Venezuela: The Bolívar Predicament

“We are all millionaires, but we are all poor!”

This is what a local Venezuelan man had to say about what has happened to Venezuelans due to their country’s hyper-inflation. This hyper-inflation has caused Venezuela’s GDP to fall 35% between 2013 and 2017 (a much greater dip than what USA had experienced during The Great Depression) and caused the national currency (the bolívar) to become seven times less valuable than virtual gold from the game “World of Warcraft” (May 2018). In July 2018, the annual inflation rate was measured at around 200,000%; the highest in Latin American history. This number is expected to keep rising rapidly and some experts even suggest that it may reach 1 million percent by the end of the year.

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What caused this?

The initial seeds for this disaster were first planted by Hugo Chavez during his rule in around 2004. During this time, the value for a single barrel of oil sky-rocketed from around $7/barrel to around $100/barrel. Since Venezuela has the largest known oil reserves in the world, this made Venezuela the richest country in Latin America. With their economic rise, Chavez decided to bring oil to the centre of their economic model, making them highly dependent on its high price. It’s also important to note that his unrestrained spending on investing in new social programmes led to a growing deficit that would be impossible to sustain if the price of oil ever dropped. Chavez’s main goal was to reduce poverty with such social programmes.

Once Chavez succumbed to cancer in 2013, Nicolás Maduro took charge as his hand-picked successor. Unfortunately, in 2014, the price of oil plummeted by nearly 50% in the year’s final quarter.

Venezuela is so dependent on oil that a whopping 95% of its government revenue comes just from oil exports.

Maduro’s Solutions towards Hyper-Inflation

The bolívar had become so worthless that Maduro’s initial solution was to omit 5 zeroes from the currency. This was implemented in late August 2018. Simply put, new banknotes were introduced with the largest banknote representing 500 new “sovereign” bolívars. That is the equivalent to 50 million old bolívars. This is currently worth a miniscule €6.88.

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However, removing five zeroes from the currency will not freeze this hyper-inflation. It will simply make the money easier to handle practically.

This point raises a question: “What will Venezuelans do with their old bolívars?”. If the situation as a whole wasn’t confusing enough, both sets of currencies must exist for some time together since it is impossible to directly implement this so-called solution. This time will remain until all large old notes are eased off from the market.

According to Maduro himself, the new bolívar is pegged to a state-run cryptocurrency which he created earlier this year named Petro. He stated that 1 petro will be equal to 3600 new bolívars and that 1 petro is valued at around $60. By doing so, Maduro managed to devalue his nation’s currency by 95-96%. This “solution” racked up lots of controversy since the Venezuelan leader opted to peg the bolívar to a cryptocurrency i.e. a currency that exists in no true shape or form and is not traded on any recognised platform, hence, heavily questioning its credibility.

In hopes of combatting this problem, the Venezuelan government plans to increase its minimum wage by 3000% to provide more money to their citizens.

Fallout

Venezuela’s annual inflation rate is (at the time of writing) sitting at over 200,000% and is predicted by the International Monetary Fund (IMF) to reach an astonishing value of 1 million percent by the end of this year.

Nearly 90% of their total population of 37M people are currently living below the poverty line as ordinary supplies could cost millions of bolívars e.g. a single roll of toilet paper is valued at 2.6M old bolívars (just $0.40).

As a result of this major economic downfall, approximately 2.3M people (14.1% of the current total population) have left the country since 2014.

Crime rates and murder rates have also shot up significantly since the roots of this hyper-inflation began back in 2014.

The Venezuelans are furious at Maduro for adjusting horribly to this situation. This was evident when on August 4, 2018, the Venezuelan President survived a drone attack which had allegedly detonated two explosives near him as he was addressing the Bolivarian National Guard. Six arrests were made regarding the incident and no fatalities were recorded.

Supplies as a whole have become scarce. These range from ordinary supplies one does not usually worry about not having (e.g. toothpaste, chicken, toilet paper) to important necessities such as medicines and clean facilities in hospitals. People cannot be treated for the smallest sicknesses, leaving their lives in peril.

Written by: Kyle P. Camilleri

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