Venezuela’s Central Bank Law Reform Allows Limited Government Use of Reserves

This week Venezuela's National Assembly passed a reform of the Central Bank Law, which will place $6 billion dollars or 20% of the country's foreign currency reserves in a special account to be used by the executive for purchases and investment abroad. According to Chavez, the country's excess reserves will benefit the country's development.

Caracas, Venezuela, July 22, 2005—Venezuela’s National Assembly passed a reform of the country’s Central Bank law last Tuesday. The reform will allow President Chavez to use up to $6 billion of Venezuela’s $30 billion foreign currency reserves, for investment and purchases outside of the country. The opposition warned, though, that the reform would have an inflationary effect on Venezuela’s economy.

A little over a year ago Chavez had asked Venezuela’s Central Bank to turn over $1 billion for the country’s agricultural sector. However, the central Bank board refused to comply and so Chavez took the matter to the National Assembly.

The new “excess reserves,” as Chavez has called them, will be deposited into a special fund, known as the National Development Fund (Fonden) and can only be used for purchases and investments outside the country. The reformed law states, “The resources transferred to the fund … only may be used by it, in foreign currency, for the financing of investment projects in the real economy, and in education and in health; for the improvement of the profile and balance of the external public debt; as well as for attending to special and strategic situations.”

Opposition economists argue that the use of Central Bank reserves, even for foreign purchases will cause an increase in inflation and would endanger the stability of the country’s currency.

Pro-Chavez legislators and analysts, however, argue that by keeping the funds out of the national economy would not cause any inflation. Rodrigo Cabezas, the pro-Chavez legislator who helped draft the reform said, “This discourse that we will close the Central Bank and that we are removing its autonomy is false. The BCV [Central Bank of Venezuela] will continue to administer the [foreign] reserves, just as the law stipulates.”

Venezuela’s finance minister, Nelson Merentes, proposed today that if part of the Fonden funds were invested in bonds or international stocks, it could generate annual returns of 5% or more, which would be twice the returns that the Central Bank reserves currently generate. Only a part of these funds would be invested in bonds or shares. Most of it will be used for the purchase of products that will benefit Venezuela’s health and education sectors.