Venezuela - Economic Briefing July 2003

Government Mulling Dual Exchange Rate

The economy continues to be battered by the after effects of the nationwide strike at the beginning of the year exacerbated by price and exchange rate controls imposed more recently. Consequently, businesses are struggling to remain afloat amid the restrictive conditions. The government is now considering a devaluation and subsequent adoption of a dual exchange rate system to enable importers of non-essential goods to begin operating again.

Government considering dual exchange rate regime
In the five months that the foreign exchange controls have been in place, the Committee for the Administration of Foreign Currency (Cadivi, Comisión de Administración de Divisas) has delivered just US$ 200 million to importers, when prior to the regime adoption the Central Bank sold some US$ 60 million a day. The lack of foreign exchange is deepening the current economic depression, as businesses, who were already struggling to keep afloat amid the dire conditions provoked by the nationwide strikes at the beginning of the year, are now faced with the inability to obtain foreign currency needed to import goods. According to the Central Bank, the government is currently weighing the possibility of adopting a parallel exchange rate market to the current fixed foreign exchange regime, which would be supervised by the monetary authorities. This market would be determined by market forces and would be intended to provide foreign currency for importers of non-essential imports. The Finance Ministry has also hinted that the government may devalue the currency before adopting the dual exchange rate system to close the current gap between the official exchange rate of 1,600 bolivares to the US$ and the unofficial rate, which has the currency trading at a 30% to 40% premium. Even though the exact time schedule for adoption of the new regime has not been presented, authorities claim that it is likely to occur in the second half of this year. The dual exchange rate system would be held in place for at least six months after which the government hopes to revert to a free floating currency regime again. Participants foresee a 22.6% devaluation by year-end. Furthermore, the currency is seen to depreciate an additional 24.4% next year.

Consumer price increases remain stable amid price and exchange controls
In June, consumer prices rose 1.4% over the prior month. The strongest increases were observed in food/non-alcoholic beverages and alcoholic beverages/tobacco prices. The higher prices in the aforementioned categories were partially offset by more subdued price developments in communications and housing services. The June consumer price figure lowered the annual inflation rate to 34.2% from 35.1% in May. At its current level, inflation is just below the government’s estimated inflation rate of 35% to 36%. However, participants appear to be less optimistic about inflationary prospects, as an expected depreciation in the currency is likely to pass through to domestic prices. As a result, Consensus Forecast participants see annual inflation rising again in the second half of the year. Despite the likely acceleration in the economy and a probable depreciation of the currency, participants remain optimistic that inflation will come down next year, with year-end inflation now estimated to slow. However, inflationary expectations are rising, as this month’s 2004 forecast is up 0.8 percentage points from last month.