By Andy Webb-Vidal in Caracas http://www.ft.com/cms/s/7a01256e-0096-11db-8078-0000779e2340.html
Published: June 20 2006 21:01 | Last updated: June 20 2006 21:01
Hugo Chávez, Venezuela’s president, has ordered the country’s central bank and legislature to introduce a new national currency that would knock three zeroes off the exchange value and could be renamed the “nuevo bolivar”.
Experts said the impact of such a measure would be more symbolic than economic. Government legislators say the “monetary reform”, as it is being described, is intended primarily to help reduce inflation, as well as to make accounting easier for the government, businesses and consumers.
The aim, according to central bank officials and legislators, is to eliminate three zeros from the value of the bolívar, which currently trades at a fixed official exchange rate of 2,150 to the dollar.
Rodrigo Cabezas, president of the National Assembly’s finance commission, said the government intended to introduce the new currency on January 1 2008.
“The central bank must prepare for this monetary reform, whose almost sole objective is to defeat inflation once and for all,” Mr Cabezas said.
However, some experts suspect that the measure has more to do with the sort of patriotic symbolism favoured by Mr Chávez than with economics.
The removal of several zeros from the value of a currency has historically been a component of a wider policy aimed at stopping hyperinflation. In the 1980s and early 1990s, such measures were introduced in countries such as Argentina, Bolivia and Brazil, when inflation rates were often measured in thousands of percentage points.
Today, Venezuela has the fastest rate of inflation in the region. But at 14.4 per cent in 2005, the rate is way below what could be deemed “hyperinflation”.
Economists say the introduction of a new currency will be pointless if it is not accompanied by an overhaul of fiscal policy.
Awash with dollars from oil exports, the Chávez government has dramatically increased expenditure in parallel to the official budget, one of the main causes of excess liquidity and persistent inflation.
“A new currency could end up being the crowning moment of a period of reckless fiscal expansion and extra-budgetary spending,” said Orlando Ochoa, an independent economic consultant in Caracas. “What Chávez really wants to do is to see his historical heroes printed on a new currency for his regime,” he added.
In the past three years, Mr Chávez has revamped several national symbols, including the country’s flag.
Copyright The Financial Times Limited 2006