The Monetary Reconversion and the Economic Programme to Come

Absent decisive measures to control inflation, the government’s new monetary reconversion will change little, concludes the OVRE.

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Venezuelan President Nicolas Maduro shows off the new 100 Sovereign Bolivar bill
Venezuelan President Nicolas Maduro shows off the new 100 Sovereign Bolivar bill. (Presidential Press)
By Ingerzon Freites - Venezuelan Observatory of Economic Reality (OVRE)
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This past April, Venezuelan President Nicolas Maduro announced a monetary reconversion in which his government plans to remove three zeros from the “Strong Bolivar,” the national currency, renaming it the “Sovereign Bolivar.” The date for this reconversion was initially set for the June 4, later being postponed until August 4. Maduro claimed that the reconversion would assist in combatting inflation levels. In 2008, his predecessor, Hugo Chavez, reconverted the “Bolivar” into the “Strong Bolivar,” likewise removing three zeros from its denominations.

On December 27, 2017 the Venezuelan Observatory of Economic Reality (OVRE) shared “the Economic Proposals of OVRE” in various press outlets. Amongst these proposals was a monetary reconversion as part of a comprehensive economic policy.

Monetary reconversion is a measure used in public policy which consists in eliminating a specific number of zeros from the national currency. It has as its objective taking the currency to a new and lesser monetary scale. As such, this measure touches on all of the monetary values, amongst which we can highlight the prices of goods and services which are sold or rented in the country, wages and salaries, savings, pensions, debts, property rents and other payment commitments, and exchange rates and taxes. It aims to simplify the understanding, use, and handling of the currency.

According to monetary authorities, reconversions have various objectives, amongst which include: a) Strengthen confidence in the national currency by disconnecting its nominal bills from inflationary influence; b) Reach a greater efficiency in payment systems (better use of monies); c) Simplify the calculations and countable registers of transactions as well as mathematical calculations of monetary values, and ease the understanding of what are great amounts of monies.

According to my understanding of things, monetary reconversion is a neutral public policy whose success depends on the application and economic programme which goes with it. Nevertheless, we must alert here that the figure of three zeros seems insufficient to us due to the prices which products currently have. Another proposal which could be looked at would be to maintain the elimination of three zeros from the monetary system and eliminate a fourth zero from the economy (from the price, administration, account, and the financial system).

When we talk of the economic programme to come, we refer to the series of actions and measures which the national executive must take to overcome the current economic crisis, caused principally by extraction smuggling (gasoline and food), attacks against the national currency (bill smuggling and exchange rate imposition) and the inexistence of a rigorous and safeguarded economic policy.

As we don’t look to over-emphasise the methods of the economic war, we consider it more important to encourage and invite the national government to complete the announcement of the reconversion with the formulation of an economic policy which addresses fiscal, monetary, exchange-rate, and extractive rent issues, as well as apply a sectorial policy.

For the reconversion to have the hoped-for results, the first thing which this or any new economic cabinet must do is reconstruct fiscal policy whose principal objectives point towards optimising public spending, tax policy, and subsidies as a variable of protection for the people. Taking these objectives as our starting point, its obligatory to evaluate an adjustment in the [highly subsidised] price of gasoline, which we believe to be the principal component of the economic war due to the high stock trading which it generates in the border regions of the country. Equally, the [highly subsidised, sometimes even free] services of electricity, gas, telephones, and mass transport (metro) should be adjusted to lighten the burden on the State and compensate for the direct subsidies which the national government is implementing and may come to implement in the context of the formulation of an economic programme.

Going against the tide of basic service rate increases, an economic programme should take us towards an integration between monetary and fiscal policy, with the objective of guaranteeing the stability of prices through increases in interest rates and other monetary instruments, including cryptocurrencies. This policy should be led by the Central Bank of Venezuela whilst the executive should guarantee increases in consumption power of Venezuelans through direct short term subsidies and paced-out wage increases. It is important to realise that if we are not able to stop hyperinflation, then the monetary reconversion will make no sense.

Equally, in the short term, the government has three or four real sources of income, amongst which are the income generated by the oil industry, the mining industry, internal and external lending, tax income, and the implementation of the Petro cryptocurrency. Part of this income should be directed to covering the programs of social protection until urgent improvements in public spending come about.

The gradual nature of fiscal and monetary policy will bring better conditions in which one can promote a balanced exchange rate and contribute towards price stability and competition in national production. These measures will help generate a climate of necessary confidence, increasing investment and the capture of resources for the economy.

Investments should be directed to those sectors whose rapid expansion will push the rest of the system. One must remember that an economy doesn’t grow in the same proportion in all sectors, and as such attention should be paid to those sectors which can grow beyond the average level of economic growth and thus be of great interest for, principally, foreign investment.

In the medium term, an economic programme may resolve the most complex problems of production and productivity in the country whilst always balancing macro fiscal and monetary factors so as not to lose the initial effects of what is to come.

Projection of the impact and possible results is important in any economic programme, which is why we suggest that the Central Bank and Ministry of Planning construct a space in which evaluation and follow-up of the economic programme may be carried out in each of the areas mentioned.

Translated by Paul Dobson for Venezuelanalysis.com.

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