Thursday, June 30, 2005

Jun 30/05 - On Venezuela's fiscal imprudence

PMBComment: the Economist manages to fumble an obvious story about abuse of power and misuse of public funds. Stating cavalierly that “even if some is stolen, much of the money from the BCV may end up funding social projects”, the writers and editors miss the point that history is full of examples in which this type of largesse and the popularity it brings temporarily to the dispenser have little to do with effective, democratic and accountable governance. Any election bought in this manner is bound to be unfair and less than transparent. Keep in mind that campaign finance laws have been implemented world-wide in order to level the playing field and keep the incumbents from eternizing themselves. My only explanation for this weak story from this superb outfit is that they tried to shove too much info in too little a space. No even the final sentence “One day they may come to rue their complaisance”, compensates for their glaring lack of connection between fiscal prudence and electoral fairness. PMB

The Economist

Bank raid

Jun 30th 2005 | CARACAS
From The Economist print edition

Reserve money for the revolution

HUGO CHÁVEZ, Venezuela's left-wing president, has long cast a covetous eye at the foreign-currency reserves of the Banco Central de Venezuela (BCV), the country's central bank. With prices for Venezuela's oil exports at record levels and with strict exchange controls in place, those reserves have climbed to almost $30 billion. This, say officials, is $10 billion-12 billion more than is needed to back the country's currency. The “excess”, they say, should be turned over to the government to spend on Mr Chávez's socialist revolution.

Last year, the BCV yielded to government pressure and allowed Petróleos de Venezuela (PDVSA), the state oil monopoly, to divert $2 billion of its dollar revenues that would normally be deposited at the bank into a new fund for social projects. Despite the objections of some BCV officials, the government has taken this to be a “rotating” fund, to be topped up as and when necessary.

Now this fund is to be absorbed into a bigger one, called Fonden (the National Development Fund). A bill close to approval by the National Assembly will require the bank to divert at least $5 billion into Fonden this year, and to make annual payments thereafter. These billions, officials cheerfully admit, constitute a parallel budget whose spending will be decided by the president alone. That looks to be against the constitution, drawn up under Mr Chávez in 1999: Article 314 states that “no kind of spending will be made which has not been foreseen in the Budget Law.”

Orthodox economists are aghast. But most concede that the transfer of funds in itself is unlikely to lead to a swift devaluation or to higher inflation. Government spokesmen say that the money will not be spent in Venezuela but instead will be used to pay foreign debts or to purchase capital goods abroad. However, the bill's text refers to education and health projects, as well as to vague “special and strategic situations”.

Opponents see another blow to Venezuela's institutions. The constitution sets as the BCV's objectives price stability and the maintenance of the value of the currency. The BCV is prohibited by law from endorsing or underwriting deficit financing. But in practice, it is coming to resemble a government piggy-bank. PDVSA, too, is being used to further Mr Chávez's purposes: on June 29th, he signed an energy co-operation pact with 13 Caribbean countries, including Cuba. This codifies, and may expand, schemes under which Venezuela supplies subsidised oil. In return, it can expect diplomatic support in regional bodies.

Mr Chávez often calls on Venezuelans to fight corruption, which the government blames on capitalist thinking. Opponents point out that the president is dismantling the checks and balances required to deter it. But even if some is stolen, much of the money from the BCV may end up funding social projects. Venezuelans are likely to show their appreciation for that by supporting Mr Chávez in a parliamentary election in December. One day they may come to rue their complaisance.