Venezuela: Is dollarization doable?

This proposal can be very risky for a country that needs reconstruction

Venezuela: Is dollarization doable?

This past May 20 presidential elections were held in Venezuela. With a result of 67.84%, Nicolas Maduro will govern the country for the period 2019-2025. These elections lacked guarantees and recognition by the international community. However, the opposition candidate, the former mayor of the Lara state, Heri Falcón, achieved 20.93% of the votes.

Leer en español: Venezuela: ¿es viable la dolarización?

Henri Falcón ignored the results and called for new elections for the month of October, showing his willingness to participate "without advantage and without blackmail". Falcón's statements were accompanied by complaints about electoral crimes regarding assisted voting and in this way the candidate ignored the electoral process and called it illegitimate.

Although the picture is complicated for upcoming elections in Venezuela, Henri Falcón seems willing to participate and the question remains whether his campaign would maintain the same north and without the support of the country's opposition. Reminding primarily that the presidential campaign of the former mayor revolved around his plan for the government of National Salvation and, of course, a controversial issue for the Latin American country: dollarization. Henri Falcón has made it clear that the first step to get out of the economic crisis and stop hyperinflation is through dollarization. There is talk of a minimum salary of $ 75, which he hopes to raise to $ 300 for the fourth year of office.

The dollarization proposal is the candidate's response to an economy that he characterized as hit by US sanctions, speculation and sabotage. It has the support of the adviser and economist Francisco Rodríguez. This is not the first time that there has been talk of a dollarization proposal by an opposition candidate. In 2015, the candidate for the parliamentary elections Tomás Guanipa also presented the idea of ​​dollarization.

The scenario is different in this opportunity. To speak of a dollarization in Venezuela with the economic, social and humanitarian crisis, the country must acquire a debt of up to 100,000 million dollars through organizations such as the International Monetary Fund (IMF) that has not visited the Latin American country since 2004.

Henri Falcón and his team calculate in a 3,000 million dollars the change of all the bolivars that are in circulation, but leaves the question of what will be the value for the change. Will you follow the DolarToday numbers or how many points less will be discussed?

The reference of dollarization in Latin America are the cases of Panama, Ecuador, and El Salvador, which, although they have maintained an economy, established and managed to curb inflation at the time, it may not be the same situation with Venezuela.

Venezuela has a concentrated production in a single raw material, oil, whose market is very volatile. A dollarized country under this condition is exposed to external shocks and a complete dependence on the Federal Reserve of the United States.

If it is true that dollarization in Venezuela would curb hyperinflation and the central bank would be left without the possibility of printing inorganic notes, this is a measure that affects the growth of the economy at a time when the country needs to be rebuilt.

The loss of an exchange rate to offset external shocks, is also joined by the need for a very high fiscal responsibility to denominate the dollarization at 100%, taking IGNORE INTO account that the candidate Henri Falcón has referred to a "voluntary" dollarization .

The report of the Latin American Institute of Social Investigations "Why is  dollarization more a straitjacket than a salvation?" Refers to the fact that dollarization would only make sense in:

  1. Countries with economies closely linked to the United States and that therefore experience very similar shocks
  2. Countries with small economies in which the majority of prices are set in dollars and in which the majority of goods are traded in international trade
  3. Countries with flexible labor markets
  4. Countries where the central bank can not be trusted to manage its own currency.

This questions whether dollarization is the right solution for Venezuela's economy in crisis.

Latin American Post | Diana Ramos

Translated from "Venezuela: ¿es viable la dolarización?"