Over the past years, monetary policy transparency in Venezuela has been on the decline. In its 2006 assessment of monetary policy transparency in Venezuela, Oxford Analytica (OA) asserted that ongoing reduction of the operational autonomy of the Central Bank of Venezuela (Banco Central de Venezuela, or BCV) has been the consequence of the implementation of the amendment to the BCV Law on July 19, 2005. In fact the BCV no longer sets the long-term monetary policy targets, and it is the government which announces the annual inflation target. Furthermore, the government's new Treasury Bank (Banco del Tesoro) became operational in 2006, taking over previous BCV responsibilities such as management of internal and external public debt. Three developments are particularly worrisome with regard to monetary policy transparency. First is the dominance of the government's fiscal operations, which prevent the BCV from assuming its role in implementing monetary policy. Second, new government agencies such as the Treasury Bank as well as the National Development Fund, have taken over classical agency roles of the Central Bank without having its accountability structure. Last, partially as a result of a severe loss of staff as well as political pressure, the previously highly regarded quality of data reporting by the BCV is increasingly doubted.

General Overview

Over the past years, monetary policy transparency in Venezuela has been on the decline. After his re-election in December 2006, President Chávez in January 2007 announced a renewed effort to implement his vision of "21st Century Socialism" in Venezuela. He asked the National Assembly to grant him special constitutional powers via an "enabling law" to rule by decree over a broad range of society and subsequently received those powers for a term of 18 months. It is generally expected that this will entail a further reduction of the already diminished operational autonomy of the BCV.

In its 2006 assessment of monetary policy transparency in Venezuela, OA asserted that the progressing reduction of the operational autonomy of the BCV has been the consequence of the implementation of the July 19, 2005 amendment to the BCV Law. Commentators quoted by OA stated that "government pressure on the BCV has become so regular and intense in 2006 that the level of resistance offered by the BCV's Board of Directors has fallen compared to previous years" (p. 433).

The Chavez's government actions over the last years have three immediate critical implications for monetary transparency in Venezuela. The OA report defines these as follows: "(1) the dominance of fiscal policy, the transfer of funds away from the BCV, and the continuation of controls on foreign exchange operations have undermined the central bank's capacity to implement monetary policy; (2) the establishment of the National Development Fund (Fonden) and the government-owned Treasury Bank are undermining the agency roles performed by the central bank on behalf of the government; and (3) concerns are being raised about the accuracy of some BCV data" (p. 433).

A vivid example of the demotion of the Central Bank is the fact that the BCV no longer sets the long-term monetary policy targets and it is the government which announces the annual inflation target. Furthermore, the government's new Treasury Bank -- Banco del Tesoro -- became operational in 2006, taking over previous BCV responsibilities such as management of internal and external public debt. This is officially rationalized as a way to increase efficiency, but the OA 2006 report cautions that "in practice, it will permit the government to exert greater control over aspects of the financial system, without having to overcome possible (primarily passive) resistance from the BCV" (p. 433). Furthermore, the Treasury Bank allows President Chavez to continue using the BCV reserves to purchase international debt obligations of governments in order to extend the reach of his influence, as was the case with Argentine and Ecuadorian bonds.

Of equal concern is the National Development Fund, which receives monies from the Venezuelan State oil company, PDVSA, and the BCV. The 2006 OA report suggests that "it is unclear how much of these funds have already been spent, although a significant portion are believed still to be held outside of Venezuela. There is little transparency about how funds are transferred to Fonden, and no publicly available analysis about how the activities of this fund will impact the economy in the medium-to-long-term" (p. 433).

Lastly, according to the OA report, the accuracy of BCV data is increasingly doubted by independent observers, which is contrary to the traditionally good reputation of the BCV for its data quality. While the distrust in official inflation numbers ahead of the elections might be indicative of the general tensions in the current Venezuelan political environment, it nonetheless illustrates the loss of general credibility and belief in the independence of the BCV.

In the "Preliminary Overview of the Economies of Latin America and the Caribbean" for 2006, the UN's Economic Commissions for Latin America and the Caribbean (ECLAC) reports that in November 2006, cumulative inflation as measured by the consumer price index (CPI) stood at 14.9% in relation to December 2005. The largest increases were recorded in the prices of food and beverages, restaurants and hotels, and education services, despite price controls for a significant group of products in the CPI basket. The wholesale price index increased by 14.1%, with prices of national products up by 16.2% and those of imported products by 7.6%.

