Thursday, March 22, 2007

Venezuelan currency gets new name, number

Of all the startling measures announced by President Hugo Chavez this year, from the nationalization of major utilities to threats of imprisonment for violators of price controls, none has baffled economists quite like his venture into monetary reform.

I think that economists would have another list than just the implementation of policies about price controls. Which one was the loss of the independence of the Central Bank.
First, Chavez said the authorities would remove three zeroes from the denomination of the currency, the bolivar. Then he said the new bolivar, worth 1,000 old bolivars, would be renamed the bolivar fuerte, or strong bolivar.

Finally, at the behest of Chavez, the central bank said last week that it would reintroduce a 12 1/2 -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.

Chavez 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.

Window dressings like this move does nothing without significant structural reforms. In all the cases I have seen none have resulted in a stable currency or any reduction in inflation without major changes happening. To give you an example, Timeline: Zimbabwe's economic woes.
In 1998 it started out with an exchange rate of:
Exchange rate: 1 US dollar (USD) = 24 Zimbabwean dollars (ZWD)
Then it reached a level of:
December 2005: Exchange rate: 1 USD = 77,965 ZWD.
And then they decided to introduce a new currency:
August 2006:Exchange rate: 1 USD = 101 new ZWD = 101,347 old ZWD
And how did this help?
Exchange rate: 1 USD = 259 new ZWD = 259,793 old ZWD.
'Hoarders' blamed
Officials blame "hoarders" for shortages of basic goods and price increases for food on the black market. Chavez says that the renaming and redenominating of the currency will instill confidence in it.

Gaston Parra, the president of the central bank, went on television last 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 that the changes, combined with inflation, could heighten confusion over prices. Those economists say that the inflation is a result of a surge in public spending by Chavez 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 Faria, an economist at the Institute of Higher Management Studies, a private business school here. "Anyone who sees a 12 1/2 -cent coin as a remedy for this country's problems isn't thinking too clearly."

Yes, blaming anyone beside Government Officials is just a waste of breath. The troubles with their inflation and thus their currency is well beyond a little window dressing that is trying to instill confidence. It is government policies that are creating inflation as well as creating incentives to circumvent the government regulations. Obviously Hugo has little understanding of economics and has very poor advisers. Confidence comes from making logical decisions and not rash decisions by an authoritarian dictator.
Inflation climbing rapidly
Inflation has been climbing rapidly since January when a sharp decline in the black-market value of the bolivar pushed up prices of imported goods.

Since Chavez 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 bolivar 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.

When it was announced the nationalizations earlier this year also caused this drop ot around 4000 to the US dollar.

One way that they have moved money out of the country was take stock certificates from Venezuela and transfer them to the USA which then becomes an ADR and when sold they become US dollars.

PS: Not sure where title link went to but saw another blog with some more information.
Monetary reform in Venezuela: the zeroes are the problem

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.


Update (5-11-07): Can "New" Currency Abate Venezuelan Inflation?

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