Maduro to Re-Denominate the Bolívar Fuerte

Zimbabwe experienced the worse case of hyperinflation a decade ago before it adopted the United States dollar as its official currency. / July 9, 2011 / topquark22 / Flickr

Venezuela will re-denominate the bolívar this summer by removing three zeros from its highly devalued currency. Hyperinflation in Venezuela has exacerbated one of the most severe economic crisis in the history of the Americas.

President Nicolás Maduro announced last week that the change will take place after June 4, according to Reuters.

Maduro blamed the United States and its allies for waging “economic war” against the socialist nation. The US placed sanctions on the socialist regime last summer after it held elections for a new legislative body meant to override the opposition-controlled National Assembly. Additional sanctions have since been levied against individuals with close ties to President Maduro and his government.

Francisco Rodriguez, an economic and Wall Street analyst, characterized the re-denomination as an attempt “to hide hyperinflation by knocking zeros off the currency.”

In March 2007 then-President Hugo Chávez renamed Venezuela’s currency the “bolívar fuerte” and set its value at 1,000 times higher than that of the previous currency. Although the events are quite similar, Maduro is not replacing his country’s currency the way that his predecessor did 10 years ago.

Dolar Today reports that the actual exchange rate is more than 235,000 bolívares per US dollar. One year ago, the exchange rate was about 3,000 bolívares per dollar.

The common issue of inflation

High inflation has been a persistent problem in many Latin American and Caribbean countries.

One of the most important and difficult tasks of Argentine President Mauricio Macri, when he took office in 2015, was to rein in inflation. While inflation has come down, it remains near 20 percent.

Reuters reported that economists predict Argentina’s inflation rate will be 19.9 percent in 2018. The 54 economists who were polled also predicted that economic growth would only be 2.7 percent.

“Macri has said fighting inflation is a priority as his government seeks to attract private investment and boost growth after more than a decade of populist rule,” stated the article. “But his administration’s utilities subsidy cuts, crucial to efforts to lower the fiscal deficit, have contributed to price hikes.”
However, while double-digit inflation can be a weight on an economy holding down economic growth, hyperinflation is always catastrophic.

In the 1980s Bolivia experience hyperinflation of 23,000 percent. It took more than a decade for inflation to consistently remain below 10 percent. It was another decade after that before real gross domestic product per capita to return to pre-crisis levels.

Thayer Watkins, a former professor at San Jose State University, explained on his website that the solution to hyperinflation in Bolivia required harsh fiscal discipline and support from policymakers.

“In 1985 Gonzalo Sanchez de Lozada, working with Jeffrey Sachs of Harvard, formulated a financial program that curbed the hyperinflation. The program was basic. The government maintained a balanced budget. It did not spend any more than it took in in taxes. As the program began to work Jeffrey Sachs recommended that the Bolivian Central Bank use its funds to support the value of the Bolivian peso. This was a remarkable financial coup because it resulted in Bolivians who were afraid to hold their assets in Bolivian pesos regaining their confidence. The transfer of funds back into the Bolivian peso further shored up its value and led to even more capital flows back into Bolivia.”

Other countries like Ecuador and El Salvador abandoned their domestic currency in favor of the US dollar as a means of curtailing high inflation.

No end in sight for hyperinflation in Venezuela

Under the regime of President Nicolas Maduro, however, there does not appear to be an appetite to truly tackle inflation.

Drastic policies are necessary to bring inflation under control. Maduro continues to blame the United States and its allies on his nation’s economic woes rather than enact the painful, but necessary, policies that are needed to slow inflation.

Until the government in Caracas takes such measures, the people of Venezuela will continue to suffer and be paid in a currency that loses value by the hour.

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