Chapter

VII Recent Experiences with Capital Controls: Chile, Colombia, Malaysia, and Venezuela

Author(s):
Owen Evens, and Peter Quirk
Published Date:
October 1995
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This section presents case studies of recent experiences with capital controls in four IMF member countries with a view to assessing the impact of those controls. The controls in Chile, Colombia, and Malaysia were aimed at deterring capital inflows or at changing their composition, while those in Venezuela were intended to limit capital outflows.

Chile

Chile’s economy was seriously affected by the debt crisis of the 1980s. After growth slumped sharply through the mid-1980s, the authorities introduced effective stabilization polices. Rapid recovery then ensued, prompting the Central Bank of Chile to attempt to reduce aggregate demand by raising interest rates. The official reference interest rate was increased by about 2 percentage points, to 8.7 percent (in real terms) in January 1990, pushing the real bank lending rate to about 16.5 percent.107 At that time, the authorities were managing the exchange rate flexibly, allowing it to fluctuate within a band of 5 percent on either side of a central reference rate. The reference rate was adjusted daily, with the goal of offsetting the annual differential between local and world inflation. Following the tightening in monetary policy, the exchange rate began to appreciate toward the top of the band, and by June 1990 it was about 7 percent more appreciated than it had been in January. Nevertheless, short-term capital inflows began to surge, prompting the introduction of policies in 1991–92 designed to limit them (primarily with measures to control and discourage inflows, as well as increased exchange rate flexibility) while still maintaining an attractive environment for long-term inflows.

Reintroduction of Controls on Inflows

Before 1991, capital flows into Chile were reasonably free of restrictions, reflecting the economy’s need for foreign savings, whereas most outflows were restricted. The restrictions on inflows in place then and now include a 30 percent nonremunerated reserve requirement to be constituted for one year on all external liabilities, irrespective of their maturity; a minimum one-year holding period for all foreign investments (direct and portfolio investment); and a minimum amount and minimum rating requirement for all American depository receipts (ADRs) and bonds issued by Chilean companies. All foreign borrowing and investment flows must be authorized in advance by the central bank, although this regulation appears not to have been used for capital control purposes in the recent past.

Following the initial surge, in June 1991 a stamp tax of 1.2 percent was imposed on foreign borrowing, to equate the tax treatment of domestic and foreign borrowing, and a reserve requirement of 20 percent was applied to all new foreign borrowing except trade credits. A phased extension of the reserve requirement to existing borrowing was introduced the following month.108 In January 1992, the reserve requirement was extended to foreign currency bank deposits at commercial banks. A further attempt to slow the expansion of private demand led to another round of interest rate increases between March and November 1992, as the central bank gradually raised the real annualized interest rate on its 90-day paper to 6.4 percent from 4.7 percent.

Other measures were taken concurrently. In January 1992, the official exchange rate of the peso was revalued by 5 percent, and the exchange rate band was widened to 10 percent on either side of the reference rate, allowing the exchange rate to appreciate immediately by about 3 percent. During 1991–92, the central bank conducted open market operations to sterilize the monetary effects of the capital inflows. With international interest rates declining, however, short-term capital inflows surged again. In March 1992, in response to the continuing inflows, exporters were allowed to keep 10 percent of their export proceeds in foreign currency; and in May 1992, the reserve requirement on foreign liabilities of commercial banks was increased to 30 percent and some capital outflows were liberalized. The reserve requirement on direct foreign currency borrowing by nonfinancial enterprises was extended to 30 percent in August 1992 (further liberalization measures regarding outflows were introduced in July and October of that year).

Role of Controls

Net short-term private capital inflows recorded in the balance of payments declined in 1991, the first year of restrictions on inflows. However, both estimated misinvoicing and net errors and omissions may also reflect capital inflows. These flows increased sharply in 1991, so that the aggregate contribution of these items and short-term inflows to the capital account surplus increased, despite the introduction of the controls (Table 2). As noted, short-term inflows surged again in 1992 but then fell in 1993 (although they remained significantly positive). Both estimated misinvoicing and net errors and omissions also fell in 1993, while long-term inflows increased, indicating that the strengthened controls may have had some effect on the maturity structure of inflows, although total recorded capital inflows changed little.109 Total capital inflows into Chile appear to have surged again in 1994. These developments may be taken to imply that the controls were of limited macroeconomic effectiveness.

