«The indexed petro»: The proposal that Venezuela is evaluating to curb hyperinflation

In Venezuela, the Finance and Economic Development Commission of the Parliament has in its possession a proposal that seeks to turn around the economic crisis that the country is suffering, with hyperinflation sustained for years and a tight financial blockade imposed by the US and the European Union (EU).

The proposal was brought to parliament two weeks ago by deputy Tony Boza who, along with other economists, asks to index the economy, that is, to establish a reference index.

Indexing is a technique applied to the economy that takes care of adjusting fixed payments at a permanent rate, in order to maintain purchasing power in the midst of an inflation process.

Until now, the crisis has been classified by the Venezuelan authorities as the result of an «economic war» based on the boycott of the local currency: the Bolívar, through an exchange system popularly known as the «parallel», which averages its value against the dollar in an unofficial market. In the midst of this scenario, what is the legislative proposal about?

«Mechanism of disturbance»

In an interview with RT, Boza explained his vision of how the use of the dollar to boycott the Venezuelan economy operates and how the indexation proposal could stop this hyperinflationary impact.

For this analysis, the first thing he clarifies is that the «parallel» average is used in Venezuela as a reference for transactions by individuals and private businesses, and is usually highly volatile.

«The external manipulation of the exchange rate does not obey any supply and demand criteria of the formal economic game. It has been declared by actors of the US administration: the exchange rate has been used as a mechanism of disturbance against the economy, which is due to political and geopolitical issues «, says Boza.

For its part, the Central Bank of Venezuela (BCV) does not average an official exchange rate because it does not auction dollars due to exchange control policies and the fact that the country’s income fell almost 100% since the unilateral coercive measures intensified. These sanctions are directed, mainly, against the oil industry, the main source of foreign exchange for the State.

What the BCV does is to publish, through social networks, the daily average weighted by banks in their transactions with currencies. An indicator that is usually similar to and even higher than the parallel, and that in daily life it has begun to be used to fix or «index» prices in some businesses, as well as in State offices that carry out procedures.

What does the proposal propose?

The Venezuelan economy seems to have taken a slight breather from the spontaneous use of foreign currencies (dollars and euros), carried out by some privileged sectors of the citizenry. However, access to these currencies is quite restricted and elusive for sectors such as retirees, pensioners and public workers, who abruptly lost their purchasing power, previously valued at about $ 400 a month and now minimized to $1 or $2 a month.

This distortion is the one that would be seeked to be modified through indexing, say the project’s defenders. «What we are proposing is that the salaries of the public administration and pensioners, plus the calculation of the public budget, are those that should be under an indexing formula that resembles the one that the Venezuelan State has been applying in different ways», Boza holds up.

The parliamentarian considers that this indexation process would take place as an adaptation to the hyperinflationary process. That is, that all transactions carry the same rate of inflation so that purchasing power does not fall again.
According to his approach, this will allow that when the nation’s budget is formulated by the Executive, the planned resources do not lose their purchasing power and can be used to execute projects, buy, pay the payroll, among other commitments that allow the economy to be motorized.

«In Venezuela, the budget is calculated in November and approved in December. When January, February or March [of the following year] arrives for its execution, the budget, although it remains the same in nominal values [amounts in bolivars], in real values has lost half or a third of its value due to inflation [calculated in dollars]».

Reactivate the economy

The index proposal – says Boza – would be a starting point to move the country’s hard hit productive apparatus. «It is a mechanism that will favor national industry and entrepreneurs, because it will preserve the purchasing power of workers, which guarantees sufficient aggregate demand for the economy to be reactivated», he says.

The parliamentarian affirms that by indexing the economy, a balance would be achieved between the different factors that intervene in the production process, that is, the financial, industrial, commercial capital factors and the workforce.
«The workforce also has to be paid in a fair, just and balanced way, which ensures sufficient aggregate demand so that the economy can be relaunched», he points out.

Along the same lines, he warns that “it is impossible” to increase production in the country, “if the levels of demand and the purchasing power of wage earners continue to be as low as in Venezuela, where a formal salary is 1 or 2 dollars a month».

«Such a constrained demand will not allow a relaunch of the economy, which is why the formula that we propose will also positively affect the recovery of aggregate demand, which is necessary to boost the economy».

