(David Luhnow, Dan Molinski)
CARACAS—Much of the world is fixated on Europe's sovereign-debt problems, but Venezuela is struggling with a homemade economic and financial crisis that is likely to create growing political problems for President Hugo Chávez.
The Venezuelan economy is taking a double hit from a deep recession and high inflation, causing incomes to decline for rich and poor alike. The "strong bolívar" currency was losing value so quickly that the government recently outlawed the only part of the foreign-exchange market where money could trade relatively freely.
Economists say Mr. Chávez's populist economic policies are at the root of the problems, and that his attempted solutions are only likely to make matters worse, lengthening a painful recession that began last year.
Venezuela's economy contracted 5.8% in the first quarter after shrinking 3.3% in all of 2009. The decline isn't expected to stop anytime soon. Morgan Stanley forecasts Venezuela's economic output will slide 6.2% this year, and fall another 1.2% next year. If that happens, it would mark three consecutive years of recession.
The contraction seems to be gathering pace. Although Venezuela doesn't release economic data that compares one quarter to the preceding quarter, Morgan Stanley estimates the economic contraction on a quarterly basis accelerated from minus 1.4% during the fourth quarter of last year (an annual rate of minus 5.7%) to minus 2.0% in the first quarter of this year (a minus 8.2% annual pace).
Venezuela's economic decline comes even as oil prices have rebounded from last summer's lows of below $68 a barrel. On Thursday, Nymex crude for August delivery gained 16 cents, or 0.21%, to $76.51 a barrel.
"Venezuela's economy is becoming so inefficient that it is having a harder time growing even with higher oil prices," says Tamara Herrera, an economist at Global Source Partners, a Venezuelan economic forecasting group.
At the root of the current trouble was a huge run-up in public spending under Mr. Chávez's government during the past few years on the back of high oil prices. To try to limit the resulting inflation, the president's team resorted to price controls, which led to shortages and other problems.
One of the prices the government has tried to set is the exchange rate. But the system has grown in complexity, with effectively four different exchange rates, three set by the government and one set by the market—the black market.
In May, the government outlawed an unregulated, free-floating currency market and replaced it with a new foreign-exchange system called SITME. The government claimed that fraud and speculation in the unregulated market had caused the bolívar to slide unfairly, leading to a spike in inflation.
Under SITME, the central bank must review all requests for dollars. The new system sets a maximum monthly amount that importers can request.
Noel Álvarez, head of Venezuela's Federation of Chambers of Commerce, Fedecamaras, contends the new system simply isn't working.
"It's another roadblock in the process of granting foreign currency," he said in a television interview this week. "The amounts are insufficient to meet the needs of companies, which could limit even more the production and creation of goods and services."
By reducing economic activity, the new regime could aggravate inflation—something SITME was supposed to ward off. Venezuela's inflation is running at an annual 31%, one of the highest rates in the world.
The SITME system, which provides dollars at a rate of 5.3 Venezuelan bolívars to the dollar, is supposed to work faster than the six months or more companies often wait to access greenbacks at two other government-fixed rates. Those rates are 4.3 bolívars per dollar and 2.6 bolívars per dollar; the latter is meant for importers of essentials such as medicine.
Central-bank President Nelson Merentes promised that the SITME system would handle requests within 48 hours, but importers say that isn't happening.
One Caracas electronics importer says he has been trying to sign up for SITME since it launched two weeks ago, but has been stymied by a requirement that he must establish an overseas account to receive dollars.
Trading volume in SITME is averaging around $30 million a day so far—less than half the $80 million a day the free-floating market traded before the government shut it down.
Reflecting the difficulties in accessing dollars through official channels, an illegal black market is thriving despite Mr. Chávez's warnings that participants face arrest. The black-market rate, arguably the best gauge of true supply and demand, was recently at about 8.15 bolívars to the dollar, street traders say.
—Jeanne Liendo contributed to this article.