Chaos and confusion erupted across Venezuela, and most stores were shuttered on Saturday, after president Nicolas Maduro announced that the government would enact a massive currency devaluation, implement a new minimum wage, hike taxes, and also raise gasoline prices for most citizens even as the country struggles with the greatest hyperinflation on record, surpassing even that of the Weimar Republic.
As a result of the enacted actions, the new version of the bolivar will be pegged to the value of the state cryptocurrency, the etro, which according to Bloomberg amounts to a 95% devaluation of the official rate, and will trade in line with where the black market was; the government will also raise the minimum wage more than 3,000 percent, which works out to about $30 a month.
Maduro said the new currency, set to enter circulation on Monday, will be called the “sovereign bolivar” and will be based on the petro, which is valued at $60 or 3,600 sovereign bolivars, after the redenomination planned for August 20 slashes five zeroes off the national currency. The minimum wage will be set at half that, 1,800 sovereign bolivars. The government would cover the minimum wage increase at small and medium-size companies for 90 days, Maduro added. It was not clear what happens after.
“They’ve dollarized our prices. I am petrolizing salaries and petrolizing prices,” Maduro explained in a Friday televised address. “We are going to convert the petro into the reference that pegs the entire economy’s movements.”
In other words, for the first time ever, an oil-linked cryptocurrency effectively replaces the sovereign currency. As a result the petro, which will fluctuate dramatically, will be used to set prices for goods. The package of measures combine the necessary with the baffling, Luis Vicente Leon, president of the Caracas-based pollster Datanalisis, said in a Twitter post on Friday.
“The government has recognized the need to anchor the economy to an external variable outside of its control, such as the international price of oil. A wise decision, but it does so by hiding it in a vehicle that suffers from lack of confidence and viability, such as the Petro,” Leon said.
“You won’t find the IMF’s claws or ill-gotten prescriptions here,” Maduro said, although after years of socialist torment, it is not clear if Venezuela’s ordinary citizens would not have opted for that alternative. Maduro also said that “no experts were involved who do not feel the clamor of the people”… Just dictators.
Maduro also said he intends to create a unified exchange rate across the country. The new petro-to-dollar-to-bolivar rate would bring the official price of one US dollar to six million (or 60 post-redenomination), which is about the same as the current black market exchange rate and about 25 times worse than the official rate.
To implement the bizarre plan, information Minister Jorge Rodriguez said Saturday the government will open 300 currency exchange kiosks in hotels, airports and shopping malls as part of a bid to supersede the country’s black market. Maduro said Friday that the central bank will increase the frequency of weekly foreign exchange auctions to three and eventually five.
Speaking to Bloomberg, Henkel Garcia, director of the Caracas consultancy Econometrica, said the announcements amounted to a head-scratcher. “This series of measures is a mix of incoherent and contradictory ideas. It is a worrying contraption that generates a lot of uncertainty about how it will be executed.”
Friday’s devaluation, while is merely a formality to allow the official rate to catch up with the black market, ranks among Venezuela’s most significant. In 1983, President Luis Herrera Campins devalued the bolivar for the first time in 22 years after oil prices crashed on a day known locally as “Black Friday.” When in 1989 Venezuela raised gasoline costs, lifted foreign-exchange controls and let the currency plunge, prices soared 21 percent in one month, leading to the “Caracazo” riots that killed hundreds and paved the way for the leftist President Hugo Chavez’s rise to power.
Devaluations have become the de factor norm in Venezuela’s recent history as Chavez and Maduro devalued the bolivar many times in their combined two decades in power. Chavez devalued the currency several times, including by 32 percent in 2013, a month before his death in Caracas. Maduro allowed the bolivar to devalue 80% in currency auctions in February.
The result has been galloping hyperinflation, and according to the Bloomberg Cafe Con Leche index – which tracks the price of a cup of coffee – inflation in Venezuela has hit an annual inflation rate of 108,596%, and is on its way to 1,000,000% according to the IMF.
The announcement led to even more confusion within Venezuela: “on Saturday, shoppers arrived at an eastern Caracas supermarket to stock up on goods before prices rise even further, but a security guard shooed them away.”
“The supermarket is now closed, the shelves are almost empty because of the number of people who came early today,” the guard, identifying himself only as Luis, said as he tried to manage the crowd. Some gas stations were closed and others had long lines.
Meanwhile, Maduro failed to offer more details on Friday on the country’s new gasoline price system, saying that he wants a plan that includes direct subsidies to registered public transport operators and individual vehicle owners. Those not registered won’t receive a subsidy and will have to pay international prices. Drivers have until August 30 to register for the subsidy. Venezuela would save $10 billion through the new fuel price system, Maduro said.
Besides the token minimum wage hike, Maduro also raised the value-added tax on luxury items to 16% from 12%, and said a tax on financial transactions would range from zero to 2%.
Venezuela’s economy remains in shambles, with record-beating hyperinflation crushing any purchasing power the locals may have and thousands of people fleeing poverty to nearby countries. Over the past year, the US has imposed increasingly restrictive sanctions on Venezuela’s finances and debt issuance, aiming to drive ‘dictator’ Maduro out of power. However, the US remains Venezuela’s top oil importer and Washington has been reluctant to apply any direct penalties to the country’s oil industry.
Maduro’s actions come as unrest grows over the collapse of the economy, including a foiled coup attempt and a drone attack on Maduro. In May, scores of highly-decorated servicemen and women unsuccessfully conspired to launch a palace coup and put the socialist president on trial. Earlier this month, Maduro survived what the government claimed was a drone attack as explosive-laden devices were detonated during a military parade.
Meanwhile, Venezuela is now in default on more than $6 billion of its bonds after the government missed a principal payment on one of its bonds for the first time this week. The missed payment, while hardly a surprise for investors, confirmed that creditors creditors are unlikely to get much, if any, of their money as the overdue payments pile up with no resolution in sight to Venezuela’s collapsing economy, cryptocurrency-pegged bolivar notwithstanding.