Venezuela launches new currency, economic reforms

August 24, 2018
President Nicolas Maduro with his cabinet.

Venezuelans braced themselves as a series of long-anticipated economic measures came into effect on August 20, including the launch of a new paper currency called the Sovereign Bolivar.

The new currency brings with it a revaluation of all prices, wages and pensions, which will be cut by five zeros. Both the old Strong Bolivar and Sovereign Bolivar will co-exist for a period of time yet to be announced by the government.

The reconversion has required a complete overhaul of administrative accounting mechanisms, as well as all of the cash circulating in the banking system. Bank transfers and electronic payment systems have been suspended over the weekend of August 18 and 19. August 20 was declared a bank holiday by President Nicolas Maduro to ease the changeover.

It has been claimed the monetary reconversion is costing the Venezuelan state more than US$300 million, and has twice been postponed since the initial announcement in March. Despite such delays, Maduro urged citizens to have “confidence” in the measure.

The launch follows weeks of public information campaigns by the government, the central bank, and private and public banks. Despite this, many citizens have expressed confusion in interpreting new prices and their new wages or pensions.

Shops and businesses were closed on August 20 as the country awaited the “necessary” reconversion, which Maduro said would help overcome the economic crisis gripping the Caribbean country.

The launch of the Sovereign Bolivar is also accompanied by a series of other economic measures. These include eliminating exchange controls, opening 300 exchange houses, and what amounts to a 97% devaluation as the government recognises parallel market exchange rates for the first time.

As part of the measures, Maduro has also urged fiscal discipline, looking to bring the fiscal deficit to zero. He has promised to halt the printing of money and promoted digital transactions to ease the cash flow bottleneck.

He has also declared a 3464% rise in both the minimum wage and state pensions as of September. He proposed to tie them to the Petro cryptocurrency — itself pegged to the price of a barrel of oil — in a bid to shore up consumer purchasing power.

The government has pledged to pay the difference in private sector salaries for a 90-day transition period.

A series of tax reforms were also due to come into effect, including an increase in consumption tax from 12 to 16% and a complete exemption from the consumption tax for food and medicine.

Reforms of income tax are also planned, in which the higher bands are due to pay more at more frequent intervals. A crackdown on tax evasion has also been promised.

Holders of the government’s national Homeland Card can also expect a special “reconversion bonus” worth US$10 or eleven and a half months minimum wage to ease the economic confusion this week.

A shift in the government policy of heavy petrol subsidies is also in the works. There are significant hikes in petrol prices due in September for all except those holding the Homeland Card, in what could constitute an important new source of funding for struggling state oil company PDVSA.

Many of Maduro’s allies are tentatively withholding judgement on the effectiveness of the reforms. However, some have pointed to the lack of “clarity”, especially with regard to how wages and prices are to be pegged to the Petro cryto-currency, which analysts say is itself riddled with ambiguities.

Others, such as Ecoanalitica Director Alejandro Grisanti, have welcomed selected elements of the package, such as the announced wage hike.

“These announcements are a radical change in the economic policies of the past 20 years. The wage increase, if brusque, was necessary and our workers could not continue to earn roughly the same as the price of a kilo of rice a month,” he has explained.

Many, however, are sceptical about the measures. Vehement objections have come from Venezuela’s right-wing opposition, who have called for protests, marches, and even a national economic shutdown in response. Turnout at previous opposition activities has been poor, and it is uncertain to what extent their calls will be heeded by the wider population.

The Trump administration, which has applied economic sanctions against Caracas, has also taken aim at the reforms, with Vice-President Mike Pence claiming that they “will only worsen the lives of the Venezuelans”.

[Abridged from]

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