Venezuela: the great reform in ruins

28.08.2018 11:29|Marcin Lipka

It took only a week for the key point of Venezuela's economic reform, which took months to prepare, to fail. President Maduro’s team has failed to stabilize the local currency. With each passing day, the life of Venezuelans becomes more and more difficult, not only because of the lack of food or medicine, but also water," writes Marcin Lipka, Conotoxia Senior Analyst.

The exchange rate of the Venezuelan currency with the US dollar was supposed to be 60 bolivars to one dollar from August 20th. This information was provided by the traditional and digital media in President Nicolas Maduro's country. The upcoming currency stabilisation was also promoted by ministries, the central bank as well as twitter accounts linked to the government propaganda machine.

The economic reality, which should not come as a big surprise, has been more brutal. According to DolarToday, only the first day after the reforms the bolivar lost 10% of its value to the dollar. Currently, the price of the Venezuelan currency is 30% lower and the dollar can be bought for 84.31 bolivars. Why did the laboriously prepared changes not last for even a week?

Foreign evil

Venezuela is not the first country to experience hyperinflation (currently around 100,000% per year). The easiest way to solve this problem is to link the local currency to for example, the US dollar, at least temporarily. However, for this process to succeed, it is essential to ensure that foreign currency influences the country through exports, attracting foreign investment and accepting international assistance in conjunction with reforms.

Venezuela exports practically only oil. And, like the states of the Gulf, it could thus prosper relatively well. Unfortunately, the ideology of socialism began to prevail over even the interests of those in power. Despite the risk of rebellion, the authorities in Caracas decided to confront foreign companies. Instead of a symbiosis in the energy resources exploitation, in which technology is provided as part of the revenue from extraction, we are faced with a military dictatorship which is loyal to President Maduro.

As a result, oil production has fallen by almost half over the last three years. Additionally, despite having the largest reserves of black gold in the world, Venezuela has to import fuel from abroad, because underfunded refineries are not able to process crude oil, using only a quarter of the potential possibilities.

Tax revenue is a good example of the state collapse and the relocation of private activity to an informal economy. In his Financial Times article, Ricardo Hausmann, Professor at Harvard Kennedy School, points out that as early as January 2014, tax revenue from the non-production sector amounted to 8.6 billion USD (calculated at a black market rate for the past 12 months). In March, it was only 1.1 billion USD, which is a perfect example of the country collapse.

Petro - the big scam

The country's openness to the world and the admission of foreign investors are at odds with Maduro's ideology. The authorities in Caracas came up with a treacherous idea that, on the wave of cryptocurrency popularity, they should create a mechanism that would give the population hope that the economic situation would stabilize and food would return to store shelves.

The topic of cryptocurrencies is very popular in Venezuela because of cheap electricity. Mining bitcoins or other digital currencies has become a national activity, because in the real economy it was difficult to earn more than a few dozen US dollars a month.

The public was manipulated for several months with this trend by the fact that petro, the cryptocurrency of Venezuela, linked to the price of oil, would provide stability to the bolivar. Petro was to be exchangeable for 60 USD and the dollar for 60 bolivars. However, despite the increase in crude oil prices by about 6% since August 20th, the bolivar has lost 30% of its value to the US currency.

Printers will be running at full power

Since the petro-manipulation has practically collapsed, Maduro's team is returning to a known pattern of increasing money supply, commonly referred to as printing. The central bank will generate new bolivars, which will further drive inflation and the alternative market outside the official economy.

That's how the problems will only get worse for the Venezuelan people. There is already a shortage of basic goods in the shops. When they appear on shelves, they tend to have higher prices than in the United States or Europe. The authorities are trying to enforce regulated food prices by detaining entrepreneurs, but this will only end in even higher prices and even lower accessibility.

In the coming months, mass emigration will continue and the authorities will not even be able to bring peace by force, because apart from food and medical care, there is also a shortage of water.

After bitcoin mining, it's time for well digging

The real paradox is that in a country where average annual rainfall exceeds 2000 mm, there is a shortage of water. In addition, still in 2012, according to the International Renewable Energy Agency report, Venezuela generated as much as 65% of its electricity from hydropower plants.

Now, however, due to the dramatic decline in infrastructure investments, there has been no tap water in some parts of the capital for six months, as reported by Bloomberg in a series of articles entitled "Life in Caracas".

Without water, of course, the sewerage system does not work either. There is a huge problem with daily personal hygiene and washing, emphasizes Andrew Rosati in "Life in Caracas". Water shortages are also affecting the country's wealthy population. Instead of relying on the city's water supply systems, they order wells to be dug or bring spring water from nearby mountains.

Thus, Venezuela, standing on oil and water, can neither sell black gold from its largest deposits in the world, nor meet the basic needs of its citizens.

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