Venezuela revises Central Bank rules

Venezuela revises Central Bank law, requiring more frequent handover of 'excess' reserves

• By Rachel Jones, Associated Press Writer
• On 3:46 pm EDT, Friday October 30, 2009

CARACAS, Venezuela (AP) -- Venezuelan lawmakers have approved a law that will let the Central Bank buy debt directly from the state oil company and require it to hand over "excess" reserve funds more frequently to the government.

Lawmakers allied with President Hugo Chavez say the new rules will amplify the Central Bank's role in maintaining financial stability and will enable it to fuel economic development by providing loans to businesses in key sectors of the economy,including agriculture and manufacturing.

But critics say the changes by largely pro-Chavez lawmakers will erode the Central Bank's autonomy and could add to inflation that already stands at 27 percent a year.

The law approved by the National Assembly on Thursday allows the bank to buy bonds directly from state oil company Petroleos de Venezuela SA, or PDVSA, instead of turning to securities markets to make the purchases as it did in the past.

Economist Asdrubal Oliveros in Caracas said the reform is "ending what little autonomy the Central Bank has left."

While Venezuela's Central Bank is constitutionally recognized as autonomous, its independence has been diminished under Chavez by rules such as one that mandates the transfer of reserves considered "excess" to a government development fund.

The bank has been required to make an annual transfer to the government fund since 2005. The new law calls for it to transfer surplus international reserves to the fund twice a year.

Oliveros and other analysts express concern that the bank could set a level of optimal foreign reserves lower than the $30 billion it has been using, depleting the import-dependent nation's collateral for foreign transactions while investing the reserves in non-liquid assets that come with a higher level of risk.

"International reserves aren't resources for financial speculation; they're resources that guarantee the payment of a country with respect to the rest of the world," Oliveros said.

Chavez's supporters, including lawmaker Ricardo Sanguino, who is president of the Assembly's Finance Committee, say the changes will allow PDVSA to obtain the resources it needs without adversely affecting the nation's international reserves.

The law will "allow the bank to have more dynamic relations with financing institutions," Sanguino said in a statement.

Chavez's government has been seeking additional funding sources to compensate for reduced income from oil sales.

The government has also been seeking to reduce inflation in part by using debt sales to slash a gap between the currency's official and black market values -- an anomaly that has developed due to the country's strict currency exchange controls.

But economist Domingo Maza Zavala, a former Central Bank director, warns that bond sales to the Central Bank could also increase the amount of cash in Venezuela's economy and instead contribute to inflation.

Central Bank president Nelson Merentes declined to comment immediately on the new measures when reached by phone.

Buzz up!