Draws to an End and Government Imposes Capital Controls

The two-month national strike against the government of Hugo Chávez ended at the beginning of January. However, the strong deterioration in the currency and international reserves resulting from the political disarray has prompted the government to impose foreign exchange, capital and price controls. With the first month of the year practically lost and the political crisis anything but solved, the economy promises to fall deeper into recession this year.

Government imposes exchange controls amid heightened volatility in markets
The currency deterioration observed in December, when the bolivar depreciated 5.2% to the US$, accelerated notably in January, as the prospects for a negotiated agreement between the government and opposition dimmed and the stifling seven-week nationwide strike threatened to persist. From the beginning of January through 22 January, the currency depreciated 24.4% to reach 1,843 bolivares to the US$. The currency slide observed in December and January was accompanied by an 11.1% decline in international reserves, as investors sold off Venezuelan assets and monetary officials intervened in the exchange rate markets by selling an estimated US$ 70 to US$ 80 million in reserves daily. To stem the strong capital flight, the government decided to suspend foreign exchange trading for five days on 22 January in order to give monetary and government officials time to study more permanent exchange and capital restrictions. On 6 February, a new exchange rate regime came into force. The measures adopted include:

- Fixed exchange rate. The exchange rate will be fixed at 1,596 bolivares to the US$ for buying and 1,600 bolivares to the US$ for selling. The Central Bank and the government are authorized to adjust the exchange rate as required.

- Commission for the administration of currencies. A newly formed Foreign Currency Administration Commission (CADIVI, Comisión de Administración de Divisas) is charged with coordinating, administrating and controlling the new exchange rate regime. According to the preliminary draft, the commission is composed five-members representing the government and Central Bank officials. The members of the CADIVI are an ex-military captain and associate in the military coup Chávez staged 1992, Edgard Hernández Behrens (new president of the CADIVI), Adina Bastidas (ex-vicepresident of the Republic), a former brigadier general, Alfredo Pardo Acosta (current president of the National Budget Office), Mary Espinoza de Robles and Maigualida Lobos Calzadilla (Central Bank official).

- Individual foreign currency exchange restrictions. Venezuelans travelling abroad will be limited to an annual US$ 9,000 foreign exchange quota (US$ 6,000 for minors). Daily exchange limits are set at US$ 300 per person (US$ 200 for minors). The maximum limit on credit cards will be set at US$ 1,000 annually. Furthermore, daily foreign currency exchange limits for business travel will be US$ 300 with a maximum of six trips a year allowed. Maximum monthly foreign currency remittances for individuals studying abroad will be US$ 2,000 in addition to required registration fees. Finally, monthly remittances to individuals abroad are set at US$ 300.

- Contractual exchange limits. Private dollar denominated contracts must be paid in domestic currency at an exchange rate of 1,000 bolivares to the US$. Currency availability for trade will be limited to raw material importers. Exporters of goods and services will be required to sell foreign currency to the Central Bank at the official exchange rate. Foreign currency for purposes of capital repatriation or the remission of dividends will require authorization with the National Office for the Administration of Foreign Currency (ONAD, Oficina Nacional de Administración de Divisas).

- Fines for violation of restrictions. The government will seek congressional approval for a new law that penalizes violations of the exchange rate controls with fines of 100% to 300% of the foreign currency amount used in an illegal operation.

The new exchange rate is 15.8% stronger than the closing rate on the last day of official trading in January and the currency is currently estimated to be trading in the rapidly established black market at around 2,000 bolivares to the US$. Participants anticipate that the currency will be adjusted to the new realities before the end of the year, as the bolivar is seen depreciating 29.6% to 1,982 bolivares to the US$ by year-end.