Economy
The oil prices blink mismatched the accounts of state-run oil holding Petróleos de Venezuela (Pdvsa) and the whole public sector. As a result, the Venezuelan government has postponed labor commitments and curtailed expenditure, curbing in this way the economic growth. Nevertheless, President Hugo Chávez's administration is getting ready to go off without a hitch through a reform of the Central Bank Law.

The National Assembly's congressmen already raised their hands approvingly. As soon as the new articles are published in the Official Gazette, if Pdvsa needs resources, all it has to do is selling bonds to the Central Bank of Venezuela (BCV) to get the local currency that will cover the expenses.

Concomitantly, if the government needs funds for agricultural or building projects, to reinforce the export capacity or the industry, it may issue bonds and sell them to a financial entity.

Subsequently, financial entities will be able to deposit the bonds in the Central Bank as surety to get funding, thus recovering the bolivars previously paid up in favorable conditions regarding terms and interest rates.

In addition, twice a year, at the end of each half, the Central Bank will transfer to the National Development Fund (Fonden), a fund managed by the Executive branch of government and covering planned expenditure, a portion of the US dollars which form part of the international reserves.

Thus, with a view to 2010, the year where the control of the National Assembly will be decided and voted, the government will have new funds to increase public expenditure.

According to a study of think tank Ecoanalítica, "more than 80 percent in the variation of the President's popularity can be explained by increasing or decreasing public expenditure."

Nothing is for free
Unlike an ordinary financial entity, the Central Bank does not receive deposits from individuals or corporations, but has the power to manufacture banknotes.

Jesús Rojas, ex Chief Financial Officer at BCV, explained that in order to purchase bonds from Pdvsa and other public agencies, the Central Bank will print out banknotes out of nowhere, without any backup and once in the economy, they will fuel inflation.

Economists agree on saying that a steady supply of additional cash behind the same amount of goods will result in higher prices.

"We have entered a stage where the BCV is amenable to finance the government with inorganic money and this applies additional inflationary pressure," said Domingo Maza Zavala, a former member of the Board of Directors at the Central Bank.

He reasoned that the case of the cash to be created by the Central Bank in order to back sectors such as agriculture could prove to be positive if it would truly bolster production.

"To the extent that there will be a strict regulation of loans, then the created money will be backed. But if production does not grow, current bolivars will just rise and this is highly inflationary."

The Constitution
Article 320 of the Constitution prohibits, like in most countries that have undergone hyper-inflation, the Central Bank from injecting resources.

"Pdvsa is a state company. This could be construed as indirect state funding; the law reform is inconsistent with the Constitution," Maza Zavala said.
vsalmeron@eluniversal.com

Translated by Conchita Delgado