Caracas Chronicles

A new currency redenomination is on its way. It would be the third one in thirteen years. And just like in 2008 and 2018, it would only serve as a temporary solution for cash shortage and accounting complications, a cosmetic reform to try to fix a diseased economy only on the outside. Not to actually heal it.

With this new redenomination, none of the serious economic problems that the country’s been going through for years would be solved: neither hyperinflation, nor devaluation, nor recession. Economists, financial analysts, and business leaders consulted by Caracas Chronicles for this analysis agree on that.

No Official Announcement

We know that there’s a redenomination coming our way because the Banking Superintendency (SUDEBAN), called representatives of private banks to talk about the subject earlier this year, but so far, they haven’t made any official announcements. In January, a banking source told El Diario that they were planning on “eliminating six zeroes and reducing the amount of cash. It doesn’t make sense to print dysfunctional money. We have to reset the bolivar. A large portion of the population will be included in the banking system through the Patria card.” 

“Not only has it become difficult to make payments because the amounts are too high, but printing such numbers is becoming difficult for the label makers,” former president of Consecomercio Felipe Capozzolo said recently.

But the only thing that’s happened so far is the introduction of three new bills to the set already in circulation; for 200,000; 500,000; and 1,000,000 bolívares soberanos (Bs.S.). Oh, and Maduro also showed some interest in making payment methods digital. “Physical money disappears and it’s quite an advantage for Venezuela,” he said in an interview broadcast by Telesur in late 2020 after he showed a graph that proved that only 3.4% of transactions were made in cash.

At the time, they had authorized national banks to open savings and checking accounts in foreign currency for users to be able to pay through them, with the official currency exchange rates by the Banco Central de Venezuela (BCV).

Where’s the BCV?

In May, leaders from the Consejo Nacional del Comercio y Servicios (Consecomercio) and the Federación de Cámaras y Asociaciones de Comercio y Producción de Venezuela (Fedecámaras), the two most important business guild organizations, requested the BCV to introduce a new currency redenomination, mostly to solve basic accounting problems and commercial, corporate, and financial operations of its members.

“Not only has it become difficult to make payments because the amounts are too high, but printing such numbers is becoming difficult for the label makers,” former president of Consecomercio Felipe Capozzolo said recently. He pointed out that people have been taking away three zeroes on their own at their stores, to make things easier for them, but this informal pragmatism is also causing problems and misunderstandings which could be solved with a currency redenomination.

“A redenomination leaves you with numbers that are more rational and easier to understand, but you also have to enable means of payment, as well as change, which affects the ease of trade on goods and services,” Capozzolo added.

According to Consecomercio, the new redenomination should be complemented by measures that would allow hyperinflation to be defeated and give back some stability to the bolivar, as well as purchasing power to Venezuelans. “Hyperinflation is a very serious problem, not only for those in trade; the most affected party is definitely the consumer since they are the ones suffering the pulverization of their income in bolivars and it is one of the highest taxes the citizens must pay. Besides, it generates a complex issue when handling the numbers that should certainly be tackled, but the main thing is fixing the root of the inflation problem,” Tiziana Polesel, the new president of Consecomercio, said to El Pitazo.

Without Structural Changes, There’s No Way Out

Economist Leonardo Buniak warns that it will be impossible to beat hyperinflation without structural economic reforms. “One of them’s giving the BCV absolute autonomy,” he explains. “To cease monetizing the fiscal deficit. In other words, the monetary financing of the negative balance of the fiscal deficit. Any monetary reform you apply without giving the Banco Central its autonomy back is just a face-lift.” It won’t solve anything.

In fact, those three new bills introduced a few months ago have already lost their value. The highest one, the 1,000,000 Bs.S. banknote, isn’t even worth a dollar.

The redenominations that took place in 2008 and 2018 didn’t strengthen the bolivar nor did they prevent its devaluation. In the chart, you’ll see that our currency’s devaluation after those two redenominations has been much higher compared to any of those that happened in the last century.

When Hugo Chávez took office for the first time, in February 1999, you could buy one American dollar for 573.8 bolivars. Today, the price of a dollar is 31,277,000,000,000 of those bolivars.

The official exchange rate is currently 3,127,700 bolívares soberanos per dollar, but that bolivar has eight zeroes less than the one in 1999 due to the two monetary redenominations done by the chavista and madurista administrations: Chávez took away three zeroes in 2008 and Maduro took five zeroes away in 2018.

According to Buniak “the bolívar fuerte was born weak and the bolívar soberano was born without sovereignty. Without room for it to trade with the dollar. None of the reforms was complemented with macroeconomic stabilization plans. They continued printing money to finance public spending with a clientelist nature, a never-ending source of inflation.” 

