Chavez Passes Law-Decree on Monetary Reform in Venezuela

Caracas, Venezuela, March 9, 2007— Tuesday evening, during his radio program Aló Presidente, President Chavez signed into effect the law for a reform of the country’s currency, such that as of January 1, 2008 three zeros will be eliminated from the denomination. The reform is supposed to simplify accounting and increase confidence in the currency.

The practical implication of the new currency is that 1,000 bolivars, as the Venezuelan currency is known, would be worth 1 new bolivar. This means that, at the official exchange rate one dollar will be worth 2.15 bolivars as of Jan. 1, 2008. (The black market rate currently hovers between 3,500 and 4,000 bolivars.) In comparison, one dollar is worth 2.13 Brazilian reals and 3.10 Argentinean pesos.

Chavez was able to pass this new law on the basis of an “enabling law” that the Venezuelan National Assembly passed in January, which allows the president to pass laws by decree in ten different areas for a period of 18 months.

Yesterday evening the board of directors of Venezuela’s Central Bank provided further details in a nationally televised address, in which they explained that there would be a transition period of six months in which both the old and the new currency would coexist. Also, three months prior to the introduction of the new currency stores will be told to post prices in both the old and the new currency, so that Venezuelans get used to the new one.

While Chavez at first stated that the name of the currency will not change, the Central Bank President, Gaston Parra, explained that for a transition period of between six and twelve months the new currency will be known as the “strong bolivar” (bolivar fuerte), abbreviated as Bs.F. After this transition period it would go back to the original name, bolivar (Bs.), since this is the name the currency has in Venezuela’s 1999 constitution.

Parra further explained, “The monetary reconversion will not alter the relative value of incomes, expenses, debts, etc.”

The reform’s main purpose, according to the Central Bank, is to “achieve greater efficiency in the system of payments,” “simplify the calculation of economic transactions,” and “simplify the financial management and budget of the country.”

Some in the Chavez camp, such as the National Assembly deputy Elvis Amoroso, who is a member of its finance committee, argue that the reform would also help lower inflation. As an example he cited the experience of Brazil, which managed to lower its inflation rate from 2,000% to 70% with the introduction of its new currency, the real. “We will lower inflation considerably,” said Amoroso yesterday.

Venezuela had an inflation rate of 18% in 2006, which is far higher than the 10-12% the government had aimed for. For 2007 it has announced a number of measures to reduce inflation to the single digits, such as lowering the Value Added Tax from 14% to 9% and selling dollar denominated bonds to absorb excess liquidity.