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The former minister and political economy professor talks to VA about the way out of the current crisis.
Former Venezuelan Vice President for Productive Economy Luis Salas is part of the 15 y Ultimo collective. A committed researcher and prolific writer, Salas teaches political economy at the Bolivarian University in Caracas.
In part one of this exclusive interview with Venezuelanalysis, Salas analyzed the government’s economic policy since August 2018, describing how they morphed into an orthodox structural adjustment package. In part two of the interview, which follows, he turns to the current tendency towards dollarization, and the way out of the present crisis.
For our previous September 2018 interview with Professor Salas, click here.
For many years, the government’s economic policies seemed to be merely reactive, but now there appears to have been a shift toward more a active stance with the government actually having a strategy, although it is not public. Let’s talk about this shift in relation to the current process of dollarization.
Indeed, as you say, the government’s policies went from reactive – an ambulance chaser – to being more proactive with the “monetary lobotomy” and other adjustments put in place over the past few months.
For many years, the government’s policy came ex post facto. Basically, they established new frameworks legalizing [extra-legal] activity. For example, the government’s response to widespread violations of price controls was to liberate prices, and to solve the parallel, illegal dollar market problem, the exchange rate was liberalized [to be equal to the parallel, blackmarket rate]. They chose to turn legal infractions into the law.
More recently, we have seen that the government flexibilized the exchange market and, in doing so, it also loosened-up on monetary sovereignty. Why? When you flexibilize the exchange market, which comes with the free convertibility of currencies, you open the door so that other currencies, which aren’t the Bolivar, will begin to circulate more freely in the national economy. (By the way, in constitutional terms, the Bolivar is declared to be the “one and only currency” that can circulate in Venezuela).
Other currencies first began to circulate in the tourist sector, where the government legalized payment with foreign currencies, and later with the cryptocurrencies, with the Petro taking the lead.
At first, the Petro was presented as a cryptocurrency for international transactions, but later President Maduro began to talk about budgets in Petros, payments in Petros, savings in Petros, etc. So really what happened is that the Petro opened the door for other cryptocurrencies. The cryptocurrencies, in turn, opened the door to normalizing the circulation of other currencies.
At around the same time, in mid-2018, the National Constituent Assembly eliminated the Illicit Exchange Law. Later in the year, the Supreme Court emitted [two different] sentences legalizing payments for services and labor contracts in US dollars. Additionally, on December 28, the SENIAT [Venezuelan tax agency] emitted a resolution that allows to pay taxes in dollars and other foreign currencies.
Here we can see a coordinated institutional change in policy, affecting the National Constitutive Assembly, Venezuela’s Supreme Court, and the state’s tax office.
It’s very important to point out that – in addition to allowing other currencies to circulate in the economy – the government has been simultaneously restricting the circulation of Bolivars through its new monetary policy. All this in an economy where the Bolivar is more and more depreciated every day!
If you take, as a starting point, the value of the Bolivar Soberano on August 20, 2018 [the day that the Economic Recovery Plan was announced] and you compare it to the Bolivar Soberano on April 12 of this year, you can see that the devaluation has been about 99.5%! This is a variation in terms of real value. (In nominal terms, the devaluation is about 5000%.)
We are facing a strange situation in which, due to the monetarist policy that the government has recently adopted in the effort to reduce inflation, there are far fewer Bolivars than needed circulating in the economy, but on top of that, those Bolivars are now worth far less.
To put this in numbers, when you take the total economic liquidity in Bolivars, from bills and coins to all the money in banks, etc., and you divide that by the official DICOM [state-run foreign currency marker] exchange rate, then the monetary mass comes to 1.3 billion dollars. In other words, if the government wanted to exchange all the circulating Bolivars to USD, all it would have to have would be 1.3 billion dollars. (I make this calculation based on reports issued by the BCV on April 5, which was the last report issued.) On the other hand, if we consider only the Bolivar bills and coins that circulate in our economy, that yields somewhere between 60 and 70 million dollars.
All this means that if the government were to come out today and announce that it was going to formally dollarize the economy (which I don’t think will happen), all it would need would be 1.3 billion USD to do the currency shift. That represents just 11% of the country’s reserves, which are already seriously depleted.
If you add to this that Venezuela, given the massive immigration triggered by the current crisis, is one of the main countries receiving family remittances in the region, that will give you a general panorama that shows how polarized things are getting.
Conservative estimates say that last year some two billion dollars entered the country as remittances in 2018. Now, it must be taken into account that, even though that may be a good estimate of what was sent, not all of it arrived in the country as greenbacks; often there is banking triangulation, and in the exchange process some dollars stay in accounts abroad. So a super-conservative estimate would be that half of that initial two billion arrived to Venezuela. If you add to that the fact that in many businesses you can now pay with international credit cards, we can then safely assume that in our economy there are more US dollars than Bolivars circulating. (And that is if we are only talking about dollars. To that one should add Euro, cryptocurrencies, etc.)
So I would say that we are not in a process of dollarization in the strict sense of the word. We are in a process of de‐Bolivarization. The Bolivar, due to policies and spontaneous phenomena, is being expelled out of the economy. Obviously this could rapidly open the path to full dollarization, or it could open to a period similar to the one in Zimbabwe where there was a sort of monetary chaos, with a multiplicity of hard currencies and cryptocurrencies circulating in the economy. A consequence [of that chaos] is that it is impossible for the Zimbabwean government to apply economic policies.
In a word, we are in a process of de‐Bolivarization that can take us to dollarization after the current economic chaos, or we could sink more deeply into chaos.
Now, what is paradoxical about this situation? The fact is that the government’s economic policy is contributing to dollarization, even if that’s not the aim. In other words, if dollarization hasn’t advanced more, that is because the sanctions, especially the financial ones, prevent more dollars from coming into the economy.
We have a situation in which, on the one hand, the government’s economic policy (most likely unintentionally) pushes our economy towards dollarization while US sanctions put a break on it. Interestingly, however, Larry Kudlow, a White House economy assessor, said recently that in a context where Maduro wasn’t president, there is a plan to inject dollars into the Venezuelan economy through smartphones, in a general plan to dollarize the economy.
The issue here, however, is that the conditions for dollarization are being created, and they are in part generated by the government’s own economic policy!