Venezuela unveils new foreign exchange system

Venezuelan officials announced Tuesday that they will allow a free-floating exchange rate for the country's battered currency.

The socialist South American government has been struggling to maintain its decade-old currency controls as inflation has soared with heavy public spending.

Now the falling price of petroleum is slamming the oil-based economy.

While the bolivar is trading for about 190 per dollar on the black market, the government sells dollars for the most crucial imports at rates of 6.3 or 12 bolivars and demands that retailers hold down prices to reflect the subsidies.

It has also been selling limited amounts of hard currency at a third rate, around 52 bolivars to the dollar, but officials say that rate will now be replaced by a more transparent system in which dealers and buyers exchange currency on a supply and demand basis.

Finance Minister Rodolfo Marco Torres said the new system would be "totally free" with "the market itself setting the exchange rate." But officials said trades would have to be made through authorized banks or exchange houses and only people with dollar-denominated bank accounts can take part.

As it struggles with a cash crunch, Venezuela's government has limited the amount of dollars it auctions at any of the rates, and businesses say delays in getting money for imports has fed shortages. The exchange difficulties have driven people to an illegal parallel market.

The new system announced yesterday could allow greater access to dollars, but at a far higher price than legally possible before. Central Bank President Nelson Merentes encouraged Venezuelans living outside the country to use the new system to send money back home.

Analysts called the new system an effective devaluation, which most economists agree is needed on a larger scale to right the country's economy. But analysts also speculated the new system would likely be more tightly regulated than officials suggested.

With the threat of street protests and a legislative election looming, the government is likely to look for ways to channel scarce dollars to politically sensitive goods and take steps to prevent capital from leaving the country, said Risa Grais-Targow, an analyst at the Washington-based Eurasia Group.

"I think it will be less flexible because the government's incentives right now are to increase control," she said. The full regulations governing the new market are to be published today.