Venezuela does not just have two presidents that co-exist, it also has two currencies. Politics in the Caribbean country has a significant influence on the social and economic aspects, which frequently vary. These changes cause temporary improvements, brief perceptions of stabilization, market transformations or enormous imbalances and losses that manage to impact the day-to-day through problems such as inflation.
Venezuela’s economic panorama has changed in recent months with an increase in the use of the dollar. After having a strong exchange control that prevented the population from having access to the currency, recently, businesses and people in general have started to use the dollar more fluently.
“The economic reality in Venezuela is an informal, forced and disorderly dollarization product of 36 months of hyperinflation, product of 16 quarters of accelerated fall of the productive apparatus, and the evident consequence is the death of the bolivar as a social institution,” assures the economist and university professor Carlos Ñáñez.
In the country, market economy principles have been envisioned such as Gresham’s law, which establishes that, in a dual monetary system, bad money displaces good money. According to the academic director of the Faculty of Legal and Political Sciences of the University of Carabobo, the first year and a half of hyperinflation was based on this law, “exchange the dollars, obtain a significant amount in bolivars and take advantage of this inflationary lag in relation to the devaluation rate.”
At present, a variation is being observed with Thiers’ law, where the good currency replaces the bad one. “The dollar is replacing the bolivar because there is no possibility of having the required amounts in local currency,” mentions Ñáñez. This inverse use of Gresham’s law has been experienced in economies such as Venezuela’s with weakened currencies and where the dollar is not being used as legal tender, but is selected by people for transactions of higher value.
A change in the economy?
The economic situation seems to be different from that of a few months ago when the financial collapse was felt on the streets, but we must keep in mind that in Venezuela there is scarce production of products, a marked inflation still continues, the political model remains the same, not all Venezuelans have access to foreign currency and the production of oil has had quite low figures in the last year.
The extensive use of the dollar in Venezuela has been provoked by society itself, trying to find financial relief for the incessant loss of value of the bolivar. The dollarization is not official, this makes reference to an ‘informal, factual and transactional dollarization’. The bolivar has not been replaced in the country and there are no new economic policies in place. The foreign currency has started to be used in a massive way as a method of escaping financial difficulties and surviving.
The dollar offered a greater dynamism to the commercial sector in the month of December 2019, “an absolutely artificial dynamism… this process of asymmetric and informal dollarization, where the dollar is used as a fixation or exchange scheme, does not imply any improvement.” The professor emphasizes that in the coming months, hostility will continue in the exchange rate and inflation, “we will see the consequences with higher levels of misery, poverty and entropy from the economic point of view.”
The entry of dollars to the population comes through remittances, personal savings, independent jobs or companies that begin to pay part of the salary in dollars to avoid losing workers as a result of the high migration, but these companies are few and the salaries in general in the country are not adjusted to reality, where the minimum wage represents around $5 per month, depending on the exchange rate of the day.
According to data from Ecoanalítica, more than half of the transactions realized in the country in the last few months are in dollars. But these figures do not mean that a large part of the population has access to foreign currency or in the amounts required to live. Carlos Ñáñez confirms that the “distribution of the use of the currency as an exchange mechanism is not more than 15% of the population, the other percentage of the population is absolutely separated from the benefits.”
Although in recent years the amount of remittances in Venezuela has increased, Ñáñez assures that the figures are not sufficient, “we are receiving less remittances than Honduras, which is a smaller country… if you look at the World Bank report… the volume of remittances that have entered the Venezuelan economy is 3.4 billion dollars… that on average per capita would generate about $150 in the luckiest cases.”
$150 in an economy like Venezuela’s becomes little because “the process of exchange rate devaluation is not as rapid as the process of price adjustment.”
Maduro and the use of the dollar
The government’s restrictions are now relaxed and Maduro has recognized through the media that the dollar can be used for the recovery of the country’s economy, but in the past the situation was different, the regime pointed out that dollarization was unconstitutional and persecuted the people who negotiated with the prices of the parallel dollar.
The government supporters also demanded that transactions be made in bolivares or in barter as a measure to strengthen the national currency. Despite this, Venezuelans refused to continue losing and implemented payment systems with the dollar, Maduro’s last words have contributed to the confidence of many in its use.
The acceptance of the government without an official measure has some problems for the population, since the majority of jobs in the country are not paid in dollars. The lack of a precise legal framework also presents obstacles to savings and banking transactions, because people cannot use foreign currency debit cards. This results in payments being made to banks abroad, with virtual platforms or through cash.
In the past, other countries in the region such as Ecuador, Panama and El Salvador have turned to the dollar to stabilize the economy and stop inflation from continuing. In Venezuela, the dollar just helped to oxygenate the economy for a while, but inflation is prolonged.
“It is not enough to stop the crisis, because informal dollarization does not emerge as a public policy… it is a natural consequence of the repudiation and toxicity of the bolivar in the national economy,” the analyst said.
The economic situation in Venezuela can be exemplified by the devaluation of the bolivar in the last 21 years since Chavez took power. In January 1999, one dollar was equal to 573 bolivares, two decades later by January 2, 2020, one dollar was equal to 60,000 bolivares which, in reality, after two currency devaluations and eight zeros less, is equivalent to 6,000,000,000,000 bolivares.
The erroneous belief of dollar devaluation
A couple of years ago, consumers were able to get more with smaller amounts of foreign currency. “This is what people erroneously claim as dollar inflation, and it’s simply that hyperinflation destroys the purchasing power of both, the local and national currency,” says Ñáñez.
Hyperinflation can be seen as a disease with different levels. The university professor points out that during the first stage, in 2017, there was an exorbitant rise in prices, at which time people with access to dollars could cover their monthly needs with smaller amounts.
For the second level, Venezuelans began to sell their excess assets, such as second homes or cars, televisions, and furniture, in order to survive the financial crisis. The third stage is the absence of the local currency and the increased use of foreign currency. Ñáñez also highlights that “this informal process began with a lot of reticence and vices; traders stopped receiving dollar bills that were bent, scratched or with some kind of deterioration and said that these bills had no purchasing power, until they understood with the development of the dynamics of the crisis that they had to accept this money.”
Is formal dollarization of the Venezuelan economy feasible?
According to economic experts, complete dollarization is viable in Venezuela given the current situation. But the measure depends on a government decision and there are ideological aspects that separate the country from the process which could put a brake on hyperinflation.
In order to dollarize the economy in Venezuela, it is necessary to repurchase the monetary mass, which could be an acceptable cost compared to the price of hyperinflation. But in addition, there must be moderately friendly relations with the United States to complete the official use of the dollar as a currency, which temporarily distances the perspective of the implementation of the measure due to the current reality between the two countries.
Image credit: Alpari