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Venezuelan bolivar loses ground

This year, the implementation of VEB 500 (USD 50) and VEB 1,000 (USD 100) bills is expected. Nevertheless, the fact that it would happen together with actions that hold back inflation is not foreseen

Advirtió el diputado, Elias Mata

El Universal

18 de marzo de 2016 23:59 PM

Actualizado el 24 de marzo de 2016 12:06 PM


Venezuelan bolivar loses ground

Money makes no distinction among social status, religious or political views. Money is needed on a daily basis to pay everything -from services to essential goods, such as food. Currently, Venezuelans have taken note of their decreasing purchasing power due to the domestic inflation index. By the end of 2015, this index totaled 180.9%, according to the Central Bank of Venezuela (BCV).

In accordance with Article 318 of the Constitution, the bolivar is the legal tender and the Central Bank of Venezuela (BCV) is the only institution responsible for making monetary policies governing domestic economy. Nelson Merentes, President of BCV, avowed in a conversation with news agency Associated Press (AP) that the existing family of bills and coins -known in finance jargon as "monetary cone"- is insufficient. Merentes added that the BCV is pondering on printing notes of 500 (USD 50) and 1,000 (USD 100) bolivars. Likewise, he underscored that the proposal could be implemented this year. Nevertheless, Merentes did not specify the exact date and denied that paper bill designs are already drawn. However, the forecast of skyrocketing prices in Venezuela for the next months puts a big question mark about the successful implementation of a new group of notes with a top value of 1,000 bolivars.

Monetary update

Though the national economic model is conceived from a socialist point of view, a capitalist side can be appreciated in Venezuelans’ concern about obtaining bolivars for any transaction, for they need more bills to buy the same thing. The lowest denomination of paper money in any country should be intended to afford, at least transportation or minor goods, such as candies. Such premise is far from reality in Venezuela. Neither coins nor the notes of 2 (USD 0.2), 5 (USD 0.5) or 10 (USD 1) bolivars can afford the cheapest transportation ticket (VEB 20 or USD 2), or the lollipops that are sold at VEB 50 (USD 5) inside Caracas Metro railway stations.      

In the opinion of Joastin Rangel, an economist with consulting firm ODH Consultores, introducing notes of 500 and 1,000 bolivars in domestic economy would solve the transactional costs for Venezuelan individuals and production sectors. This means that citizens could purchase more goods with fewer bills. Nonetheless, Rangel added that, nowadays, this action is insufficient. He reckoned that, taking into consideration the current level of inflation and in order to keep the same purchasing power of 2008 (when the current coin entered into effect), the bill of lowest denomination must be at least VEB 2,000 (USD 200). However, Rangel highlighted that the new scheme should ensure that the paper money of lowest value can afford the lowest prices of some goods and services.   

José Guerra, deputy of the National Assembly's (AN) Finance and Economic Development Committee and former director of analysis and economic studies of the Central Bank of Venezuela (BCV), agreed on the need for a note higher than VEB 1,000. Guerra suggested that the new monetary cone should be composed of five bills: VEB 2,000 (USD 200); VEB 1,000 (USD 100); VEB 500 (USD 50); VEB 100 (USD 10) and VEB 50 (USD 5), so that the BCV can save "at least USD 5 million."

According to Ricardo Sanguino, deputy for the Great Patriotic Pole (GPP) parliament group, a member and former president of the AN Finance Committee, “the induced inflation has distorted” the country price system. Sanguino stressed that the authorities of the Finance, Banking and Insurance Engine have dwelled on a proposal to change the current monetary cone. He added that representatives from the financial sector have also studied, together with members of the National Council for Productive Economy, the possibility of printing notes of 500 and 1,000 bolivars.  

José Grasso, CEO of consulting firm Softline Consultores, pointed out that in meetings between members of the Banking Association and members of the Finance, Banking and Insurance Engine of the national government, the initiative to change the bolivar denominations has been discussed. In Grasso’s point of view, such forum “is a space to discuss the new monetary cone.” He also stressed that the Venezuelan modern banking system “is all set up” to implement a new monetary scheme.

