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Venezuela Monetary and Exchange Rate Policies
The Central Bank of Venezuela (Banco Central de
Venezuela--
BCV) performed all typical central bank functions, such as
managing the money supply, issuing bank notes, and
allocating
credit. As part of the country's overall financial sector
reform,
the BCV embarked in 1989 on numerous revisions of monetary
policy
aimed at improving the bank's control over the money
supply. The
most important policy change was the government's decision
to
allow the interest rate to fluctuate with market rates.
Despite
its initial inflationary effect, the policy created
incentives
for savings and investment, thereby attracting and
retaining
capital. Deposits swelled noticeably during 1989. In 1990,
however, the Venezuelan Supreme Court declared that the
BCV was
legally responsible for setting interest rates. The BCV
hoped to
rescind the law in the early 1990s.
Venezuela traditionally enjoyed general price
stability;
inflation averaged a mere 3 percent from 1930 to 1970.
Annual
price increases did not exceed 25 percent until the
mid-1980s.
During the 1970s, many economists credited the FIV with
successfully managing and investing overseas the country's
oil
windfalls in a way that prevented inordinate price
instability.
By the 1980s, however, financial deterioration, weakening
BCV
authority, numerous devaluations, and fiscal deficits had
combined to push consumer prices and inflation up
dramatically in
the late 1980s. The average consumer price index rose by
an
unprecedented 85 percent in 1989 (see
table 8, Appendix).
Some
price increases were associated with the 1989 structural
adjustment program, and thus represented what some
economists
refer to as "correctionary inflation," the trade-off for
eliminating previous distortions in prices. By 1990 only a
handful of price controls remained in effect.
The bolívar was traditionally a very stable currency,
pegged
to the United States dollar at a value of B4.29=US$1 from
1976 to
1983. The bolívar experienced several devaluations from
1983 to
1988, when monetary authorities implemented a complicated
fourtier exchange-rate system that provided special subsidized
rates
for certain priority activities. The multiple
exchange-rate
system, however, proved to be only a stopgap measure,
eventually
giving way to a 150 percent devaluation at the market rate
in
1989. The 1989 devaluation unified all rates from the
official
B14=US$1 rate to the new B36=US$1 rate, which was a
floating rate
subject to the supply and demand of the market. By late
1990, the
value of the bolívar had crept down to B43=US$1.
In a related matter, the Differential Exchange System
Office
(Régimen de Cambio de Dinero--Recadi), the organization
that
oversaw the various exchange rates, became the focus of
one of
the largest scandals in the decade. Between 1983 and 1988,
businessmen bribed Recadi officials in return for access
to halfpriced United States dollars to funnel an alleged US$8
billion
overseas. When the scandal broke in 1989, law enforcement
agents
investigated as many as 2,800 businesses, and more than
100
executives from leading multinational enterprises fled the
country in fear of prosecution.
Data as of December 1990
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