Nov. 6 (Bloomberg) -- Venezuela’s government authorized the central bank to buy and sell bonds issued by state-run oil company Petroleos de Venezuela, setting the stage for increased intervention to strengthen the bolivar.

With the initiative, published in the official gazette today, the central bank may become the biggest player in the local currency market, Asdrubal Oliveros, a director at Caracas- based consulting firm Ecoanalitica, said in an interview. The central bank may use 10 percent to 15 percent of its international reserves of $32 billion to buy PDVSA bonds, increasing the supply of dollars in the local market, he said.

“The main objective of this law reform is to allow the government to take control of the parallel foreign exchange market,” Oliveros said.

The bolivar strengthened to 5.35 per U.S. dollar at 4:24 p.m. New York time from 5.45 yesterday in the parallel market, traders said. While the government sets the official bolivar exchange rate at 2.15 per dollar, the currency trades at a weaker rate in the unofficial market.

The central bank’s participation in the currency market may allow the government to maintain the bolivar at about 5.5 per dollar, Oliveros said.

Central bank President Nelson Merentes said Oct. 8 his target for the unofficial rate is a difference of no more than 60 percent. The currency gains would reduce the cost of imported goods, helping lower inflation that’s running at 29 percent, the highest among 78 major economies tracked by Bloomberg.

Currency Restrictions

Venezuelans can purchase the securities locally with bolivars and re-sell them abroad in international markets for dollars. Under restrictions imposed by President Hugo Chavez in 2003, the government controls the sale of dollars at the official exchange rate of 2.15. Venezuelans buy dollars in the parallel unregulated market when they can’t get government authorization to purchase them at the official rate.

The bank will also require the state oil company known as PDVSA to transfer some oil export income to a government fund for investment, education and health projects, according to the official gazette, the formal record of government actions.

The new law requires the banking sector to make loans to “productive sectors” like agriculture, construction, manufacturing and exporters.

To contact the reporter on this story: Steven Bodzin in Caracas at sbodzin@bloomberg.net.

Last Updated: November 6, 2009 17:22 EST