Inflation reflection

Merentes, during the same conversation with Associated Press (AP), highlighted that the proposed new monetary cone aims to reduce the country inflation rate, because there would be “less narrow money.” Alfonso Marquina, Head of the AN Finance Committee, rejected such affirmation by arguing that money printing does not affect inflation as such; on the contrary, it mirrors the reality of prices in the country. For his part, José Grasso does not think that the monetary cone might be a way to hold back or speed up inflation. He acknowledged that its only goal is to work as a transactional mechanism in the markets.

Based on BCV data, analyzed by ODH Consultants, 31% of the outstanding money by the end of January 2016 comprised notes of 100 bolivars. This denomination doubles the amount of VEB 50 bills, which represented only 16% during the same term. The gap between both sets of currency can be explained by the sustained increase of the National Consumer Price Index (NCPI).

Joastin Rangel does not think that the implementation of this new monetary policy will have an inflationary impact “per se.” Nevertheless, he noted that the issue of the BCV opacity and non-dependability could have an effect on the NCPI. Furthermore, he wondered if the BCV mechanism to curb inflation could be really effective. Rangel established a link between the growing inflation index and the hike by 19.713% of printing of notes of 100 bolivars from 2008 to January 2016.

Budgetary impact

An article published on the American newspaper The Wall Street Journal, reported that the Venezuelan government authorized the import of at least five billion bills that arrived some months ago “onboard 36 Boeings 747 from different countries.” This illustrates three undeniable realities. Firstly, BCV mint located in Maracay (central Aragua state) is unable right now to produce the required notes. Secondly, there is a growing need for money in order to meet the requirements of the domestic economy. Thirdly, current costs of BCV are high, due to paper money imports.

Former BCV director José Guerra stressed that bills simplification is urgent so that both the BCV and other banks can diminish costs. He added that the BCV prints bills in the United States “because its lacks production capacity.” Likewise, Ricardo Sanguino stated that in some cases, production costs of a bill are higher than its exchange value. 

Economist Joastin Rangel highlighted that BCV opacity problem makes it impossible to calculate the cost of the change of denominations. Furthermore, in his view, it is hard to know how much it costs the BCV the use of bills, for such data are not reflected on its financial statements. He stated that because of the lack of transparency, nobody knows if the BCV complies with its task of stabilizing prices at the Venezuelan market, as set forth in Article 318 of the Constitution.  

Since the second half of 2015, paper money replenishment at ATM’s has also soared. Public and private banking has recorded rising operating costs due to the daily increase of transfers of securities to the ATM’s in order to meet the cash demand of users.

José Grasso, an expert in Venezuelan banking, identified another advantage from the implementation of a new monetary cone: to improve the ATM’s useful life. He explained that by using them less, technical problems and repairs would decrease. Therefore, in the long run, banks could save foreign currency for import of spare parts. 

For the BCV, the introduction of new outstanding money would not be a big issue. The experience with the latest change of the monetary cone eight years ago proved that the adjustment was in good timing, with no setbacks. 

The change of the national monetary scheme is also urgent to protect Venezuelans, who would handle less cash flow, thus diminishing the possibility of being a target for crime.

The BCV proposal to introduce higher denomination bills has being accepted by all the parties involved in the national monetary system. Some sectors consider it a late proposal, though.

This action might imply a short-term improvement to ensure Venezuelans’ security, as well as the reduction of operating costs for financial institutions. Alfonso Marquina stressed that the new monetary cone “would speed up the banking system,” thus improving performance of financial services.

However, if parallel actions are not taken to control inflation, such as holding back from executing loss-making budgets or applying other liquidity absorption operations, the Venezuelan government might have to think of new denominations in the medium term.

According to José Grasso, the second half of 2016 is suitable to change the monetary cone. He also recommended the Venezuelan government to think about the possibility of a mixed system (notes and e-currency), and the related cost saving involved in its implementation.

Twitter: @Os0790

Translated by Karen Daza

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