Why Venezuela’s New 1 Million Bolivar Banknote Will Be A ‘Currency Change’ – 03/10/2021 – Worldwide

Venezuela’s spiral of hyperinflation took another step this week.

The Central Bank of Venezuela (BCV) has put into circulation a new banknote that reflects the hyperinflation that the country has been experiencing for years: the 1 million bolivar banknote, the highest denomination in the country’s history.

Despite this high number, its real value is very low: US $ 0.52 (around R $ 3) at the official exchange rate last week, when the BCV announced its introduction to all banknotes and coins in circulation.

The forecast, however, is that it will depreciate quickly, as price escalation remains uncontrollable and Venezuela continues to experience one of the most severe economic crises in recent history.

According to BCV, price indices increased by 2,665% last year.

What has the Central Bank announced?

In addition to the ballot of 1 million bolivars, the Twitter account of the Central Bank of Venezuela announced the launch of two new additional banknotes, of 200,000 and 500,000, “to meet the needs of the national economy”.

In 2018, five zeros had been removed from the coin, which did not prevent the value of the bolívar from continuing to fall.

BBC News Mundo, the Spanish-language service of the BBC, contacted the Venezuelan government through the Venezuelan Ministry of Communications, but received no immediate response.

In the midst of real dollarization (66% of transactions are already made with the dollar, according to Ecoanalítica), the measure has been interpreted as the answer to the problem of the lack of exchange, which makes the most common transactions extremely difficult on one day for Venezuelans. .

Because money in bolivars is scarce and the real value of what is available decreases, many people try to pay for low-value services, such as public transport tickets (150,000 bolivars or $ 0.07 ), with dollar bills and drivers rarely get enough. change to return.

The unstoppable devaluation of the bolivar has made the US dollar the preferred currency in recent years – and the bolivar has only been left for small transactions and retail. But, since there is not enough money, it does not fulfill this role either.

According to estimates by the consultancy firm Econométrica, only 1.9% of bolivars circulating in the system do so in kind.

And the scarcity of cash bolivars is compounded by the lack of low-value dollars, which makes things like paying for a packet of flour or a bus ticket a headache for many.

Economist Luis Vicente León, of consultancy firm Datanálisis, told the report that “they are launching a banknote that will have the higher value of a bolivar note, but in reality it will work more like a currency. to repay”.

Is the million dollar bill the solution?

The launch of the new note was greeted with skepticism. The general forecast is that it will lose its already low value as quickly as many of its predecessors.

León believes that “this measure will only take effect for a few weeks, or even a few months, because the bolivar does not inspire any confidence”.

Recent history does not inspire much reason for optimism.

In the summer of 2018, President Nicolás Maduro announced the launch of a new currency cone (set of banknotes and coins) as part of his plan for economic recovery, growth and prosperity to deal with “war economic ”of the United States, which he blames for the problems of the Venezuelan economy.

The sovereign bolivar was born there, a new bolivar whose face value was removed by five zeros to compensate for the accumulated effect of hyperinflation.

Maduro continued in the tradition of his predecessor, Hugo Chávez, who had adopted a similar measure years earlier.

These successive revaluations of the nominal value of the bolivar following a political decision are palliative measures for the erosion that hyperinflation has imposed on the Venezuelan currency.

Opposition economist and politician José Guerra estimates that if you add up all the zeros eliminated by the government in recent years, the new $ 1million bill would actually be $ 100 billion.

The future of the bolivar

Although the Venezuelan Constitution stipulates that its currency is the bolívar, it seems difficult that, in the current context, the currency can recover its value and its role in the economy.

“Removing zeros from the room or renaming is not the solution,” says Leon.

Venezuela has been plunged into an economic crisis for years that consumed more than half of its gross domestic product (GDP) and was made worse by the coronavirus pandemic.

After years of prohibiting the use of the dollar, the government in recent months has allowed the currency to be used more and more as an “outlet”, in Maduro’s words.

“I see no harm (…) this process which they call dollarization; it can be used for the recovery and the development of the productive forces of the country and for the functioning of the economy (…), thank God, it exists, ”the president said a few months ago.

“Venezuela will always have its currency (…), we will always have the bolivar, and we will recover it and we will defend it,” he added.

The president recently said he wanted to implement a plan to make the country’s economy completely digital this year. In this sense, the payment of the Caracas metro with an electronic card has already been implemented.

The Chavist leader maintains that the American sanctions and the “international blockade” are at the origin of the problems of the Venezuelan economy. But experts and several international bodies warn that until structural reforms are carried out, it will not be possible to stabilize the bolívar – and recommend that the government abandon its practice of monetizing the budget deficit (by covering by the issuance of money the imbalance between government revenue and expenditure).

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