UPDATE 2-Venezuela to boost dollar supplies through forex system revamp

Wed Jul 3, 2013 6:33pm EDT

* Changes to Sicad system seen reducing product shortages

* Measure also likely to spur already soaring inflation

By Brian Ellsworth and Eyanir Chinea

CARACAS, July 3 (Reuters) - Venezuela on Wednesday revamped a currency exchange system to boost the flow of dollars into the economy and ease nagging product shortages, a move that further devalues the local currency and may aggravate spiraling inflation.

Changes to the Sicad foreign exchange system, which operates in parallel with a decade-long currency control mechanism, will include holding at least two dollar auctions per month and loosening restrictions that business leaders had called cumbersome.

But the system will provide greenbacks at a rate weaker than the official exchange rate of 6.3 bolivars per dollar, further weakening the currency after a devaluation in February helped push annualized inflation above 35 percent.

"This is a considerable improvement over the previous version of the Sicad," said Henkel Garcia of local firm Econometrica, which is openly critical of government policy, citing elimination of bureaucratic hoops.

The change moves Venezuela toward a more market-based economy after vast expansion of state control by late socialist leader Hugo Chavez, whose 14-year rule was characterized by frequent nationalizations and constant confrontations with private industry.

After heavy state spending last year, President Nicolas Maduro faces a "stagflationary" panorama of a sharply slowing economy combined with a rising consumer prices.

Sicad was originally unveiled in March, but held just one auction that sold only $200 million, a fraction of the country's monthly import bill. It was frozen amid operational problems in disbursing currency.

The next auction will take place in the first two weeks of July. Changes to the system include expanding the number of people that can access the system, eliminating the need for letters of credit, and providing hard currency directly to importers rather than to their offshore providers.

Garcia estimated Sicad would sell dollars at a rate of around 16 bolivars each, more than twice the official rate but around half the price that greenbacks fetch currently fetch on an illegal black market.

Businesses have for months complained that inadequate access to dollars had prevented them from importing consumer staples ranging from wheat flour to toilet paper.

One business group on Wednesday said the country may not have enough toys for Christmas if the government does not increase dollar sales.

Sicad system also hold "special auctions" involving the sale of government debt, which could signal the return of a bond-swap mechanism used in previous years as a way for the government to provide currency to citizens and businesses.