Tale Of Two Economies
We’ll get to our Down The Rabbit Hole segment in just a bit but first, our “Tale Of Two Economies.” A lot has been made lately of the economic news coming out of Venezuela. Hyperinflation may be over. 2021 may actually be the first year since Maduro took power that the economy hasn’t contracted.Yes folks, that’s eight years in a row of negative growth. And even the lowly bolivar, the local currency, seems to have stabilized after massive devaluation under Chavez and Maduro (they have lopped 14 zeros off the currency under Chavismo). But what has really changed?
BNN Bloomberg reports that after a 99.99% plunge the bolivar has remained stable for about 4 months. Why is this? Well, the BCV, Venezuela’s Central Bank, has used some of it’s oil revenue (and there isn’t all that much) to inject dollars into the financial system to buy bolivars artificially supporting the bolivar which was reconfigured in October by lopping off 6 zeros from it’s value. This artificial demand lends stability but for how long? The Maduro regime is basically broke so at some point they’ll have to stop the dollar injections.
We also have a collapse of imports which are paid for in dollars. In 2021 there were $8 billion in imports. For reference, ten years ago imports were $53 billion.
Then we have the Maduro regime allowing business to be transacted in dollars which,until recently, had been illegal. I believe this de facto dollarization is the driving force behind any positive economic signs in Venezuela as there have been no other structural policy changes. Over 60% of transactions in Venezuela now use dollars. So, where does this leave us?
Well, despite all the happy talk, the poverty rate in Venezuela is 95% with an extreme poverty rate of 70%. (Remember, the poverty rate before Chavismo was 50%, still high but a lot less than 95%) All of these “economic advances” are tied to dollars so there are two economies in Venezuela, one that uses dollars (the wealthy and connected Chavistas) and the other that uses bolivares. The 5% of the country that is not below the poverty line are those that have dollars. The average Venezuelan that earns the minimum wage,which is paid in bolivares, earns less than $2 a month, in dollar terms. Most survive on remittances from abroad by family members that have already fled the Maduro regime’s 21st Century Bolivarian Socialism so the migration will continue. For those left behind, the 95% still living in poverty, there is no economic recovery. They are still without reliable access to water and power. They still have no food or medicine and dig through trash for food.They are still starving and dying. This whole thing is smoke and mirrors. There are two economies, those with dollars and those without, and it’s not going to change anytime soon.
Moving on…Caracas Chronicles had a good piece showing us a “Map Of Armed Actors in Venezuela.” Those not starving in the cities are subject to the violence of the border areas. There is competition for control of all the same routes which are used for smuggling of migrants and trafficking of fuel,drugs,gold, etc. The “armed actors” include ELN, FARC dissidents, gangs, and collectivos all fighting amongst each other with civilians caught in the crossfire. It’s worth remembering that Venezuela became a major drug hub when Chavez announced he would no longer cooperate with the US DEA and the Colombian anti-drug efforts claiming the Chavistas would handle it themselves. So how’s that working out?
And then we have Confidential.com reminding us that Venezuela has a seat on the UN Human Rights Council until December,2022. The NGO, UN Watch tells us that 68% of the countries on the Human Rights Council are known Human Rights violators, including Venezuela.
And on the Corona virus front we have Telesur (government media) reporting that another one million doses of the Cuban vaccine, Sovereign Plus, has arrived in Venezuela. No mention of the record spike in Covid-19 cases nor the fact that these Cuban vaccines have not been approved by the WHO (World Health Organization) nor the PAHO (Pan American Health Organization) except for a passing Chavista barb about how these organizations are all controlled by people trying to “bring down the Revolution.”
Now, Down The Rabbit Hole we go….
In 2016 a new system was announced although it wouldn’t be functioning until 2017. The new DICOM system would solve everything! Hmmm…wasn’t that what they said about the three systems before DICOM? Anyway…one thing that was different was a higher exchange rate while still maintaining the 10 bolivar rate for priority usage called the DIPRO.
So now we have the DICOM,the DIPRO, and the black market. Since DICOM and DIPRO required that the government spend some of their highly coveted dollars there wasn’t much volume in these two. DIPRO was almost non-existent and DICOM only sold $32 million from inception until mid-2019.In the world of foreign exchange that is almost nothing so,as before, businesses and non-connected individuals had to rely on the black market.Here’s an example of the break down from 2018 :
DIPRO – 10 bolivares/dollar
DICOM – 3,345 bolivares/dollar
Black Market – 240,000 bolivares/dollar
At the same time this was happening the government was printing money at an astounding rate. They kept increasing the minimum wage, between 4-5 times per year,and funding it by creating money out of thin air.The money supply increased 3,000% in 2018 alone. The hyperinflation genie was out of the bottle.
The earlier example of the three rates was from January,2018. By April,2018 here’s what it looked like :
DIPRO – 10 bolivares/dollar
DICOM – 60,000 bolivares/dollar (average for the month)
Black Market – 880,000 bolivares/dollar
At this point the minimum wage was 1,800,000 bolivares per month or just over two bucks. Here’s a snapshot of a few prices from April,2018 :
Vegetable oil – 748,367 bsf (bolivares fuertes after Chavez lopped off 3 zeros from the bolivar)
Cheese – 2,160,950 bsf (non-imported)
Chicken – 2,299,500 bsf
Toilet paper – 400,000 bsf (two rolls)
Ground beef – 1,150,000 bsf
Pair of shoes – 6,000,000 (approximate price of non-designer brand)
As you can see, food was becoming a luxury and having to work more than three months to buy a pair of shoes really isn’t doable.Over the next several months it would get much worse.The monthly minimum wage would reach a low, when converted on the black market (the only real rate), of just 60 cents per month. The prices were so out of control that stores were weighing cash instead of counting it. Financial institutions were having difficulty because their systems weren’t able to process numbers in the trillions and beyond so they were issuing statements with an amendment stating that the figures represented them having dropped decimal places. Something had to give and Maduro had already shown he wouldn’t listen to anyone’s counsel on economic matters. he even blew off recommendations from Russia and China, his two primary creditors.
People were using bolivar notes in various denominations to make things like handbags. Street vendors offered bills instead of napkins because they were cheaper. When riots and looting occurred and people came in to assess the aftermath the floor would be littered with bolivar notes from the register or cash box. They weren’t even worth picking up off the ground.
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