INSIGHT: Venezuela’s new rules for foreign exchange “not much help”

17 July 2013 19:00  [Source: ICIS news]

By George Martin

HOUSTON (ICIS)--Venezuelan plastic converters who have been dealing with shortages of specialty plastic resins for years, have a new system to address import delays in the so-called “SICAD”, which stands for complementary system of administration of foreign exchange (translated Spanish acronym). However, the new system may not provide tangible benefits for the plastics sector, industry sources say.

The system is “complementary” because it comes to the rescue of CADIVI, the discredited state agency that regulates imports and the administration of foreign exchange for import/export operations.

Under CADIVI, companies needing US dollars to buy imports of raw materials, machinery or any kind of imported goods need to apply for a certificate of insufficient domestic production. If the certificate is granted, the next step is to wait for the government to make available the necessary dollars to pay the suppliers of such authorised imports.

The typical complaint contends that CADIVI is too slow granting the permits and even slower in delivering the dollars, even after authorising the purchases as legitimate imports.

But CADIVI’s advantage is that it provides US dollars at the official rate, currently set at bolivar (Bs) 6.30 per US dollar.

Because of high inflation in the country, the dollar value in the streets has climbed to three to five times the official rate.

The SICAD system aims to operate in the middle, auctioning dollars to the best bidder in a sort of legalised black market for currencies.

What is the point of selling dollars at the official exchange rate when you can auction them to the highest bidder?

One obvious benefit is that it keeps prices from skyrocketing, but the consequences of keeping the currency artificially low are detrimental to the nation’s coffers.

Market participants complain that there is undue secrecy in the SICAD proceedings.

SICAD will have two auctions per month that will be open to everyone, and the rules will be clearly spelled out for each of the programmed events, according to official sources.

One such auction has been held so far, a few months ago, according to local sources, and the value obtained is believed to be in the range of Bs12-20 per dollar, although nobody is sure. The amount auctioned was said to be less than $200m.

The differential between the official exchange rate and the SICAD exchange allegedly goes to a social fund to be administered directly by the Venezuelan president.

Locals fear the fund will be used for political purposes, as there is not much information about the rules governing the use of those funds, sources said.

The different sectors of the economy called to these auctions will have a different rate, making the process less transparent.

For instance, an auction can be open only for people of certain states, or people of certain industries. The exchange rates obtained out of the different sectors will vary and will not be published, again obscuring the process.

Persons or entities currently working imports with a CADIVI approved permit will not be allowed to participate in SICAD auctions.

Most companies in the plastics industry will stay with the CADIVI process, because with the SICAD, it is impossible to control costs.

The amount of dollars offered by the Venezuelan Central Bank in each auction will not be revealed. It is believed that the amount will be around $200m per auction, local sources said.

The food and medical sectors cannot afford to pay much more over the official rate, and are likely to stay with CADIVI, local sources said.

“People that import spare parts, smaller companies that do not have the resources to deal with the CADIVI requirements and delays, and those that currently get dollars in the free market at a high cost can benefit with the auctions” a transformer said.

“Citizens looking for dollars for traveling are limited to a maximum amount of $2,500, while people seeking medical imports for health reasons are limited to $5,000,” another source said.

Nobody believes the amounts auctioned will be a panacea for the economy, but the SICAD is seen as a tacit change of direction forced by the tough circumstances of the Venezuelan economy.  For some, SICAD can be considered a first step towards more flexible currency policies.

Under present currency policies, the dollar black market is illegal, and the mention of dollar rates different to the official one can be a punishable act, a source said.

Venezuelans are not sure the procedure is a good thing overall. Many say that selling dollars above the official rate will generate inflation, and perhaps increase recessionary conditions.

But above all, they contend that the dollars auctioned are only a minor fraction of what Venezuelans need, and that the auctions are simply another patch applied to problems that have been busting at the seams for too long.

By: George Martin
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