Wednesday, October 27

What does it mean that Venezuela has erased six zeros from its currency

The million dollar bill has ceased to exist in Venezuela. But not because things have improved, rather the opposite. Inflation climbs homeless and more than 76% of Venezuelans live in extreme poverty, almost nine percentage points more than last year, according to the latest Survey on Living Conditions from the Andrés Bello Catholic University.

But the Government of Nicolás Maduro has decided to eliminate six zeros from the currency. Since Friday, it takes just over four digital bolivars to buy a dollar, an important change if we take into account that before this measure, more than four million were needed.

The first thing Venezuelan political scientist Ricardo Sucre did, very early on Friday morning, was to test the new digital currency. “The main advantage is that it reduces the zeros and allows better management of accounting in firms and personal accounts,” he tells elDiarioes. “For example, in the office we did not know what to do with so many zeros. We started to do the invoices by hand so that the zeros would enter the invoice format. Now, this will not be the case. They can be done on a computer. The disadvantage is which is a palliative, but the inflationary problem remains “.

Venezuela has only five bills as of Friday: one of five, 10, 20, 50 and 100 bolivars, although, in practice, the US currency is the one used by Venezuelans in a country that has been without money for more than seven years. cash.

“The amount of bolivars in cash until the conversion was equivalent to less than a dollar per inhabitant. It is assumed that if this measure is moderately successful it could increase the amount of bolivars in the street and that would lead to streamlining the means of payment,” says the Venezuelan economist, Manuel Sutherland, to this medium.

However, this decision does not represent a change in the value of the currency and, despite being digital, it is not a cryptocurrency. The projections among Venezuelans regarding the impact that this measure may have are not good. They expect it to end in a price increase and an unintended devaluation.

These are the keys to understanding the measure.

Less zeros, but with the same value

The new conversion implies that for every million sovereign bolivars, a digital bolivar will be obtained or, in other words, six zeros will be erased from the previous amounts. Therefore, the new digital one hundred bolivar bill is equivalent to one hundred million of the old sovereign bolivars.

“It is not a devaluation, it is simply a nominal change, six zeros are eliminated from the currency for the enormous amount of effort that was needed to make calculations and buy on the street. That should imply that the bolivar loses or gains value,” he says Sutherland. “However, unfortunately, on the last day, the bolivar depreciated and the exchange rate increased by 16%, which represents a 25% devaluation of the currency. But that is not due to currency reconversion but because the market for money in foreign currency is very small in the country and the fear that people have had that the currency will lose even more value or that they will not be able to buy dollars led to a very rapid increase in the demand for dollars. ”

This is one of the unwanted effects by the Government, which did not seek with this measure to modify the exchange rate to acquire other currencies, but which nevertheless has resulted, in a few hours, in that.

It is not a cryptocurrency

The digital bolivar is not a cryptocurrency, nor will it be used exclusively online. What the Government seeks with this measure is that the bolivars, almost disappeared from the streets, are once again used in daily purchases, but they will be worth a million times less than what it says on paper.

“The digital bolivar is not a purely digital currency as is happening in China. In Venezuela it does not happen there, this country already has a crypto asset, called Petro, which they tried to use as a unit of account but that proposal never finished working”, Sutherland says.

The attempt to find solutions has not only led Venezuelans to adopt foreign currencies, and sometimes cryptocurrencies, to have a certain guarantee of stability, but has also led to experimenting with digital forms of payment in the face of the depreciation of their currency.

Purchases in sovereign bolivars became impossible because they required an unsustainable number of banknotes, so merchants had to look for alternatives such as almost exclusive payment by card or through digital platforms, two options that are also complicated by failures in the internet access and constant power outages.

All roads lead to the dollar

The accelerated loss of value of the national currency has pushed the Government of Nicolás Maduro to advance in a process of informal dollarization of its economy. The US currency went from being its worst enemy to an ally in uncertain times.

According to different estimates, about 70% of daily transactions are carried out in US banknotes, although many Venezuelans still do not have them at their fingertips. As it is impossible to ignore these realities to plan any Venezuelan economic activity, the new bolivar must adapt to this situation, as well as to coexistence with the dollar and the diminished purchasing power of Venezuelans, while trying to navigate on the waves produced by hyperinflation.

A story erasing zeros

But this is not the first time it has happened. It is the third currency conversion in the last 15 years. In 2007, President Hugo Chávez (1999-2013) made the first of this century by eliminating three zeros. In 2018, already with Nicolás Maduro as president, the second was carried out, by eliminating five zeros from the currency. But since that moment the devaluation and hyperinflation has not stopped and has ended up inflicting a fatal stab at the sovereign bolivar, which has undergone its formal burial this Friday, since the Venezuelans had buried it long ago.

“Venezuela is the second country with the longest hyperinflation in history. The first has been Nicaragua in the eighties, with the first government of Daniel Ortega, which lasted about 60 months. Venezuela has already been 45 months, with a loss 80% of its GDP and eight years of constant recession, “says the Venezuelan economist.

Dollarization offers some stability, so if there is another reconversion, specialists hope that, at least, it will not be in such a short time as it was in 2018 that lasted until now.

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