UPDATE 1-Venezuela revamping currency controls to stop capital flight

Mon Dec 16, 2013 3:17pm EST

By Brian Ellsworth and Diego Ore

CARACAS Dec 16 (Reuters) - Venezuela said on Monday it is revamping its decade-long exchange controls by expanding the use of a complementary currency auction system to stop capital flight and combat the black market for greenbacks.

Currency exchange linked to tourism, oil investments, and the central bank's gold purchases will be carried out via the auction system known as Sicad, said Oil Minister Rafael Ramirez, giving those sectors a rate more favorable than the official one.

He also echoed calls by other officials for Venezuelans to contemplate higher prices of their highly-subsidized gasoline, signaling the state's desire to shore up its finances amid soaring inflation and chronic product shortages.

"We are opening up channels so dollars can come in not only through oil income but also through other sectors," Ramirez, who is also economy vice president, told reporters.

The currency control agency Cadivi sells dollars at the official rate of 6.3. But greenbacks fetch more than 10 times that on the black market as delays and restricted access via Cadivi leave businesses struggling to pay offshore providers.

The Sicad system was created to sell dollars at a rate that has not been officially disclosed but is believed to fluctuate in different auctions at around 12 bolivars.

"STEALTH DEVALUATION"

Ramirez said the auction system would gradually begin to displace Cadivi, which even ruling party officials recognize has lost tens of billions of dollars over the last two years to fake imports by shell companies.

Boosting the use of Sicad "will allow us to combat the parallel (black) market, which is one of the things that has done the most damage to our economy," Ramirez said.

He said Sicad would bring in $6 billion next year through oil investments, helping address the complaints of oil companies who say high inflation combined with a fixed official exchange rate makes operations prohibitively expensive.

"It is an incentive to investments in the oil sector because you now get more bolivars for your money," Alberto Ramos, Goldman Sachs analyst, told Reuters.

"Secondly, they want to divert more transactions away from Cadivi and into Sicad. So in that respect it is akin to a stealth devaluation of the bolivar without the political cost."

Echoing recent comments by the country's vice president, Ramirez said Venezuelans should consider supporting an increase in the price of gasoline that is now the world's cheapest.

"We need to have a national discussion as to whether or not we've reached the moment that we need to start charging for gasoline," he said, adding the subsidy costs $12.5 billion each year. "This is a major distortion."

Officials have been reluctant to raise the price of gasoline since 1989 due to riots then that were triggered in part by a fuel price hike, though Venezuela did raise prices in 1997 without incident.

Close to a decade of double-digit inflation has gradually eaten away at the fixed price and creates huge losses for state oil company PDVSA. Ramirez pointed out that a consumer can buy 250 liters of diesel for the cost of a soft drink.