Economists analyze the measure six months from its enactment

New cycle without major changes

 

Economists Ronald Balza and Abelardo Daza sustain that monetary reconversion has not been an effective measure to slow down inflation. As they say, this situation should be attacked from several economic flanks to be successfully defeated

 

Lourdes Rojas

 

Six months after the enactment of the monetary reconversion policy, economy sustain that the purposes sought by the National Assembly’s plan to close the high inflation cycle and recover the economic strength Venezuela had until 1983 have not been achieved yet.

Many economists believe that the measure, which became effective on January 1st, 2008, was conceived without any prior discussion of its consequences.

The experts emphasize on the rapid handling of the measure by the financial system to enforce the measure and to acknowledge that, after its enforcement, it can still be improved. However, they believe that monetary reconversion has had a very high cost, the amount of which has not yet been accurately determined.

“The monetary reform has not been a useless measure; it has been unnecessarily expensive, not transparent, badly designed and poorly introduced to the public” says the economist Ronald Balza, a professor at the UCAB and UCV.

“To begin with, there never was any publication of any technical document explaining the reasons for reconversion. What we had, in a good measure, was an ambiguous campaign that associated the monetary reconversion to an anti-inflationary plan, but in effect, deleting three zeros from the currency is a measure that will have no effects on price evolution”.

 

BUSINESS VENEZUELA (BV) In your opinion, what have been the mistakes of the monetary reconversion?

RONALD BALZA (RB) I believe the BCV has made several significant mistakes. The first was the over estimation of the importance of this measure, a measure that had been harshly criticized by many on the basis of solid reasons related to the fact that the government had not recognized that inflation causes were related to its cost policies and the lack of encouragement of private investment.

Another problem is the lack of transparency. Nobody knows how the funds destined for this purpose were used; nobody knows who sells the pieces, which denominations are bought or if there was ever any possibility of buying them for less if they had been bought well in advance, not in a hurry.

 

BV: Why are the costs of the monetary reform unknown?

RB: Neither the origin nor the use of these resources is clear. The National Assembly had said that these were BCV resources and made reference to two deficit accounts at that time.

The National Assembly initially stated that it exceeded 660 billion Bolivares in two additional credits granted to the BCV. It also mentioned two approvals, one on April 11, 2007 for 440 trillion and another on June 20, for 226 trillion, which adds up to approximately 700 trillion. That was the Bolivar cost, but one thing is knowing the figure and another is knowing its distribution.

The 2006 BCV accounts show a Bs. 340 trillion deficit. Those same accounts showed a Bs. 11 trillion in June 2007.

If BCV spent Bs. 700 trillion and had to finance it with deficit accounts, it would be important to know where those funds came from.

 

BV: Which aspects of the process have been positive?

RB: One of the aspects to be recognized of this process is that banks adjusted their technological platform without any problem for the duration of the measure, and fortunately, the fact that the public has had to exchange old bills and coins for new ones has not been taken very seriously by it.

One of the major concerns was that people would not be able to use the fractioned coins because they were not used to it, but those coins have no purchasing power and therefore, any losses related to that fact have not been very significant.

 

BV: Why do you say that those coins have no purchasing power?

RB: Because from a sample of 22 thousand prices, including food, collected by the BCV, only 5,5% had a cost of one thousand bolivares or less.

 

BV: Has the consumer been harmed by the monetary reform?

RB: I don’t think so, and fortunately, it has not been felt that way, because reconversion is not a cause of inflation. One of the concerns I had was that there could be an association of the price increase with abusive round-ups and then explained as vendor speculation.

 

BV: But the government adopted the monetary reform as a measure to slow down inflation

RB: That is the ambiguity problem. The fact that the BCV has permitted that association makes the monetary reform measure deceitful, because it was obviously not going to solve that problem.

The lack of any technical explanation of the measure and the fact that the BCV made no observation regarding the causes of inflation could have generated a number of speculations regarding the future in the Bolivar/Dollar relationship, where many people could have thought that reconversion was one way of bringing forward or anticipating devaluation, which could have an effect in the wish to buy foreign currency by individuals.

