Venezuela's government took control of currency trading on Tuesday by promising a band for dollar exchanges and banning brokerages from an unofficial market where the local bolivar has bombed this year. Seeking once again to rein in a currency that has been devalued three times since he took power in 1999, President Hugo Chavez has ordered the central bank to take sole charge of the free-floating "parallel" market.
He accuses capitalist speculators of driving down the bolivar and fuelling sky-high inflation in the Opec member. Critics blame him, however, for the currency chaos in Venezuela, saying an ill-planned and multilayered system has distorted the market and created corruption, while socialist policies have crushed investment and production. The bolivar's woes are a far cry from the oil boom days of the 1970s when many Venezuelans enjoyed frequent shopping trips abroad, becoming jokingly known for their cry of "Damedos!" (Give me two!) when stocking up in Miami boutiques.
In a keenly awaited press conference to explain the new rules, Central Bank President Nelson Merentes said international bond prices would be used as a reference to give transparency to a system run by the bank. He said brokerages would be "totally" excluded from the new mechanism, thereby eliminating the impact of speculation while still letting market forces set prices.
"We want to find a stable, transparent and efficient system," Merentes told a televised news conference. A senior government source told Reuters the new system should be operating within two weeks, and that the government and state oil firm PDVSA might issue bonds to cover local dollar demand. Officials had previously ruled out placing new issues this year, though market analysts had said they would have to.
The parallel market, where dozens of brokerages had used a debt swap mechanism to sell dollars at well above the official rates of 2.6 and 4.3 bolivars per dollar, had been supplying currency for about half of all Venezuela's imports. The bolivar has plunged to more than 8.0 per dollar this month, fuelling one of the world's highest inflation rates.
Analysts and market sources believe the band for the parallel dollar will probably be between 5.0-7.0 bolivars. But a fourth, black market is now also expected to emerge. Market players focused intently on the news conference, where Merentes appeared alongside Finance Minister Jorge Giordani and the stock market regulator. The television transmission from the Miraflores presidential palace cut out several times.
"From a technical point of view, it (the new system) is complicated and BCV (the central bank) does not have the systems ready. We hope there will not be a long delay," New York-based RBS analyst Boris Segura told Reuters. "The key is to get it functioning fast. The more time the parallel market remains closed, the more difficult it will be for importers, and then that will have an effect on private consumption, supply, growth and inflation."
Chavez has called parallel market trading "robbery" and urged the public to report cases of it to him on his Twitter account. "We are battling a mafia ... we are going to give them the mother of all blows," he said last week in one TV speech. The authorities have raided six brokerages in recent days, and websites publishing the parallel rates have disappeared.
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