Table 2.Chile: Estimated Trade Misinvoicing, Net Short-Term Capital Flows, and Net Errors and Omissions(Millions of U.S. dollars; negative sign denotes outflow)
YearEstimated Misinvoicing1Net Private Short-Term CapitalNet Errors and OmissionsTotal
198853241−109464
1989−4638−122−130
199044927−32939
19914685083941,370
19926641,3683592,391
1993441625−94972
Total2,1023,5073966,006
Sources: International Monetary Fund, International Financial Statistics (Washington, various issues), and Direction of Trade Statistics (Washington, various issues); and IMF staff estimates.

Chile’s exports to the rest of the world minus the rest of the world’s imports from Chile plus the rest of the world’s exports to Chile minus Chile’s imports from the rest of world. Import data are converted from c.i.f. basis to f.o.b. basis using c.i.f./f.o.b. factors from IFS.

Sources: International Monetary Fund, International Financial Statistics (Washington, various issues), and Direction of Trade Statistics (Washington, various issues); and IMF staff estimates.

Chile’s exports to the rest of the world minus the rest of the world’s imports from Chile plus the rest of the world’s exports to Chile minus Chile’s imports from the rest of world. Import data are converted from c.i.f. basis to f.o.b. basis using c.i.f./f.o.b. factors from IFS.

The effectiveness of capital controls may be investigated by comparing offshore and onshore interest rates, to the extent that controls drive a wedge between these rates.110 Effective capital controls should allow the authorities to maintain higher real interest rates than would otherwise have been possible. Comparing the period after mid-1992, when the process of widening and intensifying the controls was completed, with that before, there is no discernible increase in real interest rates (Chart 1). However, interest rates were generally quite positive, and it may be argued that the size of any risk premium contained in real rates should have fallen during the period as the authorities’ reform program proceeded and capital inflows occurred.

Chart 1.Chile: Interest Rates

A. Controls were introduced in June 1991.

B. Widening of controls was completed in August 1992.

(Percent)

The impact of capital controls on interest rates can also be examined by looking at differentials between domestic and foreign interest rates adjusted for forward exchange rate premiums or discounts, that is, covered interest parity. As in many developing countries, no forward foreign exchange rate data are available for Chile, so that actual ex post exchange rate movement must be used as a proxy.111 Calculations on this basis for Chile show no clear shift, either upward or downward, in the adjusted interest rate differential following the introduction of the controls on capital inflows (Chart 2).112

Chart 2.Chile: Interest Rate Differential

A. Controls were introduced in June 1991.

B. Widening of controls was completed in August 1992.

(Adjusted for exchange rate change, in percent)

Based on these developments, it is not possible to judge definitively the effectiveness of Chile’s capital controls. Real interest rates have generally not increased but also have not fallen. Other factors, such as a deteriorating terms of trade and exchange rate appreciation, may have contributed to the slowdown of inflows in 1993 and any switching between categories of capital inflow may also be attributable to factors other than the controls. Moreover, it would appear from available data that inflows surged again in 1994, despite continuing controls.

Colombia

In the mid-1980s, Colombia successfully undertook a comprehensive adjustment effort to deal with domestic and external imbalances. These policies and structural reforms, which included liberalization of the external sector, have helped sustain relatively robust economic growth and a strong balance of payments position in recent years. Inflation has remained between 20 percent and 30 percent a year, owing initially to a generally accommodating monetary policy and, more recently, to a rapid increase in public expenditure.

Private capital inflows rose sharply in the early 1990s in response to a tax amnesty, financial liberalization, and higher interest rates. The authorities sought to sterilize these inflows through open market operations with a view to avoiding a real appreciation of the peso. The resulting increases in interest rates encouraged further capital inflows—also stimulated by improved investor confidence following the discovery of new oil fields—while sharply raising the intervention costs of the Banco de la Republica. Recognizing that some degree of real appreciation was unavoidable in the light of economic fundamentals, policy was reoriented toward allowing more exchange rate flexibility, enabling monetary policy to be directed at controlling monetary aggregate growth.113 Continuing concerns regarding external competitiveness prompted the authorities to resort to increasingly restrictive controls on external indebtedness in 1993–94.

