Venezuelans are bracing for Christmas without cash after the country’s highest denomination banknote was withdrawn from circulation with new larger bills not due until January, as many fear that the country is spiralling towards hyperinflation.
Embattled President Nicolás Maduro this week announced plans to scrap the ubiquitous 100 bolívar bill, which makes up about half the country’s banknotes but is increasingly worthless as annual inflation is forecast to top 1,600 per cent next year.
The measure risks leaving ordinary Venezuelans cashless in the run-up to Christmas. It created stampedes by citizens already wrestling with a plummeting currency and ravaging food scarcities to deposit sackloads of bills. On Friday there were protests and looting in parts of the country.
The plan, which the government insists is necessary to fight currency hoarders and counter an “economic war”, is to replace the old money with new high denomination notes, including 20,000 bolívar bills. Flashing the new money during a televised speech on Thursday, the deadline to do away with the smaller notes, Mr Maduro said some fresh currency was already being distributed and would be fully in circulation by January.
But as of Friday the new notes were yet to been seen by ordinary Venezuelans and cash machines and bank tellers lacked currency. “This weekend, many Venezuelans won’t have the means to pay for their food and basic goods, all because of a deranged measure,” said Henkel García, an economist at Econométrica in Caracas. Further hurting those who live in isolated areas and mainly rely on cash, Mr Maduro said citizens would now have until December 20 to turn in 100-bolívar bills at offices of the central bank.
“This is crazy, Christmas is here and now we have to deal with this madness,” said Maritza Pacheco, 59, who said she had been waiting for hours outside the state-run Banco de Venezuela in eastern Caracas to swap her scrapped bills. “No other country would impose such a measure in such short notice. This could only happen in Venezuela.”
Mr Maduro, who has also shut the border with Colombia and Brazil, insists that getting rid of the smaller bills was necessary to fight the smuggling “mafias” that he said sought to destabilise the nation.
The currency move echoes the shock decision last month by India’s prime minister Narendra Modi to scrap 500 and 1,000 rupee notes as part of a crackdown on “black money”, which has posed a huge challenge to India’s economy by removing about 86 per cent of all circulating cash.
However, India’s problems are nowhere near as bad as Venezuela’s, which is suffering a lethal combination of the world’s deepest recession and fastest inflation. The International Monetary Fund has said 2017 inflation will be 1,660 per cent.
“Venezuela, welcome to the record books,” wrote Steve Hanke, a hyperinflation expert with the Cato Institute think-tank and professor at Johns Hopkins University, adding that the country’s monthly inflation was above 50 per cent.
“You have now entered the inglorious sphere of hyperinflation. It is a world of economic chaos, wrenching poverty and death. Its purveyors should be incarcerated, and the keys should be thrown away.”
Christmas is here and we have to deal with this madness. No other country would impose such a measure in such short notice. This could only happen in Venezuela.
But Francisco Rodríguez, chief economist at Torino Capital, a US-based investment bank, disagreed with this doomsday scenario, saying the 60 per cent slump in the value of the bolívar in November was in part due to “a sizeable expansion in liquidity and excess bank reserves associated with the payment of year-end bonuses”.
“We see these increases in liquidity as unlikely to be repeated in the near term, and expect the currency to stabilise,” Mr Rodríguez added. The latest government moves have, at least temporarily, abruptly halted the crash of the bolívar in the parallel market.
The introduction of the bills is aimed at alleviating the runaway inflation. Caracas-based consultancy Ecoanalítica said the range of notes reflected inflation of 17,011 per cent since the older notes were first launched in 2008.
Mr Hanke dismissed the move, saying Mr Maduro’s remedy would do nothing to fix the underlying problems causing Venezuela’s economic implosion. “When inflation goes to the moon, you physically cannot re-denominate bills fast enough — you can only add zeroes to notes so quickly,” he said.
The Venezuelan mathematician and pollster Luis Vicente León has a different view, saying: “This is not about putting or removing zeros from the currency, but to rescue the only thing that backs it — confidence.”
José Toro Hardy, a Venezuelan economist, asked: “The US dollar bills have a motto: ‘In God we trust’. In who could we trust when it comes to the bolívar bills?”
Those hoping the rampant inflation may hasten the demise of Mr Maduro’s government could be in for disappointment.
Galloping prices did speed the departure of the democratic government of Argentina’s Raúl Alfonsín in 1989. But Robert Mugabe, who has ruled Zimbabwe since independence from Britain in 1980, held on to power even after hyperinflation crippled the economy of the southern African nation in 2008-09. The comparison has led some Venezuelans to wryly refer to the country, which has larger crude reserves than Saudi Arabia, as “Venebabwe” or “Zimbazuela”.
Yet as Mr Maduro’s increasingly dictatorial government controls most of the country’s main institutions, including the supreme court, the electoral council and the armed forces, one Venezuelan private sector businessman was sceptical about whether the latest economic crisis would lead to a change of direction.
“Hyperinflation need not necessarily bring down this government,” the businessman said. “Venezuela is a petrostate with some very special characteristics . . . For one, all government revenues are in dollars and that’s what counts.”
Additional reporting by John Paul Rathbone