Swamped in Inflation, Venezuela Will Cut Five Zeros from Currency :: WRAL.com

MEDELLÍN, Colombia — Faced with nearly incomprehensible inflation — 32,714 percent as of Wednesday — Venezuelan officials thought they had a solution: They changed the color 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.

“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 Nicolás Maduro as he tries to right his country’s capsized economy. The five-digit inflation has earned Venezuela comparisons to the hyperinflation of Zimbabwe and Weimar Germany from the International Monetary Fund.

The newly minted currency, which will be known as the “sovereign bolívar,” will be rolled out Monday. In addition, the president has ordered measures his United Socialist Party has been loath to consider in the past: An increase in gas prices for some drivers and a modest ease in the currency controls that have made dollars inaccessible to most Venezuelans 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.

“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 1,000 percent 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 bolívares, as the surplus of printed cash makes existing money increasingly worthless.

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

On Aug. 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.

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 math.

“I am confused,” said Edwin García, 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 stabilized 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-Rodríguez, 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 subsidizing 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-Rodríguez. “It’s a bid for loyalty.” In gas stations in Caracas, there were more doubts about the plan. Alejandro Bolívar, a station supervisor in the suburb of El Hatillo, said no one from the government had come to reset the machines to the new currency or to explain when they would need to start verifying if buyers had government ID cards.

For its part, the Venezuelan government claims inflation has been caused by an “economic war” waged by the United States and business people who oppose it.

But economists said that if Venezuela is to curb hyperinflation, it will have to stop printing money.

Hanke, the Johns Hopkins economist, recalls a similar situation in Yugoslavia, which he advised until 1991. Though Hanke objected to its currency changes, the country pushed ahead in 1990, removing four zeros from its bills. Its succeeding government removed another zero in 1992. In October 1993 it removed six zeros, in December nine more, and then at the start of 1994 another seven.

With hyperinflation running at 313 million percent per month, the mint couldn’t keep up.

And that country, Hanke noted, had a world-class mint. Maduro has no working mint, and must import bank notes.

“It’s an impossible situation,” said Hanke.


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