Nicolas Maduro announced that new Venezuelan bolivar will be pegged to Petro. 1 Petro will be equal to 60 dollars, to 360,000 old bolivars or to 3,600 new bolivars, so the redenomination ratio will be 1:1000.
The government promised to set up kiosks across the country to make the exchange process easier. However, the new rate devalues the existing currency by 96%, which led to panic. Now all the shops in Venezuela are closed, and all shelves are empty.
That's a harsh decision, but Venezuela has to come through this. Its economy is in a death spiral, and this is the only reasonable solution to end it. Venezuela has an incompetent government, but it's not only Maduro's fault. Many factors came into play:
- Heavy dependence on oil prices. 95% of the Venezuelan budget is based on oil export. Everything was more or less balanced when prices were high. But after the insane drop of oil prices in 2014, this source of income was gone.
- Economic policies. Maduro's predecessor, Hugo Chávez, was a socialist, and he set many policies, which were a heavy burden for the economy. The price regulations on food made it more affordable for poor citizens because Chávez set the floor for food pricing. It backlashed later when many food producers went bankrupt, unable to cover production cost and make profit. Initially, it was compensated with food import, but when oil prices fell, the government simply didn’t have money to pay for it, which led to shortages.
- Currency exchange control. Chávez set the artificial exchange rate for bolivar, but it doesn’t work on open market. You have to keep buying your currency and selling foreign currency to keep the ratio until you go bankrupt. The exactly same situation happened with Russia in 1998 — declining oil, fixed exchange rate, the inability to implement any efficient reforms, all reserves were spent in attempt to support the ruble. It ended with rouble devaluation, redenomination and Russian default. It was painful for its economy, but it worked. 20 years later this piece is played in Venezuela. In addition, this gives a boost to black currency market, with its own exchange rates. And don’t forget how popular cryptocurrencies are in Venezuela, that’s another side effect of fixed exchange rate.
- American sanctions on debt. The situation could be less grave if Venezuela could borrow money from somewhere. But it can’t, because America imposed sanctions on Venezuela, restricting its sale of debt.
- Ineffective government. Any government, who know the basics of economy, would have done something at this point. But all they did — printed more worthless money, driving hyperinflation higher, up to 1,000,000%.
The combination of these unfortunate factors led to this crisis and it can’t be resolved easily.
The redenomination is the smartest move that could have done this government. Cut the zeroes, stop printing money endlessly.
The tricky part here is the use of Petro and the announced exchange rate. Does it mean that the Venezuelan government didn’t learn its lesson? The exchange rate should be set by markets, not by the government, or the inflation will continue to grow. There is another question: will the number of tokens be fixed or not? The whole Petro concept is shady, will it have any real value, or it is just another attempt to raise money by a failing regime? It’s not traded on exchanges, and nobody uses it yet.
This first step is in the right direction, and it can help decrease the chaos in monetary policy if everything will be done right. But does Maduro have the competency to make it right? Will Petro help Venezuela overcome sanctions, and become the first country with governmental-issued widely used cryptocurrency? We have yet to see. But if that happens, we’ll see all pros and cons of using crypto in real life on the governmental level.