Caracas Chronicles

I can’t tell you how excited I was to hear the MUD caucus recently introduced a bill to reform Venezuela’s Central Bank law. As an economist, I’ve long been convinced that Venezuela’s screwed up Central Bank Law is our biggest wellspring of economic chaos. “Great,” I thought to myself, “MUD’s finally taking on a substantive, desperately needed reform!”

So imagine my disappointment when I learned MUD’s reform proposal is really quite minimal. It’s aimed narrowly at reversing Maduro’s last minute decreto-ley approved under his Enabling Powers in December 2015.

MUD’s bill basically claws back two areas of influence for the Asamblea Nacional:

1) it allows the Assembly to name 2 (out of 7) board members;

and

2) it allows AN to demand information from the BCV.

 
Chavez managed to fuse oil industry and state in order to use oil rents at will without any checks, balances or even oversight. The amalgam that glued it all together was the 2005 Reform of the Central Bank Law.

In the words of the President of the Subcommittee for Finance and Tax Policies, Rafael Guzman, the reform aims to restore AN’s role as BCV’s watchdog.  And, indeed, the public consultation process focused on issues like BCV’s independence and its responsibility over the country’s inflation.

That’s a good start, but really only the beginning. The problem is what this reform leaves out: any discussion of the Chávez’s radical 2005 overhaul to the rules of the BCV game. This, really, is the crux of the matter, and MUD’s bill has nothing to say about it.

Dawn of the Bochinche Parafiscal

Let’s take a trip down memory lane. After the collapse of the Paro Petrolero in 2003, President Chávez embarked on a determined program to rid the state of any focal points of dissent or contestation. Chavez managed to fuse oil industry and state in order to use oil rents at will without any checks, balances or even oversight. The amalgam that glued it all together was the 2005 Reform of the Central Bank Law.

Before that reform, PDVSA was mandated to deposit all its foreign currency income in its BCV accounts. That allowed the Central Bank to manage the exchange rate: easy enough when you monopolize all hard currency transactions and manage all international reserves under the sole premise of stabilizing your own currency.

But in 2005, the galactic giant considered it was “simply stupid” to hold on to more than $30 billion in foreign currency reserves, arguing that the opportunity cost in terms of “social investment” was unacceptable. For him, the money should be spent in poverty alleviation programs –  misiones, in the lingo. Not that he was re-inventing the wheel; this was just another interpretation of Uslar’s cliché, Sembrar el Petróleo, and, if you ask me, one of the most extended consensuses in Venezuelan society.

As a result, the rules were modified so that hard currency income derived from oil exports could be legally divided in three parts:

1) One part was to be sold to the BCV at the official exchange rate. The “optimal level of international reserves” would be indicated by the AN during the planning of the yearly National Budget, but of course the actual basis for that calculation remained vague.

2) A second chunk was to be kept by PDVSA, for its own external operations.

3) Anything left over would be deposited at the Fondo de Desarrollo Nacional (FONDEN), a black box fund audited by no one, overseen by no one and accountable exclusively to the President’s office.

As a consequence, three clear trends took hold:

1) Year after year, the chavista National Assembly approved fantasy budgets totally unhinged from fiscal fundamentals, leaving the optimal level of international reserves around $25 billion per year and simply asking for “créditos adicionales” to make ends meet.

2) PDVSA mushroomed, spawning seven non-oil subsidiaries in Agriculture, Industry, Services, Engineering & Construction, Naval, Urban Development and Communal Gas to absorb the enterprises and lands that ended up in state hands during the ¡Exprópiese! Era. They implemented the famous misiones directly, importing all sorts of goods and services using PDVSA’s own cash flow, and declaring it into the economy at whichever exchange rate they saw fit. Oversight? None. Control? Surely you jest.

