Archive for October 13th, 2004

A Constitutional move to open the boxes

October 13, 2004

A group of people that lives in the Salias municipality right outside of Caracas went today to the Electoral Board (CNE) to inform them that they had held a Citizens Assembly according to Article 70 of the Venezuelan Constitution and that the 4,000 people at that assembly had voted to open all of the electoral boxes on Oct. 31st. They presented a document outlining how this ill be done and said they did not need the approval of the CNE, because of said article, combined with Art. 5 of the Constitution, which says that sovereignty is exercised directly and is not transferable from the people. The group encouraged other municipalities to follow suit.


This is article 70 of Venezuela’s Constitution, which was the cornerstone of Chavez’ much ballyhooed “participative” democracy which has now been set aside:


 


Artículo 70. Son medios de participación y protagonismo del pueblo en ejercicio de su soberanía, en lo político: la elección de cargos públicos, el referendo, la consulta popular, la revocatoria del mandato, la iniciativa legislativa. Constitucional y constituyente, el cabildo abierto y la asamblea de ciudadanos y ciudadanas cuyas decisiones serán de carácter vinculante, …


 


Article 70. The means of participation and protagonism of the people in the exercise of its sovereignty on politics are: the direct election to public office, the referendum, popular consultation, revoking mandates, legislative initiatives, Constitutional and Constituent, town halls and citizens assemblies the decisions of which will be binding….


 


If more municipalities imitate Los Salias, it will be interesting to see how the CNE and the Government approach the issue. I really don’t believe they want to open all of the boxes, much like they did not want to open them for the August. 15th.  recall vote. It could be dangerous to go to the Supreme Court since the Electoral Law is so clear in saying that all of the boxes have to be opened. Thus, I suspect the CNE will simply block people from doing it on Oct. 31st. or postpone the vote.

The fight over Venezuela’s Central Bank Exchange profits

October 13, 2004

This weekend President Chávez once again attacked the Central Bank over the amount of “foreign exchange profits” it should turn over to the Government. This continues to be an issue that is not resolved and highly controversial.


Essentially, Central Banks around the world began a few years ago publishing financial statements very much like those of a commercial banks, even if their purpose is not to make a profit but monetary stability. Every time there is devaluation, the foreign currency “purchased” by the Central Bank at the old price is “worth” more in terms of local currency. Thus, the bank “makes” a lot of money every time there is devaluation and it sells this foreign currency purchased at lower prices.


 


About four years ago, the Venezuelan Government asked the Central Bank to hand over those profits, which it did. This is not a common practice, in fact, it is forbidden by law in many countries. The practice itself is not considered negative by economists as long as handing over the foreign exchange profits fits the purpose of currency and monetary stability which the central bank has. The usual recommendation is that the practice does not become recurrent and that it not be done if it threatens the balance sheet of the Central Bank..


 


In Venezuela handing over these profits has become recurrent via the annual devaluation that has taken place in the last few years. In the first half of the year alone, the Venezuelan Central Bank transferred Bs. 1.5 trillion in foreign exchange profits, some US$ 781 million at the official exchange rate. A similar payment will be made in the second half. The problem here is that this already represents almost 5% of the funding for the Government’s 2005 budget. Thus, it becomes a vicious circle, as the Government needs to devalue again, even if oil prices are very high, because it has no other source for funding such a large piece of the budget.


 


The origin of the discussion is that now the Government wants to receive more of these profits and it is arguing that the Central Bank is using for the accounting of these profits LIFO (Last In First Out), rather than using FIFO (First In First Out). The Government wants to use FIFO, because then dollars obtained by the Central Bank last year or the year before at much lower exchange rates would be sold at the current one, thus the profits would be higher. In the Government’s proposal, the Central Bank would have to hand over Bs. 3.1 trillion for the first half of 2004, US$ 1.6 billion or 6% of next year’s budget. The Superintedent of Banks said today that these foreign exchange earnings may reach Bs. 8 to 9 trillion or 15% of next year’s budget which is a huge proprtion. I am not sure where this higher figure comes from, but it sounds too high to me.


 


Clearly, this would insure that next year there would have to be devaluation, as these profits may reach 10-15% of the national budget, unless oil prices skyrocketed even further. If the Government did not devalue, these profits would evaporate as the Central Bank rotates its inventory this year and fewer profits would be left over for next year. The Government would not have an alternate source of funds for such a large piece of the budget.


 


Chávez is threatening to go to the Supreme Court on the issue, while Central Bank Directors are calling for arbitration. In either case, the final result will be further devaluations and more inflation because of its recurrent nature. The only unknown is by how much.

The fight over Venezuela’s Central Bank Exchange profits

October 13, 2004

This weekend President Chávez once again attacked the Central Bank over the amount of “foreign exchange profits” it should turn over to the Government. This continues to be an issue that is not resolved and highly controversial.


Essentially, Central Banks around the world began a few years ago publishing financial statements very much like those of a commercial banks, even if their purpose is not to make a profit but monetary stability. Every time there is devaluation, the foreign currency “purchased” by the Central Bank at the old price is “worth” more in terms of local currency. Thus, the bank “makes” a lot of money every time there is devaluation and it sells this foreign currency purchased at lower prices.


