VICTOR SALMERON
EL UNIVERSAL

The National Assembly Finance Committee, some directors of the Central Bank of Venezuela (BCV) and the Finance vice-minister believe those days when people deposited VEB 500,000 (USD 233) in their accounts and spent it all in an afternoon to purchase two pairs of shoes should be over.

The monetary reform, a plan to simplify the amounts involved in transactions and ease -and even eradicate- inflation, is under way.

The goal is to put an end to astronomic figures comprising tons of zeros by changing the denomination of the legal tender. In this way, VEB 20,000 bills would become VEB 20 bills. People earning a monthly wage of VEB 1,000,000 would receive a VEB 1,000 monthly paycheck.

Prices would drop accordingly and Venezuelan bolivars would have as much purchasing power domestically as abroad, as US dollars are to fall from heights to VEB 2.15

The advocates of monetary reform agree that the present climate favors this change. They argue there is no risk to face a situation similar to that in Argentina. In 1985, Buenos Aires implemented a monetary reform, and six years later the country's economy sank into hyperinflation.

They ensure that Venezuelan economy is going through a golden era, where inflation is near one digit, extraordinary high oil revenues are expected to remain steady -thus guaranteeing economic strength-, public debt has fallen significantly, and sustained growth is a reality.

Armando León, a member of BCV board of directors and supporter of the intended monetary reform, explains that over the next two weeks BCV experts are to complete a survey to determine whether macroeconomic conditions are favorable.

Once the report is forwarded to the BCV board of directors, they are to determine whether the monetary reform is applicable or not.

Experts have already warned the directors of BCV that discontinuing currency in use requires at least three years. However, sources claim that if President Hugo Chávez okays the reform, changes could take place at full throttle.

A long way
In 2001, the Central Bank assessed the possibility to implement a monetary reform and sought advise from experts. Roberto Frenkel, who took part in the Argentine Austral Plan, advised the BCV against making such a move as long as Venezuela does not solve the economic fragility resulting from volatile oil revenues and poorly diversified tax base.

Basically, reference was made to implementation of moves intended to discontinue the pattern that prevailed over the last 20 years. Under such model, the Government increases expenses every time oil prices soar. Then, when oil prices drop, the Government has no other choice than devaluation, in order to obtain more bolivars from petro-dollars.

In its latest report, research firm Ecoanalítica claims the recommendations made by Roberto Frenkel are still valid. Econoanalítica warns that if the monetary reform is to meet its goals, it is vital "to reduce vulnerability of fiscal accounts vis-à-vis oil revenues."

The firm argues that over the last few years, dependence on oil sales has heightened. In 1999, oil revenues represented 10.1 points of GDP, soaring to 23.1 points in 2005. In order to mitigate the impact of falling oil prices on the Venezuelan economy, the Government created the Macroeconomic Stabilization Fund (FEM). This is a piggy bank where the Government was supposed to save a part of excess revenues. This initiative, however, sank into oblivion, and it currently holds USD 747 million only.

Instead, the Government has been making deposits in the National Development Fund (Fonden), whose goal is to earmark resources to implement investment plans and expenses.

Another important factor is the fact that inflation has decreased in the last two years, and there are signals that it will be around 10 percent in 2006. However, this outstanding performance is the result of price and exchange controls. Therefore, experts claim, inflation is merely repressed.

Further, over the last three years, the Central Bank has delivered both exchange gains and excess international reserves to the Government. This is a little orthodox practice that tends to undermine the currency, according to experts.

Ronald Balza, an economist and professor with the Andrés Bello Catholic University, explains that "keeping a sustainable level of expenses and avoiding financing expenses with BCV resources could decisively help stabilize exchange rate, interest rates, and prices, with no dependence on controls and without any need to remove zeros from the currency."

vsalmeron@eluniversal.com

Translated by Maryflor Suárez R.