3) FONDEN took in over $200 billion during the 2001-2013 period (to put the number into perspective, consider that PDVSA’s entire oil exports for 2016 may amount to just $22 billion if prices remain at $25 a barrel). We’re told a good deal of that money went to major infrastructure projects like Guri, Tocoma, the ever-unfinished high speed railroad to Valencia and the Gran Mision Vivienda, but as there’s no oversight, auditing or control, there is no way to know where exactly the money went (cough cough Andorra cough)

Comment at the time tended to see the 2005 BCV Law Reform as a grab for control of the Central Bank, but it was so much more than that. It was actually the lynchpin of a new model for managing the petrostate designed to centralize control over rents and hollow out transparency, oversight and control. This was done by maximizing the dollars left at the control of PDVSA and FONDEN – parafiscal flows answerable only to the President – and minimize the flows going through the National Budget – the only mechanism subject to public controls.

 
The decision to lowball the flows to the National Budget is at the heart of today’s service delivery problems.

This is what I mean by bochinche parafiscal – the spending free-for-all nobody’s allowed to audit.

The decision to lowball the flows to the National Budget is at the heart of today’s service delivery problems. Remember that every current spending outlay made by the public sector has to go through the budget. We’re talking public schools and universities, hospitals, utilities, local governments, jails, police and military expenses… everything the state requires to function properly. By reducing its income in real terms, Chávez crippled the capabilities of all these public services, concentrating all the execution power in the misiones, a bloated PDVSA and FONDEN.

With the 2005 reform, the BCV board lost control over the Nation’s monetary and foreign exchange policies. In subtle but unambiguous bureaucratic jargon, the current law explicitly says  that both policies must be “coordinated with the Executive Power” in the terms that “best suit the Executive”. A buen entendedor…

The BCV law continued to be tinkered with in 2009 and 2010. Mopping up what remained of its autonomy, those later reforms made it legal for the bank to finance all state owned enterprises, including PDVSA, and other major economic projects in bolivares. To a civilian that may sound like a relatively minor technical point, but economists know that allowing the Central Bank to cover public sector deficits with freshly printed money is the puerta grande towards hyperinflation.

If the bochinche parafiscal was a wonderful mess when oil rent was flowing in ever-increasing amounts, it became an unmanageable nightmare when the petroparty came to an abrupt end. The results have been uncontrollable inflation and skyrocketing parallel exchange rates. In other words, Venezuela completely lost control over its macroeconomic situation.

Back to MUD’s Bill

What’s disappointing is that the bill MUD introduced is utterly oblivious to this discussion, which makes me wonder: is it because they have no idea, or is it because they are unwilling to have the discussion? Maybe it is a matter of taking baby steps, but the opposition may be risking postponing one of the most fundamental changes that need to be reviewed if we are serious about transforming Venezuela’s economic model.

The MUD needs to have a real discussion with all relevant aspects of this extremely important law. (WTF is up with that tiny three-day public consult, dude?)

MUD needs to push a thoroughgoing reform of articles 34, 47, 49, 60, 87, 101, 102, 103, 122 and 125, regarding who is responsible for macroeconomic coordination, financing the government’s deficit, who controls the FX policy and whether the FONDEN should exist at all. These are the root causes of today’s borderline hyperinflation, not DolarToday or the Economic War.

It’s not for lack of will that the Fondo de Estabilización Macroeconómica only saved USD 3 MM during fat cows’ time, as Guzman suggested, it is a matter of the incentives allowed by the current institutional framework, incentives enshrined by the 2005 reform of the BCV law.

It’s been disappointing to see how little blowback MUD has faced for this half-baked reform proposal. Transparencia Venezuela did publish a formal communiqué warning that the text would do nothing to curb the parafiscal shenanigans that have done so much to bring the economy to chaos. For some reason the comuniqué disappeared from their website.

I think the MUD (and Venezuelan society as a whole) should have a serious talk about these matters, put a much more ambitious proposal forward and see what happens. Articles 318 to 321 provide a robust constitutional grounding to any such reform. But even if if the Sala Constitucional overrules the law, having this discussion is essential to the nation in the medium and long term.