So Hugo Chavez finally gets his blank check!
18.06.05 | The National Assembly is getting ready to start its first debate of the amendment to the Central Bank of Venezuela Law. One of the main objectives of this amendment is to change the current provision that obliges PDVSA to sell all the foreign currency it gets from exporting hydrocarbons exclusively to the Central Bank.
The amendment bill that is about to be debated states that, of the foreign currency obtained from selling hydrocarbons, PDVSA will sell to the Central Bank only those amounts needed to cover operating and running costs and to pay the company’s taxes. Whatever is left over will be deposited in funds to be set up by the Executive to finance the Bolivarian revolution’s social spending.
The crucial thing here is that the bill stipulates that these funds will be handled at the discretion of the Executive, with the result that the Central Bank will be no more than a simple administrator and its opinion will not be binding on the use to which the money in these funds is put.
Thanks to this amendment, the vigilance and prudence exercised by the Central Bank will disappear and the Executive will be able to go on a spending spree, with no controls and with no thought for the consequences. In principle, a National Development Fund (Fondes) will be set up by presidential decree, which will take over the special mechanism currently being used by the oil industry for channeling investment. The Fund is to be started of with an initial lump sum in foreign currency of no less than $5 billion, which would be transferred by the Central Bank from the international reserves, and after that it will receive the surplus foreign currency from PDVSA’s exports before they are turned into reserves. VenEconomy considers passing the amendment to the Law on Banks and setting up this Fund will be tantamount to installing a “money-making machine” that will give rise to an increase in the money base of around 20%, which, in turn, will generate strong inflationary pressure and increased pressure on the exchange rate.
Yet it seems that none of these negative consequences for the country count. The important thing is that, at last, President Chávez will get what he wants: the Central Bank’s reserves and Fondes will be put at his disposal, like a checking account he can draw on whenever he wants. However, this money-making machine will, inevitably, fail, as it failed in the past, and will lead to the collapse of the system as it did in 1989.
This is just one more step down the road to manufacturing greater poverty.
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