Caracas Chronicles

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 Peru 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 Panama.

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.

Ecuador was dollarized on January 9th, 2000, after a deep economic crisis that included severe hyperinflation and a complete devaluation of their national currency, the sucre.

In 2001, El Salvador was also dollarized and began using two currencies: the colón and the dollar. But the colón has since been out of circulation and the only currency in use today is the dollar.

Other countries in the region, such as Bolivia, Peru, and Paraguay are also among the most dollarized in the world, but they use their local currency to move their economies and control their monetary policies.

Technically, an economy is considered “dollarized” when deposits in foreign currency surpass 30 percent of the monetary liquidity, and it’s “moderately dollarized” when this ratio is between 16 and 30 percent.

You also have to remember that official dollarization doesn’t necessarily mean putting an end to the Banco Central de Venezuela. From the start of this century, for instance, Peru’s central bank has been successfully implementing a monetary policy based on inflationary targets, in spite of it being one of the most dollarized economies in the world, Zambrano underlines. Peru is a partially dollarized economy, where 70 percent of the national financial system’s liquidity has been in dollars for years. Most of the salaries and goods are traded in soles (national currency), but companies and people use dollars for debt and savings. In the case of Ecuador, an oil-based economy officially dollarized 21 years ago, the central bank still centralizes reserves in dollars to tend to the liquidity needs of the financial system.

“The Banco Central de Ecuador still watches over the operations of the payment systems and it has an important control over data and monetary and financial information of the economy,” Vera adds. When asked about the Ecuadorian experience as an oil-based economy that moves with the dollar as its only currency, Vera said that in the mid and long term, dollarization can turn into a straitjacket for Venezuela: “Tying yourself to a strong foreign currency, when your neighbors all have sovereign currencies and they’re afloat, leaves you without competitivity and with little room to diversify your exportable basket beyond oil. And oil, by the way, isn’t what it used to be for Venezuela, neither as a source of income nor as a product with the potential to move the economy. The case of Ecuador is pathetic and it should serve as a lesson. It can’t compete with Colombia and Peru and with the oil income diminished, the country has stopped its per capita growth for the last seven years.” However, with dollarization, Ecuador managed to control inflation, avoid flight of capital and bank runs, and stabilize its financial system.

Economist Asdrubal Oliveros, director of Ecoanalítica, holds that the ideal plan for Venezuela is to keep going forward with a multi-monetary environment that can maintain two ecosystems (bolivars and dollars) and generate a financial quasi-dollarization, which translates into higher economic reliability and an increased tax collection. “The State would have to move forward to what economists call financial dollarization, where dollars go through banks, in a more efficient ecosystem. And then the State can collect taxes in foreign currency,” Oliveros says to Prodavinci.

Zambrano warns that a poorly regulated banking system, in a dual monetary currency context, is a surefire way to a self-inflicted crisis. “The recovery of savings and term deposits, and even more so of long term credits, depend on other factors besides dollarization itself, starting with the quality of economic policies and the reputation and credibility of those policy makers and institutions,” concludes Zambrano.