Identifier
Created
Classification
Origin
07CARACAS2330
2007-12-12 14:48:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

PRESSURE MOUNTS ON VENEZUELA'S EXCHANGE CONTROL

Tags:  ECON EFIN VE 
pdf how-to read a cable
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PP RUEHWEB

DE RUEHCV #2330/01 3461448
ZNY CCCCC ZZH
P 121448Z DEC 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC PRIORITY 0284
INFO RUEHBO/AMEMBASSY BOGOTA 7616
RUEHLP/AMEMBASSY LA PAZ DEC LIMA 0905
RUEHQT/AMEMBASSY QUITO 2719
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
C O N F I D E N T I A L CARACAS 002330 

SIPDIS

SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR MMALLOY
NSC FOR JCARDENAS AND JSHRIER
COMMERCE FOR 4431/MAC/WH/MCAMERON

E.O. 12958: DECL: 12/07/2017
TAGS: ECON EFIN VE
SUBJECT: PRESSURE MOUNTS ON VENEZUELA'S EXCHANGE CONTROL
REGIME

REF: CARACAS 2228

Classified By: Economic Counselor Andrew N. Bowen for reasons 1.4 (b) a
nd (d).

C O N F I D E N T I A L CARACAS 002330

SIPDIS

SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR MMALLOY
NSC FOR JCARDENAS AND JSHRIER
COMMERCE FOR 4431/MAC/WH/MCAMERON

E.O. 12958: DECL: 12/07/2017
TAGS: ECON EFIN VE
SUBJECT: PRESSURE MOUNTS ON VENEZUELA'S EXCHANGE CONTROL
REGIME

REF: CARACAS 2228

Classified By: Economic Counselor Andrew N. Bowen for reasons 1.4 (b) a
nd (d).


1. (C) Summary: The BRV's exchange control system appears to
be coming under increasing pressure, as a persistent and
large gap between the official and parallel exchange rates
makes acquiring dollars at the official rate the best
business in town. Contacts note that CADIVI is falling
further behind in processing dollar requests, and its
web-based system for receiving requests has repeatedly
crashed due to overwhelming demand. Processing delays may
constrain import growth, as many banks have reached the limit
on lines of credit that finance imports in advance of
CADIVI's authorization for the disbursement of hard currency.
Banks are also bearing the brunt of CADIVI's delay in
authorizing funds to cover credit card purchases abroad.
There is speculation that the BRV could move to a dual
exchange rate system or restrict the scope of imports
eligible for CADIVI dollars. We doubt, however, that the BRV
would prove any more adept at managing a dual rate system
than the current one. End summary.

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Endless Opportunities
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2. (SBU) The official exchange rate, a fixed rate last
adjusted by the BRV to 2150 bolivars (Bs) to the dollar in
March 2005, has become increasingly overvalued, thanks in
part to several years of double-digit inflation. The
parallel market rate is currently at 5,600 Bs/USD, and it has
been more than double the official rate for the past six
months. Given the bolivar's overvaluation and the persistent
gap between the official and parallel rates, anyone who can
get dollars at the official rate is making a killing.
Wealthy Venezuelans, for example, can send their children to
top private colleges in the U.S. for just over one third the
cost with "CADIVI dollars" (if a parent converted USD 10,000
into Bs at the parallel rate and turned those Bs over to
CADIVI, the corresponding CADIVI dollars would pay for a
tuition of USD 26,000).


3. (SBU) CADIVI, the BRV agency charged with authorizing

disbursement of official dollars, only publishes total
dollars authorized for disbursement, not the total amount
requested. We are sure, however, that the total requested
has leapt astronomically this year. One of our contacts who
executes parallel market transactions said recently that he
was seeking to open several import businesses; his only
lament was that everyone else seemed to have the same idea.

