The Impostor who destroyed the Bolivar’s Value
All the measures that ended up destroying the Bolivar and creating the situation of current unbridled inflation, were adopted at the highest level of Government and all, without exception, were radically contrary to what the Constitution foresees.
Here they are, with all their unconstitutional supports, listed one after the other.
By Adriana Vigilanza
Since August 15, 1944, the foreign currency originated from hydrocarbon exports, in Venezuela, had to be acquired exclusively by the Central Bank of Venezuela (“CBV”). With the nationalization of oil, through a series of “Exchange Agreements” the operative affiliates of Petróleos de Venezuela S.A. (“PDVSA”, the State own holding oil company) were obliged to sell to the CBV all the foreign currency they produced. In accordance with certain “Agreements” between the CBV and PDVSA, their parent company, those operating PDVSA affiliates were allowed, however, to keep a portion of their revenue in foreign currency, the necessary to meet their operating budgets.
The implementation of Exchange Control
This exceptional exchange control regime, with intervals of general but non-permanent exchanges controls, lasted until 2003, when through “Foreign Exchange Agreement No. 1”, an authentic and general exchange control, not only applicable to PDVSA and its affiliates, was created with universal limitations for the acquisition or disposal of foreign currency, in the country. This control was supported on the allegedly need of the Executive Power (President of the Republic) to “(…) adopt measures aimed at achieving stability of the currency, ensure the continuity of the country’s international payments and counteract inconvenient movements of capital (…)”. (See Exchange Agreement No. 1, dated February 5, 2003). Therefore, Article 1 of that Agreement stated that “The Central Bank of Venezuela will centralize the purchase and sale of foreign currency in the country (…)”.
In 2005, the National Executive decided to change that policy. By a Decree No. 3.854, dated August 29, 2005 (Official Gazette No. 38.261, dated August 30 2005), the Executive created a company called “Fondo de Desarrollo Nacional, S.A.” (FONDEN, for its initials in Spanish) and since that year, all foreign currency obtained from oil commerce, in Venezuela, is received by 3 entities: FONDEN, SA, which is equivalent to the President of the Republic (all its Directors are appointed by and report to him); PDVSA and the CBV. Gastón Parra, President of the CBV by then, said that this was necessary “(…) to avoid the monetization of extraordinary oil revenues and guarantee a greater and continuous amount of foreign currency resources for the development of the country (…)”. (Speech by Gastón Parra, President of the CBV in the act of the swearing of FONDEN´s Board of Directors).
Supposedly, FONDEN, S.A. should use the foreign currency for the “financing of projects of real productive investment in all areas and the improvement of the profile and balance of the external or internal public debt”. However, in the years 2005, 2006 and 2007, FONDEN, S.A. spent much more on purchases of military weapons (11%) than on health (4%) education (0%) or Infrastructure Projects. In 2009, Nelson Merentes, FONDEN´s President at that time, used more than 50% of what was contributed to FONDEN, S.A. not for projects but for the purchase of “structured notes” (basically, bad debt from Argentina and Ecuador), which immediately lost value and created losses for Venezuela.
FONDEN, S.A, in itself, violates the Constitution and several laws. A lot, if not all, of what it was contributed to FONDEN, S.A. (to 2009, some US $120,000 million although nobody knows the amount for sure), should have gone to the “Fund for Macroeconomic Stabilization”, in accordance to the Constitution (Article 321) or the “Intergenerational Savings Fund” (“FAI”, Art 55 of the “Organic Act for Financial Administration of the Public Sector” (or “LOAFSP”, for its initials in Spanish). But nothing has been contributed to such Funds, since 2002. That is, Venezuela failed to save the surplus of oil income that according to Article 311 of the Constitution, should had been saved and should have privilege expenses in education and health. Although in the form of a private held mercantile company, FONDEN, S.A. is in substance a mere “Fund”, because it does not serve a commercial purpose. As such, it is also not Constitutional because according to the Constitution, no revenue coming from the sale of oil can have a predetermined destiny. The Organic Act for Financial Administration of the Public Sector (“LOAFSP”), in its Article 34, only admits predestinations of income with respect to Funds of a Constitutional origin, which is not the case of FONDEN, S.A . Because FONDEN S.A. is a company that does not provide any service or sell any good, with its creation the Executive also violated Art. 29 of the Organic Law of Public Administration, which prohibits the National Executive to create an “S,A.” (Commercial company) with no business purposes (meaning that which does not sell a good or a service).
FONDEN, S.A. allowed the interference of the National Executive in the monetary policy of the country, which also violates Art.148 of the LOAFSP and Arts.318 and 320 of the Constitution (in accordance to which the CBV will not be subordinated to directives of the Executive Power and will not be able to validate or finance deficit fiscal policies). FONDEN, S.A. paid internal suppliers, not in foreign currency but in Bolívars, at the official exchange rate, becoming a parallel “Exchange Control Administration Office” or “CADIVI” (for its initials in Spanish. See article by José Guerra, titled “Managers Merentes, Cabeza e Isea to Trial”: http://webarticulista.net.free.fr/jg200802042026+Jose-Guerra.html) in violation of Art. 8 of the Amending Law of the CBV Law, which stated that FONDEN, SA would only pay in foreign currency. Evidently, with FONDEN, S.A. the President “bypassed” the basic control over public spending, usurping a competence that is attributed by the Constitution to the National Assembly (Art. 187.22 of the Constitution was violated).
In the 2007 Referendum for the Constitutional Amendment, the people of Venezuela rejected, among others, the proposal that CBV lost managing autonomy. People feared that this would cause a loss of value of the Venezuelan currency. However, they ignored that such autonomy had already been given up 2 years before by the CBV, which is equal to saying “to the President of the Republic. In May 2007, Rodrigo Cabezas, Finance Minister and President of FONDEN, S.A., declared: “We have changed the distribution of the oil surplus in the country.” And indeed, they had changed it. In an unconstitutional and illegal way. For the benefit of corrupt Government officers and foreign governments, to the detriment of generations of Venezuelans, of today and of the future, to whom they have leaved the legacy of a completely devalued currency. It is not mere chance that Venezuela has the highest inflation on the planet. To add insult to injury, in September 2014, the Executive reformed the corporate purpose of FONDEN, S.A. to expressly allow it to “carry out financial operations that represent indebtedness”. Something FONDEN, S.A., arguably a Commercial corporation, had already done.
Cynically, the CBV issued a report on its performance in 2014, which reads:
“(…) In February 2014, political sectors unleashed actions of street violence, colloquially called “guarimbas” (…) these actions against the national order prevented the full distribution of basic goods to the population, as well as the normal development of the production of goods and services. This resulted in an upturn in inflation, and a fall in economic activity (…) “. (See: http://www.bcv.org.ve/Upload/Comunicados/aviso301214.pdf).
However, that same report shows a very different thing: inflation in January, February and March 2014 was, according to the CBV, 5.7%, this is, lower than in the same months, in 2013 (6.1%, according to the own BCV), when there were not protests in the country but the uncertainty about what had happened with Chavez, because of his health and when nobody knew if Diosdado Cabello would assume or not the Presidency of the Republic.
After all these, one can easily understand what led the “Strong Bolívar” (or “Bolivar Fuerte”, as it was officially called since 2010) to be the weakest Bolívar in our history. Violating the Constitution, does have a price.