Introduction of Controls on Inflows

The authorities’ policies were generally oriented toward a more liberal capital account in the early 1990s. However, in September 1993, in response to the strong capital inflows, the central bank imposed a tax on foreign borrowing in the form of a non-interest-bearing deposit requirement of 47 percent of the loan amount on all loans with a maturity of 18 months or less. In addition, the Banco de la Republica required that import payments be made within six months of the due date for the purpose of accelerating payments of outflows and increasing the cost of import financing. Import payments that were not settled during the six-month period were considered debt and were subject to the deposit requirement. The non-interest-bearing deposit would be held at the Banco de la Republica for one year but could be sold to the bank at an annual discount rate of 13 percent.114

In the face of ongoing pressure toward appreciation of the peso, the restrictions on foreign borrowing were tightened twice during 1994.115 In March 1994, the deposit requirement was extended to foreign loans with maturities of up to three years. However, the borrower could choose to place a 1-year deposit for 93 percent, an 18-month deposit for 64 percent, or a 2-year deposit for 53 percent of the loan amount. In August 1994, the maximum maturity subject to the deposit requirement was extended to five years; the deposit as a percentage of the loan was also increased, ranging from 140 percent for loans with a maturity up to 30 days to 43 percent for loans with a maturity of 5 years (with a schedule of deposit ratios and maturities). These deposits would be held for a period corresponding to the loan maturity. In addition, the maximum period for payments of imports without incurring a deposit requirement was shortened to four months from six months. Furthermore, rules for foreign borrowing for real estate purposes were also tightened in March 1994, when a minimum maturity for such loans was raised to three years from two years, whereas in August all borrowing related to real estate transactions was prohibited.

Role of Controls

Despite the controls and the other changes in policy, capital inflows strengthened sharply from US$2.4 billion in 1993 to an estimated US$3.3 billion in 1994. The overall balance of payments surplus declined as the current account shifted into deficit during these years (Table 3). The recorded composition of these net capital inflows changed as borrowers moved further toward long-term maturities to avoid the deposit requirements; foreign direct investments and other long-term capital rose from US$1.6 billion in 1993 to US$4.5 billion in 1994, while short-term private sector capital net inflows declined to US$0.1 billion from US$0.9 billion.

Table 3.Colombia: Summary of Balance of Payments(Millions of U.S. dollars)
Account1990199119921993Estimate 1994
Current account5812,306735−2,242−3,189
Capital account16−2565912,3953,300
Official capital (net)−195−291−1,018−842−1,479
Financial sector (net)−890587−599796243
Private sector (net)1,101−5522,2082,4414,537
Direct investments4844337407691,410
Long-term capital−176−10438053,041
Short-term capital1793−9741,42586786
Overall balance5972,0491,326153III
Sources: Banco de la Republica; and IMF staff estimates.

Includes errors and omissions.

Sources: Banco de la Republica; and IMF staff estimates.

Includes errors and omissions.

The lack of availability of offshore interest rates for the peso also makes analysis of the impact of the capital restrictions on domestic interest rates problematic, although some indication may be obtained by examining whether the authorities were able to maintain higher real interest rates than they would have otherwise. A comparison of data for the period preceding September 1993, when controls were first introduced, and the subsequent period suggests that both nominal and real interest rates have risen since capital controls were introduced (see Chart 3). The rise began in the first quarter of 1994, around the time of the first round of tightening of the controls. It is difficult, however, to separate the possible im-pact of capital controls from other factors that contributed to higher real interest rates because the change in the exchange regime that took place at the same time allowed monetary policy to be directed more toward containing the growth of monetary aggregates.

Chart 3.Colombia: Interest Rates

A. Controls were introduced in September 1993.

B. Controls were tightened in March 1994.

C. Controls were tightened in August 1994.

(Percent)

An alternative view of the effectiveness of the measures in Colombia emerges from an examination of the differential between domestic and foreign interest rates, adjusted for the forward premium. In Colombia, no forward market rate exists; hence, the actual ex post change in the spot rate has been used as a proxy for the forward rate. Chart 4 shows that the “covered” differential (thus measured) initially remained stable following the introduction of the first set of controls in September 1993 but that it appears to have increased since December 1993.116 Once again, a qualification must be made owing to the change in exchange regime and monetary policy stance in early 1994.

Chart 4.Colombia: Interest Rate Differential

A. Controls were introduced in September 1993.

B. Controls were tightened in March 1994.

C. Controls were tightened in August 1994.

In summary, the evidence concerning the effectiveness of the capital controls in Colombia is inconclusive. While recorded short-term flows dropped after the controls were introduced, this drop was more than offset by increased long-term inflows, contributing to further strong growth in monetary aggregates, while the real effective exchange rate appreciated further (see Table 4). If the aim of the controls was to slow the overall rate of capital inflows, they would not seem to have succeeded. If the goal was to alter the structure of inflows toward longer-term maturities, then they appear to have had some impact. However, simultaneous changes in exchange rate and monetary policies make it difficult to attribute the impact conclusively to capital controls.

