During his weekly broadcast Sunday, President Hugo Chávez announced plans to use further international reserves -managed by the Venezuelan Central Bank (BCV)- to fund his projects.

Commenting on the sources of funds for his devised community councils, the ruler said he would eliminate the autonomy of the Central Bank, because "we have international reserves available and let us say that the public budget fails to meet our needs, then we could use reserves to fund the community councils, to fund the construction of houses for indigenous people, or to fund the construction of schools and so many other productive activities."

At the end of January 23rd, Venezuelan international reserves amounted to USD 35.48 billion. Experts say, however, that using such funds has a drawback, as increased government expenses could cause indigestion to the local economy and push prices up.

Money cycle in Venezuela is as follows: state-run oil conglomerate Pdvsa sells oils and receives US dollars. Pdvsa delivers such foreign currency to the Central Bank and is given Venezuelan bolivars at the official exchange rate of VEB 2,150 per US dollar. BCV deposits the US dollars it gets from Pdvsa in the international reserves account, while Pdvsa delivers the bolivars it received from BCV to the government, which in turn uses this money to afford public expenses.

Therefore, if US dollars are withdrawn from international reserves and converted in bolivars again, as Chávez intends to do, then the same US dollar would be used twice.

"Straightforwardly, using international reserves amounts to devaluating because you are obtaining more bolivars for the same US dollar. One US dollar gives you VEB 2,150 (when Pdvsa changes it at the BCV). If you use the same US dollar later, then you are receiving VEB 4,300. Devaluation is proportional to the percentage of reserves you are withdrawing. For instance, if you take 10 percent of reserves, then devaluation is 10 percent."

Injecting more bolivars into the Venezuelan economy results in inflation.

BCV has delivered Chávez administration USD 10.2 billion that have helped shore up public expenses. Consequently, liquidity jumped 66 percent in 2006, while inflation last year was 17 percent -the highest rate in Latin America-, despite price and exchange controls in force since three and two years, respectively.

In the parallel market, the exchange rate of the Venezuelan bolivar to the USD skyrocketed 70 percent in 2006, thus causing significant price increases.