Stop Venezuela's Economic Death Spiral - Dollarize, Now
Venezuela’s bolivar is worthless and its annual inflation rate is the world’s highest: 1195%. Not surprisingly, Venezuelans get rid of their bolivars like hot potatoes and replace them with U.S. dollars. So, Venezuela is, to a large extent, unofficially dollarized.
To stop Venezuela’s death spiral, it must officially dump the bolivar and adopt the greenback. Official “dollarization” is a proven elixir. I know because I operated as a State Counselor in Montenegro when it dumped the worthless Yugoslav dinar in 1999 and replaced it with the Deutsche mark. I also watched the successful dollarization of Ecuador in 2001, when I was operating as an adviser to the Minister of Economy and Finance.
Countries that are officially dollarized produce lower, less variable inflation rates and higher, more stable economic growth rates than comparable countries with central banks that issue domestic currencies. There is a tried and true way to stabilize the economy, which is a necessary condition required before the massive task of life-giving reforms can begin. It is dollarization. Stability might not be everything, but everything is nothing without stability.
Just what does the Venezuelan public think of the dollarization idea? To answer that question, a professional survey of public opinion on the topic was conducted in March 2017 by Datincorp in Caracas. The results are encouraging. Sixty-two (62%) of the public favors dollarization. It’s time for enlightened, practical politicians in Venezuela to embrace the dollarization idea. The public already does.
But, the question I am repeatedly asked is, how do you officially dollarize a place like Venezuela? To do that you need a dollarization law. I have drafted such a model law. The model statute is meant to suggest the main features that are desirable for a law on dollarization. Legal technicalities may require an actual statute to be somewhat different.
A Model Dollarization Statute For Venezuela
1. The Banco Central de Venezuela (BCV) shall cease to issue Venezuelan bolivars expect as replacements for equal amounts of old currency that become worn out.
2. Except as specified in paragraph 3, wages, prices, assets, and liabilities shall be converted from Venezuelan bolivars to U.S. dollars (“the replacement currency”) at the conversion rate chosen in the law that accompanies this law. By 60 days after this law enters into force, wages and prices shall cease to be quoted in Venezuelan bolivars.
3a. Interest rates shall be converted into the replacement currency by the following procedure. The independent committee of experts specified in the law accompanying this law shall choose benchmark interest rates in the Venezuelan bolivar and replacement currency, having similar characteristics with respect to maturity and liquidity insofar as possible. The ratio between existing interest rates in Venezuelan bolivars and the benchmark interest rate in the Venezuelan bolivar shall determine the interest rate in the replacement currency, which shall bear the same ratio to the benchmark rate in the replacement currency.
3b. In no case, however, shall new interest rates in the replacement currency resulting from the conversion procedure exceed 50 percent a year.
4. The president may appoint a committee of experts on technical issues connected with this law to recommend changes in regulations that may be necessary.
5. Nothing in this law shall prevent parties to a transaction from using any currency that is mutually agreeable. However, the replacement currency may be established as the default currency where no other currency is specified.
6. While Venezuelan bolivars remain in circulation, the government shall accept them in payment of taxes at no premium to the conversion rate with the replacement currency. Acceptance of Venezuelan bolivars shall not be obligatory for any other party.
7. Within five years after this law takes effect the government shall redeem all outstanding Venezuelan bolivars for the replacement currency or exchange it for government debt bearing a market-determined rate of interest.
8. Existing laws that conflict with this law are void.
9. This law takes effect immediately upon publication.
Prof. Steve Hanke
Originally published on Forbes.