A devaluationist sends a message

Due to my work as a financial advisor, I have been able to see the damage being done to our economy by the overvaluation of the Bolivar firsthand. I therefore reiterate with urgency my call for a readjustment in the exchange rate of between 30% and 40%.

I am a bit disconcerted by the fact that by calling for this adjustment, for some strange reason that I don’t understand, I know I will be branded as a member of a group named “the devaluationists”. This group apparently has been attributed characteristics similar to those of a gang of hoodlums or even worse, of some type of malevolent sect. It is said that “the devaluationists” operate in the name of, and to the benefit of, evil speculators.

Jesting aside, the truth is that during the past weeks we have seen the birth in Venezuela of a campaign against the use of the devaluation as a normal and legitimate economic policy tool. Before the credo of “No Devaluation” acquires religious status, I wish to say the following: I wish for a devaluation now! This does not make me a “devaluationist”. Not any more so than a doctor who diagnoses the onset of gangrene and immediately orders the amputation of the affected limb cannot be labeled an “amputationist”.

For a long time now Venezuela has suffered through a period of inflation which is far and above the devaluation of it currency. The latter, therefore, has slowly but surely been revalued. A devaluation today would simply serve to bring the past up to date.

In order to sustain the actual overvaluation of the Bolivar, the government has had to resort to a policy of exorbitant interest rates which have only succeeded in shrinking our economy even further. The fact that Government officials maintain that the stability of our currency is the result of their excellent handling of the economy while they have to resort to high interest rates in order to support the same, would be funny if it were not for its tragic implications.

To blame inflation and other such diseases on devaluation is similar to believing that a fever causes illness, to the punishing a messenger because he delivers bad news. And as if that were not enough, the poor behavior of oil prices should cause enough to implement an immediate and anticipated devaluation without having to wait for our foreign reserves to be depleted.

Surely a devaluation will benefit some speculators. However, all speculation has two sides to it. Should we not devalue, speculators who dedicate their time to taking advantage of the high real interest rates offered by the financial system in Venezuela will benefit.

I recently read some illustrative declarations issued by Dr. Bradford DeLong of the University of California about the debate between those that propose a fluctuating exchange rate, represented in this case by Dr. Milton Friedman of Stanford University and those that favor a fixed exchange rate, represented by Dr. Robert Mundell of Columbia University.

DeLong explained the debate as follows. According to Dr. Friedman, the exchange rate is a price. To fix it, therefore, would be to violate human freedom. On the other hand, Dr. Mundell maintains that an exchange rate implies a promise. Therefore, to change it would be to default on an obligation. The concept of a solemn “promise” must be what inspires today’s fervor in Venezuela.

Evidently, should someone in Venezuela have issued a promise such as that mentioned by Dr. Mundell and should this promise have been accompanied by economic policies that at least gave us some hope that it would have been kept, I would be able to join, at least hypothetically, the group that defends a fixed exchange rate. To embrace the credo of a fixed exchange rate in the Venezuela of today, in which economic chaos reigns and without having received a formal and credible “promise” simply seems foolish.

I entreat my colleagues to go to the interior of the country. I will undoubtedly horrify them to see the number of jobs that are disappearing, some of them for ever, simply due to the overvaluation of the bolivar or the recession caused by the sky-high interest rates. The jobs I am talking about are not those created by illusions of the past such as the production of apples. No Sir, I am talking about real jobs in developed sectors in which we are solidly competitive. In the face of global recession that depresses prices and promotes dumping, these sectors deserve support, not punishment.

Those that say today that we should not devalue, simply have not analyzed the realities of the Venezuelan economy. Due to the lack of internal and external demand, most people are simply working in order to satisfy, precariously, their cash flow needs. In this sense, we also have a considerable repressed inflation which must be reflected somehow before we reach an equilibrium.

The lost jobs are civil fatalities caused by the war against the use of devaluation as the government’s fiscal tool. In this war, we are not taking the proper precautions in order to correctly identify the weapons to be used as well as to avoid aiming at civilians. Many of my colleagues simply are closing their eyes, or worse, are clamoring for the use of more napalm.

Unhinged economic planning

We have often heard about the lack of resources available to fund institutions such as the National Exchange Commission. The latter, by the way, would be much better off reviewing and stamping prospectus’ of new issues with stamps such as “Danger - Opportunities and Risks - Issue Not Controlled” than creating the illusion of exercising effective control. We vividly remember the Bank Superintendency during the recent bank crisis.

However, some new government initiatives such as the new Banco de Comercio Exterior (Export Bank), are receiving ample budgetary support via capitalization (this should not be construed as being a criticism or as trying to belittle the importance of Bancoex). No one can dispute the fact that economic planning seems to be a bit disjointed.

Additionally, we all have heard about the ambitious investment programs being implemented by sectors such as Petrochemicals. However, when we read in the local press about the strict orders issued to firms such as Cadafe and Hidroven, both of utmost importance for the development of the country, to drastically reduce their investments supposedly in order to fight inflation (by reducing “excess” liquidity), there is no doubt that national economic development seems to lack a backbone.

We must remember that one of the main justifications for the Reactivation of Marginal Oil Fields program was that a great number of the wells were shut down, not for lack of productivity, but because it would have required large amounts of resources and investment, and that PDVSA, lacking these resources, preferred to invest in areas that held more promise and higher returns.

Now, PDVSA is being asked to cut back on its expenditure in 1998 in order to join the attack on inflation. For the third time, we dare put forward the thesis that there is total dyslexia in our national economic planning. A more extreme interpretation of this seems to imply that investment in marginal fields under the oil opening program may go ahead while development of the high yield wells operated by PDVSA must by scaled back.

Additionally, without trying to discuss the reason why, the country has been suffering though high inflation without the corresponding devaluation of the national currency. This real appreciation of the currency flies directly into the face of the efforts of those businesses trying to compete in the international arena via exports of goods or services such as tourism.

The cutback order by the national executive in the investment programs of the above-mentioned entities specifically and unbelievably excludes the purchases of imported goods and services, paid in hard currency all under the assumption that these disbursements do not adversely affect monetary liquidity in the country. We come back again to the thesis that national economic planning is basically brain-dead. Another extreme interpretation is that it is forbidden to buy locally produced goods (no compre Venezolano) while the purchase of imported goods are encouraged.

The dramatic reduction in the economic activity of the country over the past few years has created unemployment and hunger in a great part of its population. It cannot be disputed that we urgently need to develop a plan to reactivate the economy. This plan must go much further than simply stimulating an increase in the demand for consumer goods, which is usually a simple hedge against inflation and not the result of a coherent plan.

However, when we observe that our planning teams, lacking the courage to confront inefficient public spending, the main cause of all most of our ills, continue to raise smoke screens such as the argument of excessive liquidity, we can only add another attribute to our national economic planning, lack of heart.

I’ve mentioned this before in a previous article and I repeat it now. The omnipresent preoccupation with excess liquidity is like a physician who worries about possible leftovers of food when a patient refuses nourishment and begins to fade away. The problem is not the food, it is the appetite. The problem is not excess liquidity, it is the lack of a healthy economic plan aimed a generating production and productivity.

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.