Financial Analyst/Content Writer, RADEX MARKETS
Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS.
ХУВьЦАА
Venezuela may be getting closer to abandoning its official currency, the bolivar, in favour of the United States dollar. While citizens of the inflation-ravaged country have already resorted to using the greenback in daily commerce, as well as a store of value to defend against the bolivar’s constant depreciation, the local currency remains the sole legal tender issued by the Central Bank of Venezuela.
Famous economist Steve Hanke, special advisor to the Venezuelan National Assembly, has estimated that the switch will take place with a 50% to 80% probability. Professor of applied economics at the John Hopkins University in Baltimore, Steve Hanke is well placed to have an opinion on the matter, having guided several other countries through similar transitions in the past. Dubbed the “Money Doctor”, Hanke previously helped Montenegro switch from the hyperinflating Yugoslav dinar to the German Deutschmark back in 1999, before aiding Ecuador in converting to the USD in 2000. The professor has also pushed for dollarisation in Zimbabwe, a nation that has ripped through half a dozen currencies in the last decade alone.
The bolivar was first introduced all the way back in 1879, and for almost a century remained one of the most stable currencies in the entire world. Unfortunately, inflation in Venezuela in recent years has destroyed any credibility the South American currency once enjoyed. Since 2008, the bolivar has undergone three redenominations, together shaving 14 zeros from the previous iteration. One single bolivar today is equivalent to one hundred trillion pre-2008 bolivars. Inflation in Venezuela remains above 500% as of this year, with no end in sight.
Although US dollars are already ubiquitous throughout Venezuela, officially switching currencies presents a number of major legal and technical hurdles.
The Venezuelan constitution itself defines the bolivar as the country’s only legal currency, meaning an amendment would be required. The National Assembly would then have to pass a law granting the status of legal tender to the US dollar, as well as define a fixed exchange rate between the two currencies.
Next, Venezuela would have to make sure that it has enough dollars to actually buy all the bolivars currently in circulation, which would require auditing the entire monetary base of the nation.
Every single bank account, investment account, debt, obligation, mortgage, balance sheet, salary, contract and tax code would then need to be re-accounted.
A transition period would then occur, during which both the dollar and the bolivar would be legally accepted, while slowing phasing out and mopping up all remaining notes of the latter.
Assuming all went according to plan, the central bank of Venezuela would no longer be a central bank in any meaningful sense. All monetary powers would be stripped away, leaving the bank unable to print money or adjust interest rates. Instead, the bank would act like something of an administrative agent for the Venezuelan government, being responsible for auditing private banks, managing tax deposits and importing fresh supplies of physical cash when commercial banks find themselves in need of such.
Many countries around the world adopted the US dollar as their official currency decades ago. Panama has been using the USD since 1904; Marshal Islands and Micronesia since 1944; Palau since 1994; Ecuador and Timor-Leste since 2000; El Salvador since 2001. A number of American, British and Dutch overseas territories have also adopted the greenback.
Although the dollar is already the de facto currency of Venezuela, de jure adoption faces strong opposition from its current administration. Switching to a currency outside of the control of the government is never comfortable; the loss of monetary sovereignty is not to be brushed aside as a minor inconvenience. Beyond such concerns, losing the bolivar is also a matter of national pride, which, for historical reasons, is notably high in Venezuela’s case. The oil-rich nation suffered awful leadership under Chávez and later Maduro, whilst simultaneously being put under pressure by US economic sanctions. Maduro now awaits trial in a New York detention centre, while American energy giant Chevron is rapidly expanding its operations throughout Venezuelan oil fields.
Venezuela may have to swallow its pride to regain its prosperity.
Дериватив болон хөшүүрэгтэй бүтээгдэхүүнээр арилжаа хийх нь өндөр эрсдэлтэй бөгөөд таны анхны хөрөнгө оруулалтаас давсан алдагдал хүлээх эрсдэлтэй. Арилжаа хийхээсээ өмнө манай Нөхцөл, болзол (T&C) болон Бүтээгдэхүүний мэдээллийн баримт бичиг (PDS)-ийг уншина уу.
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