Caracas, Venezuela: Venezuela President Nicolas Maduro announced on Friday night the plan to tie the national currency’s exchange rate to the state-launched cryptocurrency petro. The country’s new and increase minimum wage will also be anchored to the petro.
“The new bolivar will be issued on August 20 and will be tied to the petro [cryptocurrency]… We will also knock five zeros off the bolivar,” Maduro said on national television.
Maduro said the petro would be valued at $60 or 3,600 sovereign bolivars after the redenomination planned for August 20 slashes five zeroes off the national currency. The minimum wage will be set at half that, 1,800 sovereign bolivars.
“They’ve dollarized our prices. I am petrolizing salaries and petrolizing prices,” Maduro said in a Friday televised address. “We are going to convert the petro into the reference that pegs the entire economy’s movements.”
Maduro said he intends to create a unified exchange rate across the country. The new petro-to-dollar-to-bolivar rate would bring the official price of one US dollar to six million (or 60 post-redenomination), which is about the same as the current black market exchange rate and about 25 times worse than the official rate.
The value added tax will rise 4 percentage points and officials will end some gasoline subsidies, saving the government $10 billion a year, Maduro said, without providing more details. The central bank will increase the frequency of foreign exchange auctions to three and eventually five days a week.
Earlier, Maduro said that starting on August 20 the petro would be considered a national monetary and accounting unit along with the bolivar, and serve as reference point for all transactions with the state oil company Petróleos de Venezuela (PDVSA).
Venezuelan President also vowed earlier he would raise the minimal wage to 1,800 new bolivars from the current 30 redenominated bolivars on August 20, ahead of Saturday’s transition to petro and the slimmed-down bolivar.
Meanwhile, the annual inflation rate in Venezuela reached 82,766 percent in July.
“The inflation rate in July was 125 percent, accumulated inflation – 10,664.7 percent, annual inflation – 82,766 percent, daily inflation – 2.7 percent. This is why Venezuelans are protesting on the streets. There is no salary or pay raise, as they are taken away by hyperinflation,” Venezuelan parliament Finance Commission Rafael Guzman wrote on Twitter.
Venezuela’s economy is in shambles, with hyperinflation heading for 1,000,000 percent by end of year, according to the IMF, and thousands of people fleeing poverty to nearby countries. Over the past year, the US has imposed increasingly restrictive sanctions on Venezuela’s finances and debt issuance, aiming to drive ‘dictator’ Maduro out of power. The US remains Venezuela’s top oil importer, however, and Washington has been reluctant to apply any direct penalties to the country’s oil industry.
The economic situation in the Latin American country has deteriorated due to the deficit of goods, accelerating inflation, a fall in the government’s revenues driven by dropping oil and gas prices, as well as mass protests in the country.
In May, US President Donald Trump signed an order prohibiting US citizens and legal bodies from making any transactions involving debts tied to the Venezuelan government debt as well as preventing Venezuelan officials from selling equity in any government-owned entity, including PDVSA, as part of its tightened sanctions on the country’s government. This step followed Maduro’s re-election, which Washington has criticized as unfair.
The Venezuelan government took over currency controls in the country in 2003. The old bolivars will be phased out starting this weekend, with the new currency being pegged to petro.
The new currency notes with five fewer zeroes come into circulation on Monday, which was made a public holiday to allow people to get used to the new currency.
Old and new notes will coexist for an unspecified period of time.
Maduro declared Aug. 20, the day of the currency rollout, a national holiday. The country will use two units of account, the sovereign bolivar and the nation’s Petro cryptocurrency, which will be the basis for the new wage system and price system, he said.
The central bank will publish the bolivar rate daily, Maduro said.
Maduro announced last month that he was postponing the currency rollout and would lop five, not three, zeroes off the currency as the International Monetary Fund sees inflation reaching 1 million percent by the end of the year.
Venezuela has the world’s largest proven oil reserves and oil exports account for about 95 percent of the country’s export earnings.
When world oil prices dropped sharply in 2014, the Venezuelan economy began to struggle, with hyperinflation exacerbated by the government’s willingness to print extra money.
The currency has fallen 99.99 percent against the dollar on the black market since Maduro came to power in April 2013.
It’s not clear how the shock measures announced by Maduro will sit with one of his key allies: the military. Top ranking generals have been handed the keys to ministries, the state-run oil company and the lucrative business of food imports. Myriad exchange rates created juicy arbitrage opportunities that enriched many close associates of the state.
Clearly this will hit Maduro’s popularity, but power is being sustained with bullets and not with votes. As long as the military continues to have access to lucrative businesses it will continue to grant support to the government.
The opposition, a fragmented group of parties whose leaders are either in hiding or in jail, called for protests against the measures. Several labor unions also called for a 24-hour national strike.
Many private companies, already dealing with hyperinflation, years of brain drain, price controls and threats of seizure, now must deal with even faster inflation and mandatory wage hikes. It’s also possible that the exodus of Venezuelans to other countries will increase, even as Ecuador and Peru announced entry restrictions and tensions flared along the border with Brazil.
Many Venezuelans are choosing to leave their country where a recession is now entering its fifth year. According to United Nations, an estimated 2.3 million Venezuelans had fled the country as of June, mainly to Colombia, Ecuador, Peru and Brazil. Ecuador and Peru imposed passport requirements for Venezuelan migrants fleeing poverty and violence, leaving hundreds stranded at the Colombia-Ecuador border. Venezuelan passports are difficult to get and people were previously allowed through with ID cards.
Last week the Pentagon said it is preparing to dispatch a hospital ship to Colombia to assist with the refugee crisis. The ship will depart from Norfolk, Virginia, and arrive in the fall. “It is absolutely a humanitarian mission,” Defense Secretary James Mattis said.
That may not be soon enough to help countries deal with the volume of refugees. Ecuador declared a state of emergency earlier this month. In Brazil, Col. Hilel Zanatta, who heads the military task force that is managing the refugee process in Pacaraima, said the border there had reopened Sunday after what he called “a very tense day.”
The symbolism of announcing the drastic measures on a Friday night wasn’t lost on many Venezuelans. In 1983, President Luis Herrera Campins devalued the bolivar for the first time in 22 years after oil prices crashed. The day became to be known locally as “Black Friday.”
When in 1989 Venezuela raised gasoline costs, lifted foreign-exchange controls and let the currency plunge, prices soared 21 percent in one month alone, leading to riots known as the “Caracazo” that killed hundreds and eventually paved the way for Chavez’s rise to power.