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Venezuelan runaway inflation calls for bigger bills

Paper versus plastic. New larger-denominated bank notes or the same old bills but with three zeros less. It is undeniable that rampant inflation in Venezuela calls for a change in the current monetary system. The financial implications could have a negative impact on the government's image

The largest banknote currently in circulation: the 100-bolívar bill

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11 de junio de 2016 12:09 PM

Actualizado el 11 de junio de 2016 12:34 PM


Henkel García: “Larger-denominated bank notes are needed more than ever to pay for simple things”

Luis Vicente León: “If you introduce a 500-bolivar note, currency conversion is coming too late because that note is already worthless”

One bill, two bills, 15 bills, 40 bills …

Shopping at a farmers' market in Venezuela involves carrying around a bulky wad of bills. With inflation hovering at 180% at the end of 2015, as recognized by high-ranking government officials, shoppers in Venezuela complain that to buy producethey need to carry around a lot of moneywith them, especially bundles of the largest banknotecurrently in circulation: the 100-bolívar bill.

Still, money is not enough.

“Larger-denominated bank notes are needed more than ever to pay for simple things,”says analyst, instructor in Finance, and director of Econométrica, Henkel García.

Hence, more and more merchants and consumers have shifted to the use of electronic means of payment, with debit cards as the main non-cash means of payment for products and services.

But there are those who for various reasons do not haveaccess to banking services. Therefore, economists have stressed the need for the Central Bank of Venezuela (BCV) to adjust the current monetary system introducing higher value banknotes, which was announced by the BCV itself.

A weakened “strong bolívar”

President of the Central Bank of Venezuela Nelson Merentes' comments in an interview last February with The Associated Press were the first confirmation that Venezuela is preparing to print 500- and 1,000-bolivar notes. “This is a big project that will take us to a monetary system more in line with the Venezuelan situation,”he said. Merentes said that no date had been set for the 500- and 1,000-bolivar notes to enter circulation nor had it been decided what image would be on the new bills.

"The need to print larger-denominated bank notes is associated to the loss of value of the currency. If you calculate the cumulative inflation since the issuance of the largest bill currently in circulation , that bill is not even worth what was then one bolivar," says Venezuelan economist and President of Datanálisis Luis Vicente León.

This view is shared by CongressmanJosé Guerra, an economist and former central bank directorwho chairs the National Assembly's Finance Committee. “The accumulated rate of inflation since the date the first 100-bolivar note entered circulation, on January 1, 2008, is 1,500%. That has greatly depressed the value of the currency,"he said.“A 100-bolivar bill is now worth about two bolivars of 2008, which means that it has lost 98% of its purchasing power."

Germán Ferrer, also a congressman and a member of the Standing Committee on Energy and Petroleum, concurs. “Our currency is no longer worth anything. The country's biggest currency note is 100 bolivars. To solve cash purchasing problems larger-denominated bank notes must be printed.”

With this in mind, León recalls that the term "strong bolivar" was merely a marketing strategy to try and “sell” the idea of the currency redenomination back in 2008.

"The strong bolivar was a fictional concept. Actually, what was recognized was that the bolivar was worthless," he says.

Costs are increasingly being added

All four experts interviewed agreed thatapart fromeveryday purchases, with consumers hauling “wheelbarrows of cash,” in the manner described by Luis Vicente León, other transactions of the economy are affected by a monetary system that is out of line with reality.

Guerra explains that in 2008 100-bolívar bills accounted for 20% of bills printed; now they account for 80%. “A 1,000-bolívar bill would cost USD 0.15 to print, whereas ten 100-bolívar bills cost one dollar and 15 cents. That means that the BCV is spending a lot of money to print a worthless banknote."

Banks are confronted to an additional problem. “The whole ATM system becomes impaired because how many banknotes do ATMs have to dispense to meet the needs of the public?" he wonders.

Datanálisis president pointed at therising costs of cash transportation from the Mint to ATMs, with “ATMs having a limited number of bills that can be dispensed through the slot. So those are costs that are increasingly being added.”

“I propose”

In addition to the statement by the president of the BCV, the Standing Committee on Finance of the National Assembly has proposed that, in updating the monetary system, bills of 2,000; 1,000; 500; 200 and 100 bolivars are included.

“Coins are not needed. They are the least desirable when there is inflation because they lose value faster. What are needed are higher denomination banknotes,” says Congressman José Guerra.

But some think that, with an estimation of more than 500% cumulative inflation in Venezuela at the end of 2016, it is necessary that evenlarger-denominated bank notes are printed. León and García are considering a 5,000-bolívar bill.

"I believe that the Venezuelan currency may well have bills of 5,000; 1,000 and 500 bolivars.  That would allow it somehow to rescue its purchasing power, and also to be used in small transactions, says León.

"I think we need a bill of 5,000; one of 2,000; one of 500 and one of 200 bolivars. And perhaps we could keep the 100-bolívar bill, but over time that bill would have to be devalued; it would be the lowest denomination banknote," says Henkel García.

What about removing three zeros?

Congressman Ferrer mentions that some people are also suggesting the possibility of again removing three zeros, but he admits that that would not be the solution.

"This really wouldn’t affect the inflation problem because ultimately what we would do would be to make the currency more manageable cash-wise, but inflation will continue its course as long as corrective measures are not taken.Obviously, the production of goods and servicesshould be increased to reduce inflation, and appropriate measures from a macroeconomic point of view should be taken," he said.

In 2008, "Three zeros were removed to mask the loss of value, but that alone would not solve the problem because the root of the inflationary problem was left completely untouched. You can remove three zeros, but within three years you will have to remove three more. Removing zeros has no real impact,” adds Luis Vicente León.

Whatever the decision, “there should be a new currency in Venezuela, either by removing three zeros, or by printing new larger-denominated bank notes,” Ferrer notes. “The Mint and the BCV should be consulted. The latter should make the decision and of course assess the costs.”

A case of too little, too late or a band aid solution?

Real life experiences set the tone though. According to analysts, theintroduction of banknotes of 1,000 and 500 bolivars seems to be a “too little, too late” response.

“If you introduce a 500-bolivar note, currency conversion is coming too late, because that note is already worthless,” notes Luis Vicente León.

"The thing is that when inflation is very high and galloping, bills lose valuevery quickly. You have to constantly replace bills according to some rule,” said José Guerra. "Among other things, we propose a rule whereby banknotes are restated based on inflation. You cannot have a monetary systemthat hasn’t been restated for seven years, with a runaway inflation that virtually destroyed the currency.”

Henkel García clarifies that the major economic problems will not be solved with this measure, "But it would facilitate transactions. No longer would we need a lot of bills to pay for the goods and services we want to pay cash, and of course it would facilitate the lives of Venezuelans. That is the right thing to do. Also, we would save money printing bills.” 

"Most of the money in Venezuela is electronic money, anyway. The amount of cash is actually less than 10%. Introducing a new family of banknotes would facilitate payments,” he claims.

"The Central Bank of Venezuela is free to print the currency denomination it wishes, but I think they are evading the issue because of its political impact as they would be acknowledging that the currency is worthless,” says Luis Vicente León.

Translated by Sancho Araujo

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