Gold, Petro, and Bolivares Soberanos; The Plan to Save Venezuela

Focus By Aparaajita Pandey*

Focus

The introduction of a new currency with lower denominations is standard economic practice. However with no other structural changes in the economy and continued maladministration, the introduction of a new currency would not be able to reverse the economic plight that Venezuela faces today.

Venezuela, a country that was once poised to be the success story from Latin America has now turned into an economic, social, and political nightmare, a nightmare that seems far from its end; and has started to frighten its neighbours too. The Venezuelan economy under its former beloved President Hugo Chavez was supported by oil exports. It has been proven that Venezuela has the largest crude oil reserves in the world and the Venezuelan economy flourished on the back of the revenue that it incurred on oil exports. The crude oil revenues helped fund social assistance programmes for the under privileged and schemes for the development of the country. Essentials like food, medicine, electricity, and water remained highly subsidized. However, the economy remained solely dependent on crude oil exports and did not diversify.

Subsequently a global decline in oil prices was coupled with the demise of Hugo Chavez and Nicolas Maduro came to power. The global decline in oil prices and the inability of Venezuelan economy to diversify and maladministration of the country pushed the country into a recession in the 2014. By November of 2016 the Venezuelan economy had entered the phase of hyper- inflation where inflation was rising by 219 per cent every month and the prices doubled every eighteen days. The shortages of food, water, medicine, diapers, and other such essentials led to massive protests, yet the government owing to the political tactics employed by Maduro continued to be in power. The Venezuelan statistics continue to be baffling in all aspects, the rate of inflation, the rate of crime, the number of deaths, and the mass exodus of Venezuelans in the past four years. Venezuela is stuck in a downward spiral with no escape in sight.

However, with the army by Maduro’s side and a new constituent assembly in place, Nicolas Maduro won the presidential elections held amidst the dystopian crisis that Venezuelans face every day and on August 17 of the year 2018, President Maduro announced his economic plan to save the economy. During his government controlled and televised appearances on Venezuelan National television, Maduro announced his new economic plan. The revolutionary saviour of the Venezuelan economy that was concocted after Maduro faced strong protests because pictures of his opulent Turkish feast surfaced in the media in a time when 82 per cent of the Venezuelan population has been pushed below the poverty line and the entire county is facing an acute food shortage.

The Sovereign Bolivar

The plan is three fold. The first part of the economic strategy was to change the Venezuelan currency. Therefore on 17th of August it was announced that the Bolivar which was the previous Venezuelan currency would be replaced by the Sovereign Bolivar. All denominations of bills that were less than a 1000 Bolivars would seize to be legal tender and bills with denominations of 1000 Bolivars and higher would be phased out gradually (the new currency was introduced in Banks on the 20th of August 2018).

The plan states that this would bring down the inflation and also the exchange rate with respect to the American Dollar. The Venezuelan national currency promptly dropped five zeroes from itself in an attempt to contain inflation. There has also been an announcement of raising the minimum wage in the country by 34 times. The expected reaction to this measure was a sharp decrease in the prices of every day products like coffee, milk, and produce. However, the measure has led to more confusion than anything else. People on the streets commented that entire process of dropping zeroes from the currency has become nothing but a strange mathematical exercise for them and no one is sure as to how much they have left in their bank accounts.

Economists have pointed out that the damage done to the economy is extensive and intrinsic and that such measures would be unable to affect any prominent change. The basis of the Venezuelan economy, its crude oil production is also facing neglect due to lack of advanced technological know-how. Venezuelan oil production is declining by 50,000 barrels per day which has accumulated to a decline that is equivalent of one-third of its total production every year. Petrol is still a subsidized commodity in Venezuela and is sold at a fraction of the global cost.

The introduction of the Sovereign Bolivar is not an unorthodox approach. The introduction of a new currency with lower denominations is standard economic practice however with no other structural changes in the economy and continued maladministration, the introduction of a new currency would not be able to reverse the economic plight that Venezuela faces today.

The Petro

In February of this year the Venezuelan government stated that it has raised a fund of 753 million USD to launch its own crypto currency; called the Perto. They mentioned in the same breath that this would be the first currency that would be introduced by the government of a sovereign nation hence it would carry greater legitimacy than any other virtual currency in the world.

It was also clarified that each and every Petro was backed by its actual worth in crude oil. To put afore mentioned statistics into perspective according to a UK based portal – Coinschedule globally a little over 20 billion USD has been raised for the launch of crypto currencies through Initial Coin Offerings or ICO’s.

If the statistics coming out of Venezuela are to be taken as complete verifiable truth, then the Petro would have raised the fourth largest fund in the world, however these facts cannot be verified as the Venezuelan administration refuses to answer questions about the Petro and/or release data for its value against crude oil.

Recently it was also announced that soon the new Venezuelan currency – the Sovereign Bolivar would be pegged against the Petro and that the Petro would soon be launched in the international market and it would soon be ready for international trade. The specific date for this has not been announced.

The introduction of a crypto currency and the accumulation of crypto assets have not inspired confidence in economists or the people. Its alleged objective and impact on the Venezuelan economy are also unclear and expectations from it are at an all time low.

Gold

Venezuela is a country that has been blessed with natural resources. In addition to crude oil and natural gas, the country has also been blessed with what Venezuela claims to be is the fourth largest gold mine in the world.

It is important to mention that despite such an abundance of gold in the country, Venezuela does not feature on the list of the top ten gold exporters of the world.

The government has now planned to utlise its resource to combat its crippling economy. The Maduro regime launched it savings in gold programme in September 2018 according to which the Venezuelan populace can buy a certificate that would be worth of 1.5 and 2.5 grams of gold bars. This measure is aimed at increasing the flow of cash into the government coffers that can then be used to combat rampant inflation.

However, the scheme has not been met with an enthusiastic response. Hyper inflation in the economy has made it extremely difficult for a majority of the population to procure essentials like food, baby formula, and medicines. This has left only a fraction of the population with the ability to save for future.

Gold certificates and virtual currencies also suffer from another common dilemma. Their value is often based in the legitimacy of their issuing authority. The prices of gold in Venezuela are decided by government and not international markets. The legitimacy and authenticity of the Venezuelan government is questionable to say the least.

The crypto currency and gold investment scheme both seem to be distractions more than concrete policy to combat inflation in Venezuela.

Conclusion

Venezuela currently faces a fiscal deficit that is 30 per cent of its GDP. Tareck El Aissami, the Venezuelan minister of Industry claims that the government has raised 12 million Bolivares Soberanos (Sovereign Bolivars) to reach “fiscal balance and protect social investment”. The materialisation of his statement remains to be seen.

The Venezuelan economy based itself on noble intentions, on subsidized essentials, and negligent taxation; however, it refused to diversify and built itself up on a singular resource. Crude oil is still the most important resource in Venezuela however; the country is stuck in a vicious cycle of needing advanced technology to harvest crude oil and not having enough money to spend on it.

Meanwhile the Venezuelan people have faced the brunt of it all. A total of 2.3 million people have left the country is since 2014 and it has been estimated that another 2 million would leave by 2020. Venezuela needs a complete renovation of its economy, an overhaul of its energy sector, and a revamp of its government to emerge out of its current situation.

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Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.

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