How would this process be carried out in Venezuela?

The index proposal also foresees alternative solutions to particular situations in the Venezuelan economy, such as the constant rise in prices even though the value of the dollar depreciates.

The approach is that when inflation is above the exchange rate, the indexation is adjusted with a formula that takes the Consumer Price Index (CPI) as the «monthly correction factor».

In this way, even if the currency exchange rate is below the inflationary level (product price), the CPI corrective will be applied and purchasing power will be guaranteed.

«If I buy x quantity of products in a month, this corrective factor will allow me -as a worker- to continue buying the same quantity of products month after month. This guarantees my survival with my workforce, which is the most fundamental element of production”, says the deputy.

The indexation would then be based on an «invariable unit of measure» or constant, which allows the number of bolivars to be increased at the time of payment and which would be permanently proportional to the same amount in foreign currency.

A distributive proposition, not a panacea

Although it sounds good on paper, the application of these measures is not a matter of decrees, even less so when over the years the dynamics of the Venezuelan economy -subject to internal and external disturbances- has ruined initiatives by the Executive to achieve the long-awaited and postponed recovery.

In fact, Boza acknowledges that indexing «is not a panacea» because «it will not solve some things», such as the lack of foreign exchange in the country. The objective, he argues, is to make «a distributive proposal» that guarantees purchasing power, as is already applied by merchants and industrialists.

«It is a distributive mechanism. What is being done is putting everything on the same inflation train».
In Venezuela, de facto, practically everything is indexed to inflation: merchandise, services, freelance work, company and commercial budgets, and even some positions in private companies. What is not in  this process is the salary of public workers, pensions and the national budget.

“With indexation, it is sought that the proportion of the distribution of wealth does not continue to change, that is, a larger proportion for industrialists and merchants; and a smaller proportion for workers. What we are guaranteeing is that the distribution of wealth does not continue to deteriorate».

Boza alleges that problems such as the inflow of foreign currency are solved with the increase in internal and external investments, the activation of the special economic zones, and the relaunch of the oil industry, a sector that has already begun to index the wages of its workers.

In parallel, he insists on the need to implement mechanisms to index accounts and taxes.

Precedents in Venezuela

The legislative proposal of indexing for Venezuela is based on the study of cases such as those of Hungary, Greece, Germany, Yugoslavia, Brazil and Zimbabwe, as well as theoretical materials published by the Pontifical Catholic University of Rio de Janeiro and publications by the economist André Lara Resende .

These cases converge on the idea of indexation through an “indexed unit of account” or an “indexed currency”, which in the case of Brazil, for example, served to end a decade of a hyperinflationary process in which five plans were implemented, all based on fiscal and monetary aspects, which failed one after another.

The index response – adds Boza – arose as a natural response from economic actors, first informally and, later, when goods and services began to be offered with prices set at the value of a stable currency, as is the case in Venezuela.
There are also precedents from the Venezuelan State itself, which has taken steps both in the regulation and in some decrees, in judgments of the Supreme Court of Justice (TSJ) and in resolutions of the BCV.

What is being sought, said Boza, is to create a mechanism «that allows to control, manage and administer the indexing process», as is already the case with the use of an indexed account unit called the Commercial Credit Value Unit, approved by the BCV in 2017.

I signed with great joy the Collective Agreement that protects and protects the workers of the Venezuelan oil industry. Sisters and brothers! Despite the difficulties and the economic war that has hit us, I confirm that Yes It Can be done. Congratulations! pic.twitter.com/jgZJMrX7CC– Nicolás Maduro (@NicolasMaduro) February 19, 2021

The TJS set a precedent, in 2018, when it established that debts between private parties will be indexed at the time of payment to the same value of foreign currency in which it was acquired. Also, the collective agreement signed between the Executive and oil workers has indexing mechanisms.

The proposal that the parliament has in its hands, could use the name of the petro, although they do not rule out other options. «It would be used as a unit of measure with an invariable value in currency terms. It could be called ‘petro indexed’ and it would have nothing to do with its market value».

The proposal is still in the Finance Committee and it is unknown if it will be discussed in plenary. «It no longer depends on the will of a deputy, it depends on the whole of the body. However, we will continue to promote it in all scenarios».