Currency plans will not halt inflation

Por Venezuela Real - 1 de Abril, 2008, 11:15, Categoría: Economía

ARCAYA & ASOCIADOS
VENEZUELA IN THE INTERNATIONAL PRESS
April 01, 2008

THINK TANK

The government is considering the issue of a global bond to operate as a virtual dual currency on the domestic market, it was reported yesterday, in a bid to eliminate the parallel black market on which the new 'strong' bolivar is trading at far below the official rate of 2.15 to the dollar. It is anticipated that importers of essential products would still be able to buy dollars at the official rate, while others would be required to buy dollars on the stock market at a rate estimated at up to 3.5 strong bolivars.


This would reportedly require the government to sell up to 100 million dollars per week in order to maintain the exchange rate, which fell to nearly 7 strong bolivars last year.

Despite such countermeasures, the rate of inflation -- 22.5% last year -- is likely to continue rising, storing up risks for government support.

Ultimately, a long-term plan to raise and diversify the economy's productive capacity is the only solution to the country's persistent inflation problem.

Financial Times Caracas eyes 'dual currency' amid pressure of devaluation. By BENEDICT MANDER Venezuela is preparing to introduce a de facto dual currency in order to ease pressure from a full-blown devaluation and record-high inflation, according to an adviser to the finance minister.

After the parallel "black" market value of the bolivar suffered a devaluation against the dollar of about 100 per cent during 2007, spurring annual inflation of 22.5 per cent, the new finance minister, Rafael Isea, is taking a different tack.

"The intention is to finish with the parallel market and instead allow the dollar to trade through a global bond on the local stock market, transparently and freely," said the source, who requested anonymity.

"Basically, we are getting into a dual currency, thus avoiding having to announce a devaluation," he said.

Importers of essential items such as food and medicine will still be able to obtain dollars at the preferential fixed official exchange rate of 2.15 "strong" bolivars to the dollar. Importers of "luxury" items and tourists, however, will have to obtain their dollars on the stock market at the more expensive rate, which the government hopes to maintain between three to 3.5 "strong" bolivars.

"The government will have to participate continuously in the market. Each week it would need to sell between Dollars 50m and at the most Dollars 100m to keep the exchange rate within this range," said the adviser. To this end, a Dollars 1.8bn (Euros 1.1bn, Pounds 900m) bond will be issued this month, for which a roadshow begins on April 10. Another issue for the same amount is planned for June. If the plans are successful, it will mark a strong contrast to last year's economic performance.

With the parallel market exchange rate reaching the equivalent of almost seven "strong" bolivars late last year, capital flight increased fourfold during 2007.

"Last year the finance ministry's policies were the worst this country could have had. In less than a year they almost destroyed the economy," said the adviser.

So far this year, however, a series of factors has caused the parallel rate to strengthen to less than four "strong" bolivars to the dollar. In part this is due to a series of measures introduced by the new team at the finance ministry, although markets were also calmed by President Hugo Chavez's referendum defeat last November, preventing changes to the constitution.

One of the key measures easing pressure on the exchange rate has been the sale over the last two months of almost Dollars 1bn in "structured notes" -

high-risk financial instruments in the state development fund which the government wants to get rid of.

Payable in bolivars at a premium to the official exchange rate, local banks, all of which are participating, sell the instruments to international banks for dollars. The banks are required by the government to sell the dollars back into the local market, often allowing substantial arbitrage gains.

Black market The bolivar has been pegged to the dollar at its current rate since March 2005, with exchange controls first introduced in 2003 to prevent capital flight amid intense political unrest.

Now, however, the official exchange rate is thought to be 30 to 50 per cent overvalued, triggering a thriving black market.

Bankers have benefited hugely by arbitraging the exchange rate - some have made "Russia-like" fortunes, according to one source - while hordes of average Venezuelans have been flying abroad to obtain their quota of "subsidised" dollars, only to return home immediately to sell them on the black market. Last year, demand for dollars for travelling abroad quadrupled.





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