VÍCTOR SALMERÓN
EL UNIVERSAL

Under the proposed changes to the Constitution of the Bolivarian Republic of Venezuela, President Hugo Chávez will keep tight rein on the Venezuelan international reserves -the account denominated in US dollars that allows for the payment of imports and guarantees the servicing of foreign debt.

Article 318 of the proposal states: "International reserves shall be managed by the Central Bank of Venezuela (BCV), under the administration and guidance of the President, as the administrator of the national treasury."

Further, article 321 reads: "As the administrator of international reserves, the Venezuelan Head of State shall set, in coordination with the Central Bank and ending each year, the level of reserves required to support the economy, as well as the amount of excess reserves which shall be used for any funds as established by the National Executive."

The money, this article adds, should be used for "productive investment, development and infrastructure, funding of social 'misiones' and, finally, comprehensive, endogenous, humanist and socialist development of the nation."

Through several amendments to the Central Bank Law, the Chávez Administration has made it clear that Venezuela's economy requires a given amount of international reserves, which will be determined on a yearly basis. The remaining reserves are to be transferred to investment funds.

Until now, the "excess" reserves calculation has been under control of the BCV board of directors, which has transferred USD 16.9 billion to the government in two years. But under the proposed changes to the Constitution, the bank is to share this function with the President, resulting in a likely higher amount of fund transfers out of the BCV account.
 
As a matter of fact, the transfers made to the National Development Fund (Fonden) have already depleted international reserves following a 28.7 percent steep drop in the period January 2-August 15.

Economic indigestion
The use of international reserves to cover public spending has had some aftereffects. BCV feeds these reserves by means of US dollars the run-state oil holding Petróleos de Venezuela (Pdvsa) obtains from oil exports, and the oil industry, in turn, convert them in Venezuelan bolivars (VEB) that injects into the government.

The outcome has been that by using the dollars entering BCV as international reserves without making the corresponding deposit in Venezuelan currency to replace them -as the government of President Chávez has been doing- these dollars are practically being used twice, making the economy to suffer from indigestion due to the injection of too much money.

Money in circulation has soared 60 percent over the last three years. That means that a higher amount of Venezuelan bolívars available to purchase a basket of basic foodstuffs that does not grow at the same pace has resulted in a price hike.
 
Accumulated inflation peaked 17.2 percent over the last year, and grew a yearly 13.5 percent between July 2005 and July 2006..

Feeling quite dizzy
If the level of foreign currencies in the BCV accounts continues edging lower, markets are very likely to get jittery. According to several analysts, the difference between a bill and any piece of paper is the support provided by the international reserves.

This fall in Venezuela's international reserves actually goes hand in hand with the rise of the unregulated parallel foreign exchange rate, which has climbed to VEB 4.600 from VEB 3.300 from January to August this year.

This surge has had an impact on inflation as it pays for 15 percent of imports and is taken account of by businessmen as guidance for replacement costs.

The demand for foreign currencies has reached such a level that the Ministry of Finance has fed supply by means of the issuance of Pdvsa Bonds and Bonds of the South worth USD 11.0 billion this year, and the parallel foreign exchange rate remains unchanged.

Shrinking oil income
The doubts that the proposed changes to the Constitution cast on the stability of international reserves have arisen at a time when imports have skyrocketed and oil income tumbled.

Oil exports fell 9.2 percent while imports advanced 38.7 percent, from USD 7.85 billion to USD 10.89 billion in the second quarter.

As a result, imports have been eating away at USD 72 out of every USD 100 from oil income. This ratio was 42.8 percent over the same period of 2006.

In this context, the strength of international reserves is crucial.

vsalmeron@eluniversal.com

Translated by Servio Viloria