Venezuela’s solutions for its economic crisis: a new currency, minimum wage hike by 3000%

Banks will close Monday as they prepare to release the ``sovereign bolivar,'' the new currency printed with five fewer zeroes in a bid to tame soaring inflation.

By: AP | Caracas | Updated: August 20, 2018 12:53:36 pm

People check prices of fruits and vegetables in a street market in Caracas. (Reuters image)

Venezuelan shopkeepers and consumers nervously awaited the launch of dramatic reforms announced by President Nicolas Maduro to rescue a downward-spiraling economy, including a new currency and a more-than-3,000 percent hike in the minimum wage.

The changes start to kick in Monday with the introduction of a currency that lops five zeros off the country’s fast-depreciating bills. Maduro says he’ll also raise gasoline prices to international levels – a combination of measures critics say will only make things worse.

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Opposition leaders seized on tension among residents, calling for a nationwide strike and protest Tuesday. They hope to draw masses into the streets against Maduro’s socialist ruling party – something they’ve failed to do in over a year.

Banks will close Monday as they prepare to release the “sovereign bolivar,” the new currency printed with five fewer zeroes in a bid to tame soaring inflation. Maduro’s government says that in late-September, the world’s cheapest gas will rise to international levels to curtail rampant smuggling across borders.

Maduro said Friday that the minimum wage will also soon jump dramatically.

Economists say the package of measures is likely to accelerate hyperinflation rather than address its core economic troubles, like oil production plunging to levels last seen in 1947.

“The bolivar’s redenomination will be like going under the knife of one of Caracas’ famed plastic surgeons,” Johns Hopkins University economist Steve Hanke wrote on http://www.forbes.com . “Appearances change, but, in reality, nothing changes. That’s what’s in store for the bolivar: a face-lift.”

Lines on Saturday were longer than normal at a Caracas street market, where people stocked up due to uncertainty about what will come this week. Many were frustrated by bank card readers that were slow to register or that failed altogether, forcing some to leave their goods walking away empty-handed.

“You have to be patient,” a shop worker selling grains told a growing line of customers. Many other stores remained closed, uncertain what prices to set for their goods.

Venezuela was once among Latin America’s most prosperous nations, holding the world’s largest proven oil reserves, but a recent fall in oil prices accompanied by corruption and mismanagement under two decades of socialist rule have left the economy in a historic economic and political crisis.

Inflation this year could top 1 million percent, according to economists at the International Monetary Fund.

Inflation has made it difficult to find paper money. The largest bill under the outgoing cash system was the 100,000-bolivar note, equal to less than 3 cents on the commonly used black market exchange rate. A cup of coffee cost more than 2 million bolivars.

The new paper bills will have two coins and paper denominations ranging from 2 up to 500. The lowest represents the buying power of 200,000 current bolivars while the highest stands in for 50 million.

The old and new currencies will remain in circulation together during a transitional period.

The government made a similar move in 2008, when then-President Hugo Chavez issued new currency that eliminated three zeros to combat soaring inflation.

Maduro also announced Friday a more-than-3,000 percent leap in the minimum wage, bringing it up to around $30 at the widely used black market rate. It’s unclear when the change will start.

Adding to confusion, Maduro said he wants to peg wages, prices and pensions to the petro – a cryptocurrency announced in February, but which has yet to start circulating. He said one petro would equal $60, with the goal of moving toward a single floating exchange rate in the future tied to the digital currency.

“The next few days will be very confusing for both consumers and the private sector, especially commercial retailers,” said Asdrubal Oliveros, director of Caracas-based Ecoanalitica. “It’s a chaotic scenario.”

A coalition of opposition leaders and union officials said Sunday they are calling for a strike and protest on Tuesday.

“The measures announced on Friday are not any economic recovery plan for the country,” opposition leader Andres Velasquez said. “On the contrary, they represent more hunger, more ruin, more poverty, more suffering, more pain, more inflation, more deterioration of the economy.”

Business owners say they fear the sudden wage hike would make them unable to pay employees without sharply increasing prices, despite Maduro’s call to help small and mid-sized businesses for the first three months.

Jesus Pacheco, who employs six people at his butcher shop in Caracas, said Sunday that he may have no option but to let go some of his employees to stay in business. He expects the slaughterhouse prices will go up for him.

“You’re going to buy products, and they’re more expensive,” Pacheco said. “We are going to have to fire employees. What else can you do?”