Caracas, May 12, 2010 (venezuelanalysis.com) – Venezuela’s National Assembly approved, in the first round of discussion, a new reform to the Law against Illicit Exchange on Tuesday in order to curb speculation after the Bolivar currency fell further in the parallel market.
The reform, which still has to be approved in a second round of debate, would give the Central Bank of Venezuela (BCV) exclusive power to authorise the purchase and sale of foreign currencies.
It also aims to close a loophole that allows Venezuelan brokerage firms to buy and sell government debt, and thereby trade currency in the parallel foreign exchange market, by redefining currency trading to include transactions of bond denominated in foreign currency.
Chairman of the parliamentary standing committee on finance, Deputy Ricardo Sanguino, said on state television that the reform will restrict bond trading by securities brokerage firms because they are undermining the value of the Bolivar.
On Monday three brokerage firms were taken over by the government and others are currently being audited by the Venezuelan Securities Commission.
The move comes after Venezuelan President Hugo Chavez addressed the cabinet on Saturday saying, “We need to stop this right now; we need to smash speculation as the bourgeoisie do not listen to appeals to their conscience. Let’s act with a firm hand.”
Venezuela has a two-tiered official exchange rate of Bs 4.3 per dollar, for most imports, and Bs 2.6 per dollar for transactions identified as priorities such as food and medicine.
However, in the parallel or unofficial market the Bolivar is currently nearly twice as weak as the official rate, trading at Bs 8.5 per dollar.
Earlier this year, the Central Bank issued $500 million in 90 day dollar bonds priced at Bs 4.8 per dollar to soak up dollar demand and boost the Bolivar; however this produced a “speculative process” with traders selling the bonds at the parallel rate which has averaged Bs 7 per dollar this year Sanguino said.
Chavez argued that the central bank could continue to issue bonds in an attempt to boost the Bolivar, but that this would have no effect and just “burn” reserves because speculation in Venezuela has a political component.
“Now the Central Bank will be empowered to allocate certain transactions for currency traders, in order that such transactions are public to avoid speculation and fraud,” Sanguino said.
Sanguino, who helped to draft the reforms, said they could be passed as early as this week, given the urgency of the situation.
“The State has to strengthen its role, supervision and regulation to preserve currency stability,” the introduction of the new draft read.
“The goal is to avoid creating disturbances in the real world that have undesired consequences on social well-being,” it continued.
National Assembly Deputy Elvis Amoroso explained, “The idea is to control to whom or what currency bonds are targeted when they are acquired by brokerage firms and bankers because we have to prevent these people speculating excessively and then become multimillionaires with the money that belongs to all Venezuelans.”