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Easter
Lagniappe
From
reform to reconversion: Is something fishy?
By
Ana María Di Leo F.
After so much insistence on a supposed monetary reform, the
government
suddenly decided to adopt only a reconversion. In this case,
it will divide
all prices and salaries by 1,000 starting Oct.
1. And starting Jan. 1, 2008, it will issue a new currency called
the Bolivar Fuerte (Bs. F). But of measures needed to lower
inflation and protect the value of this new currency, nothing
is said. So what is the peremptory nature of this measure due
to?
Since 2001 the Hugo Chávez government had been insisting
on the need for a monetary reform, which is much more complex,
of greater range and more useful than any rudimentary currency
reconversion.
To the contrary, a reconversion simply means modifying the monetary
denomination.
That is, dividing the current value of all bills and coins,
as well as prices and wages, by 1,000. In other words, three
zeros will be eliminated from all the bills and coins in circulation,
to be substituted by others with three fewer zeros. This, moreover,
will include, according to BCV President Gastón Parra
Luzardo, designs alluding to nationality, Venezuelan ethnic
origins and its women.
The reconversion will come into force Oct. 1, when all prices
and wages must be simultaneously expressed in Bs. and in Bs.
F, but it will not be until Jan. 1, 2008 when new bills will
circulate in denominations of Bs.F 100, 50, 20, 10, 5 and 2;
and coins of Bs. 1,00, 0.50, 0.25, 0.125, 0.10, 0.05 and 0.01.
Current bills in bolivars will continue to be used during a
transition period whose duration has yet to be stipulated, when
both currencies may be used. After this transition
period, only the Bolivar Fuerte (Bs.F.) will be valid.
The denominations of these currencies will be very similar to
those minted during the Presidency of Antonio Guzmán
Blanco (1870-1877; 1879-1884; 1886-1887)
with some interesting exceptions, such as: a) in Venezuelan
monetary pre-history, the currency of least value was the “puya”
of Bs.0.05, and there was no coin for Bs.0.01 or Bs.2.00. b)
Coins for Bs.F.5.00 (equivalent to the traditional “fuerte”)
will not exist.
And c) curiously, a bill will be issued for Bs.F.100 (equivalent
to a Bs.100,000 bill,
which does not currently exist). This leads one to imagine that
the government is seeking to avoid, for some time, the need
to issue bills of greater value, because inflation will continue
at its accelerated pace.
Nevertheless, with the announced reconversion, nothing will
perceptibly improve, nor worsen, in terms of purchasing power
for the average citizen. Perhaps, at the beginning, there might
be some confusion for the general public, or small additional
costs for some economic actors who manage large quantities of
money, such as the banks. (Not counting the printing costs of
the new bills and minting the coins, which will substitute the
current ones in a period of about nine months.)
A reconversion, in contrast to a monetary reform, does not imply
taking decisions that substantially alter the direction of the
economy. The conditions that have caused the deterioration of
the currency will continue to be present and in good health.
Chronic inflation will proceed along its inexorable path, and
the cause of the emission of more bills with an increasing number
of zeros will continue to exert a pernicious effect: wages will
continue to erode, prices will increase, and the new Bolivar
Fuerte will eventually begin to deteriorate at the same pace.
With the reconversion, no measure is taken that implies a review
of the government´s spending policy, of its policy to
negatively stimulate private investment, or of price or exchange
controls, or much less a measure that will restore lost legal
security.
What had to come first
So
why the haste in implementing a measure that from every point
of view is insufficient and partial, that attacks the disease
of inflation but does not deal with its causes?
It seems the government is unable to make a serious attempt
to defeat the inflation monster, such as taking costly measures
that might result in loss of popularity in the short term.
In not being disposed to pay that price, the government has
decided to undertake in a rash manner something that is much
more simple: a reconversion. This will conceal with makeup the
consequences of inflation on the currency, without including
any real solution in the medium or long term.
Yet this cover will eventually fall and time and considerable
financial resources, which at this juncture cannot be calculated,
will have been spent in printing new bills and educating the
population with regard to their use, only to return again to
the beginning.
In Decree-Law 5.229 of March 6, not even in the declarations
of spokespersons, is there any mention of how the problems that
have caused the acceleration of inflation will be addressed,
such as excessive and inefficient public spending that increases
liquidity without control and stimulates the demand for goods;
uncertainty in the area of ownership of any means of production,
price controls, exchange controls and instability in the rules
of the game. In summary, how to
deal with excess demand at a time when the supply of goods and
services is increasingly more inadequate because of mistaken
and perhaps intentional policies that sow lack of confidence
in private investment.
