Venezuela: Government announces new oil-backed digital currency amid parallel dollar free fall
December 4, 2017
On 3 December, President Nicolás Maduro announced plans to launch a cryptocurrency backed by oil and gas reserves, along with the country’s gold and mineral reserves. As Venezuela falls deeper into an economic crisis, Maduro claimed that the new digital currency, the “petro”, would help the nation circumvent financial sanctions and serve as a substitute for the U.S. dollar in global transactions. Details concerning the petro, however, were sparse, and it is unknown when the currency will be launched or if the country can even pull off such a feat. Excessive money printing, soaring inflation and dollar shortages have caused the bolivar, the country’s paper currency traded in the parallel market, to freefall in value in the past month.
On 1 December, the bolivar traded in the parallel market at 103,024 VED per USD, a stunning 59.9% depreciation from the same day last month. At the start of November, Maduro announced that Venezuela would seek to restructure its external debt, a move that added more pressure on the already-battered parallel dollar. The parallel dollar has shed a massive 96.9% of its value since the start of the year and 95.5% of its value from the same day last year amid a vicious “inflation-depreciation” spiral, whereby higher inflation raises the demand for dollars. As more dollars are purchased, the black-market price of the dollar rises, increasing the cost of imports and propelling inflation up even further.
Analysts participating in the LatinFocus Consensus Forecast expect the parallel dollar to remain under severe pressure next year. They project a non-official exchange rate of 2,069,486 VEF per USD by the end of 2018. In 2019, the panel sees the non-official exchange rate trading at 2,725,000 VEF per USD.
The Dipro exchange rate—the first tier of the official exchange rate system—remained unchanged at 10.00 VEF per USD on 1 December. The Dipro is controlled by the government and used exclusively to purchase essential goods, such as medicine and food; it can face devaluations when authorities deem it necessary. Meanwhile, the government has not held a currency auction under the Dicom exchange rate, the second tier of the exchange rate system, since 31 August. On 21 November, the Central Bank cancelled a planned auction, stating that it could not liquidate currency due to financial sanctions imposed by the U.S.