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Thursday, 29 October, 2020

Keys | Hyperinflation killed the purchasing power in Venezuela

The two monetary reconversions since 2008 not only did not stop inflation but caused an acceleration on it.

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By Lenys Vargas.

In 2008, the government of Hugo Chávez carried out the first monetary reconversion in Venezuelan history, to fight a budding but persistent two-digit inflation rate. Bs 1,000 were to become Bs 1, which was called El Bolivar Fuerte, (the strong Bolivar). Chavez spent the last months of his life advertising.

In 2008, the Bs 100 Bolivar Fuerte bill was equivalent to about $20. In 2020, Maduro is discussing the issuing of a Bs 100,000 Soberano will that will be equivalent to $0,23.

However, inflation persisted, and Chávez died at some point in late 2012. Later, hyperinflation got declared in late 2017. Then, Maduro carried out a second and even more ambitious reconversion in 2018. The Bs Fuertes 100,000 were to become one (1) Bolivares Soberanos (the sovereign Bolivar), eliminating five zeroes.

In November 2020, Venezuela will enter its fourth year of hyperinflation. Chávez and Maduro eliminated eight zeroes in ten years. Now, Venezuela is the only country in the world with a case of hyperinflation, one of the longest in recorded economic history.

The minimum monthly salary in the South American country is equivalent to less than $.090. Teachers refuse to return to classrooms. Doctors are on semi-permanent strike, and even the police and military Maduro has tried to shield from the ravages of a bad economy have migrated in droves.

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And all of this took place as Venezuela experienced the highest oil prices in history.

The 2008 Bolivar Fuerte

In 2005, former president Hugo Chávez, by an Enabling Law approved by the National Assembly, issued Decree No. 5,229 to carry out a monetary reconversion that entered into effect on January 1, 2008, when Official Gazette No. 38,638 established that the new currency would be called the Bolivar Fuerte.

At the end of November 2007, the government showed the bills and coins of the new currency for the first time. The pre-conversion system and the bolívar Fuerte co-existed for three years in the Venezuelan economy.

In 2007, before the beginning of the monetary reconversion, inflation closed at 22.5%. In October 2017, inflation exceeded 50% a month for the first time in history, thus becoming hyperinflation, a trend that has continued to this date and during which Venezuelans have experienced monthly inflation rates of 150% and more. Six consecutive months of monthly rates below 50% are necessary before you pronounce hyperinflation over, according to analysts.

When the decree became a reality, in 2008, the official exchange rate went from Bs 4,300 to Bs 4.30 per dollar.

When the conversion began, the new monetary cone brought with it six bills and seven coins. By that time, the coin with the highest value was the 100 Bolivares Fuertes, equivalent to more than $20 at the official rate.

From strong to the sovereign

On March 22, 2018, the Maduro regime announced the elimination of three zeros from the currency as well as the circulation of a new monetary cone in June of that same year. “The monetary reconversion is a fact,” said the Maduro shortly after the announcement.

In the end, five zeroes got knocked out. Maduro had turned the Fuerte coin of Chávez into his sovereign. But inflation had already become hyperinflation. At that time, he explained that Venezuela was not to be dollarizing and that they were going to “defend the Bolivar and the Petro”, to strengthen the economy.

Reconversion postponed

In July 2018, the new system got postponed to August of that year due to hyperinflation in the country. On August 20, 2018, the conversion finally began, removing five zeros from the currency. Venezuela joined the group of Latin American countries with at least two reconversions: Argentina, Bolivia, Brazil, Chile, Peru, and Uruguay. The price of the parallel dollar that day was 59.21.

Bolivar bills are scarce

The Central Bank could not print fast enough: violent riots broke out as paper currency became scarce in 2017. In an interview with EFE, economist Guillermo Arcay summarized the current Venezuelan situation in one sentence: “People went from laughing at Venezuela for being a country with many zeros on its bills to being a country where there are simply no bills.”

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