Op-Ed Commentary

 

 

VenEconomy:
From reform to “reconversion”

 

The National Assembly will have to toss out the parody of “monetary reform” it has been debating for the past year. Yesterday, President Hugo Chávez beat them to the post, spelled out the government’s intentions and, making use of his “special” powers, decreed the Law on the “Reconversion” of the Monetary Unit.

While for the man in the street both procedures might seem to be the same song to a different tune, they are not.

A true monetary reform requires the implementation of economic measures that cover fiscal, foreign exchange and financial aspects and contemplates: 1) control of and discipline in government spending; 2) a freely convertible currency; 3) free play of supply and demand (i.e. no price controls); and 4) an autonomous Central Bank.

This type of reform is generally implemented in economies where inflation is out of control.

All this is contrary to the economic program being imposed by the Bolivarian government, and which, incidentally, it doesn’t want to change. That is the reason it opted for the fastest and most “manageable” route to achieve its objective of reforming the monetary unit: a “reconversion” of the bolivar.

The “reconversion” or restatement of the monetary unit that will go into effect on January 1, 2008, pursuant to the President’s decree-law, is no more than an “operation whereby zeros will be eliminated from the currency,” which, in Venezuela’s case will involve lopping off three zeros to achieve the new “Bolívar Fuerte” or “Strong Bolivar,” as the new monetary unit is to be called. According to a Central Bank communiqué, this will mean, among other things, “a restatement of the nominal prices of goods and services, wages and salaries, loans and debts and adjustments in calculating foreign exchange and systems of calculation.” In other words, it will simplify the handling of cash and the keeping of accounts. Some analysts are of the opinion that the government is also seeking to reap a political gain by making the currency seem stronger.

VenEconomy asks whether it is worth putting the country through such a costly and administratively complicated process merely to reduce the number of banknotes in people’s pockets and the number of zeros on the accounting books or so that the government can achieve a political-psychological impact by making the bolivar seem stronger. It wouldn’t seem so.

So, bearing in mind the political-economic models that the Bolivarian government uses as points of reference, there may well be grounds for thinking that more ambitious plans are lurking behind this tinkering with the monetary unit, implementing a savage communism, for example.

In Cuba in the 60s and more recently in Zimbabwe (only last year), similar reforms turned into a confiscation of the value of the currency as a means of exchange and of people’s savings. Given these precedents, will this imminent “reconversion” of the currency be translated into changes in the systems of private property and the convertibility of the bolivar? After all, one of the government’s premises is that it is necessary to do away with the accumulation value of the monetary unit, “a perverse instrument that has become merchandise.”

VenEconomy is a Venezuela's leading specialized publisher in the economic and financial area. VenEconomy's Points of View on the issues of the day, as seen by VenEconomy during the last week. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by VenEconomy, on 03/07/2007. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 03/08/07

Copyright© 2007 VenEconomy. All rights reserved.

 

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