 


About four years ago, the Venezuelan Government asked the Central Bank to hand over those profits, which it did. This is not a common practice, in fact, it is forbidden by law in many countries. The practice itself is not considered negative by economists as long as handing over the foreign exchange profits fits the purpose of currency and monetary stability which the central bank has. The usual recommendation is that the practice does not become recurrent and that it not be done if it threatens the balance sheet of the Central Bank..


 


In Venezuela handing over these profits has become recurrent via the annual devaluation that has taken place in the last few years. In the first half of the year alone, the Venezuelan Central Bank transferred Bs. 1.5 trillion in foreign exchange profits, some US$ 781 million at the official exchange rate. A similar payment will be made in the second half. The problem here is that this already represents almost 5% of the funding for the Government’s 2005 budget. Thus, it becomes a vicious circle, as the Government needs to devalue again, even if oil prices are very high, because it has no other source for funding such a large piece of the budget.


 


The origin of the discussion is that now the Government wants to receive more of these profits and it is arguing that the Central Bank is using for the accounting of these profits LIFO (Last In First Out), rather than using FIFO (First In First Out). The Government wants to use FIFO, because then dollars obtained by the Central Bank last year or the year before at much lower exchange rates would be sold at the current one, thus the profits would be higher. In the Government’s proposal, the Central Bank would have to hand over Bs. 3.1 trillion for the first half of 2004, US$ 1.6 billion or 6% of next year’s budget. The Superintedent of Banks said today that these foreign exchange earnings may reach Bs. 8 to 9 trillion or 15% of next year’s budget which is a huge proprtion. I am not sure where this higher figure comes from, but it sounds too high to me.


 


Clearly, this would insure that next year there would have to be devaluation, as these profits may reach 10-15% of the national budget, unless oil prices skyrocketed even further. If the Government did not devalue, these profits would evaporate as the Central Bank rotates its inventory this year and fewer profits would be left over for next year. The Government would not have an alternate source of funds for such a large piece of the budget.


 


Chávez is threatening to go to the Supreme Court on the issue, while Central Bank Directors are calling for arbitration. In either case, the final result will be further devaluations and more inflation because of its recurrent nature. The only unknown is by how much.

The fight over Venezuela’s Central Bank Exchange profits

October 13, 2004

This weekend President Chávez once again attacked the Central Bank over the amount of “foreign exchange profits” it should turn over to the Government. This continues to be an issue that is not resolved and highly controversial.


Essentially, Central Banks around the world began a few years ago publishing financial statements very much like those of a commercial banks, even if their purpose is not to make a profit but monetary stability. Every time there is devaluation, the foreign currency “purchased” by the Central Bank at the old price is “worth” more in terms of local currency. Thus, the bank “makes” a lot of money every time there is devaluation and it sells this foreign currency purchased at lower prices.


 


About four years ago, the Venezuelan Government asked the Central Bank to hand over those profits, which it did. This is not a common practice, in fact, it is forbidden by law in many countries. The practice itself is not considered negative by economists as long as handing over the foreign exchange profits fits the purpose of currency and monetary stability which the central bank has. The usual recommendation is that the practice does not become recurrent and that it not be done if it threatens the balance sheet of the Central Bank..


 


In Venezuela handing over these profits has become recurrent via the annual devaluation that has taken place in the last few years. In the first half of the year alone, the Venezuelan Central Bank transferred Bs. 1.5 trillion in foreign exchange profits, some US$ 781 million at the official exchange rate. A similar payment will be made in the second half. The problem here is that this already represents almost 5% of the funding for the Government’s 2005 budget. Thus, it becomes a vicious circle, as the Government needs to devalue again, even if oil prices are very high, because it has no other source for funding such a large piece of the budget.


 


The origin of the discussion is that now the Government wants to receive more of these profits and it is arguing that the Central Bank is using for the accounting of these profits LIFO (Last In First Out), rather than using FIFO (First In First Out). The Government wants to use FIFO, because then dollars obtained by the Central Bank last year or the year before at much lower exchange rates would be sold at the current one, thus the profits would be higher. In the Government’s proposal, the Central Bank would have to hand over Bs. 3.1 trillion for the first half of 2004, US$ 1.6 billion or 6% of next year’s budget. The Superintedent of Banks said today that these foreign exchange earnings may reach Bs. 8 to 9 trillion or 15% of next year’s budget which is a huge proprtion. I am not sure where this higher figure comes from, but it sounds too high to me.


 


Clearly, this would insure that next year there would have to be devaluation, as these profits may reach 10-15% of the national budget, unless oil prices skyrocketed even further. If the Government did not devalue, these profits would evaporate as the Central Bank rotates its inventory this year and fewer profits would be left over for next year. The Government would not have an alternate source of funds for such a large piece of the budget.


 


Chávez is threatening to go to the Supreme Court on the issue, while Central Bank Directors are calling for arbitration. In either case, the final result will be further devaluations and more inflation because of its recurrent nature. The only unknown is by how much.

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