And you have to wonder what Central Bank Director Armando Leon has been smoking this year. The once respected economist, whose term at the BCV expires this year, told local newspapers that he saw nothing wrong with President Chavez asking the Central Bank to give out US$ 8.7 billion to the Development Fund Fonden.
Leon saw no problem with this saying that this created no disequilibrium given that Venezuela had a nice position in international reserves. Ummm….The disequilibrium does not come from the position in reserves, but the artificial creation of monetary liquidity at a rate which can only end in a disaster. Moreover, oil prices have come down significantly which means that reserves will go down if the Government continues to spend (or buy stakes into well run companies for ideological purposes, rather than spend the money where it can benefit the people).
Leon also told us that the exchange control administration has been managed efficiently. Apparently he is not aware of all of the new rules which forbid giving foreign currency to a large list of items, as well as the new certification that the product is not being produced in Venezuela. The result will be more pressure in the parallel exchange rate as those importers buy the foreign currency there. And the parallel rate, even if the Government does not want to acknowledge it affects the inflation rate. In 1995, the rate topped the annualized value of 120%, forcing the Caldera administration to remove exchange controls, something this “control all” administration is not ready to do.
But the mots hilarious statement by Leon, even if it is not funny, was to argue that people have learned to invest in Venezuela. Even worse, Leon mentioned that small investors have bought shares of CANTV and Electricidad de Caracas. I guess Mr. Leon must have been abroad the last week as these stocks lost over 30% of their value, putting the Caracas Stock Exchange in deep freeze for a long time to come. Who does he think he is kidding?
Reality is that monetary liquidity increased by 70% last year, but reserves increased by only 16%. Subtract now from the reserves US$ 8.7 billion to satisfy Chavez wishes, subtract then however much the Government will pay for nationalizations and add Government spending in 2007 which its conmmesurate increase in liquidity and you have a time bomb. At the end you can spice this all up with making savings rates so deeply negative that people have no incentive to save and have all incentives to buy dollars in the parallel market.
The only measure under which you can say Venezuela’s reserves are adequate is in terms of its yearly imports. The rest is simply hot air and I am truly amazed and surprised that Mr. Leon will publicly say what he did. Unless, of course, he wants to be reappointed as Central Bank Director.
The whole issue of reserves is being handled with total irresponsibility. Next time the Chinese Prime Minister comes I do hope Chavez asks him why if China as exchange controls like Venezuela, it does not use a good chunk of its US$ 1 trillion in international reserves for development projects. But, of course, he will not think of it.