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Maduro's botched bolivar
Published in The Saudi Gazette on 20 - 12 - 2016

THE Indian government's withdrawal Rs500 and Rs1,000 banknotes may have been controversial but at least it was part of a carefully worked-out plan, even if some elements did not work out as expected. By contrast the behavior of Venezuela's Nicolas Maduro in withdrawing the 100 bolivar note seems extremely ill-considered not least because, unlike India, the Venezuelan economy is in free fall.
Inflation is rising rapidly through 500 percent and is expected to hit 1600 percent at some time in the coming year — by which point the price spiral is likely to be out of control. An indication of how bad the situation has become is that the 100 bolivar note — the country's highest denomination — it is currently worth around 43 US cents.
It has been clear that Venezuela needed some for of currency reform. Banknotes could be revalued or overprinted with new denominations. Or a government could elect to issue completely new bills. The danger with the last course is that shiny new banknotes do not necessary bring confidence and stability. They can instead become symbols of a currency's collapse. In Weimar Germany the printing presses were rushing to keep up with the demand for newer higher denomination notes. As face values of individual bills passed through the billions, hyperinflation had taken off. Not only were people pushing wheelbarrows loaded with banknotes to buy just few loaves of bread, but the value of the German mark was falling so rapidly, workers were insisting on being paid daily and rushing out to shop before prices outpaced their wages.
President Maduro wants to introduce high value notes of up to twenty thousand bolivar. However in an act of economic madness, he chose to demonetize the existing one hundred bolivar bills before alternatives arrived. A stock of the new higher denomination bills is apparently stuck in Sweden. Maduro is accusing unseen foreign hands of blocking the charter flight to bring the cargo of new currency to Venezuela. There are many who believe the Maduro administration's claims of outside sabotage. This quasi-Marxist regime has few friends in the Americas. Even if there is no deliberate campaign to wreck the Venezuelan economy, few of its neighbors are minded to lift a finger very high to help the Maduro government out of its problems.
Yet the president cannot blame anyone but himself for the decision to declare the one hundred bolivar banknote to be no longer legal tender. That of itself was financially and socially disastrous. It smacks of the economic mismanagement which has reduced a once wealthy oil state to the condition of an economic basket case.
Maduro has now delayed the death of the 100 bolivar note until next month. but immense damage has already been done. Currencies rise and fall on the degree of confidence that people have in their underlying value. They generally trade within an established band, with the odd systemic shock that produces upward or downward spikes in value. But when a currency is under the sort of immense pressure as the Venezuelan bolivar, the monetary authorities have to act with extreme caution, so as not to make an already bad situation even worse. Yet astonishingly Maduro seems not to have recognized this responsibility and it is he and no outside actor, who is responsible for the barely credible demonetization of this key banknote.


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