Venezuela lawmakers to give Central Bank control over bond trading, aiming to cut inflation

Pro-Chavez lawmakers to tighten currency controls

CARACAS, Venezuela — Lawmakers loyal to President Hugo Chavez are proposing to tighten currency dealing rules to give the Central Bank exclusive control over trading in government bonds — a market where Venezuela’s currency has been swiftly falling against the U.S. dollar.

Congressman Ricardo Sanguino, president of the National Assembly’s Finance Committee, told state television Tuesday the proposed revisions in the currency law will exclude private brokerages from operating in the “parallel” dollar market through bond trading.

But Sanguino also said that some businesses — it was not clear which ones — would still be able to perform such currency transactions under the Central Bank’s direct supervision.

The legislature, which is dominated by pro-Chavez lawmakers, gave initial approval to the bill later Tuesday. The measure must be voted on again by legislators and signed by the president before it becomes law..

Chavez’s socialist government has currency controls that set fixed, official rates for Venezuela’s bolivar against the U.S. dollar. The currency agency provides some dollars for approved imports such as food and medicine at the official rate, but a black-market trade is also flourishing, and many businesses have turned to legal bond transactions to trade currency.

Chavez has called for the government to take action in the currency market as a way to combat worsening inflation — now running at an annual rate of just over 30 percent, the highest in Latin America.

He blames the rise of the U.S. dollar against the bolivar on speculation by wealthy businessmen, owners of brokerage firms and currency traders. The price of the dollar on the black market and the parallel bond market has increased in recent weeks to about 8.20 bolivars to the dollar.

Chavez set a two-tiered official exchange rate in January, pegging the bolivar at 2.60 to the dollar for priority goods such as food and 4.30 per dollar for imports of products the government deems nonessential.

Business groups say the government has not distributed enough dollars at the official rate to satisfy demand, forcing many businesses and importers to buy more expensive dollars on the black market or through bond trades.

About 30 percent of imports in Venezuela are purchased using dollars obtained through the unofficial market, according to the Venezuelan consulting firm Ecoanalitica.

The currency controls have failed to halt capital flight, and some Venezuelans continue to transfer funds abroad. Ecoanalitica estimates about 70 percent of the capital flowing out of the country leaves through the black market or bond trades.

The price of dollars on the black market heavily influences inflation. Last week, the Central Bank and National Statistics Institute said consumer prices jumped 5.2 percent in just April, driving the annual inflation rate to 30.4 percent.

Economist Orlando Ochoa said it is possible the new currency measures might not have a huge impact if the Central Bank merely supervises financial companies involved in currency trading. But he warned that the tighter rules could backfire if they end up turning into a crackdown that blocks movement in the market.

“If the Central Bank is going to persecute the big operators, the banks are going to decide not to participate and their nervous … clients are going to jump to the black market,” Ochoa said in a telephone interview.

That could heat up inflation even more, he said.