Back to bolívar? Venezuela makes an offer to revive the local currency | Nicolas Maduro News

For years, the bolivar drifted into irrelevance as Venezuelans embraced the economic stability brought by the widespread use of the US dollar.

But the socialist regime, still reluctant to turn its economy entirely to the dollar, is now making a surprise offer to revive the local currency. Emboldened by surging oil exports that are fueling economic growth and helping to keep the exchange rate stable, the government is pushing Venezuelans to use the bolivar more by imposing a 3% tax on purchases made with dollars in stores , restaurants and grocery stores.

A study carried out by a private company indicates that there was a slight move away from the dollar in the days following the entry into force of the tax. A separate report published on Tuesday revealed that the use of bolivars in Caracas increased sharply in April, the first full month after its introduction.

The move is a sign that President Nicolas Maduro is increasingly confident that the economy is on solid footing after a series of free-market reforms and that Venezuelans believe his government will succeed in preventing a return of the kind of hyperinflation that has ravaged the country for years. But it’s a high-risk strategy that could backfire on the length and depth of the economic collapse – the worst in the Western Hemisphere in decades – and the tepidness of consumer and investor confidence.

The tax threatens to push businesses further into informality and undermine the government’s inflation-fighting strategy, said Giorgio Cunto, senior economist at Ecoanalitica, the Caracas-based consultancy that carried out the study. on dollar transactions. Businesses and individuals will demand more bolivars to make their payments, which could put additional pressure on the foreign exchange market.

“If that pressure is more than the central bank can handle, we would see an increase in the exchange rate,” Cunto said. “This could hamper the nascent recovery which remains very fragile.”

Over the past six months, the bolivar has fallen 7% against the dollar, uncharted territory given that it lost almost all of its value every year, leading the central bank to strip it of 14 zeros since 2008. The government has a long way to go before people have enough confidence in the currency to switch from the dollar, especially with inflation still at an annual level of around 99%, according to the Bloomberg Cafe con Leche Index.

Policymakers tend to mistakenly assume that it is possible to return to dollarization once inflation is brought under control, said Daniel Cadenas, an economist and professor at the Central University of Venezuela, citing cases such as Peru, where the use of the dollar is still common despite decades. to fight it.

“Dollarization is not going to reverse,” he said. “The cost for economic actors of the return to thinking in bolivars is greater than the benefits. As long as this is the case, dollarization will persist.

Instead of eliminating the dollar altogether, the government is likely trying to balance the use of the two currencies, economists have said.

Chaotic deployment

For many who got used to the greenback, the tax came as a shock. Even Maduro himself had pushed Venezuelans to embrace the use of the dollar, which helped pull the country out of a period of hyperinflation and made daily shopping easier.

The government has offered little explanation as to why the tax is needed, though leaders have repeatedly vowed to defend the bolivar and resisted dollarization of the financial system, despite lobbying from CEOs. business.

With little information on how to apply the levy, its introduction on March 28 caused confusion. Half of companies have not been able to recover it a month after it was put in place, according to estimates by the largest trade association, Consecomercio.

Some stores have temporarily stopped taking dollars. Others posted the official government order to convince skeptical shoppers that the tax was real. Customers asked if it was collected before deciding to make purchases. The percentage of purchases made with the dollar fell to the lowest level since 2019, according to the Ecoanalitica study.

Many traders resorted to manual record keeping because buying new accounting systems was so expensive that public banks had to offer loans. Several large companies with multiple registers, such as supermarkets, have not been able to adapt.

For industry leaders, the main criticism is that the tax has a cumulative effect. Since the entire production chain is dollarized, the impact on the final price of locally manufactured goods could be exponentially greater than 3%, which would lead to inflation.

“The rate is extremely high,” said Luigi Pisella, president of the industry’s largest guild, Conindustria, which is proposing the government cut the rate to less than 0.5% and make the tax temporary. “Local production is going to be much more affected than imported goods.”

(Updates to include Caracas study in 3rd paragraph)

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