Don’t compare Venezuela Demonetization with India

The Venezuela government announced the demonetization of its largest currency bill of 100 Bolivar (worth 10 USD) in the second week of December 2016. This led to huge chaos in the South American nation as the President Nicolas Maduro had given only 72-hours of deposit of the demonetized currency; interestingly 40% of the population are not connected to the banking system. Some media reports have compared this with the demonetization in India, comparing the queues and chaos. So I am only here to say one thing in this post “Don’t compare demonetization in Venezuela with India”. I will present few facts which will clear the myth about the demonetization drive about India and Venezuela.

 

Venezuela Demonetization

Venezuela demonetization exercise: – Dont Compare with India

 

A Quick take on Venezuela

 

Venezuela is a South American Nation bordering Columbia and Brazil, and sea facing towards the United States of America. One of the world’s first countries to get independence from colonization fully in 1830, it was occupied by Spanish conquest in 1522 making Spanish the official language of Venezuela.

 

In 1910s, the country discovered oil, making the country really rich with investments from foreign players like Standard Oil and Royal Dutch Shell. With an increase in revenue accounting to close to 70% of the total exports of Venezuela, the country wanted to become a developed nation with the principle of “Sow the Oil” put forth by their intellectual leader Arturo Uslar Pietri in 1936. But when the revenues started to dominate the country, instead of following this principle to develop new avenues of revenue, the country decided to nationalize oil assets in the country, started bringing in socialist schemes like providing basic health care, cheap fuel, subsidized fuel, etc.…. While this was possible till 1982, when the world suffered an oil glut resulting in decline of fuel prices, the country’s infrastructure projects were halted, ran into severe debt but still continued with its socialist schemes. Many corrupt government officials funnelled out enough money from the revenues generated from oil, leaving ash for the citizens. While the situation tends to stable in 2002-03 when oil prices were high, but lack of government efforts to develop new revenue streams made it an extremely oil dependent economy (96%) and rest four per-cent for other exports. Fuel prices touched an all-time low of $28 in 2015-16, making the economy more crippled, increased the inflation (326%) and on the verge of default.

 

The South American nation is the most gifted nation in the world. Venezuela is not only gifted with world’s highest oil reserves (300,000 million of barrels) and eighth largest gas reserves, but also with beautiful snow-capped mountains, Caribbean beaches, beautiful deserts and highly fertile land. It has the resources to tap and become the world’s most powerful nation, low population (30 million), but it figures itself in the bottom 5 of ease to do business index in the world. With less farms in action today, thanks to highly subsidized food provided by the government, people feel imported food items are cheaper rather processing them in the country. Tourism can be developed, thanks to the gifted beautiful environment, but the streets are filled with goons fearing loot and murder, making no tourist to dare visit the country.

 

Demonetization of Venezuela

 

After the Venezuelan popular leader Hugo Chávez died in 2013 after his 14 year stint as the President of Venezuela, Nicholas Maduro took the charge. Situation went completely out of control once the oil prices fell in 2014. While India benefitted from the same, Venezuela was in a bad shape. Lack of dollars to import goods (no export revenue in foreign currency), the black marketers had a free run in the country.

 

Why? Venezuela has a different foreign exchange system, unlike other nations in the world. The Latin American nation has three exchange systems, namely DiPro, DiCom and black market rates. While DiPro is government controlled at 10 Bolivar per USD, DiCom is at 865 Bolivar per USD which is a free control system. The third exchange is the black market exchange rate at 1500-1800 Bolivar per USD.

 

While DiPro is only for government related transactions like public debt payment, import of goods, expenses on healthcare, food subsidy, etc… are done using this exchange system. DiCom is a free exchange system which can be used to pay taxes, fines, credit card payments, etc… Now let’s come to the third exchange system which is what people used on a daily basis in the country. According to black market rates one Bolivar is less than 1/10th of an US Cent, leaving complete distress in the country.

 

Prices of Milk vary between 70 to 7000 Bolivar in the country. While government stores charge 70 Bolivar, private stores around 150 Bolivar and in the black market you can get milk for 7000 Bolivar. Queues never end in front of the government/private stores as black marketers have hoarded sufficient food grains which they can sell for a premium.

 

On December 11, 2016 (like the PM Modi style) President Nicholas Maduro announced the demonetization of its largest denomination bill (100 Bolivar) and promised to introduce 500, 1000 and 20000 Bolivar notes. Time limit for deposit: – 72 hours later the demonetization exercise was pushed January 2017 thanks to lack of preparedness.

 

While the country announced the demonetization of the 48% circulation by volume 100 Bolivar to curb mafia across Columbia border, the government couldn’t release even one higher denomination bill within 72 hours after the announcement, creating unrest in the country, while in India, we were able to access Rs.2000 note on the first day of the exercise.

 

The Venezuela population didn’t support the President decision like in India. Venezuela is in a different situation where their economy might cripple anytime with some nation needing to bail out the country, India is a booming economy. Except for the opposition, no one has opposed the demonetization more in India.

 

Queues have been existent in Venezuela since 3-4 years (some people admit it has become its daily routine) unlike in India where people are happy to contribute to the welfare of the country.

 

So guys please don’t compare Indian demonetization with Venezuela. Venezuela never needed the demonetization to add to the existing vows of the people. The inflation is estimated to cross 500% this year and reach 1000% by June 2017, if the country doesn’t get the necessary reforms.  Venezuela needs to be bailed out economically and politically too, control the free fall of its currency, reduce the ambiguity in its forex, improve its revenues other than oil and introduce a stable equivalent currency unit pegged to the Dollar. It seems better the country defaults rather constantly punishing the country’s population with slew new schemes. Hope the best for the South American nation which aspired to become a developed nation by the end of 2000.

 

Leave a Reply