Economy

Venezuela's cosmetic subtraction of zeros from the national currency

Nicolás Maduro's government cuts zeros and renames the national currency in an attempt to make up for the hailstorm of failures in the economy

Ariel Palacios

31.Aug.2021 19:10 BRT
UPDATED 01.Sep.2021 13:01 BRT

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If you’re sad, add more lipstick and attack.”

Many governments throughout history have acted on the economy as if they were following this advice given in the 1920s by the French fashion emblem, Coco Chanel. If the country’s economy was going badly and the currency was devaluing horribly, the way out was to appeal to some makeup. A kind of financial cosmetic. Transform banknotes that had a scary amount of zeros stamped on them into banknotes with fewer digits, implementing the cutting of zeros on the money.

Let’s imagine a country. Ruritania. Currency, the Ruritanian crown. Due to the inflation generated by the chaotic economic policy of King Rudolf II, it was necessary to create a 100,000 kroner note (the highest note before was the 10,000). But what do you do if – some time later – this banknote is no longer worth anything? Well, financial cosmetics are applied and three zeros are removed from that banknote, which becomes a less scary banknote of only 100 kroner.

The classic cut of zeros, all over the planet, is three digits. However, by order of Venezuela’s autocrat, Nicolás Maduro, starting October 1 the Venezuelan national currency will be cut by six zeros. This will be a monetary guillotine that has only occurred once before in the history of Latin America (or, rather, the entire American continent) – the lone precedent was in the chaotic Peru of 1991.

In this way, the 1 million bolivar banknote will become a 1 bolivar banknote. Before that, Nicolás Maduro had already made another cut, in 2018, when five zeros were eliminated from the national currency. And, it is worth remembering, in 2008 the then-president Hugo Chávez (1999-2013) had already extirpated another three zeros.

That is, due to escalating inflation, in just 13 years the Venezuelan currency lost 14 zeros. More than one zero per year. This means that 100,000,000,000,000 bolivars in 2008 would be equivalent to 1 digital bolivar today. According to the Venezuelan Central Bank, the cut of zeros aims to “facilitate” the use of the currency, “bringing it to a simpler monetary scale.”

The country has had several phases of very elevated inflation throughout its history. But since Maduro took office in 2013, after the death of Chávez, the situation has gotten out of control: Venezuela has been in uninterrupted hyperinflation for 44 months and has accumulated eight years of recession. In 2020, Venezuela had hyperinflation of 2,959.8% (although economists critical of the regime indicate that the real rate was 3,713%). In 2019 it had been 9,585%. It is the highest inflation on the planet.

Add to this the poverty that plagues most of the inhabitants who have stayed in the country. Due to the chronic crisis, almost 6 million Venezuelans have left in exodus. The flow has only stopped in the last year and a half because of the pandemic, which led to the closing of borders.

Demonstration in downtown Caracas against President Nicolás Maduro in 2019. Photo: Fotos Públicas

Defenders of the regime blame economic sanctions by the United States as the cause of all of Venezuela’s ills. But in reality, the government of President Barack Obama applied sanctions against members of the regime (and not against the country’s economy), such as embargoes of the Chavista leadership’s bank accounts in American banks. Sanctions against the Venezuelan economy only began in 2018, under Donald Trump’s presidency. The Venezuelan debacle precedes the sanctions (and with them, it has worsened).

Furthermore, Maduro’s government is unable to print banknotes at the necessary speed. Paper money is scarce, which causes long waiting lines in the banks. The majority of the population has to use electronic money (with the complication of poor internet connections and power blackouts), while another portion has to resort to the dollar.

In July, Venezuelan inflation was 19%, according to the Venezuelan Finance Observatory NGO. According to the entity, the accumulated inflation since the beginning of the year is 415.7%.

The minimum wage in Venezuela is 7 million bolivars (around $1.70). The Venezuelan state provides a food subsidy that adds a value of 15.3 million bolivars, something like $3.60. But according to the Venezuelan Observatory of Finance, the basic food in July for a family of five had a cost equivalent to $303.

“Rebranding”

Besides eliminating zeros, financial cosmetics comes along with “rebranding” the money. Like a political party, which periodically, when its members are devalued in the eyes of public opinion, changes its name and acronym to create the impression that it is a better product (but deep down it remains the same as always).

This also occurs with currencies. In Brazil, the “cruzeiro” became the “cruzado” and then the “real”. In Venezuela, the currency has the surname of the national hero, Simon Bolivar. So, since it would have been heresy to change the name of the Venezuelan national currency, the solution was to add an additional denomination. Thus, the “bolivar” became “strong bolivar” by order of Chávez in 2008. And in 2018, Maduro bombastically renamed it the “sovereign bolivar.” Now Maduro renames his own renaming it the “digital bolivar.”

It’s like a kind of marketing strategy to try, desperately, to stimulate the confidence of the citizens in the supposed “new currency”.

“Café con Leche index”

Years ago, the Bloomberg agency, faced with the non-disclosure of Venezuela’s official inflation index, decided to take as a reference the price of something consumed daily by Venezuelans: a cup of latte in the bakeries of Caracas. And so the “Bloomberg Café con Leche Index” was born. The Big Mac index would have been impossible as a parameter in Venezuela since hamburger meat is a food that the vast majority of Venezuelans cannot afford.

In April 2018, a cup of latte in Caracas cost 190,000 strong bolivars. By July, it had risen to 1,400,000. And in the first days of August, it reached 2,000,000.

In August of that year, Maduro set up the “sovereign bolivar” and implemented another cut of zeros, five this time. This made a cup of latte worth 20 sovereigns bolivars. However, inflation continued its escalation. The price of the latte quickly rose to 70 bolivars in October and 800 bolivars in January 2019. In August 2019, a year after the zeros were cut, the same cup of latte cost 9,000 bolivars.

And so it was. A few days ago, on August 25, 2021, the cup of latte cost a stratospheric 7,831,138 sovereigns bolivars. That’s right, 7.8 million sovereigns bolivars to sip a prosaic cup of latte.

If Maduro had never cut the five zeros, the price would be 783.113.800.000 (783 billion strong bolivars). And if Chávez had not cut his 3 zeros in 2008, the price of the cup would be 783.113.800.000.000 (783 trillion) bolivars.

What about the dollar?

In 1973, when the Venezuelan government established free exchange, the dollar was quoted at 4.30 bolivars. In January 1999, a month before Chávez took office, the dollar was quoted at 573.86 bolivars. But in 2018, on the eve of the zeros cut starring Maduro, the dollar on the parallel market was at 5,921,486.23 bolivars (that’s right, 5.9 million).

However, thanks to the cut, the quotation stood at 59.21 sovereigns bolivars in 2018. Three years later, the quotation of the American currency has returned to the million and stands at 4,040,784 sovereigns bolivars.

Economist Tamara Herrera maintains that if the regime does not implement concrete measures to combat inflation, in three or four years Maduro would implement a new zeros cut.

(Translated by Carolina Pompeo)