Feb. 26 (Bloomberg) -- Hugo Chavez's spending spree has turned the Venezuelan bolivar into the world's worst-performing currency.

Venezuelans and foreign companies are pulling money out of the country as a two-fold increase in government spending over the past two years fuels the highest inflation rate in Latin America. Chavez spent $1.3 billion this month for controlling stakes in phone company CA Nacional Telefonos de Venezuela and power utility CA Electricidad de Caracas, nationalizations that form part of his so-called ``March to Socialism.''

The bolivar, fixed by the government at 2,150 per dollar, has plunged 16 percent this year on the black market, more than any of the 70 currencies Bloomberg tracks, according to traders in Caracas. The slump to 4,050 per dollar puts pressure on Chavez, 52, to devalue the currency two months after he won re- election.

``The government has a dilemma: They need to devalue, but they know that a devaluation would just aggravate the inflation problem,'' said Alberto Ramos, an economist with Goldman Sachs Group Inc. in New York. ``They are delaying the inevitable.''

Venezuelans have moved $8 billion out of the country on average every year since Chavez took office in 1999, up from $2 billion a year over the previous five decades, according to Emilio Medina-Smith, a former economics professor at Carabobo University in Valencia, Venezuela.

Widening Gap

Chavez sought to curb those outflows in 2003 by putting limits on how many dollars Venezuelans can purchase and fixing the bolivar at 1,600 per dollar. He also set price controls on everything from eggs to airline fares and established maximum bank lending rates and minimum savings account rates.

The government has devalued the bolivar twice since, by 17 percent in February 2004 and 11 percent a year later.

Capital flight picked up in the past three years as Venezuelans siphoned off the surging oil revenue that Chavez was spending. Trading in the black market has grown to about $40 million a day, according to Noel Alvarez, president of Consecomercio, a Caracas-based commerce group.

The rising demand for dollars has swelled the gap between the black market rate and the official rate to 1,900 bolivars from as little as 300 bolivars in March 2006.

Companies need government approval to buy dollars at the official exchange rate for imports, foreign debt payments and dividend repatriation. Most people in Venezuela, Latin America's largest oil exporter, are only allowed to buy $8,600 a year at the official rate -- $5,600 for trips abroad and $3,000 for credit card purchases over the Internet.

Empty Shelves

The price controls have sparked shortages of sugar, black beans, meat, chicken, milk and cheese as the government set prices below farmers' costs. Similar shortages in the 1980s led to rioting and prompted Chavez, then an army officer, to seek to topple the government. His failed coup attempt in 1992 made him a national hero, paving the way for his 1998 election.

Chavez, who says his aim is to make Venezuela a socialist country, has taken over ``underutilized'' farm land and factories and started nationalizing ``strategic'' companies. He also threatened this month to seize butcher shops and grocery stores, telling owners he was waiting for the ``first excuse'' to make the move if they don't obey price controls.

``Chavez is committing the same mistakes as his predecessors,'' said Medina-Smith, whose work on capital flight won him the central bank's top economic study award in 2004. ``These policies never have worked. Why should they work this time?''

Hoarders, Speculators

Chavez, using the power congress granted him last month to make law by decree, imposed legislation this month that would put ``hoarders'' and ``speculators'' in jail for up to six years. Finance Minister Rodrigo Cabezas signaled in January that the government may also prosecute people caught buying or selling dollars in the black market.

``Currency and price speculators are simply criminals, common delinquents and must face the law,'' Information Minister William Lara said on Feb. 4.

The government announced plans to sell dollar bonds to local investors to slow the bolivar's plunge in the black market after it reached as low as 4,600 per dollar in January. The bond issues provide Venezuelans a chance to purchase dollar-based assets with bolivars. They can then sell the bonds in international markets for dollars.

Oil Boom

The black market rate has become a key component fueling inflation because at least 25 percent of Venezuela's imports are purchased with dollars acquired in that market, according to Orlando Ochoa, an economics professor at Andres Bello Catholic University in Caracas. Imports surged 36 percent last year to $32.2 billion, the highest on record, as the government spending increase fueled consumer demand.

Grocery shop owners, trying to offset higher costs from the bolivar's slide, pushed up food prices 4 percent in January. That increase drove Venezuela's annual inflation rate to a two- year high of 18 percent.

``Despite the oil boom of the past three years, they keep tightening controls,'' Goldman's Ramos said. ``I have never seen anything like that.''

Venezuela's oil exports, buoyed by the rally in global prices, soared to a record high of $58 billion last year, swelling the country's foreign reserves and tax revenue. Chavez has used the funds to provide housing, medicine and subsidized food to the poor and to build bridges, railroad lines and schools. He boosted spending 51 percent in the first 11 months of 2006, following a 43 percent increase in 2005.

Foreign companies that do business in Venezuela, from Italy's Telecom Italia SpA to Chile's Corp Group, pulled more money out of the country last year than they invested, according to the central bank. The last time that happened was in the 1970s, when President Carlos Andres Perez -- the man Chavez would try to overthrow two decades later -- was nationalizing companies.

To contact the reporter on this story: Guillermo Parra-Bernal in Sao Paulo at gparra@bloomberg.net

Last Updated: February 26, 2007 13:43 EST