Venezuela is currently part of the news cycle, whether for the massive protests constantly taking place, the humanitarian crisis, stories of corruption, hunger and hyperinflation, we can see that the situation has rapidly declined for the previously prosperous country.
Where did it start?
To talk about the current Venezuelan currency crisis we have to go back to 1999 when Hugo Chavez was first elected president. By claiming to fix inequality and with a charismatic speech, Chavez had many unconditional followers. Throughout his presidency, he was able to get a grip on most of the government by placing allies in military, PDVSA (the state-run oil company) and setting in place a brand new constitution. Along with these conditions, record-high oil prices enabled Chavez to regulate media and even go after political opponents, while apparently maintaining his promises.
A prey to devaluation due to the economic climate brought in by the Chavez reign, the bolivar, the Venezuelan currency since 1879, was changed to the “bolivar fuerte” or “strong bolivar”. This new currency had a fixed exchange rate to limit capital flight.
In 2013 Chavez died of cancer, leaving as his successor current president Nicolas Maduro. With the promise of honoring the Chavez Legacy, Maduro set out to continue with popular social welfare programs. However, shortly after his rise to power in 2014, the price of oil dropped drastically. With 95 to 98% of export earnings dependent of oil and faced with years of high state spendings, tales of corruption and a general reduction of production, the economic situation took a turn for the worse. Because of the deficit of foreign currency due to low oil prices, imports suffered, and shortage ensued. This resulted in increased prices and inflation.
To counter the situation and support needed popularity, the government announced a series of reforms: including printing more money (driving its value further down), implementing price control on essential products and increasing the minimum wage on a regular basis.
Hyperinflation and Bolivar Soberano
With the unwinding economic crisis, during 2018 Venezuela continued to face hyperinflation that had prices doubling every 26 days on average. This made it almost impossible to pay for things such as coffee and other necessities (including medication), which now cost millions of “strong” bolivars. To try to face the crumbling economy and high prices, Maduro announced a series of new measures in august of 2018 that included:
- The redomination of the currency from the “bolivar fuerte” or “strong bolivar” to the “bolivar soberano” or “sovereign bolivar”. This new currency eliminated 5 zeros from the old currency, making transactions easier. The new measures also included the circulation of new bank notes worth 2, 5, 10, 20, 50, 100, 200 and 500 sovereign bolivars and two new coins.
- Other measures known as the “economic package” included:
- Raising the minimum wage 3,000%
- Anchoring the sovereign bolivar to the “petro”, the new cryptocurrency announced by the government, said to be linked to the country’s oil reserves.
- Raising the value-added tax or goods and services tax from 4% to 16%
- Rising of oil prices to international standards to fight smuggling.
What comes now?
Although the government announced reforms and has accused other countries of waging an economic war on Venezuela, the situation continues deteriorating. This has caused a humanitarian crisis and has accelerated the exodus of Venezuelan to nearby countries in search of better living conditions. Over 2 million Venezuelan are estimated to have left the country since 2014 in particular to nearby Colombia, with an estimated 600,000 people, the US with an estimated 290,000 and Spain with over 200,000. For those that have stayed, economists predict more of the same. With long queues to get ahold of new bank notes and the roots of the problem still in place, the “sovereign bolivar” could soon face the same problems of the “strong bolivar”.