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CADIVI Overwhelmed
--------------


4. (C) Complaints from businesses about delays in obtaining
authorization from CADIVI have intensified in recent months,
and several other signs suggest that CADIVI is becoming
overwhelmed with requests. Former CADIVI president Mary
Espinoza (strictly protect) told econoff in mid-November that
CADIVI's web-based system for receiving requests had been
down for five days because so many people were trying to
access it simultaneously. Business contacts have reported
difficulties in accessing the system, and even CADIVI
officials have publicly admitted to problems with the
website. Some contacts have suggested that the delays are
also due to corruption, with CADIVI officials reportedly
"charging" a fee of 400 Bs per USD to process requests. With
such a large gap between the official and parallel rates, one
of our contacts joked, "CADIVI would corrupt even the Pope."

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Banks Reporting Increasing Problems
--------------


5. (C) Citibank Venezuela president Bernardo Chacin
(strictly protect throughout) told econoffs that some banks

had reached the limits of credit lines used to finance
approved imports and were unable to finance new imports until
CADIVI authorized disbursements for previously approved
imports. (Note: CADIVI makes two key authorizations during
the import process. It approves the import for hard currency
disbursement before the import takes place, and it approves
the actual disbursement of hard currency after the approved
import takes place. Banks have to date provided financing to
bridge the gap between the first and second approval, but as
this gap increases they are increasingly reluctant to do so.
End note.) Several banking sector contacts have recently
noted that CADIVI has fallen behind on authorizing
reimbursements for credit card purchases abroad. (Note:
Venezuelans are allowed to make credit card purchases of up
to USD 3000 per year at the official rate. End note.) Oscar
Garcia Mendoza (strictly protect),president of Banco
Venezolano de Credito, claimed that banks had fronted up to
USD 1 billion to customers, for which they were waiting for
CADIVI disbursement authorizations. (Note: It was unclear if
this amount included both credit for imports and for credit
card purchases, or only the former. End note.)

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BRV Response Piecemeal to Date
--------------


6. (C) The BRV has done little to address problems in the
currency control system. The Minister of People's Power for
Finance said on December 6 that the government was
considering measures "to safeguard the system of
administering hard currency" but gave no further explanation.
Also on December 6, officials from the Ministry of People's
Power for Finance, CADIVI, and the Ministry of Food Supply
met with banking sector officials to discuss problems in the
system. According to Chacin, who was present at the meeting,
the Vice Minister of Food Supply blamed the banking sector
for delaying imports of basic foodstuffs by withholding
credit.


7. (SBU) Contacts believe that the BRV could decide to
establish a dual exchange rate, with the lower rate reserved
for priority import items such as basic foodstuffs. Yet the
only concrete step the BRV has taken to date has been to ask
tens of thousands of individuals to justify their credit card
purchases, with potential punitive measures for those who
abused the system and the "patrimony" of the state, as
CADIVI's president put it. While the USD 3000 credit card
allocation is a source of widespread fraud, it represents
only 10 percent of total CADIVI authorizations.

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Comment
--------------


8. (C) The rate of growth in hard currency disbursements
authorized by CADIVI, the majority of which go towards
financing imports, is clearly unsustainable over the medium
term. According to its website, CADIVI has already
authorized 41 percent more through December 4, 2007 (USD 38
billion) than in all of 2006 (USD 27 billion). If these
statistics are true, if CADIVI authorizations were to
continue to grow at this pace, and if petroleum revenues
leveled off at expected 2007 levels, CADIVI hard currency
authorizations would exceed petroleum revenues in 2009 (even
using the BRV's petroleum revenue figures, which we believe
to be overstated - reftel).


9. (C) Implementation of a well-managed dual exchange rate
system could in theory help alleviate bottlenecks in the
import of priority items, reducing their prices (or
eliminating shortages) and thus catering to Chavez'
constituency. On the negative side, it would certainly be
distortionary and would be equally open to corruption, as
importers switched to priority items or bribed CADIVI
officials to register their products as such. It might also
prove inflationary, to the extent that merchants have not
already set prices of "non-priority" imported items somewhere
between the official and parallel rates. Finally, it would
not solve the basic problem inherent in maintaining an

overvalued fixed exchange rate, namely that demand for hard
currency will always exceed supply, forcing the government to
manage the rationing process. We have no confidence that the
BRV would prove any more adept at managing a dual exchange
rate system than the current one. End comment.
FRENCH