In favor and against
Although reconversion does not attack even at a distance the
cause of the real problem, it does act as a palliative before
some problems that the profusion of digits in the accounts was
causing.
Without a doubt, the quantity of billions and trillions that
must currently be used causes confusion and inconvenience, because
it induces the suppression of digits from personal calculators
and other media that end up being rapidly insufficient.
With the measure, the handling of cash, the transfer of large
quantities of money, will be facilitated, and in addition, mathematical
calculations will be simpler and account registry systems more
lasting and efficient.
Nevertheless, a reconversion also produces certain costs such
as: 1) The cost of emission of the new family of bills and coins
– which will occur twice, because in the medium term it
is believed that there will be a return to the name of Bolivar,
with the new value; 2) The educational campaign at the national
level to avoid the pernicious effects of the symmetry of information
for some sectors of the population; and 3) Adjustments in the
account, financial registry and payroll systems, statistical
prices, etc.
At least the plan formulated does neutralize the problem of
the increase of inflation because of rounding. But given the
amplitude with which the new family of coins was formulated,
this cost, supported by a good educational campaign,
can be almost insignificant. And if there is something fishy?
It is all the more surprising that the government has changed
its view, or that it has reduced the level of its aspirations
and instead of launching a monetary reform, it is now satisfied
with only decreeing a reconversion, even if one at full
speed. So it wouldn’t be wrong to try to explore the scope
that this measure, which has an inoffensive appearance, may
imply.
The dangers could be manifold, if the changes that have already
been imposed at the level of the economic system and land tenure
are taken into account. Added to those are other more profound
changes to be decreed by the President of the Republic, thanks
to the full powers granted by the National Assembly for him
to legislate in any area. With respect to the Constitutional
Reform that is being written up and also ordered by the President,
little is known, as is the case
regarding the intention to impose a socialist doctrine, a mixture
of failed experiences from others countries emanating from a
single person.
The reader should keep in mind that what will be reformed will
be the monetary symbol, whereby prices and the exchange value
are expressed and which serves as an instrument for accumulation
of value, of capital. He or she should also
bear in mind that on many occasions officials and ideologues
of this “process”
are heard to utter the phrase: “We are going to remove
two basic functions from money that capitalism has given it,
which are accumulation and value.”
Even the President has explained in videos how he will implement
a currency to avoid the perverse process where the accumulation
of value (which is what allows savings and investment) will
have a date of expiration and it will lose value over time –
in addition to having geographic limitations in the country
itself – whereby the “perverse” accumulation
of capital and also of savings would be made impossible. Nor
should the reader forget the “El Mirandino,” a bill
issued by the Executive that was delivered to public employees
and that would
restrict them to buying only in certain cooperatives and only
the products that they offered.
Other experiences
Two very interesting experiences in this area, Cuba and Zimbabwe,
are worth examining. In Cuba, with the pretext of conducting
a monetary reform, the underlying value of money was eliminated,
assuring that the Cuban peso would serve only to be exchanged
for goods through the ration card, dismounting
the price formation process. The market was suppressed, thus
putting all the source of value of the economy in the hands
of the State.
In Zimbabwe, also with the pretext of mounting a monetary reform,
a ceiling was placed on the amounts of bank deposits that could
be changed to the new currency, in that way confiscating the
savings of its citizens. For anyone who showed up at a bank
with more than the equivalent of $400, an investigation was
opened, with the threat of confiscation of those resources for
up to one year. Bank accounts created with bills of a new denomination
had a limit for expenses, a measure to try to control the growth
of liquidity, which was the product of excessive fiscal spending
based on inorganic emission. Mugabe’s government alleged
that with those measures inflation was stopped.
But nine months later, inflation in that country, which was
1000%, reached 1600%.
And finally and even if it sounds repetitive, don´t forget:
the President has enabling powers to legislate alone; that a
constitutional reform is under way, to be drawn up by lawmakers
who are absolutely faithful to his ideas,
according to instructions issued by him. And in the same way
that many were surprised by the Decree Law of Reconversion,
which in its appearance was innocent, new laws and decrees to
be issued to continue to regulate the financial and monetary
environment could produce further surprises…
Ana
María Di Leo F.
is an analyst and contributor to Veneconomy
(anamaría@veneconomia.com
).
Petroleumworld not necessarily share these views.
Editor's
Note: This commentary was originally published by VenEconomy,
on Vol. 24 No. 6 – March 2007. Petroleumworld reprint
this article in the interest of our readers.
