Of bolivars and time-sharing

The oft-mentioned Law for the Safeguarding of Public Patrimony (Ley de Salvaguarda del Patrimonio Público) imposes controls over the sale or liquidation of public assets. 

It is interesting to note that this law is completely and utterly ignored when it comes to the sale, day after day, hour after hour, of what should be classified as the country’s main public assets, i.e. its reserve of dollars.

At this point in time, I doubt there is one economist that, upon having analyzed the evolution of relative prices and the forecasts for the country’s income levels (basically oil), doesn’t consider that the Bolívar is overvalued to the tune of at least 20%. That means the Dollar should be worth at least Bs. 670.

Why, then, don’t we devalue? I don’t know the proper answer for this question, but if you asked me to speculate, I would probably infer that it was due to factors such as ignorance or stubbornness. 

I still remember back in 1982, when I called for a modest devaluation of the Bolivar so as to correctly reflect circumstances that resemble the ones we have present today. The absurd argument against this devaluation I received from professionals of fame and reputation was that this was impossible since we were due to celebrate the bicentennial of our Liberator Simon Bolivar in 1983, and that a devaluation was tantamount to denigrating the latter.

These references to the dishonor of Bolivar’s memory, were totally confusing for someone like myself. I was educated under the influence of a system of competitive economies for whom the real heroes were those authorities that managed to devalue the currencies of their countries just a tad more that their neighbors, furthering economic development even if this came at the expense of others. I consider it is patriotic to generate opportunities of internal employment by way of increasing exports and minimizing imports. 

It is possible that we still have public servants that equate a downwards readjustment of the exchange rate with national weakness and an upwards readjustment with strength. If these people have invested a high amount of ego in this argument, God save us if they find that they could theoretically return to the days of Bs. 4.30/US$ by increasing bank reserve requirements and increasing interest rates.

One of the more ridiculous arguments arising from this debate is that the government is not promoting a fiscally motivated devaluation thereby showing that there is great seriousness in the managing of the country’s finances. Devaluations are the consequence of irresponsible fiscal management, not the cause of it.

The only truly fiscally motivated devaluation that occurs is when, due to a lack of confidence in the future of the country, the market decides to pay an exaggerated premium for foreign currency. We could call this a tax on nervousness. 

When we analyze recent Venezuelan history, there is no doubt that our governments have been very efficient in their collection of this tax. “The budget doesn’t balance. Let’s spook the markets and get more Bolivars for every Dollar”.

The least we should expect out of a government in its dying days is that they don’t leave a wide gap in the valuation of our currency based exclusively on artifices such as disproportionately high interest rates or the simple burning of international reserves.

The next government’s job, whoever it is, will be sufficiently complicated without having to tackle this type of problem.

The use of mini-devaluations fixed within a band is a reasonable policy when one is trying to manage market expectations on inflation and devaluation into the future. The use of the band system and mini-devaluations to hide facts that already exist (inflation and falling oil prices) is an insult to our country and our intelligence.

If, in the face of all of its mistakes, the Government really wishes to make an act of penitence, I suggest they go about seriously and effectively reducing the unproductive public payroll. I say seriously and effectively since our governors have in the past demonstrated their dexterity in applying the techniques used by the sales persons hawking time-sharing units.

These sales persons normally increase the sales price by US$ 15,000 in order to then generously award potential purchasers a discount of US$ 12,000. The same goes for our politicians, who first increase the public payroll in order to then propose a reduction.

By the way, it is being said that, although the government has not been able to reduce the payroll, it has at least designed the restructuring plans that will allow the next government to achieve this goal “with ease”. 

I believe that, as far as shamelessness is concerned, our politicians are head and shoulders above sellers of time-sharing units.

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.