Venezuela should abolish central bank; lopping zeros off Bolivar is a scam: Steve Hanke
ECONOMYNEXT – Venezuela should abolish its notoriously incompetent central bank in favour of dollarization or a currency board for lasting stability, and the latest attempt to stop hyperinflation by slashing zeros off the bolivar is a cosmetic scam, a top economist has said.
Venezuela’s central bank is replacing its hyper inflating bolivar with a ‘sovereign’ currency at the rate of 1 for every 100,000 with five zeros being taken off.
Steven Hanke a professor at The John Hopkins University, Baltimore, who runs a project tracking troubled currencies at Cato Insitute, a think tank, calculates the current hyperinflation in Venezuela is running at 48,760 percent a year.
In the days before currency reform the Bolivar had fallen to 6.6 million to the US dollar, with the official exchange rate at 248,521 to the US dollar, giving a black market premium of 2,584 percent.
Hanke says cronies of the socialist President Maduro who get dollars at the official rate, could dump them in the black market at massive profits.
Taking zeros off the currency notes is a cosmetic exercise without radical changes to the central bank, he said.
"The bolivar’s redenomination will be like going under the knife of one of Caracas’s famed plastic surgeons," Hanke said writing in Forbes, a business magazine.
"Appearances change, but, in reality, nothing changes. That’s what’s in store for the bolivar: a face lift."
The new currency is linked to the Petro, a so-called crypto currency which is supposedly based on petroleum but is considered a scam, Hanke said.
In 1990, Hanke recalled, he was asked to advise the then Yugoslav administration, which also proposed to slash zeros.
"With that face lift, four zeros were removed," he said.
"I concluded that the convertible dinar would never survive and argued that the only thing that could save the dinar would be a currency board in which the dinar traded freely at a fixed rate with the Deutschemark and was backed 100% by Deutschemark reserves.
"I was so convinced that the Yugoslav currency reform of 1990 would end in disaster that I co-authored a book with Kurt Schuler on what Yugoslavia should have done with the dinar, namely make it a clone of the Deutschemark.
"Alas, my advice was not followed, and the dinar’s zeros just kept coming off in one cosmetic currency reform after another."
In 1992 one zero had been removed. In 1993 six zeros had been removed in October and another nine in December. In January 1994, when with monthly inflation at 313,000,000 percent, another seven zeros were taken off.
"In total, from 1990 through 1994, five new dinars were issued and 27 zeros were removed from the hapless dinar," Hanke said.
"Unless Venezuela adopts a completely new currency regime—like a currency board, or dollarization—the bolivar will face the same fate as did the Yugoslav dinar.
"Hyperinflation will soar and the bolivar will more frequently come under the knife." (Colombo/Aug20/2018)