Analysis

'This is a mockery': Venezuela's poor hit hardest by currency chaos

Venezuela’s leaders are not widely regarded as economic wise men. Indeed, their latest stroke — based in part on a bizarre conspiracy theory — was to outlaw most of the nation’s cash before getting around to introducing new banknotes.

Leaders cite conspiracy theory while banning the country's most-used banknote

A street vendor counts bolivar notes near Venezuela's Central Bank in Caracas on Friday. (Marco Bello/Reuters)
After leading the nation with the world's largest oil reserves into turmoil, food shortages and hyperinflation, Venezuela's socialist leaders are not widely regarded as economic wise men.

Indeed, their latest stroke — based in part on a bizarre conspiracy theory — was to outlaw most of the nation's cash before getting around to introducing new banknotes.

The surprise move, announced last Sunday, turned Venezuela into a largely cashless society just before Christmas, with people struggling to pay for goods with old banknotes that store owners no longer accept.

Frustrated Venezuelans have blocked streets and looted stores in six cities this week, leading to 32 arrests.

"What the government is doing is completely irrational," said Caracas economist Carlos Alvarez.

The troubles began when President Nicolas Maduro announced that the 100-bolivar banknote would be taken out of circulation in an effort to stabilize the economy and disrupt black-marketeers​.

Worth about two Canadian cents on the black market, the 100-bolivar bill is Venezuela's highest denomination banknote and makes up about 77 per cent of Venezuela's cash. Paying for almost anything in cash — from a pair of jeans to lunch at McDonald's — requires lugging around thick wads of bolivars.

A man burns a 100-bolivar bill during a protest in El Pinal, Venezuela, on Friday. (Carlos Eduardo Ramirez/Reuters)

But rather than gradually ditching the old bills over a period of months, Maduro outlawed them starting Wednesday and gave Venezuelans until Monday (Dec. 19) to deposit them in their bank accounts or exchange them for newly minted 100-bolivar coins and a new set of higher-denomination bills.

The catch is that this new currency, which is to include a 20,000-bolivar note, has yet to be brought into circulation despite promises that it would be in the hands of shoppers this week. Even ATMs at state-run banks continue to distribute the old currency.

"I don't get the joke," Caracas office worker Yarelis Carrero told the AFP news agency. "When you withdraw cash at the ATMs, they give you 100-bolivar bills. And you can't get the new ones inside the bank."

Vast conspiracy, government says

Even more outlandish is one of the government's explanations for the currency switch.

At a news conference Tuesday, Interior Minister Nestor Reverol used charts and photographs to unveil what he called a vast conspiracy involving criminal gangs, foreign NGOs and the U.S. government. He claimed these groups are trying to strangle Venezuela's economy and overthrow its government by hoarding millions of 100-bolivar bills in warehouses in Poland, Ukraine, the Czech Republic and Germany.

Upon the fall of the Maduro government, Reverol claimed, the U.S. Treasury Department would pay currency smugglers about one U.S. dollar for every 100-bolivar note they had spirited out of the country.
Venezuela's Interior and Justice Minister Nestor Reverol speaks during a news conference in Caracas on Dec. 12. (Ueslei Marcelino/Reuters)

"They are trying to asphyxiate our nation," said Reverol, who was indicted in August by a U.S. district court in New York on drug trafficking charges.

Analysts scoffed at Reverol's account, saying it makes little sense to hoard one of the fastest depreciating currencies in the world. However, Venezuelan officials regularly blame the country's problems on the U.S. government, political opponents and outsiders, whom they accuse of waging an "economic war" against the Maduro government.

Reining in smugglers

Some experts believe the true target of the new currency policy is the Colombian Mafia, which uses bolivars to buy cheap, price-controlled food in Venezuela and then smuggles it back across the border to sell for huge profits — aggravating food shortages in Venezuela. As part of the crackdown, Maduro has temporarily closed Venezuela's land borders with Colombia and Brazil.
A cashier counts Venezuelan bolivar notes inside a restaurant in downtown Caracas on Dec. 12. (Ueslei Marcelino/Reuters)

"This is a big effort we're doing to tackle so many evils and tricks. We're burning the hands of the Mafia," Maduro said in a Thursday speech.

Alvarez, the Caracas economist, said the move may be aimed at combating inflation and black-market currency traders amid a historic meltdown of the bolivar. In November, the bolivar lost 55 per cent of its value. This month, researchers at Johns Hopkins University announced that Venezuela had become the world's 57th known case of hyperinflation since 1795.

But fighting such ills by eliminating more than three-quarters of the country's currency nearly overnight "is the economic equivalent of trying to get rid of a mosquito on your forehead with a flamethrower," wrote Venezuelan political analyst and blogger Francisco Toro.
People line up to withdraw cash from an automated teller machine outside a Banco de Venezuela branch in Caracas on Dec. 12. (Marco Bello/Reuters)

What's more, fresh banknotes will not necessarily cure inflation. Venezuela tried the same thing in 2007 and, in a bit of wishful thinking, rechristened the bolivar the "strong bolivar." But it quickly weakened against the U.S. dollar.

Opposition Congressman Jose Guerra said that until the government reduces spending, scraps price and currency controls and other socialist policies, the economy will remain in a free fall. "We need to defend our local currency by lowering our fiscal deficit and inflation, not by withdrawing bills from circulation," he said.

Poor left adrift

Ironically, those hardest hit by the currency chaos are poor and working-class people who, according to the government, make up its base of support.

About one-third of the Venezuelan population — mostly the poor — lack bank accounts. Thus, they are unable to use debit and credit cards to purchase food and other staples amid the cash shortage.

As he took part in a protest outside a bank in the western town of El Pinal, bus driver Richard Montilva told Reuters: "This is a mockery."

About the Author

John Otis

John Otis is a U.S. journalist who reports from South America. He is the author of the 2010 book Law of the Jungle about Colombia's guerrilla war.