Bolívar Distorted: The Effects of Exchange Controls on the ...

independence to the Chávez government. Allowing Chávez to access that sum <strong>of</strong> money would
only exacerbate the current inflation problem by expanding the money supply by 15%, assuming
that he was granted the funds in bolivars at the <strong>of</strong>ficial exchange rate. 91 <strong>The</strong>re exist a number <strong>of</strong>
other options to obtain extra revenue for the government’s social spending programs. Most <strong>of</strong>
these options require a change in the current monetary and exchange rate regime. <strong>The</strong> most
efficient <strong>of</strong> these would be an auction, as already discussed. <strong>The</strong> government receives
approximately US$2 billion monthly from oil revenues, which it promptly sells to the Central
Bank at the <strong>of</strong>ficial, pegged rate to obtain bolivars to finance its projects. Instead <strong>of</strong> selling to the
Central Bank, the government could hold an auction whereby it could sell the dollars directly to
importers, businesses and individuals who needed dollars. This solution allows the government
the bolivars it needs and is actually deflationary. As more bolivars are exchanged for dollars, the
bolivars are taken out <strong>of</strong> circulation, contracting the money supply and driving up the price. So
long as the government does not spend all <strong>of</strong> the bolivars it obtains, there is no inflationary
money creation; “money is only passed from private property to government property.” 92
Additionally, the sale <strong>of</strong> US$1 billion would yield more bolivars than a sale to the Central Bank
at the <strong>of</strong>ficial rate. With the parallel market at Bs.3,200/US$1, the government could raise an
extra Bs.6 trillion to Bs.16 trillion for its projects. Instead, Chávez chose to stay the course with
his exchange controls and devalue in order to gain more funds.
Devaluation
For many, devaluation is one <strong>of</strong> the first signs <strong>of</strong> the failure <strong>of</strong> the exchange controls.
Facing mounting inflation, pressure from the parallel market, and sporadic shortages, the
Venezuelan government finally devalued on February 9, 2004, bringing the Bolivar to
91 Carlos Risopatrón. “La politica monetaria y el Proceso Revolucionario.” Feb 2003.
92 Carlos Risopatrón. “La politica monetaria y el Proceso Revolucionario.” Feb 2003.
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