Venezuela's latest currency redenomination: Purely superficial?
In an attempt to simplify daily transactions, the Central Bank of Venezuela decided to chop six zeros off its national currency on 1 October. The move marked the third rebasing of the Bolivar since 2008 as political turmoil over the past several years and U.S. sanctions imposed in 2019 continue to batter economic output and cause hyperinflation.
Referred to as the Digital Bolívar, the new version of the national currency is expected to have a minimal impact on taming price pressures and supporting the economic recovery, as the majority of everyday transactions are already settled in U.S. dollars. This informal dollarization has helped to temper the rise in prices: Inflation has gradually eased since March, falling to the lowest level in nearly a year in September. Therefore, the Digital Bolivar will mainly serve to boost the digitalization of the economy and simplify tax collection and accounting procedures. The physical usage of the new Bolivar may help to facilitate transactions for some daily purchases which still use the currency, such as public transport and subsidized gasoline, likely providing marginal productivity gains along the way.
Looking ahead, our panel of analysts expects inflationary pressures to ease notably this year and in 2022, but to remain excruciatingly high nonetheless. Moreover, without a concrete economic stabilization plan in place amid ongoing geopolitical tensions with the West, the Digital Bolívar is seen losing its value against the USD at a rapid pace.
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Author: Steven Burke, Economist
Date: October 14, 2021
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