Sunday, March 18, 2007

Hugo Chavez's Tract on Monetary Reform

"First, Mr. Chávez said the authorities would remove three zeroes from the denomination of the currency, the bolívar. Then he said the new bolívar, worth 1,000 old bolívars, would be renamed the “bolívar fuerte,” or strong bolívar.

Finally, at the behest of Mr. Chávez, the central bank said this week that it would reintroduce a 12.5-cent coin, a symbol of Venezuela’s prosperity in the 1960s and 1970s before freewheeling oil booms ended in abrupt devaluations, after three decades out of circulation.

Mr. Chávez champions these ideas, which will take effect in January, as ways to combat inflation, which in recent weeks crept up to 20 percent, the highest in Latin America. Officials blame “hoarders” for shortages of basic goods and price increases for food on the black market. Mr. Chávez says the renaming and redenominating the currency will instill confidence in it.

Gastón Parra, the president of the central bank, went on television this week to emphasize that the effect of these measures on the value of Venezuela’s currency would be neutral, neither increasing or decreasing salaries, debts nor the price of consumer goods.

Private economists, however, say the changes, combined with inflation, could heighten confusion over prices. Those economists say the inflation is a result of a surge in public spending by Mr. Chávez and increasingly jittery efforts by the wealthy to circumvent tightening controls on prices and foreign exchange.

“We’re witnessing policy in the form of window dressing, all carried out at the whim of one man whose strong point is not economics,” said Hugo Faría, an economist at the Institute of Higher Management Studies, a private business school here. “Anyone who sees a 12 ½-cent coin as a remedy for this country’s problems isn’t thinking too clearly.”

Inflation has been climbing rapidly since January when a sharp decline in the black-market value of the bolívar pushed up prices of imported goods. Since Mr. Chávez moved to nationalize major telephone and electricity companies in January, Venezuelans have rushed to take money out of the country, currency traders say. That exodus has caused the bolívar to weaken by about 20 percent to a level of 4,000 to the dollar on the black market, placing it among the world’s worst performing currencies this year.

The decisions to rename the currency and reintroduce the unusual coin, known here as the locha, a term thought to derive from an anachronistic practice of dividing monetary units into eighths, have dumbfounded many Venezuelans. More than a third of the country’s population of 26 million is under age 18, with no memory of the coin, which stopped circulating in the 1970s.

“I think that it’s cheap psychology,” said Jhonny Márquez, a manager at a transportation company. “I don’t believe the inflation will go down.”

Still, Mr. Chávez, 52, waxes nostalgic about the coin. Citing “the respect Venezuela’s economy has around the world” in a transmission of his television talk show this month in which he announced the coin’s return, Mr. Chávez said, “We’re going to end monetary instability in Venezuela.”

Mr. Chávez has said that redenominating the currency would reflect the economic strength that has been regained during his administration, ending a slide of the bolívar that began in 1983.

Other countries have renamed their currencies in an effort to increase confidence in their economies, but economists say such moves need to be accompanied by a display of strong economic fundamentals and transparent rules for investment by private industry.

In many respects, Venezuela has strong fundamentals, with more than $30 billion in foreign currency reserves and large inflows of revenue from oil exports this year, which are expected to surpass $50 billion. But economists say confidence in the economy has started to erode since the government began to aggressively assert control over the activities of foreign companies in recent months. The de facto devaluation of the bolívar in street trading illustrates the growing concern.

Economic historians here say the 12.5-cent coin was a descendant of a 2.5-cent coin introduced in the 1870s when the country’s currency was called the venozolano. The denomination was changed to 12.5 cents when the bolívar, named in honor of the Caracas-born liberation hero Simón Bolívar, was introduced."


- Venezuela to Give Currency New Name and Numbers

Related; Venezuela Central Bank press release;
BCV’s authorities determined that the introduction of these denominations within the Venezuelan basket (banknotes and coins) will reduce the need for rounding. Parra Luzardo pointed out that the new designs on banknotes and coins will give emphasis to nationality, Venezuelan ethnic roots and women...

Parra further explained, “The monetary reconversion will not alter the relative value of incomes, expenses, goods or debts”. If a person has saved 1,000,000 old bolivars, they would be worth 1,000 strong bolivars after applying the monetary reform. But, it does not mean that his /her savings have decreased, they would only be expressed in a new monetary range.

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