Financial controls backfire in Venezuela

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By Rachel Jones ASSOCIATED PRESS

VALENCIA, Venezuela

General Motors Corp. is halting production in Venezuela for three months starting Friday. Ford Motor Co.'s subsidiary announced 10 percent cutbacks last week. Other automakers also are shrinking their business, but not because Venezuelans don't want to buy cars.

They are closing down because the government won't give them enough dollars to import parts.

It's a crisis entirely brought on by the currency controls imposed by President Hugo Chavez, Gabriel Lopez, president of Ford Motors for Venezuela and the Andean region, told the Associated Press. "Year after year, we're shrinking by about 10 percent compared to the year before," he said.

Mr. Chavez began regulating access to dollars and making it harder for businesses and people to transfer money in 2003 after confidence in his government was shaken by a failed coup and a subsequent strike. Venezuelans must now apply to the currency agency Cadivi for dollars at the official rate of 2.15 bolivars to import goods or take vacations.

These controls have backfired with a vengeance - businessmen, companies and private citizens transferred about $72.7 billion out of Venezuela over the past six years - nearly double the outflow of the six years before that, according to the Central Bank of Venezuela - distorting the economy, fueling inflation and discouraging private investment.

But the controls themselves haven't led to a political backlash, perhaps because Venezuelans with means tend to be opposed to Mr. Chavez's socialist policies already. Low-income Venezuelans haven't been as affected, partly because the government subsidizes food and free health care.

That could change now that oil income has plunged from last year's record highs. Oil represents 93 percent of Venezuela's exports, and with crude prices at 52 percent below their July peak, the inflow of dollars is expected to drop by half this year to about $42 billion, said Alejandro Grisanti, an economist at Barclays Capital in New York.

The oil price drop has roughly cut in half the amount of goods Venezuela can afford to import, so the government has had to tighten currency controls even more and ration the dollars it supplies to travelers and importers in response, Finance Minister Ali Rodriguez said.

Just $4.9 billion was allotted for imports in the first quarter of the year - 39 percent less than the same period last year, according to the Caracas consulting firm Ecoanalitica - and the government is prioritizing dollars for food and medicines, while limiting those it provides for luxuries such as liquor, cosmetics and designer clothing.

Nearly all private businesses are feeling the pinch - from automakers to hairdressers. Textile manufacturers are waiting for currency to import cloth. Dairies are complaining that they can't buy imported powdered milk.

The closure of GM's two plants in central Carabobo state could be a tough blow to the local economy. GM is Venezuela's largest automaker, employing 4,000 people and generating 70,000 indirect jobs.

Many will be affected, including transport worker Franklin Gonzalez, 40. He said his employer, Tegma Venezuela, a subsidiary of Brazilian firm Tegma Gestao Logistica SA, will have to find business elsewhere or its roughly 20 drivers will see their salaries slashed by 60 percent or more.

"How is one supposed to work?" asked Mr. Gonzalez, who stopped supporting Mr. Chavez years ago because he thinks the president's policies have strangled private business.

Mr. Chavez has assured that "Venezuela won't go under," but said spending must be regulated carefully until oil revenues rebound.

Even hair salons - a weekly staple for many Venezuelan women - have been affected.

"You try to get one hair dye and you get another. Or you ask for 10 shades and you get six," said hairdresser Judy Morales, 42, whose salon is now using more local products than those from France, Brazil or other countries.

"We're not used to this in Venezuela," she said.

AP writer Fabiola Sanchez contributed to this report.