Table 4.Colombia: Selected Data
1990199119921993Estimate 1994
Real effective exchange rate (1990 = 100)100104113119133
Reserves minus gold14,2126,0297,3897,5527,750
Source: International Monetary Fund, International Financial Statistics (Washington, 1995).

In millions of U.S. dollars.

Source: International Monetary Fund, International Financial Statistics (Washington, 1995).

In millions of U.S. dollars.

Malaysia

Malaysia has been one of the fastest-growing Southeast Asian economies since the 1960s, with high rates of domestic and foreign direct investment. In the mid-1980s, as part of a policy package implemented in response to the 1985–86 recession, the government significantly liberalized international capital transactions. This package, together with an improving external situation, brought about an investment-led recovery starting in 1987, with real GDP growth subsequently averaging more than 8 percent and inflation less than 4 percent. The positive economic climate began to attract increasing foreign capital inflows in 1989, reflecting renewed interest in the Malaysian stock market, expectations of an appreciation of the ringgit, and a positive interest rate differential in favor of Malaysia. The surplus on the capital account grew rapidly. Foreign direct investment flows were very strong in 1989–91, especially from Japan and newly industrializing economies in the region, but leveled off in 1992–93 when the capital account was dominated by a surge in short-term capital inflows. Errors and omissions in the balance of payments, seen by the authorities as unrecorded funds destined for the stock market, were almost as large as recorded short-term flows in 1993. The process culminated in particularly large overall balance of payments surpluses in 1992–93 (equivalent to 15 percent of GNP).

Bank Negara initially attempted to offset the effects of the foreign inflows on domestic liquidity by stepping up direct borrowing from the money market, selling Bank Negara bills, issuing long-term savings bonds, transferring government and other deposits to the central bank, and raising the statutory reserve requirement. Nevertheless, liquidity conditions eased during 1992–94, under the influence of the capital inflows. At the end of 1993 and in the first two months of 1994, the Malaysian authorities moved to limit speculative capital inflows through the introduction of a series of administrative measures.

Reintroduction of Controls on Inflows

Limited controls on capital transactions were initially imposed in June 1992 when non-trade-related swaps by commercial banks were subjected to limits. As liquidity continued to grow substantially and capital inflows were sustained, more extensive controls were introduced in January and February 1994 and remained in effect through August 1994. These comprised (1) a ceiling on foreign liabilities of banking institutions other than those related to trade and investment; (2) a prohibition on residents against selling short-term monetary instruments to nonresidents; (3) an obligation for commercial banks to deposit at Bank Negara the ringgit funds of foreign banking institutions (vostro accounts of nonresident banking institutions) in non-interest-bearing accounts;117 and (4) a prohibition against all non-trade-related swap transactions and outright transfers on the bid side with nonresidents.

The Bank Negara Malaysia Annual Report of the Board of Directors for 1994 stated that the reliance on administrative measures was intended to be short term. Furthermore, “it was recognized that if such measures remained as a permanent feature in the system, possible market distortions could emerge, resulting in an inefficient allocation of resources.” Consequently, given the authorities’ view that slack demand conditions meant that lower interest rates were unlikely to fuel a significant increase in demand for credit, the one-month interbank interest rate was reduced from 6.5 percent at the beginning of 1994 to about 4.5 percent in September 1994. As international interest rates were rising at the same time, the interest rate differential swung from about 3 percentage points in favor of Malaysia to a rate of about 1/2 of 1 percentage point in favor of the United States from May onward (one-month Malaysian interbank market interest rate vis-à-vis one-month U.S. dollar LIBOR) (Chart 5). After depreciating in January and February 1994, however, the ringgit exchange rate appreciated from March to May 1994, as positive sentiment toward the currency returned and stabilized thereafter. On balance, the ringgit appreciated against the U.S. dollar by 5.6 percent in 1994.

Chart 5.Malaysia: Interest Rates

(Percent)

Sources: Asian Wall Street Journal; and International Monetary Fund, International Financial Statistics (Washington, various issues).

The objective of containing price pressures by contracting liquidity was achieved by the end of 1994. The deceleration in money growth was under-pinned by the turnaround in the overall balance of payments to a deficit equivalent to about 5 percent of GNP This reflected the reversal of short-term

Role of Controls

The developments described are consistent with a view that the capital controls may have succeeded in stemming short-term capital inflows. However, the sharp decline in domestic interest rates, together with exchange rate appreciation during most of 1994, would also have influenced yield-sensitive short-term capital. Consequently, it is difficult to determine whether the controls had a significant impact.

