Inspired by India, Venezuela demonetises Bolivar 100 notes

As one worried, the Indian demonetisation exercise could inspire many other countries going ahead. After all if one can knock off 86% of currency in a country like India, it is much easier to do in other countries.

Venezuela is the first to follow which knocked off its highest denomination till date – Bolivar 100 – from circulation. The 100 note is worth just 2 cents and requires bags of notes to even buy a loaf of bread. It is estimated as 48% of the total currency circulation.

Obviously the contexts are very different. India was doing fine – it had steady growth, low inflation and so on. Venezuela had everything in opposite and it is not surprising to see its Government come out with some tricks to sideline the other major issues. But then most demonetisations in the past have happened to counter several economic malaise as well.

The President of Venezuela Nicholas Maduro said in the typical heroic fashion – we must keep beating the mafias:

2016 has become an all-out war against cash. Last month, India almost instantly demonetizedtheir most used paper currency notes, the 500 and 1000 Rs. This has caused massive problems throughout the country, resulting in the deaths of people as they wait in line to exchange money, and a soaring market for Bitcoin.

Now, embattled Venezuelan President Nicolas Maduro announced on Sunday that the 100-bolivar bill will be decommissioned.

In India, Prime Minister Narendra Damodardas Modi announced on Nov. 8 that the government would remove India’s most used currency notes to fight “black money,” or money that is undeclared and untaxed in the underground economy. On Sunday, President Maduro seems to have taken a page out of Modi’s book, referring to “mafias” smuggling the currency.

President Nicolas Maduro said on state television:

“There has been a scam and smuggling of the one hundred bills on the border with Colombia. We have tried the diplomatic way to deal with this problem with Colombia’s government; there are huge mafias. I have decided to take out of circulation bills of 100 bolivars in the next 72 hours. We must keep beating the mafias.”

Venezuela is in the middle of a vicious case of hyper-inflation that has seen the rate for their bolivar versus the world’s global reserve currency, and the U.S. dollar, fall over 50 percent in the black market within the past month. People wait in line for hours to shop for food or use ATMs. Paying a supermarket bill without a debit or credit card can often require a backpack full of cash. Many are asked to use bank transfers instead of cash or even card payments.

On 8-Dec 2016, the central bank had announced that is will issue much higher denomination notes on 15 Dec 2016.

As of December 15, 2016, progressively, the Central Bank of Venezuela (BCV) will put into circulation six new bills Bs. 500 Bs. 1,000, Bs. 2,000, Bs. 5,000, Bs. 10,000 and Bs. 20,000. Also coins of Bs. 10 to Bs. 50 and Bs. 100. These monetary species that coexist with current, will streamline the payment system and facilitate commercial transactions for the benefit of the general population.They will be distributed by the central bank through its headquarters in Caracas and Maracaibo, and through the banking system throughout the country.

To determine the required denominations, the BCV carried out technical studies that also employ other central banks.

Among the advantages associated with the new monetary notes that, by requiring a smaller amount of notes and coins to cancel goods or services, productivity is maximized; production costs, replacement and relocation of the national banking system will be minimized; and use to the general population will be provided.

The President of the Republic, Nicolas Maduro, announced on December 2 that the process of issuing new banknotes forms part of the measures taken by the Venezuelan government to expedite the flow of the national monetary system. “Several million tickets 500 bolivars and then several million bolivars 5,000 will go into circulation as part of the measures we have agreed.”

And in the interim the government decided to knock off 100 note which has very little purchasing power but is used highly due to hyperinflation in the country. It is a classic case of how governments only try and make living more complicated for people who have been struggling anyways. If you can’t do good, do no harm atleast..

Who knows. India could have just set this new trend/fashion for governments worldwide. One will not be surprised to see many few more governments using this tactic of knocking off currency suddenly under different names (withdrawal/decomission/demonetisation). The usual threat of high currency being used for mafia/terrorism funding shall be used to justify these actions.

We could be seeing governments once again taking control of monetary policy via a different route. We have also seen how these experiments have turned out in the past.

Interesting times..


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