Why Socialist Venezuela Is Counting on the Dollar
WHY YOU SHOULD CARE
What you hate can sometimes prove to be very useful.
By Gideon Long
In the upmarket Sambil mall, “Rudolph, the Red-Nosed Reindeer” blares in Spanish from a loudspeaker as Venezuelans do their early Christmas shopping.
Zara, Ben Sherman, Mango, Adidas, Victoria’s Secret, Timberland, Reebok and Guess are just some of the brands that have outlets here. In all of them, people are spending U.S. dollars. “Today I’m buying a blouse for my sister and a shirt and a pair of jeans for me,” says Felipe Tuesta as he waits to pay. “All in dollars. I’ve just had some sent to me from relatives who live abroad.”
Despite two decades of anti-U.S. rhetoric from Venezuela’s ruling socialist party and concerted efforts to move the economy’s axis away from the United States and toward China and Russia, the dollar is increasingly part of the fabric of Venezuelan life.
I’d say around 70 percent of all our sales are now in dollars.
Jennifer Bogarin, shop owner, Caracas
President Nicolás Maduro conceded as much in November when he sang the praises of dollarization during a local television interview.
“This process which they call dollarization can be useful for the recovery and for unleashing the country’s productive forces and for the functioning of the economy,” he said. “It is an escape valve. Thank God it exists.”
The socialist leader is usually scathing about anything that comes from the U.S. and has taken several steps to “liberate” his country’s economy from the Yankee dollar, by embracing the euro, the renminbi and a homespun cryptocurrency, the petro.
But Maduro’s comments reflect a growing reality in Venezuela as the country’s economic decline gathers pace. Walk into many shops in Caracas these days and you can spend greenbacks.
“I’d say around 70 percent of all our sales are now in dollars,” says Jennifer Bogarin, owner of a shop selling children’s clothes in a mall in Caracas. “It’s really taken off since the middle of this year. A few people use euros but hardly anyone buys in bolívares anymore.”
A recent study by local consulting firm Ecoanalítica found that over half of all financial transactions in Venezuela are paid for in foreign currency — primarily dollars. In the country’s second-largest city, Maracaibo, close to the Colombian border, the figure is 86 percent.
Venezuelans use dollars for big-ticket purchases — 95 percent of home appliances, for example — but also increasingly for smaller day-to-day items: More than half of food purchases were made in dollars, the study found.
This is partly a consequence of hyperinflation. No one wants to carry a huge sack of bolívares around to pay for a coffee or a snack. It’s much easier to use dollars.
Even after the government lopped five zeros off the currency and issued a whole load of new banknotes last year, the bolívar is of little worth. The largest note in circulation is the 50,000-bolívar note — worth about $1.60. The smallest is worth a fraction of a U.S. cent. Go to an ATM and the maximum amount you can withdraw is equivalent to 10 U.S. cents. Even when Venezuelans do pay in bolívares, they often do it with a debit card. The economy is increasingly cash-free.
Steve Hanke, an inflation expert at John Hopkins University, says Venezuela’s annual inflation rate is around 10,000 percent and the country is enduring the third-longest period of hyperinflation on record — surpassed only by Nicaragua in the late 1980s and Greece during World War II. The International Monetary Fund predicts inflation of 200,000 percent this year and 500,000 next year.
Dollarization is also a consequence of the government’s recent economic liberalization measures. Until this year you could only legally buy dollars at state auctions. Now, in theory, you can get them at exchange houses, although supply is limited.
The government has tightened the legal reserve requirements for banks, making it more difficult for them to lend. That has prompted Venezuelans to look elsewhere for credit, sometimes in foreign currencies.
Remittances are also a factor. More than 4 million Venezuelans have fled the economic meltdown of recent years and many send money home, usually in dollars. Over half of all people in Maracaibo say they receive money from abroad.
Finally, economists say the prolonged blackouts that hit Venezuela this year fueled dollarization. When the lights go out, it is impossible to use debit cards for transactions. People are forced to fall back on cash, and dollars are more practical than bolívares.
But while Maduro describes this informal dollarization as “an escape valve,” economists insist it is not a panacea for the economy, which has halved in size since Maduro came to power, in 2013.
“Just because the dollar is circulating it doesn’t mean the economy improves, or that people’s purchasing power increases,” says Asdrúbal Oliveros, director of Econanalítica.
Francisco Rodríguez, a Venezuelan economist based in the U.S., says he favored a formal adoption of the greenback, arguing that “Maduro’s dollarization is highly unequal and harms those who still earn in bolívares.”
Peter West, an economist at EM Funding in London, says “a major drawback for the government of this de facto semi-dollarization is that it is reducing the scope to generate real revenues through money creation.” This is making the financing of the budget deficit even more difficult, he adds.
It also leaves a question hanging for the future. If Venezuela ever returns to anything like economic orthodoxy, will it resurrect the bolívar or formally embrace the dollar as its official currency, as Ecuador and Panama have done? “When the time comes to implement a proper stabilization program, a difficult decision will have to be made,” West says.
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