The President of the Republic has recently referred in positive terms to the "dollarization" process that is taking place in the Venezuelan economy. The topic is interesting as we believe it is appropriate to provide some thoughts on the matter.
In the first place, noteworthy is that after years of fighting the U.S. currency – which could not even be mentioned publicly in terms of its relationship with the bolivar, under the threat of suffering severe penalties – has now become something that is not such a bad thing anymore, but with some positive aspects too. This certainly proves that no one knows what tomorrow may bring.
Dollarization in Venezuela has been, curiously, a solution that has been welcomed and imposed by the country’s own population, – in a bid to protect themselves from today’s rampant inflation – rather than a decision of monetary, exchange and economic policy by the national authorities. To that extent, Venezuela has not gone through the same processes that other countries had when they made the decision in a centralized way to dollarize their economies – as happened in Ecuador – by providing their population with the amount of dollars needed to carry out the usual transactions in those societies.
That amount of dollars, in an incipient dollarization process, can come from government coffers – if the country’s reserves are buoyant – or loans specifically for these purposes. But things didn’t happen that way in Venezuela. The dollars needed for this dollarization process came, at least initially, from the pockets of the middle class and the rich – both old and new –, who were found to have a significant amount of dollars in their hands, or in accounts easy to move domestically or internationally. These sectors realized – impossible not to do so – that the bolivar was not good either as a unit of account or as a store of value – and hence opted for the dollar.
But the dollarization process needs to be fed through dollars from exports and/or loans of which the government, businesses or ordinary citizens have access to. The dollarization process cannot always be fed through what is accumulated or treasured, which will run out in the end, because there are different channels through which the dollars, especially in a situation when the country’s external accounts are in deficit, end up flowing abroad. Hence, if there are no permanent channels through which the economy can feed on dollars, dollarization will have very short legs and will not be able to get very far.
It is also worth mentioning that the dollarization of the economy, in any country, takes away from the Central Bank many of its functions and monetary policy tools, since the Central Bank cannot create dollars out of nothing, as it could do – and still can – with the bolivar. And with such a controlling government that loves getting its hands on everything, it must be difficult to see how the economy works increasingly doing without the bolivar.
It is impossible to address this issue without mentioning its limited scope. Sadly, there is a substantial percentage of the population that has no access to dollars, simply because they do not get paid or have savings in dollars – and if they ever had them, they must be all gone by now – and probably don’t have any relatives abroad to send them the foreign currency on a regular basis.