Venezuela's massive currency devaluation is a 'scam' — and does 'nothing' to ease its economic crisis, analysts say

  • In a radical attempt to end a prolonged period of economic turmoil in the oil-rich, but cash-poor nation, Venezuelan President Nicolas Maduro announced Friday that his socialist administration would issue new banknotes after lopping five zeroes off the beleaguered bolivar.
  • "I want the country to recover and I have the formula. Trust me," Maduro said in a speech broadcast on state television Friday evening.
  • The International Monetary Fund (IMF) has predicted inflation in the country will exceed 1 million percent this year.

A major currency overhaul in Venezuela is due to come into effect Monday, with critics of the move fearful it will exacerbate hyperinflation in the crisis-stricken country.

In a radical attempt to end a prolonged period of economic turmoil in the oil-rich, but cash-poor nation, Venezuelan President Nicolas Maduro announced Friday that his socialist administration would issue new banknotes after lopping five zeroes off the beleaguered bolivar.

The move effectively devalues Venezuela's currency by around 96 percent, with the bolivar set to go from about 285,000 per dollar to 6 million. Other measures announced in Maduro's speech to the nation last week included highly-subsidized gas prices, a higher corporate tax rate and a massive minimum wage increase.

Economists say that by introducing the proposed measures, Maduro's administration is only likely to make matters worse. Caracas' cash-strapped government has recently defaulted on its bondholders and is currently facing the prospect of further U.S. sanctions.

Luis Vicente Leon, president of the Caracas-based pollster Datanalisis, said Venezuela's latest package of economic measures is likely to cause major problems for domestic businesses.

"The transition to apply the concrete elements of the proposal: exponential increase in salaries, massive requests for advancement of benefits and increase and change of frequency of tax payments puts companies in a situation of catastrophic cash flow," Leon said in a tweet posted on Friday.

'Trust me'

Venezuela's revamped currency — set to be named the sovereign bolivar in order to distinguish it from the strong bolivar — will also be pegged to the country's widely discredited petro cryptocurrency.

"I want the country to recover and I have the formula. Trust me," Maduro said in a speech broadcast on state television Friday evening.

"They've dollarized our prices. I am petrolizing salaries and petrolizing prices … We are going to convert the petro into the reference that pegs the entire economy's movements," he added.

Venezuela's President Nicolas Maduro talks to the media after a meeting for signing an agreement on guarantees for the vote at the National Electoral Council (CNE) headquarters in Caracas, Venezuela March 2, 2018.
Marco Bello | Reuters
Venezuela's President Nicolas Maduro talks to the media after a meeting for signing an agreement on guarantees for the vote at the National Electoral Council (CNE) headquarters in Caracas, Venezuela March 2, 2018.

The Venezuelan economy is heavily dependent on oil exports which once made the country very rich. It's said to have the largest proven oil reserves in the world.

Oil leaving the country accounts for about 90 percent of its total exports. When oil prices began to collapse in 2014, the cash received by Caracas dropped significantly — bringing new economic challenges. To be sure, the International Monetary Fund (IMF) has predicted inflation in the country will exceed 1 million percent this year.

'In reality, nothing changes'

Steve Hanke, an applied economics professor at Johns Hopkins University, said that in the absence of a dramatic shift in the country's economic policy, Maduro's currency devaluation is meaningless.

"Linking (the) new bolivar to the petro is a scam … Appearances change, but, in reality, nothing changes. That's what's in store for the bolivar: A facelift," Hanke said via Twitter on Sunday.

The regime of Nicolas Maduro, who replaced Hugo Chavez in 2013, opted to keep the official exchange rate overvalued and tightened the government's control over access to U.S. dollars — meaning that it became harder for Venezuelans to change their bolivars, the national currency, for the greenback.

This further increased the number of bolivars available and provoked a decrease in imported goods. Lower imports boosted domestic prices, thus taking inflation to record levels.

Given the scale of the mounting problems in Venezuela, many citizens are opting to flee the country. According to data from the United Nations, published last May, over 1.5 million people have left since 2014.

The high number of people leaving Venezuela brings further economic problems. Not only does the country become a victim of so-called brain drain, but it also begins to a lack a labor force.

— CNBC's Silvia Amaro contributed to this report.