A necessary change of optics

The fact that the Venezuelan currency was named the Bolívar and the misguided sense of that a devaluation of the same would be disrespectful to the memory of our Liberator, supported the refusal to devalue the currency during 1982 even in the face of economic reality. As a consequence, the devaluation in February 1983 was much more drastic than necessary and hastened the country’s dive over the precipice of economic chaos. We still have not managed to stop this dive.

Our sense of direction was lost basically due to inflation. Today, the private sector must follow strict accounting rules which call for re-expression of accounts. The Income Tax Law has also introduced the concept of adjustment for inflation as well as the application of tax units (unidades tributarias). In spite of this, we note a curious lack of activity aimed at requesting that the public sector establish more links with reality.

When we analyze the problems inherent in the Venezuelan economy, either we are blind, or we don’t want to see, or someone simply doesn’t want us to see. I will detail some of our economic variables in United States Dollar terms in order to allow our readers to form their own criteria as to which alternative applies. We have expressed dollar terms in real 1982 values.

1) In December 1982 the total of all deposits in the Venezuelan financial system (normally known as M2) were the equivalent of US$ 31.3 billion. In July 1997, this figure had dropped to US$ 7.8 billion, that is to say, only 25% of the 1982 total. Even if we consider possible changes in the multiplier, this indicates and incredible drop in the real economic activity in the country.

Not a day goes by without some “expert” in economics expressing preoccupation about excess liquidity. This attitude could be compared to when a physician begins to worry about left-overs when the patient is in a serious state of inanition. The real problem that has traumatized the country is not the excess liquidity (food) but the lack of economic growth (appetite).

2) In 1982, Venezuela’s international reserves had reached US$ 10 billion and were equivalent to 32% of M2 as described above. In July 1997, these reserves totaled US$ 10.1 billion (in 1982 terms) and represented 130% of M2.

It is important to note that in 1982, the country did not have sufficient dollars to satisfy the demand should all deposit holders in the nation wish to purchase dollars. As it were, the Bolívar had to be devalued in 1983. In July 1997, the situation was just the opposite; all the deposit holders in the country put together do not have enough Bolívares to purchase the dollars held by the Central Bank.

If we apply a broad analytical brush to the before mentioned figures and note that the international reserves belong to the state while M2 belongs mostly to the private sector, it is evident that the latter has become much poorer in comparison to the former. When we see that in spite of these results there is still support for maintaining and even increasing tributary pressures, the reigning economic philosophy seems to have a lot in common with a Gulag-style Soviet purge.

3. In December 1982, the Venezuelan financial system had a credit portfolio totaling US$ 16 billion while in July 1997 this amount had shrunk to US$ 4 billion, again, in 1982 terms.

We have frequently heard and read that an increase in credit activity could put the country’s banking system in jeopardy. Since lending is the essence of banking by definition, and when we take into account the low volume of credit activity mentioned above, it can only mean the opposite. If lending doesn’t increase, banking slowly dies.

If we wish to recuperate an economic orientation that makes sense for the country, it is imperative that we begin to express public finance figures in terms of real figures. By this I don’t imply that we should use the US dollar as denomination to express our national accounts. I do propose, however, that we find an element that reflects reality so that we at least liberate Bolívar from having his name associated with creative or even fraudulent accounting.