CARACAS Venezuela's top economy official vowed on Monday that a new currency exchange platform would undermine the spiraling black market for U.S. dollars by adding a market-based mechanism to existing currency controls.
Economy Vice President Rafael Ramirez told reporters that the system known as Sicad 2 would be based on supply and demand and would create an exchange rate through a bond swap system known locally as "permuta."
Sicad 2 will add a third rate to the 11-year-old currency controls that sell dollars at 6.3 bolivars for preferential goods and at 11.8 for other items, both of which are far below the 87 bolivars that greenbacks fetch on the black market.
"We are going to let the (exchange) rate be determined by supply and demand," Ramirez told reporters during a press conference. "The enemy is the parallel exchange rate, we are going to bring it down."
Venezuela has maintained currency controls since 2003, but has sought to overhaul them over the last year amid product shortages that resulted from businesses struggling to import products. It has also suffered from growing corruption problems.
The government on Monday paved the way for Sicad 2 by reforming the Exchange Crimes Law to allowed businesses and individuals to take part in foreign exchange transactions. That activity had been previously reserved for the central bank.
But the new market cannot take effect until the central bank draws up a new set of currency regulations. Ramirez said he hoped that mechanism would be ready by Tuesday.
Sicad 2 will hold auctions every day, with the amount on offer to be based on demand rather than a set amount.
Buyers will not have to describe what the dollars will be used for when they bid, unlike other foreign exchange mechanism that exist under the currency controls.
Investors have responded favorably to news about Sicad 2, with the main index of the country's bonds rising steadily since the start of last week despite widespread violence linked to opposition street protests that have left 13 dead.
Prices of Venezuela's global bonds rose as much as 4.0 percent on Monday as investors took heart that the new foreign exchange mechanism would increase cash available to service debt. State oil company PDVSA's bonds were up as much as 3.0 percent.
Creating a functioning currency market would help Venezuela address chronic product shortages, boosting bondholders' confidence that the country will have sufficient cash on hand to service debt.
Previous systems including the first iteration of Sicad, which continues to exist, have involved auctions that effectively set a minimum exchange rate, which consistently leaves demand unmet and pushes buyers into the black market.
The government has consistently shied away from market-based systems such as the one proposed for Sicad 2 because it will likely boost the cost of imported goods, which would spur inflation that reached 56 percent last year.
The huge gap between the official and black market rates creates incentives for businesses to buy cheap dollars and resell them for a huge profit on the black market.
That leaves fewer dollars going toward productive activity and helps spur shortages of goods ranging from wheat flour and milk to motorcycle parts and industrial machinery.
(Editing by Andrew Cawthorne)