Venezuela’s recent history is confusing, convoluted and extremely unstable. Reality is constantly changing.
After years of the US dollar being banned in Venezuela, the country is now taking advantage of the currency. Traders have been able to invest without the fear of their money losing value and consumers began to feel that some prices were stabilizing. Now, the government is changing the game again by introducing a new tax on all transactions made in dollars.
This is a new law that went into effect a few weeks ago and it is shaking Venezuelans. How will this affect the economy? Experts fear that the tax will contribute to inflation in a country hit for years by a cycle of hyperinflation (from which it was recently emerging).
The decree establishes payments between 2.5% and 20% on transactions made with foreign currencies and cryptocurrencies. Generally speaking, an additional tax of 3% will be paid, with some exceptions. According to economists, these taxes would reduce merchants’ profit margins, becoming a new demotivating process for entrepreneurs who saw their businesses close a few years ago in the nation’s greatest time of scarcity.
Since the dollar had begun to be freely used in the streets without being condemned by the government, stores were able to stock up with imported products, especially from Colombia. However, everybody still remembers how the shelves of pharmacies and supermarkets were empty or filled with rows of water to disguise the shortages.
The new reality allowed local traders and producers to continue doing their work without the fear of losing everything, since they have a base in dollars to respond. For consumers it was a relief to no longer have to stand in line to buy corn flour, sugar, toilet paper, rice or coffee.
The current situation is not very stable either. The dollar is used, but a large part of the population does not charge in dollars, nor are there legal systems to guarantee implementation. Some national banks have started to offer dollar accounts, but there are still many doubts, as well as fear and lack of support for these methods.
The dollar and the bolivar coexist in parallel, although some traders and independent workers demand payment only in dollars. The problem with the bolivar is its constant loss of value, there are weeks with more stable rates and days when it has risen with very marked variations. The problem with the dollar is the lack of low-denomination bills, which cause a loss of money with every purchase.
The new tribute joins the 16% tax currently in place in the country for the purchase of products. In the early days of its implementation there was a lot of confusion, which led some companies to temporarily suspend payments in dollars to avoid illegalities or to avoid loss of profits.
The new measure promotes tax evasion and the black economy, according to experts, because some businesses will avoid invoicing in dollars to avoid paying. But not everyone can evade, particularly when it is estimated that between 40% and 60% of current transactions are made in dollars.
Investing in Venezuela does not generate security or stability. In spite of this, the feeling in the streets is more positive compared to four years ago, when the shelves were completely empty. But the bubble is fragile, almost non-existent, and the fear is that at any moment it may burst again.
The reconversion carried out in October 2021 did not guarantee an economic recovery. The Venezuelan government removed six zeros from the local currency, in what became the third reconversion in 13 years. The first was executed by Hugo Chávez in 2008 and the second by Nicolás Maduro in 2018. They eliminated three and five zeros respectively.
In total, 14 zeros have been deleted from the bolívar, allegedly to help economic recovery, however, without a series of measures to address inflation, the bolívar continues to depreciate. The reconversions have only helped to facilitate accounting processes.
At present, there are no signs of a lasting improvement that would provide stability to the population. In the meantime, most people continue to live from day to day trying to survive the economic insecurity.
Image: Chris Dlugosz