Hold on to your seats! Get ready! I am about to say that the Government is proposing to do something which I think is good, maybe I think it is very good! Basically, it is one of the few proposals in the last five years that really attempts to tackle a structural problem in the Venezuelan economy. But letís start at the beginning:
Currently, when the Government sends funds to any Government institution, office or Ministry, it orders the Venezuelan Central Bank to deposit the funds on behalf of that Government organization at a private bank. The Central Banks deposits typically a month or more of the institutions budget.
These Governmentís organizations, typically deposit those funds in interest bearing accounts. Now, what is perverse about this is that 60% of the amount in deposits of the Venezuelan private banking system is invested in Government bonds and Treasury bills. Thus, the Government pays banks interest so that banks can pay a lower interest to Government organizations that have funds idle in the private banking system.
This is obviously quite perverse and inefficient. Perverse, because the Government is financing banks, so that banks can pay these Government institutions. While this had always happened in Venezuela, the difference is that these funds represented 4-5% of all deposits in the Venezuelan financial system five years ago, but represents 37.5% of deposits today! This is simply huge!
But it gets worse, since Government officials have discretionary power over which banks these funds are deposited in, this ahs become one of the largest sources of corruption in Venezuela today. Many banks, I will not mention names, actually pay commissions to Government officials, treasurers and administrators to divert deposits their way, whether they pay the highest interest or not. So, this is a huge business for private banks, which coincidentally have been making obscenely huge profits in the last few years. Now, not all banks play this game, but there is a large group of banks whose deposits have grown rapidly in the last few years.
To give you an idea of orders of magnitude, deposits in the banking system are like US$ 17 billion of which about 40% receives interest. However, man time Government institutions do not deposit directly but do a repo (Repo= Repurchase agreement. A financial institution ďsellsĒ a financial instrument to someone with an agreement to repurchase it at a future date) with the bank, some that the bank does not have to reserve in the Central Bank. So, rough numbers, we are probably talking about a total of US$ 30 billion with 40% owned by Government institutions or some US$ 12 billion. Now, spreads are typically 8-9% in the banking system, so we are talking about roughly a billion US$ I n revenues for the banks, A very nice piece of change, worth fight forÖand paying for.
What the Government proposes to do is to create the Bank of the Treasury that would replace the Central Bank in these activities. Thus, institutions will not get their money until they need to use it. This will reduce the financing needs of the Government as it will be able to reduce the amount of debt issued in local currency and will allow for the more efficient use of Government resources.
This is a great idea if it is implemented efficiently and correctly and I applaud laud and clear the initiative. There are some negatives to it, but they are minor compared to what is at stake:
-Banks that have large Government deposits will suffer and have problems short term as these deposits are withdrawn from it. The Government should have a transition period in order to prevent a crisis at some financial institutions.
-Some Government institutions have actually used these deposits as a way of generating additional income to fund their activities. In particular, some institutions use this interest income to pay salaries the first few months of the year, since the Government takes time to approve and fund the budget every year. Most institutions doe not get any money until March each year. These institutions will have to learn how to live without these extra funds.
This is not the first time the idea of a bank of the Treasury has been floated. Letís hope it gets beyond the idea stage and it works. To me the savings in financing, the elimination of the associated corruption and the efficiencies introduced would make this a giant step towards improving Government finances.