Analysts have warned against the Venezuelan government’s initiative to reduce inflation by stripping zeroes off its national currency, the bolivar.
President Nicolas Maduro originally announced in March that, as a measure to try and stem the inflation problems troubling Venezuela’s economy, the government would be stripping three zeroes off the currency. He later said that this would increase to five zeroes.
Analysts view the measure as a token display, saying that the move will make little difference in reality. They suggested that the currency could become completely obsolete by December of this year.
Bank notes released in 2016 are already unable to meet the basic needs of Venezuelan citizens, with the 100,000 bolivar note now only able to cover the cost of a solitary cigarette, compared to the five kilograms of rice that it was worth just last year.
Economist Leonardo Vera said that if the stripping of zeroes off the bolivar takes place and inflation continues at its rate of 100% a month, then the new 500 bolivar note will be of little worth by the end of the year.
As an example, a pair of reading glasses can now fetch up to one billion bolivars on black markets. Given that this is well above the monthly average wage of five million bolivars, commodities considered relative basics at one point are now far out of the average Venezuelan’s reach.
These days, shops are choosing to weigh cash transactions rather than bothering to count them all out, and currently, most transactions are facing rejection in favor of electronic transfers.
Henkel Garcia of Econometrica said that the measures by Maduro would only have an effect should serious economic reform accompany them. Otherwise, they would just be an attempt to arrest the slide and acknowledge the problem of hyperinflation without properly counteracting it.
Asdrubal Oliveros of Ecoanalitica likened it to changes carried out by Maduro’s predecessor, Hugo Chavez, who stripped three zeroes off the currency in 2008. With no efforts to secure changes in the economy and introduce anti-inflation measures, no serious effect resulted from the Venezuelan government policy to reverse hyperinflation trends. It was a “transactional success”, but all benefits were almost immediately evened out by continuing problems causing inflation at the root.
The current government under Maduro has appeared to blame the weight of US sanctions, opposition government and the fluctuating oil market in the past, but problems underlying the heart of the Venezuelan economy has swelled its monetary base 250 times over the previous two years.
Industry and Production Minister Tareck El Aissami said that the plan will help “improve the spending power of the working classes”, and economists have admitted that the change will help places such as supermarkets deal with easier transactions than having to split billions of bolivars through sales, which currently can only process figures of 20 million.
Maduro has softened his stance on strict government control of currency exchange as well a reduction on tariffs of imports of raw materials and machinery, which will hopefully allow for development and investment in the country.