Inflation desperation: Venezuela to cut five zeros from currency
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Inflation desperation: Venezuela to cut five zeros from currency

Medellin: Faced with nearly incomprehensible inflation — 32,714 per cent as of Wednesday — Venezuelan officials thought they had a solution: They changed the colour of the bank notes and increased their denomination. Then they said they would lop off three zeros. And when that didn't seem enough, they announced they would cut off two more.

The tactics have left Venezuelans like Yosmar Nowak, the owner of a coffee shop in Caracas, convinced that there is no solution in sight and that the government cannot even bring down the price of a cup of coffee, an eye-watering 2 million bolivars ($11).

One hundred Bolivar bills lay on the ground close to the boots of several police officers, after they were thrown by protesters during a protest against the government of President Nicolas Maduro, in Caracas, Venezuela.

One hundred Bolivar bills lay on the ground close to the boots of several police officers, after they were thrown by protesters during a protest against the government of President Nicolas Maduro, in Caracas, Venezuela.Credit:AP

"I imagine if we keep like this we're going to have to do the same thing in December," said Nowak, who has been forced to raise prices in her cafe at least 40 times this year.

Slashing zeros from Venezuela's inflation-cursed currency, the bolivar, is the tent-pole of a set of economic changes by President Nicolas Maduro as he tries to right his country's capsized economy.

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It means nothing unless you change economic policy.

Jteve Hanke, an applied economics professor, Johns Hopkins University

The five-digit inflation has earned Venezuela comparisons to the hyperinflation of Zimbabwe and Weimar Republic (Germany) from the International Monetary Fund.

The newly minted currency, which will be known as the "sovereign bolivar," will be rolled out on Monday. In addition, the President has ordered measures his United Socialist Party has been loath to consider in the past: an increase in petrol prices for some drivers and a modest ease in the currency controls that have made dollars inaccessible to most citizens for years.

Yet these changes haven't been enough to convince economists, who see desperation in Maduro's latest moves and view the new currency as another chapter in the decades of mismanagement that have destroyed the Venezuelan economy.

Venezuela President Nicolas Maduro.

Venezuela President Nicolas Maduro.Credit:AP

"It's a cosmetic thing that's happening, the zeros," said Steve Hanke, an applied economics professor at Johns Hopkins University who has advised governments facing hyperinflation. "It means nothing unless you change economic policy."

By removing the zeros, Maduro is looking to solve what economists call hyperinflation's "wheelbarrow problem"— the point when the currency has become so worthless that a wheelbarrow of cash is necessary to make purchases.

The new currency, which will be phased in as the old one is phased out, would bring the price of that cup of coffee at Nowak's shop down to the more manageable sum of 20 sovereign bolivars. But few think that price will hold for long.

"We're expecting an increase in more than 1000 per cent for the minimum wage, and of course, more inflation," Nowak said. The tumult is so great, she said, "we're not going to open Monday."

The problem isn't to do with the zeros, but rather what's causing them to appear. The Venezuelan government depends on sales from its state oil company to pay its debts. But mismanagement allowed production to sink to 1.2 million barrels a day in July — on par with the monthly rate in 1947.

Faced with this shortage, the government turns to the Central Bank to order more money printed. While that may pay the government's bills in the short term, it comes at the expense of everyone who owns bolivar, as the surplus of printed cash makes existing money increasingly worthless.

And paying bills is only one of Maduro's concerns.

On August 4, two drones exploded over a military parade Maduro was attending, in what the government said was an assassination attempt. And the President faces increasing economic isolation after he was declared the winner of an election to extend his term to 2025, a vote widely regarded as rigged.

A woman holds a wad of bills to pay her bus fare in Caracas, Venezuela.

A woman holds a wad of bills to pay her bus fare in Caracas, Venezuela. Credit:AP

Amid this chaos, hundreds of thousands of Venezuelans are fleeing the country, finding daily life impossible in a country where grocery stores are empty and hospitals face water shortages, even in Caracas, the capital.

The rollout of the currency has also been troubled, too. At first, the government said it would remove three zeros from the bills. But on July 25, with the dollar trading for nearly 3.5 million bolivars on the black market and continuing to lose value, the government said it would lop off five instead.

The bolivar has only continued to lose value in the time since, with the dollar now approaching 6 million bolivars.

While the changes mean prices that are less astronomical, they also create another problem for Venezuelans: Dividing by the unwieldy number 100,000. Economists say devaluations are usually done in increments of tens, thousands or millions to facilitate the maths.

"I am confused," said Edwin Garcia, a construction worker in Caracas who tried to calculate what his earnings would be.

Many stores in the capital now simply quote prices in dollars to avoid confusion.

It's also unclear what backs the new currency, if anything at all.

Troubled currencies are usually stabilised with a pledge from the government that they may be exchanged for a stronger one, like dollars or euros. Maduro, by contrast, has said the new bolivar will be backed by the petro, a cryptocurrency his government rolled out in February.

And the petro itself, he said, is backed by oil reserves — a claim economists find troubling, given that much of the country's oil production is earmarked to pay off debt to China and Russia.

"You're pegging a currency to a toxic asset which no one wants," said Daniel Lansberg-Rodriguez, a political columnist for the Venezuelan newspaper El Nacional who teaches at Northwestern University's Kellogg School of Management.

Maduro's plan to raise gas prices has also been met with skepticism.

Venezuelans currently pay a fraction of a cent to fill up their tanks — the lowest price in the world. Maduro has pledged to continue subsidising fuel for those who sign up for a government identification card and register their cars with the government, but he wants Venezuelans who don't sign up to start paying the going international price.

"It allows you to target the subsidy to those willing to buy into the system," said Lansberg-Rodriguez. "It's a bid for loyalty."

New York Times