The de facto dollarization is unstoppable, but the BCV won’t disappear and Venezuela will continue to use bolivars for certain things. Several countries in the region have taken that path.
By Caracas Chronicles – Marianela Palacios
Sep 16, 2021
The de facto dollarization has sped up in the past two years. Today, Venezuelans are allowed to open bank accounts in foreign currency in the banking system, carry out transactions with those funds, and even issue debts in dollars through the Bolsa de Valores de Caracas (Caracas Stock Exchange). For the time being, Maduro’s government continues to halt financial dollarization and won’t allow banks to give credit in U.S. currency, but there’s reason to believe that this semi-official dollarization will continue to deepen progressively, even if it’s not official dollarization yet.
It’s not just for ideological reasons, but also because the regime doesn’t want to lose control of its monetary policy, which has allowed it to fund its fiscal deficit with inorganic money. Furthermore, as long as the international sanctions are still in place you can’t carry out such a process with the United States’ central bank; the National Reserve.
So the bolivar will live alongside the dollar in Venezuela for quite a while. This dual monetary currency economy isn’t a misfortune in itself, according to Leonardo Vera, an economist from the Universidad Central de Venezuela (UCV), with an MA from Roosevelt University in Chicago and a PhD from the University of East London. Maybe the government is scared of it, but in Latin America “there are many examples of partial currency substitution and of dual monetary currency regimes such as Perú and Bolivia. Venezuela should analyze those experiences.”
It all starts by stabilizing the Venezuelan economy, but Vera says that it can perfectly adapt. “Eventually credit dollarization will arrive when they start to think about unlocking the lever for growth promotion,” he explains. “They haven’t allowed credit in dollars because the Venezuelan Central Bank’s strategy to stop the high inflation process is to paralyze credit, forcing banks to keep mandatory reserves in large percentages over deposits. For them, boosting credit would fuel the inflation process.”
According to Vera, “what’s predominating is incompetence over ideology,” and it’s determining our current economic realities. A government that has taken the country to the situation it’s in and doesn’t know how to regulate a dollarized financial system, and refuses to make it official because “that would mean acknowledging they have lost total control over monetary sovereignty, and it would also leave Maduro without the possibility to support himself on monetary policies to fund transfers and payments which are still done in bolivars and are aimed at recipients of aid programs and pensioners. That component, even if the amounts are dismal, still brings some political rewards,” he adds.
Luis Zambrano agrees, an economist at the Instituto de Investigaciones Económicas y Sociales of the Universidad Católica Andrés Bello (IIES UCAB) and wrote that the semi-official dollarization is likely to stay for a long time. “The main reason for the government to not go ahead with an official dollarization, is more pragmatic than ideological, and it lies in its resistance to abandoning the use of the inflationary tax as the main source of funding public expenditure,” Zambrano says.
In full dollarization, the BCV would stop issuing the sovereign currency and the exchange market disappears. “The partial dollarization, slow, and without any guidance that we’ve been seeing, hasn’t tamed the high inflation process,” Vera points out.
What Dual Monetary Currency Economies Are Like
Today, the three officially dollarized Latin American countries are Ecuador, El Salvador, and Panamá.
Panama adopted the dollar as the official currency alongside the balboa, their national currency, in 1904, after it became independent from Colombia. One balboa has been equal to one dollar ever since and it only circulates in coins, so the country has an income from the seigniorage (it’s the profit the issuing country gets when the face value of the coin is larger than the metal used to mint it), but since they don’t print bills, its use is quite limited.
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Read More: Caracas Chronicles – Dollars are here to stay, but bolivars aren’t going away
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