The weakest point in Venezuela’s reform plan

20.08.2018 17:08|Marcin Lipka

“President of Venezuela, Nicolas Maduro, announced an economic revolution. The local currency devaluation exceeded 95%, the minimum salary increased 30 times, and the bolivar value will depend on the condition of the petro cryptocurrency. Will these changes help to stabilise the situation in the country?", writes Marcin Lipka, Conotoxia senior analyst.

5.9 million bolivars - that's what the dollar cost just before the denomination introduced on the weekend, according to Dolartoday. This is about 700 times more than a year ago and means that the inflation calculated on the exchange rate basis reached 70,000%.

From now on, Venezuelans will account for the new bolivar. 100,000 old bolivars have been converted into one refreshed currency unit. However, the purely accounting exercise (5 zeros cut denomination) was combined with an official devaluation. So far, the dollar exchange rate set by the central bank has been at the level of less than 300 thousand bolivars, and the black market exchange rate has reached up to 6 million. When devaluing the country, the government decided that the dollar was actually worth about 6 million old bolivars (95% of devaluation), that is about 60 new ones.

In this context, it seems rational for the Maduro cabinet to operate. It has adapted to the market situation. Another element that can be viewed positively is the attempt to seal the fuel market. Until now, petrol in Venezuela has been practically free, while its value without taxes and other charges amounts to 2 PLN/litre approx. In Venezuela, the state subsidised not only every litre, but also stimulated smuggling. According to the plans, the new fuel sales system will save 10 billion USD annually. Even if petrol will continue to be subsidised to a large extent, this can still be seen as a move in the right direction towards making the prices realistic.

Petro will not heal the economy

Tax and minimum wage increases have also been announced. Now the salary will amount to 1800 bolivars per month, that is 30 American Dollars (110 PLN). That is 30 times more than before. Contrary to what has been said, the amount should not create additional inflationary pressure, because in the private sector, salaries were still much higher and in dollars, and food packages were offered in the public sector, which was also associated with costs.

These changes, in Venezuela’s current situation, seem logical. They were aimed at stabilising the economic conditions at least temporarily. However, with the reform proposal, the question of the bolivar link with petro emerged. A few months ago, the Venezuelan authorities launched their unit on the crypto-market in order to circumvent US sanctions and settle accounts with Venezuelan oil buyers outside the official banking system.

Now, on the other hand, petro is to gain great popularity with a valuation of 3,600 bolivars, which is currently 60 USD (two minimum salaries). Maduro's speech on the weekend shows that the petro is supposed to have a fixed exchange rate to the bolivar, but a variable rate to the dollar. And this point of reform seems to be doomed to failure, and thus it crosses out all the others. Why?

Again, there will be no dollars

Given the zero confidence in the local currency and no greater confidence in the petro, it can be expected that any surplus of bolivars will be immediately converted into US dollars. All major transactions are also likely to be made in US dollars or other hard currency.

There are also many indications (despite the lack of up-to-date statistical data) that oil sales abroad, which account for almost 100% of the country exports, are not sufficient to meet imports.

In 2015, according to official data from the Central Bank of Venezuela, Venezuela’s current account deficit was 16 billion USD (over 7% of GDP). Meanwhile, the price of oil is currently higher than in 2015 and, in addition, oil production in Venezuela has halved. There is therefore a huge risk that the country will continue to run out of dollars, especially as foreign capital is giving Venezuela a wide berth.

The natural consequence of this will be a rapid devaluation of the petro and thus of the new bolivar. As a result, the government will start printing empty money again to bring the situation under control, as has been the case in recent years. However, rather than being an intended purpose, such action will only exacerbate the downward pressure on the new local currency and the associated cryptocurrency.

Thus, the idea put forward on the weekend will end in a disaster similar to that of the Maduro’s Government in recent years. There will still be a shortage of medicines, water and food, and the country will plunge even further into a humanitarian crisis.


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