NEW YORK (Reuters Breakingviews) - Venezuela’s President Nicolas Maduro is rearranging the economy’s deckchairs. A plan he announced on Friday night to devalue the bolivar, peg it to an obscure state-backed cryptocurrency and raise the minimum wage is likely to widen the gaping hole in the OPEC member’s finances.
In the fantasy world that passes for economic policy in Venezuela, the new measures will free the bolivar currency from enslavement to the U.S. dollar by pegging prices and salaries as well as the new “sovereign bolivar,” shorn of five zeros, to the petro. That’s the cryptocurrency Maduro’s government launched earlier this year. It is backed, in ways that are not entirely clear, by Venezuela’s oil reserves, the world’s largest. It is hard to see how this would all work, even with a competent government at the helm.
Maduro’s is not that. The International Monetary Fund estimates inflation will hit a Weimar Republic-like level of 1 million percent this year. Oil output, virtually the country’s sole source of foreign exchange, has fallen to 1.5 million barrels per day or lower due to mismanagement at state oil company Petroleos de Venezuela. In a glimmer of good news for PDVSA, it agreed on Monday to settle an arbitration award for $2 billion with ConocoPhillips that should allow it to start exporting crude from facilities in the Caribbean again. But production is at a level not seen since the 1950s. And GDP is in free fall.
Many Venezuelans are malnourished and hundreds of thousands have fled the country, seeking economic opportunity elsewhere and straining the resources of neighbors in Brazil and Colombia, in particular. Maduro may be hoping to buy some kind of economic relief by hiking the minimum wage before following through on a plan announced earlier this month to raise heavily subsidized domestic gasoline prices. That is the third rail of Venezuelan politics.
Intended to halt fuel smuggling and save the state billions of dollars, the move could easily backfire. Many Venezuelans recall the so-called Caracazo of 1989, when hundreds died in riots sparked by a fuel-price increase. Maduro hopes to limit the impact by maintaining subsidies for Venezuelans who register their vehicles in a state census. That may just exacerbate tensions, though, between those receiving state handouts and those not. The Venezuelan ship of state may be heading for a very big iceberg.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.