The possible impact of capital flows can also be examined by looking at interest rate differentials adjusted for forward exchange rate premiums or discounts, that is, covered interest parity. In the case of Malaysia, no forward foreign exchange rate data are available, so that actual ex post exchange rate movement must be used as a proxy. Calculations on this basis suggest that the covered interest rate differential has been declining since 1991 and that this trend continued in 1994 despite the introduction of the capital controls (Chart 6).

Chart 6.Malaysia: Interest Rate Differential

(Adjusted for exchange rate change, in percent)

Sources: Asian Wall Street Journal; and International Monetary Fund, International Financial Statistics (Washington, various issues).

Venezuela

Venezuela’s financial performance improved sharply in 1990 when activity recovered strongly from an earlier downturn, inflation declined, and the balance of payments strengthened. However, performance subsequently deteriorated as a fiscal imbalance re-emerged in 1991 and widened in 1992, owing to a decline in oil export revenue and delays in instituting reforms to expand the non-oil tax base. In addition, political instability and erratic monetary policy contributed to a decline in the growth of financial savings, runs on the bolivar, and large losses of international reserves in 1992.

The economy contracted in 1993, reflecting the effects of political uncertainty on consumer and investor confidence and a further drop in oil export prices. Although the interim government maintained control over public expenditure and introduced a value-added tax, a large fiscal imbalance remained and significant public sector arrears accumulated. Before the general elections of December 1993, exchange pressures intensified, net international reserves fell sharply, and the 12-month rate of inflation increased to 46 percent (compared with 32 percent at the end of 1993). In January 1994, a banking crisis developed, with the collapse of the second-largest bank, and the fiscal situation worsened. These developments adversely affected confidence and, accompanied by a loose monetary policy, contributed to sizable capital outflows, an acceleration of inflation, and a large depreciation of the bolivar exchange rate during the first half of the year.

Introduction of Exchange Controls

In the face of heavy reserve losses, the crawling peg exchange rate policy implemented in late 1992 was abandoned in April 1994 and replaced by a system of managed foreign exchange auctions. Pressures on the currency continued, however, leading to a depreciation of about 10 percent against the U.S. dollar through mid-May 1994 and a cumulative depreciation of 24 percent from the beginning of the year. The restrictive nature of the auctions led quickly to the development of a parallel market. Consequently, in late May, the authorities liberalized the auction system. Although this move was successful in eliminating the parallel market, pressures on the currency continued. At the end of June 1994, a comprehensive set of exchange controls was introduced, and the exchange rate was fixed at Bs 170 per U.S. dollar (compared with the prevailing parallel market rate of Bs 200 per U.S. dollar). The official rate was maintained at this level for the rest of 1994, resulting in the reversal by the end of 1994 of the real effective depreciation that had occurred during the first half of the year. Despite substantial penalties for parallel market trading in foreign exchange, it is reported that an active market developed, with the premium over the official rate widening to close to 30 percent by the end of 1994.

The exchange control system gave rise to substantial delays in foreign exchange sales by the central bank as the threat of substantial penalties against fraud slowed down the processing of requests by banks and may have contributed to a recovery of about US$2.7 billion in net international reserves in the second half of the year. Limits were introduced on the allocation of foreign exchange for education, travel abroad, and family remittances and were maintained for remittances of profits from certain investments. As a result, private sector external arrears are estimated to have increased by US$0.4 billion during the third quarter of 1994, only part of which was settled toward the end of the year (in addition, public sector arrears increased by over US$0.5 billion in 1994). Foreign export credit guarantee agencies responded by taking Venezuela off cover, and access to private capital markets was curtailed.

