Why Venezuela's devaluation won't solve its crisis

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Monday, August 20, 2018

The devaluation of the bolívar and other economic measures ordered by Venezuelan President Nicolás Maduro over the weekend are likely to fail in their objectives, according to an expert from Fitch Ratings.

Venezuelans woke up Monday morning with five fewer zeros in their bank accounts after Maduro implemented one of the largest devaluations in history with the local currency now tied to the petro, the country's oil price-linked cryptocurrency.

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The devaluation came with other policy announcements that include an increase in VAT rates, a reduction in fuel subsidies, and a boost to the minimum wage by 3,000%.

The move is part of an economic recovery program that is aimed at halting crippling hyperinflation and contracting GDP. Maduro's announcement is essentially a devaluation of 95% from the prior official rate.

"The measures seem to have caused great confusion by the population at large and are unlikely to stabilize the economy or put an end to hyperinflation. In the near term, they will likely exacerbate the problems actually," Richard Francis, director of Latin America sovereigns at Fitch, told BNamericas.

Economist Asdrúbal Oliveros, of Venezuelan analysis firm Ecoanalítica, was quoted by the BBC as saying the devaluation will only bring temporary relief to the troubled nation, especially in terms of helping companies "to make sense of their accounting."

Daily operations for many businesses were made difficult by too many zeroes for their computer systems, forcing many to fraction accounts to be able to manage them.

The IMF said last month it expected Venezuela to see 1mn percent inflation this year and GDP to shrink 18%.

The financial system was blacked out to accommodate the devaluation and Maduro also decreed Monday a labor holiday.

SOVEREIGN BOLÍVAR

As part of the devaluation, newly printed currency will start circulating under the name of sovereign bolívar.

Although the branches of financial institutions will not be open until Tuesday, long lines had formed at ATMs on Monday.

Maduro called on economic players to not increase prices; however, prices had already begun to surge Friday when he decreed the massive boost to the minimum wage, which will come into effect on September 1.

Spanish news agency EFE also reported that two gas stations in the center of capital Caracas on Monday charged up to 10 times more than on Friday for filling the tanks of cars and motorcycles.

In addition, Maduro said the state-controlled FX exchange market would be unified.

A failure of the new economic measures could increase pressure on neighboring countries who are ramping up efforts to deal with the exodus of Venezuelans fleeing economic collapse.

Pictured: People queue to withdraw money from an ATM in capital Caracas on Monday