The Maduro administration aims to devalues the Bolivar by slashing zeros from the currency. Despite having world’s largest proven oil deposits, many Venezuelans have lived in abject poverty. The former President, Hugo Chavez, was in office from 1999 to 2013. In that period, billions of dollars were spent in generous social..
The Maduro administration aims to devalue the Bolivar by slashing zeros from the currency.
Background
Despite having the world’s largest proven oil deposits, many Venezuelans have lived in abject poverty. The former President, Hugo Chavez, was in office from 1999 to 2013. In that period, billions of dollars were spent on generous social programs. After his death, his successor, Nicolas Maduro took office and since then, there has been a rise in inflation and a shortage of basic goods. A drop in oil prices has added to the administration’s problems.
From 2014, there have been recurrent protests against the government because of many of these issues. Detractors blame the current economic policies for the crisis. People are also disillusioned by the high level of urban violence prevalent in the nation.
The protests have increased from 2017. There have been calls for fresh elections to remove the United Socialist Party (PSUV) from power. However, the government remains as powerful as ever in the nation. Recently, a new constituent assembly was instated in Venezuela. The assembly is filled with Maduro supporters and has the power to re-write the nation’s constitution.
The International Monetary Fund (IMF) expects Venezuela’s inflation rate to reach one million% in 2018. The hyperinflation, along with stick wages and widespread unemployment has been disastrous for the Venezuelan people.
Read more of our extensive analysis the crisis in Venezuela here, here and here
Analysis
In one of the biggest economic overhauls of Maduro’s five-year government, the former bus driver and union leader also said he would hike the minimum wage by over 3,000%, boost the corporate tax rate, and increase highly-subsidised gas prices in coming weeks.
“I want the country to recover and I have the formula. Trust me,” Maduro said in a night-time speech broadcast on state television.
But economists expressed doubts that Venezuela’s cash-strapped government, which faces US sanctions and has defaulted on its bondholders, would succeed.
Venezuelans will see their meager salaries further eroded and companies will struggle with major increases to both taxes and the minimum wage, they said. “Amid this aggressive devaluation and monetary expansions due to salaries and bonuses, we are expecting a much more aggressive stage of hyperinflation. All the more so in a context where the elimination of excessive money printing is not credible. ‘The worst of all worlds’, said Venezuelan economist Asdrubal Oliveros of consultancy Ecoanalitica.
The International Monetary Fund has predicted that inflation in Venezuela would hit 1 million% this year.
Maduro said he would overhaul Venezuela’s disparate exchange rates and peg salaries, pensions, and prices to the petro, a cryptocurrency launched by the government earlier this year. Venezuela’s government has not provided a clear breakdown of petro investors or how much they have collected from the cryptocurrency’s sale.
Maduro said on Friday that one petro would equal US$60 and have the equivalent of 360 million bolivars. That implies a new exchange rate of 6 million bolivars per dollar, broadly on par with widely used black market exchange rates, entailing a 96% devaluation compared with the current official DICOM rate of 248,832 bolivars per dollar.
The five-digit inflation has earned Venezuela comparisons to the hyperinflation of Zimbabwe and Weimar Germany from the International Monetary Fund.
Assessment
Our assessment is that economic implosion and the hyperinflation has resulted in extremely poor living conditions for the citizens of the nation. Maduro has blamed the United States for orchestrating an ‘economic war’ against Venezuela. The President is hedging his bets on a petroleum-backed cryptocurrency as petroleum remains the only valuable export of Venezuela. However, critics argue that poor governance and policies are to blame for the crisis. Even if IMF proposes a rescue plan, it would also result in one of the world’s most complex bond restructurings and a big test of fund rules.
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