Venezuela will Deepen its Implicit Dollarization in 2021
In the middle of the biggest economic collapse of any nation in modern times, Venezuela is experiencing a fundamental, and perhaps irreversible, change within its economic system. Since 2019, Venezuela has been driving full throttle towards an economic phenomenon, which I refer to as implicit dollarization. The term refers to a country that despite officially maintaining its domestic currency, it is also allowing – and even encouraging – a foreign currency to circulate and become part of its economic life.
Venezuela’s implicit dollarization was initially produced by two major issues of the Venezuelan economy. The first, and most important one, is the country’s hyperinflation, which is devaluating the Venezuelan currency – the Bolivar Fuerte – for years. To put it simply, Venezuelans are keeping and using dollars, so they can protect the value of their work by protecting the purchasing power of their funds. And the second reason is the country’s power blackouts, which Venezuelans experience on a daily basis. Again, to put it simply, dollars in cash became the only option available when businesses do not have electricity to turn on their electronic payment systems.
Since 2013, Venezuela has had the highest inflation rate of any country in the world. And since 2017, the country is experiencing hyperinflation, which is a term that refers to an economy with an inflation rate greater than 50 percent per month. In 2018, for instance, Venezuela’s inflation surpassed the million percent rate. And for this year, Venezuela’s inflation rate is about 5,500 percent, according to Bloomberg’s Cafe Con Leche Index.
According to the same consulting firm, 64 percent of Venezuela’s transactions are being carried with foreign currencies, with the dollar being the most important of them. In Caracas, for instance, 60 percent of economic transactions are being carried in dollars. And in those cities near the Colombian border, 90 percent of transactions are being carried in foreign currency, with the Colombian peso being the most important means of payment. So, by every measure and in all sectors of the country, the dollar is taking the Venezuelan economy by storm.
Venezuela’s economic distortions are so astounding that even those who use and keep dollars cannot completely escape the detrimental effects of the country’s hyperinflation. What I mean by this is that since the country’s inflation rate exceeds its exchange rate devaluation, prices in Venezuela are rising even when these are denoted in dollars. According to studies made by the Venezuelan consulting firm Ecoanalitica, a dollar in Venezuela today has less than a third of the purchasing power it had in 2019.Just to illustrate Venezuela’s inflationary madness, the Bolivar lost 20 percent of its value against the dollar just in the last week, reaching 672 thousand bolivars per dollar (as shown above). The move occurred after the Venezuelan government distributed about 50 billion bolivars in Christmas bonuses and pension payments, which as a result of the country’s volatile economic environment, the citizens rushed to exchange in dollars. Of course, it goes without saying that the 50 billion dollars were manufactured by the country’s official printing press, the Venezuelan Central Bank, an institution that lost its purpose years ago, as I wrote in this column for FTN back in September.
Of course, none of this could have been possible without the “approval” of the Venezuelan government, one of the most repressive in the world, from a political but also an economic perspective. For years, the Venezuelan government condemned those who used dollars in the country, as dollars were usually used in big transactions, such as selling a house, a car, or a business. Yet, since last year, the Maduro regime understood that the country’s dollarization was both economically beneficial, and inevitable. So, despite not formally allowing dollars to circulate, the Venezuelan government implicitly allowed them. In November 2019, Maduro even said on national television, “thank God for the dollarization.” Overall, between the country’s implicit dollarization and price liberalization, the Venezuelan economy has at least mitigated its biggest problem, the chronic shortages of goods that Venezuela used to have.
So, my prediction for next year is that the Venezuelan economy will continue in this direction. The dollar will continue its rapid quest to overcoming the entire Venezuelan economy, making the Bolivar obsolete as a result. On this issue, yesterday Bloomberg reported that Maduro was in conversations with five private commercial banks in Venezuela. The conversation was set to discuss a new banking reform that Maduro wants to propose in 2021, which encompasses the creation of a clearing and settlement system in dollars. The system would turn the Venezuelan Central Bank into a dollar clearinghouse, allowing instant transactions between banks and businesses in Venezuela. The system would benefit the economy by reducing the countless transaction costs that the current form of dollarization brings (like difficulty getting change for small transactions), and it will also allow banks to offer loans in dollars, which is something that the Venezuelan private sector needs urgently.
By Jorge Jraissati
Jorge Jraissati is the president of the Venezuelan Alliance. Graduated at the Wilkes Honors College, Jorge is an economist, political leader, and a fellow at the Abigail Adams Institute. Jorge has been invited as a guest lecturer to over 20 universities, such as Harvard, NYU, and Cambridge.