Venezuela’s currency crisis explained

Venezuela is embarking this week
on a major economic overhaul – the biggest in the five years
that Nicolás Maduro has been president of the country. Why? Well, put simply, because
of hyperinflation. Inflation has been a problem
in Venezuela for years. But it’s really taken off
since the end of last year. Since then, prices have been
almost doubling every month for the past nIne months. The annual inflation rate is
now running at around 80,000%. By some measures,
that’s the highest in Latin American history. And economists in Caracas
expect it to get worse. They say it could reach
300,000%, 400,000% this year. So what’s the government
doing about it? Well, Nicolás Maduro has
announced a series of drastic measures. The first, introduced this
week, is to lop five zeros off the currency, the bolívar. So a whole load of new
banknotes have been issued. The biggest of those
banknotes is the VES 500 note. That would be worth 50
million old bolívars. That’s still only around $8. Now, this should make
things slightly easier for Venezuelans in
practical terms. They won’t have to carry big
bags of cash around with them in the way that they
have in the past. But as economists
have pointed out, lopping five zeros
off the currency won’t actually halt
hyperinflation. And just to confuse matters,
the new notes and the old notes will actually run in
parallel for a while until the old notes
are finally phased out. Mr Maduro says that the
new bolívar will be pegged to the petro, a state-run
cryptocurrency which he launched earlier this year. He says there will be 3,600
new bolívars to the petro, and the petro will be worth $60. Now, if you do the
maths, that works out as a currency devaluation
of 95% or 96%. Many economists say this is
really just smoke and mirrors, because the petro doesn’t really
exist in any recognised form. It isn’t traded on any
recognised platform. The government can
issue it at will. As one analyst said last week,
Mr Maduro has chosen to peg the new bolívar to the petro,
but he might as well have chosen to peg it to unicorns. It’s that fanciful.

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