In addition to establishing exchange controls, in June 1994 the central bank raised interest rates on zero-coupon bonds from an average of close to 50 percent during the first five months of the year to 68 percent, in an effort to stem the international reserve losses through monetary tightening. However, monetary policy was subsequently eased sharply. The central bank reduced its rediscount rate to 45 percent from 73 percent in July, and the yield on 91-day zero-coupon bonds dropped to an average of about 34 percent in the last five months of 1994. In addition, as net international reserves recovered in the second half of the year, banking system liquidity increased sharply and interest rates declined to negative real levels. Bank deposit rates fell to an average of about 29 percent during the third quarter of 1994, despite an increase in the minimum deposit rate to 10 percentage points below the yield on zero-coupon bonds; the maximum bank lending rate remained at 15 percentage points above the zero-coupon bond rate. Notwithstanding an improvement of the external current account equivalent to 10 percentage points of GDP (imports dropped by 30 percent) brought about by the sharp contraction in economic activity (nominal GDP fell by 6.5 percent and unemployment rose to 11.5 percent in early 1995), net international reserves fell by more than US$1.1 billion during 1994, reflecting large capital outflows in the early part of the year and reduced availability of external financing. Fiscal measures adopted in mid-1994 were not sufficient to stabilize the economy and at the end of 1994, the 12-month inflation rate reached 71 percent.

Role of Controls

To assess the impact of exchange controls on capital flows, it is informative to look at several indicators. Net short-term private capital flows, which deteriorated sharply in early 1994, turned positive in the third quarter following the introduction of controls, the tightening of monetary policy and the buildup in private sector arrears (Table 5). This turnaround was short lived, however, as private capital outflows recommenced in the December 1994 quarter and strengthened in the first quarter of 1995. A similar pattern is evident in the misinvoicing of trade (estimated as the difference between the trade balance as reported by Venezuela and that reported by trading partner countries), which may also be taken as an indicator of capital flows. After deteriorating in 1993, estimated misinvoicing improved significantly in the third quarter of 1994, although remaining negative, indicating a continued capital outflow. The sum of estimated misinvoicing, net private short-term capital, and net errors and omissions is shown in Table 5.

Table 5.Venezuela: Estimated Trade Misinvoicing, Net Short-Term Capital Flows, and Net Errors and Omissions(Millions of U.S. dollars; negative sign denotes outflows)
YearEstimated Misinvoicing1Short-Term CapitalNet Errors and OmissionsTotal
1992−88−815−295−1,198
1993−1,511−168407−1,272
1994−630−2,748−463−3,841
1994 QI−350−2,918833−2,435
1994 Qll−166−937−786−1,889
1994 Qlll−731,212−318821
1994 QIV−41−105−192−338
1995 Qln/a−854−520−1,374
Sources: International Monetary Fund, International Financial Statistics (Washington, various issues), and Direction of Trade Statistics (Washington, various issues), and Central Bank of Venezuela.

Venezuela’s exports to the rest of the world minus the rest of the world’s imports from Venezuela plus the rest of the world’s exports to Venezuela minus Venezuela’s imports from the rest of the world. Trade with other Western Hemisphere countries has been excluded because these data also reflect substantial misinvoicing in some countries, complicating the interpretation of Venezuela’s data.

Sources: International Monetary Fund, International Financial Statistics (Washington, various issues), and Direction of Trade Statistics (Washington, various issues), and Central Bank of Venezuela.

Venezuela’s exports to the rest of the world minus the rest of the world’s imports from Venezuela plus the rest of the world’s exports to Venezuela minus Venezuela’s imports from the rest of the world. Trade with other Western Hemisphere countries has been excluded because these data also reflect substantial misinvoicing in some countries, complicating the interpretation of Venezuela’s data.

Another indicator frequently used to measure the effectiveness of exchange controls is changes in the difference between offshore and onshore interest rates. For Venezuela, there is no information on off-shore rates. As mentioned above, domestic interest rates, which are not market determined, have become sharply negative in real terms. The 12-month inflation rate, as of mid-1995, was about 70 percent, while savings deposit rates were about 20 percent a year.

While the official exchange rate has remained fixed at Bs 170 per U.S. dollar, the parallel market rate118 depreciated from about Bs 200 per U.S. dollar in June 1994, when the exchange controls were established, to about Bs 230 per U.S. dollar (Bs 190 the selling rate and Bs 280 the buying rate), by early June 1995.

Although no definite conclusions on the role of exchange controls on capital outflows in Venezuela can be drawn from the information available, the deficit of the capital account of the balance of payments widened in the first quarter of 1995, mainly reflecting larger private outflows. In addition, the large spread between the official and the parallel exchange market rates would indicate the expectation of a significant devaluation of the bolivar and constitute an incentive for capital outflows. The information on misinvoicing would indicate that hidden capital outflows, after declining in 1990, have picked up since 1991. Finally, the estimated quarterly breakdown of total private short-term capital flows since 1994 suggests that exchange controls may have been effective in reversing the outflows during the first quarter following their imposition but that capital outflows resumed subsequently.

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