The 2006 ECLAC report adds that, "in 2006 the government invested dollars in the purchase of foreign bonds, which were mainly sold to financial institutions in the country. The government also set up foreign exchange funds abroad and has carried out an intense renegotiation program for its external debt, with a view to obtaining longer terms and lower rates" (p. 71). Domestic debt was also restructured to improve the yield curve for government bonds and, in the first half of 2006, the government repurchased all outstanding Brady bonds for just under US$ 4.4 billion. In November 2006, the Ministry of Finance publicly advertised US$ 1 billion worth of "Southern Bonds". As for foreign-exchange policy, the authorities maintained the currency regime in existence since 2003 and the same restrictions on capital outflows. The exchange rate remained fixed at 2,150 Bolívares to the dollar.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

NC

OA, in its 2006 report on Monetary Policy transparency in Venezuela, notes that the implementation of an amendment to the BCV Law on July 19, 2005, further reduced the operational autonomy of the Central Bank of Venezuela in 2006, as the government has extended its influence over the bank's operations. According to the report, "the dominance of fiscal policy, the allocation and transfer of funds away from the BCV, and the continuation of controls on foreign exchange operations have undermined the central bank's capacity to implement monetary policy" (p. 434).

Although the constitution sets out the objectives and responsibilities of the BCV, the fact that many of the areas of responsibilities (such as foreign exchange policy) are shared between the government and the BCV, does not contribute to institutional clarity. The 2006 OA report asserts that "the BCV's independence is further undermined by the National Assembly's capacity to approve the central bank's operational budget and to remove its board members by a two-thirds majority vote, should the board fail to meet its policy objectives without reasonable justification" (p. 434). Between August 2004 and January 2005, about 200 staff members left the BCV, most involuntarily. This increased influence of the government over the institution, seems to be degrading towards a mere execution agency of monetary policy set by the government.

Direct lending to the government is prevented by the Constitution of Venezuela and Articles 44-47 of the Central Bank Law. However, according to commentators cited in the OA's 2006 report, this is being done indirectly via the National Development Fund (Fonden), which is financed by both PDVSA and the BCV. Furthermore, the OA report notes that the fixed-exchange rate and foreign currency controls introduced in February 2003 have been altered by a variety of amendments aimed at furthering the governments' political goals rather than economic ones. According to the OA report: "Particular concern continues to be raised by the impact of foreign currency controls on liquidity in the financial system, as private banks now have a large stock of government debt. The government has used these resources to finance current public spending" (p. 435).

Open process for formulating and reporting monetary policy decisions.

NC

The Constitution of Venezuela, together with the BCV Law and the Organic Law on the Financial Administration of the Public Sector, establishes the institutional framework for macroeconomic coordination. According to this framework, the BCV sets monetary policy, but its targets and instruments must be consistent with the overall macroeconomic plan. According to the OA's 2006 report, concerns have become more acute in 2006 over the ability of the BCV to prioritize price stability over the government's fiscal policy objectives. The OA report is critical of the lack of concise and comprehensive publicly available documentation explaining the BCV's monetary policy framework and the instruments used to achieve it. Neither is a clear monetary policy or monetary target announced. According to the report, "Inflation is measured by changes in the consumer price index (CPI), which is produced through a limited survey that only covers Caracas, and is highly distorted owing to the government's introduction of price controls" (p. 438). The report goes on to note that neither the government nor the BCV set inflation targets. Although the report acknowledges BCV efforts to deal with excess liquidity, it notes that "those efforts have become increasingly costly (in terms of the interest payments required), resulting in the BCV's incurring of losses" (p. 438). The main conclusion of the OA report writers is that the general quality and timeliness of BCV publications has decreased substantially over the past few years.

Public availability of information on monetary policy.

EN

Venezuela is not a subscriber to the IMF's Special Data Dissemination Standard (SDDS). It does, however, meet the requirements of the General Data Dissemination System (GDDS). Its coverage of analytical accounts and time series has improved over the last several years; and most of these data are available through the Statistics Information page on the BCV website. BCV authorities have mentioned their intent to publish an advance release calendar, but it is still not available. The OA 2006 report concluded that the BCV data are generally of good quality, but doubts as to their reliability have increased. Monthly statements continue to be released within 15 days of the reference period. The quantity of ad-hoc reports and working papers has declined significantly, which is interpreted by some as an indicator of declining technical capacity at the BCV resulting from the above-mentioned exodus of staff.

Accountability and assurances of integrity by the central bank.

EN

The 2006 monetary policy assessment by OA reports that "as set out in the constitution and Article 77 of the Law of the BCV, the central bank is accountable to the National Assembly in terms of compliance with policy objectives. To this end, the BCV must submit a report every year to the National Assembly explaining its monetary policy and performance. In addition, the constitution and the Law of the BCV (Articles 81-86) give the Comptroller General and the Banking Superintendence SUDEBAN the authority to monitor all central bank operations" (p. 443). BCV financial statements must be audited externally, the results of which have to be published within three months. The conduct of officials is set out in Articles 18 and 19 of the Law of the BCV.