Venezuela Lifts Controls on Banks Trading Foreign Currency

(Bloomberg) -- In the boldest sign yet that Venezuela is abolishing its complex web of financial controls, local banks will be able to begin trading foreign currency. The move will likely prove to be too little too late as the country grapples with hyperinflation and a historic economic depression.

From today, individuals and companies will be able to buy or sell foreign currency at private and state-run banks with the average of the transactions being published as the official rate by the central bank, according to a resolution dated May 2 and uploaded early Tuesday.

The move follows meetings between the government and banks last week that were led by Central Bank President Calixto Ortega, Economy Vice President Tareck El Aissami and banking regulator Antonio Morales, according to people with direct knowledge of the conversations. The move was unilateral from the government and didn’t require lobbying on the part of the banks, they said.

Since Former President Hugo Chavez first installed currency controls in 2003 after surviving a coup, the government has largely controlled the buying and selling of dollars in a system that at times created tremendous subsidies for Venezuelans to travel abroad and buy goods and also that handed immensely profitable arbitration opportunities to government cronies and companies with state contracts, breeding corruption.

In recent years, as the gap between the official rate and black market blew out, some controls began to be removed and today in the streets of Caracas there is already essentially a single rate with many transactions done with U.S. dollars or using foreign credit cards.

“The move is important and will serve as a breather for companies, but not more that that,” said Asdrubal Oliveros, director of Ecoanalitica consulting firm in Caracas. Effects on the economy will be limited as there are bigger problems constraining the foreign exchange market.

With just $8.5 billion of foreign currency reserves -- with much of it in physical gold bars -- the government will likely be unable to meet dollar demand leaving the private sector and individuals to fill part of the gap. Many multinational companies have either been nationalized, discontinued their businesses or reduced operations to a fraction of the size. Even the all-important oil industry is floundering with production sinking to the lowest in decades.

Venezuela Lifts Controls on Banks Trading Foreign Currency

While the move has the potential to simplify transactions and allow individuals to protect savings from sky-high inflation and a quickly devaluing bolivar, it comes in the midst of a dramatic political crisis with both President Nicolas Maduro and Juan Guaido, the head of the opposition-run National Assembly, claiming to be the legitimate leaders of the country.

The U.S. has ratcheted-up sanctions on Venezuelan officials, state-oil company Petroleos de Venezuela SA and even the central bank in an attempt to push for political change as Maduro digs in with the support of Russia and Cuba foremost.

The latest variation of a state-run foreign currency auction system, known as Dicom, had largely become irrelevant in recent months and its not clear if those auctions will continue. So far in 2019, the central bank sold just $40 million through Dicom, according to Henkel Garcia, director of Caracas consultancy Econometrica.

The recent sanctioning of the central bank by the U.S. also accelerated the decision to open currency trading to commercial banks as companies voiced concern over taking part in transactions on the Dicom platform, according to people familiar with the planning who aren’t authorized to speak publicly about the issue.

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