As previewed yesterday, on Monday Venezuela officially slashed five zeros from prices and its currency as part of what has been dubbed one of the greatest currency devaluations in history which slashed the value of the official bolivar by 95%, an overhaul that President Nicolas Maduro said would tame hyperinflation, and which everyone else called the latest desperate failed socialist policy that will push the chaotic country deeper into crisis and unleash even higher hyperinflation (impossible as that may sound: as a reminder the collapse of Venezuela’s currency recently surpassed the Weimar republic).
As part of the devaluation, the official rate for the currency will go from about 285,000 per dollar to 6 million and together with salaries and prices, will be pegged to the Petro cryptocurrency which is reportedly backed by crude oil and is valued by the government at $60, or 3,600 sovereign bolivars. The Petro will fluctuate and be used to set prices for goods.
Government officials tried to partly mask the shock by raising the minimum wage 3,500% so instead of the new minimum wage being 1.8 million strong bolivars, it will be 1,800 sovereign bolivars: the equivalent of $30 a month. Banks were closed and busy trying to adopt ATMs and online platforms to the new currency rules; they will likely fail.
Less discussed was the concurrent increase in the value added tax by 4%, while officials also ended some gasoline subsidies, saving the government $10 billion a year, as many ordinary citizens are forced to switch from subsidized to western fuel prices.
Even though Maduro boasted in Friday night’s announcement that the IMF wasn’t involved in the policies, aspects of the moves bore a resemblance to a classic orthodox economic adjustment, even if those usually involve removal of the corrupt regime whereas Maduro is only becoming more entrenched. Meanwhile, most economists said the plan announced on Friday will escalate the crisis facing the once-prosperous country that is now suffering from Soviet-style product shortages and a mass exodus of citizens fleeing for nearby South American countries.
As Bloomberg notes, the symbolism of announcing the drastic measures on a Friday night wasn’t lost on many Venezuelans. In 1983, President Luis Herrera Campins devalued the bolivar for the first time in 22 years after oil prices crashed. The day became to be 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 alone, leading to riots known as the “Caracazo” that killed hundreds and eventually paved the way for Chavez’s rise to power.