Venezuela devalues Bolivar by 96%, or 24 times. To ease the shock for the population, the authorities increased the minimum wage by 60 times, from $0.5 to $30 per month. Experts say that it will not help the economy emerge from the crisis
The Venezuelan government carried out one of the biggest devaluations in the history of the world in which the official exchange rate of the Bolivar is reduced by 96%. If on Friday, August 17, the official dollar rate set by the Venezuelan Central Bank, amounted to about 248 thousand bolivars per dollar, the new rate, which shall enter into force today, equivalent to 6 million bolivars per dollar — a difference of 24 times.
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On currency reform announced President Nicolas Maduro in a televised address at the weekend. “I want the country restored, and I have a recipe. Trust me” according to the Reuters.
Minus five zeros
Maduro has not formally announced the devaluation: it is reported that the government is pursuing a denomination (the local money will be removed five zeros) and the new redenominated the Bolivar will be renamed to “sovereign Bolivar”. Predecessor Maduro, Hugo Chavez has held a denomination in 2008 when the bills were removed three zeros. The course of the new Bolivar is tied to the Venezuelan bitcoin Petro: Petro one will be equal to the cost of a barrel of Venezuelan oil ($60), or 3.6 thousand bolivars (360 million to the denomination). This means a new exchange rate — 6 million old bolivars per dollar. But as of 20:00 Moscow time on Monday (13:00 time of Caracas) the new rate of the Bolivar was not set, follows from the data Bloomberg terminal.
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A new course close to the existing in the country on the black market, the unofficial exchange rate, Reuters reports. According to the American economist, Professor Johns Hopkins University Steve Hanke, is now on the black market a dollar is worth to 6.67 million bolivars. It is from an informal course in reality depends on the pricing in the local market with an acute shortage of many basic goods, including toilet paper.
For many years in Venezuela, there is two systems of exchange rates — the official rate, determined in the course of the currency auctions of the Central Bank of Venezuela and informal, operating on the black market. Since the authorities long maintained repeatedly inflated official rate of the Bolivar to the dollar, Venezuelans rushed to buy dollars cheaply at the official rate and resell them for a profit on the black market. This sparked a shortage of hard currency, which created a total deficit of imported food and medicines. The reduction in imports has led to a sharp rise in domestic prices, due to hyperinflation was simply not enough paper money: the largest bill to the denomination was 100 thousand bolivars and to buy at least a Cup of coffee, you need more than 2 million bolivars.
Now the majority of the population and companies in Venezuela are deprived of the opportunity to purchase dollars at the exchange rate, so prices of many goods in the country due to the exchange rate on the black market. Authorities tried several times to reform the mechanisms of foreign exchange (last time in January 2018), but to no avail. In the next attack on the black market the government will open 300 of currency exchange points in hotels, airports, and shopping malls, said on 18 August the Minister of information Jorge Rodriguez.
In circulation there should be a new banknotes of 200 bolivars with a portrait of the national hero of the country, Francisco de Miranda, and 500 bolívares with the image of Simon Bolivar. In addition, after a long break to Venezuela will return the coins. Monday, August 20, Venezuelan banks were closed — was preparing to float a “sovereign Bolivar”.
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Petro, which will have free course, will be the benchmark in pricing in the local market. However, it is unclear how to operate the Petro (and whether to operate at all) and, thus, will swim the course “sovereign Bolivar”. Petro, as cryptocurrency, in reality does not exist, told RBC managing Director based in Caracas, of Caracas Capital Markets investment company Russ Dallen.
To ease the shock for the population, the government simultaneously raised the minimum wage 60 times — up to 1.8 thousand bolivars per month, or up to $30 (from the current $0,5). However, this measure can only lead to the fact that the local businesses will lay off workers. The authorities regulate prices for a range of goods, and “companies can’t raise prices to offset the costs of increasing salaries,” says RBC Dallen. Some of them face bankruptcy.
Simultaneously with the currency reform Maduro announced a package of anti-crisis measures, but without any details. These include a revision of retail petrol subsidies, without which most Venezuelan consumers would be unable to afford to buy fuel and that cost the government $10-18 billion a year. Benefits that are in addition to gasoline apply to food, leaving only the owners of new electronic identity cards. Venezuelan opposition believes that it will be a new instrument of political control over citizens. Also the government will raise VAT on luxury items from 12 to 16%, but will cancel the VAT on consumer goods and Essentials, such as food and medicines.
It will only get worse
Economists doubt that government measures will allow to recover the Venezuelan economy. “Large-scale devaluation and aggressive monetary stimuli by the increase in wages will provoke a much more rabid hyperinflation”, — quotes Reuters the words of the Venezuelan economist of Ecoanalitica Asdrubal of Oliveros. “In Venezuela there is no dollars to offer them to the market to ensure the declared exchange rate, so the Bolivar will continue to depreciate, and demand for dollars for payments for imports in a country where its practically nothing is done, will only increase the value of American currency,” says Dallen.
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The only devaluation will fuel inflation, which, according to the IMF forecast, will reach this year’s 1 million percent, writes Bloomberg. Currently annual inflation in the country is 108 thousand percent, according to the Bloomberg Café con Leche. According to the forecast of S&P, the decline of the Venezuelan economy may lose in the best case, in 2019. In 2017, the country’s GDP fell by 14%, according to the IMF, and this year is expected to decline by 18%. In February, Venezuela was named the most miserable economy in the world for the fourth consecutive year, according to the Bloomberg ranking, formed on the basis of forecasts of inflation and unemployment for the next year.