Economy
Hugo Chávez's administration has instructed the Foreign Exchange Administration Commission (Cadivi) to restrict allocation of foreign currency for various purposes, as in the fourth quarter last year imports exceeded by USD 3.72 billion the inflow of foreign currency from oil sales, amidst declining oil prices.

The statistics published by the Foreign Exchange Administration Commission (Cadivi) –the agency responsible for distributing US dollars at the official exchange rate– show that in the first two months this year, the amount allocated to importers, including the Latin American Integration Association (ALADI) agreement totals USD 3.39 billion, a 32 percent fall compared to USD 5 billion in the same period of 2008.

Everything suggests that the government is set to further restrict authorizations of US dollars for purchases abroad. Cadivi is preparing a new regulation under which the availability of foreign exchange will depend, among other things, on "the compliance with the guidelines approved by President Hugo Chávez and his cabinet."

Coping with the decline of petrodollars by curbing the supply of foreign currency is likely to translate into shortage of products or increased imports of products with US dollars purchased in the parallel market (under the Venezuelan laws, it is prohibited to disclose the parallel exchange rate). Predictably, the inflation rate is to swollen.

Abelardo Daza, an economist and professor at the Institute of Higher Education in Business Administration (IESA), said that "imports are falling because of the slowing down consumption and economy. Therefore, even if there were no restrictions, the supply of foreign exchange would have decreased this year."

Daza added that "it is very difficult to determine whether the fall of consumption is equivalent to the decline of the supply of US dollars by Cadivi. He said, however, that in his view there are no risks of shortage of food, medicines, machinery and equipments. "I believe that there is enough foreign exchange available to buy those items."

According to a study prepared by Caracas-based research firm Ecoanalítica, in 2008 imports made through the parallel market only amounted to 5 percent of total imports while in 2009, this type of imports will increase to 32 percent.

There is a latent risk, however, the history of exchange controls in Venezuela shows that when oil revenues fall and imports exceed the inflow of foreign currency, companies try to be ahead of devaluation and set prices based on the exchange rate in the parallel market. Consequently, the inflation rate grows quickly.

Traders argue that state-run oil company Petróleos de Venezuela (Pdvsa) has been selling foreign currency on the parallel market to avoid a sudden increase of the US dollar. But such operations, which have not been confirmed by official sources, have a cost. If and when Pdvsa sells foreign currency in the parallel market, the amount of dollars supplied to the Central Bank of Venezuela decreases. As a result, Venezuelan international reserves do not grow.

Analysts claim that when reserves become stagnant, both uncertainty in the foreign exchange market and expectations about currency devaluation increase. Therefore, rather than balancing the market, such operations have a negative impact.

Serious troubles
As of February 2005, Hugo Chávez's administration has pegged the exchange rate at VEB 2.15 per dollar, while the accumulated inflation in Venezuela stands at 80 percent during the same period.

As a result, the Venezuelan bolivar is overvalued and there in an imbalance between what can be bought with VEB 2.15 in Venezuela, and the items that can be purchased with one dollar in the United States or elsewhere. Therefore, there is a growing trend to import products.

Ecoanalítica created an index to measure the overvaluation of the bolivar compared to the dollar, the Colombian peso and the Brazilian real, which are the currencies of Venezuela's three major trade partners.

Thus, if the Venezuelan government decided to correct the imbalance, it would have to devalue the Venezuelan bolivar to VEB 4.76 per dollar, that is, "122 percent above the official exchange rate," Ecoanalítica said.
vsalmeron@eluniversal.com

Translated by Gerardo Cárdenas

Víctor Salmerón
EL UNIVERSAL