Archive for March 2nd, 2011

Ten Questions to the Board of the Venezuelan Central Bank

March 2, 2011

Two years ago, I wrote a careful post on the health of the Venezuelan Central Bank entitled: Central Bank Musings: Printing Money and going bankrupt. I spent a few days working on it because I wanted to explain to the non-expert what the balance sheet of a Central Bank looks like. I remember this quite well, because I was sitting on another story, the Stanford Bank story, as Alex Dalmady had written his now famous “Duck tales”, but I kept putting it off to devote time to my Central Bank post which barely generated a beep, while the Stanford story was one of the biggest ones ever covered by this blog. But the story of the financial state of the Venezuelan Central Bank, may one day be bigger.

Some of you may want to look back at that post now, because things are much worse than they were then. That is why a group of 26 Economists a week ago published this open letter to the Board of the Venezuelan Central Bank (BCV), asking ten very simple questions:

1.- Can you explain how it is possible that an asset that has been transferred from the BCV to Development Fund (Fonden), in this case US$ 39 billion in international reserves, continues to be reflected simultaneously in the balance sheet of both the BCV and Fonden as an asset? Is this consistent with the generally accepted  accounting rules?

2.- Could you make public the detailed methodology in the calculation of what you call “an adequate level of international reserves”?

3.- Why is it that the BCV has stopped publishing, for more than a year now, the table with the monetary base according to its different sources, where one would be able to appreciate the main factors of primary money creation by the BCV?

4.- Since 2004, there has been an item in the equity of the BCV denominated “adequate level of international reserves” which subtracts Bs. 9.186 billion (US$ 2.136 billion) to the overall equity. At the close of December 31st. there is in the assets of the BCV an account denominated “diverse assets in national currency” (Note 12 in the balance sheet) under the concept “adequate level of reserves” for Bs. 61.155 billion (US$ 14.222 billion). Shouldn’t this account be subtracted from the equity of the BCV in order to be coherent?

5.- Article 5 of the Central Bank law establishes that “the fundamental objective of the Venezuelan Central Bank is to achieve price stability and preserve the value of the currency”. Since the primary obligation of the BCV is the control of inflation, how do you explain that we have the world’s highest level of inflation?

6.- Can you explain why the backing of monetary issuance (International Reserves/M2) has deteriorated by 111%? Such backing was US$ 0.10 for each Bolivar in 2010, when in 1999 it was US$ 1.21 for each Bs.

7.- On July 20th. 2005, the account “Funds transferred to Fonden” was created in the amount of Bs. 12.453 billion (US$ 2.896 billion), which according to Note 11 of the balance sheet of the BCV had to be amortized by creating voluntary reserves. Why is it that after five years, this has yet to be amortized?

8.- What is the¬† content of of the item “Diverse assets in national currency”, noted in Note 12 of the balance sheet of the BCV? What are these so called financial instruments in the amount of Bs. 15.05 billion (US$ 3.5 billion)?

9.- What was the economic cost of the monetary reconversion?

10.- What have been the benefits to the citizens of the creation of the strong Bolivar, since its introduction on January 1st. 2008?

The country demands sincere answers