 

BV: At some point, the BCV stated that monetary reconversion would help Venezuela’s integration with the rest of Latin America

RB: At some point, Armando León said that this was going to help our integration with the rest of Latin America because Brazil’s and Argentina’s currency had three less zeros than ours; when in fact he omitted to say that Colombia, our principal commercial partner has three more zeros than we now have. But the fact of having three more or less zeros has no importance because all transactions can be made in Dollars.

 

BV: What are your suggestions regarding the reconversion matter?

RB: The application of the monetary reconversion could have been a lot less expensive if thought had been given to the fact that bills have an approximate useful life of 18 months, according to the BCV. Then you could say that within two years we should have changed all the bills currently circulating.

That gives time to the banking system to prepare without having to run, which only increased the odds of its going wrong. That kind of review gives us time to think about which coins to exclude, which bills should be converted into coins, and to make business with currency houses without any hurries.

 

Neutral balance

 

To offer a balance since the application of monetary reconversion, Abelardo Daza, an economist and investigator of the public policy center of the Instituto de Estudios Superiores de Administración (IESA),assures that that up to this moment, results have been “neutral”.

“Venezuela was an inflationary country and still is. In the mind of consumers, the old bolivares issue is still present and reconversion has not meant any change. I believe that the essence of reconversion was to simplify the lives of people. That is coming”, says Daza.

The specialist considers that beyond reconversion, there have been some macroeconomic improvements in the last months.

 

BUSINESS VENEZUELA: What are those improvements?

ABELARDO DAZA (AD): Namely, that excess liquidity has been controlled up to now. Surprisingly, in real terms, the central government spending is falling, just like it did last year. There may be doubts as to whether this will hold, but definitely, it has represented a very important change in these past 6 months.

The sum of bills, coins and deposits is known as liquidity. When liquidity grows in excess, its result is inflation and the sum of those coins and bills measured in real terms is less today than it was one year ago.

One year ago, the nominal figure was approximately 140 trillion (140 billones). Today, we are at 150 trillion (150 billones) 150 billion Bolivares Fuertes. But the real fall is in real terms: 150 trillion of today buy less than the 140 trillion did in the past because prices are actually higher.

The price release of controlled products and the tax uncertainties of the government with the ITF are the principal factors that explain inflation for the past 6 months..

Last year, inflation of controlled prices was only 10%, while non-regulated products showed a 32% growth. Then obviously, that 22,4% underestimated, in some way, last year’s inflation because regulated products grew to one half of the average figure and one third of non-regulated products.

We expect that towards the last quarter of this year, annualized figures are somehow reduced and that the year closes with a 26% to 27% inflation. However, that is not too much to say because the initial inflation target was 11%.

 

BV: Has the application of the monetary reform reduced the inflation rate?

AD: Eliminating three zeros does not mean eliminating three zeros from the inflation rate or reducing it automatically. Only since September 2007 we have had an inflation of around 20%, and so far, the inflation index for this year is 8.9%.

There are other aspects related to the monetary reconversion such as the simplification of accounts. I thought that it would be a positive process but maybe it’s too soon to clearly determine its impact.

 

BV:And what happens to the rounding-up issues?

AD: A distinction must be made between technical rounding-up and rounding-up that has an inflationary impact, which is really a manner of price adjustment.

Sometimes the consumer requires an argument to adjust prices. That argument may be a cost adjustment or a margin increase. Obviously, consumers do not welcome any perceptions of price increases by reason of margin increases.

Reconversion is an opportunity to adjust some prices in an inflationary environment. It was visible during January 2008.

 

BV: What can be expected from the application of this measure in the future?

 

AD: Even though this reconversion will not recover strength, there is a symbolic aspect of the new era, a new currency, a new economy, even though it is not actually happening.

After the reconversion, I believe it is important to try to improve it, to try to stabilize the economy, simplify the calculations and to prevent the happening of what already happened once: the issue a 200 bill in 6 months, then a 500 bill and another 1,000 bill because inflation keeps on growing.