The economist believes that it’s necessary to move towards a formal dollarization process. However, this is a political decision that isn’t possible at the moment, given the economic and financial sanctions the authorities and the State are up against. In any case, a stabilization plan with a structural reform program is urgently needed, in terms of fiscal, monetary, exchange, financial, oil, etc. And the support of multilateral bodies is also required. Financial aid and technical support are needed to reactivate key activities and to refinance or restructure public debt, among other things. “There won’t be an economic change in Venezuela without political change,” the economist says.

The only benefits a currency redenomination could bring this year are in terms of operations and accounting. It would eliminate the current issues with the payment methods, trade accounting, and it would simplify presenting a business’s financial statements as well as operations in the cash registers and receipt printing, but there won’t be benefits when it comes to the bolivar’s credibility as a savings and reserve instrument.

A Currency in Extinction

“The bolivar is literally becoming extinct. Basically because of the lack of credibility of the issuing body,” Buniak points out. Consulting firm Ecoanalítica estimates that around 66% of commercial transactions in Venezuela are being carried out in foreign currency today, a number 12 times higher than what it was in 2012 when it was 5%.

The governing elite hasn’t been able to stop the transactional dollarization of the economy, nor the devaluation of the national currency. Venezuela’s minimum wage (10,000,000 Bs.S.) is $3.3 per month, according to the official exchange rate by the Banco Central de Venezuela, but to cover basic food expenses you need 803.3 million bolivars ($321.3) or 97 minimum wages, according to the Centro de Documentación y Análisis Social de la Federación Venezolana de Maestros (Cendas FVM). 

The official exchange rate given by the Banco Central de Venezuela went from 60 Bs.S. per dollar on August 20th, 2018 to 3,127,700 Bs.S. per dollar as of June 9th, 2021. This means a devaluation of over 99% since the last currency redenomination, in under three years.

Likely Scenario: the Third Quarter

“The Venezuelan State exceeded its capacity to create bolivars. Most of the country has to put up with the cash issue and that won’t be solved with the redenomination,” said economist and director of Ecoanalítica Asdrúbal Oliveros during an interview on Éxitos 99.9 FM. Oliveros said that banks and the corporate sector will have 90 days to adjust their systems to the new regulations.

Economists and financial analysts believe that it’s likely this new currency redenomination will be made official during the third quarter of 2021, because leaving it for the last quarter of the year, with the upcoming elections and the peak moment of commercial activity in the country, would be inconvenient.

When Hugo Chávez took office for the first time, in February 1999, you could buy one American dollar for 573.8 bolivars. Today, the price of a dollar is 31,277,000,000,000 of those bolivars.

“Banks are prepared to adjust their accounting systems and they’re waiting for the new monetary redenomination to be announced to take action,” said Claudio Rivas, secretary of the Federación de Trabajadores Bancarios y Afines (Fetrabanca).

Engineer, financial analyst, and director of Econométrica  Henkel García said that this redenomination will be even less useful than the previous ones because this time we have a de facto dollarization and the use of foreign currency is much more widespread in economic activities. “People are getting by with dollars. And what little is made in bolivars, is very uncomfortable, especially for those businesses who are receiving bolivars because the amounts they have to deal with are very high. This process will benefit them, it will make things easier, but it won’t bring significant improvement to the Venezuelan economy.  Doing that would take a lot more than just a currency redenomination,” García points out.

For Econométrica, it would be sensible and logical to have the new redenomination accompanied by clear and efficient measures to reduce inflation. It’s estimated that the Venezuelan economy will continue to contract in 2021, adding another year to the ongoing eight in recession. Today, the country produces 80% less than what was being produced in 2013, when Maduro became president.

Three Years or Less?

In only three years, we have to go ahead with another redenomination because inflation wasn’t addressed. Although, solving inflation isn’t an easy task given the exhausted state of the Venezuelan economy and the clear limitations the current powers that be have in giving progress back to the country.

“In order to enforce an effective anti-inflation policy, not only does the monetary side have to be tackled, as they have mostly tried with the Rules on Legal Reserve, but they have to handle people’s expectations, and that also depends greatly on the confidence they might have on those bodies who draft economic policies. Production and productivity would increase if trust is gained through adequate policies, but as long as that doesn’t happen, it’s impossible,” García believes.

A new set of banknotes could have an even shorter validity period than those from 2018 (one or two years, instead of three, for example), if the current aggressive inflation cycle isn’t stopped or at least decreased.

When asked about the number of zeroes the authorities will take away from the bolivar with the new currency redenomination, the director of Econométrica said that the exact number is unknown, and it’s not necessarily six, as most people are assuming.

“The logical thing would be to take six because it would allow for longer validity, but if they do that, then bus fares will cost 0.3 Bs.S. and how can you pay for that? You would need to come up with fraction coins to make it operational,” he explains.

It’s also unknown if this process will come with a new set of bills, or if the current ones will still be in use, even if they take away the zeroes.

“We have to see how they end up doing it. But that could be an option,” García says.