Hyperinflation in Venezuela and Petro Cryptocurrency

crisis in venexuela and petro cryptocurrency

By the year 2014 premises of a complex political and economic crisis have formed in the Latin-American state of Venezuela and just a few years later the country’s economy came to pieces. The number of those pieces is quite big and the evidence of that is the fact that Venezuela of 2016-2018 is often compared to Germany in 1921-1923, which is one of the most notorious examples of hyperinflation in the modern history. So, according to IMF, inflation in Venezuela can reach the index of 1.000.000%. However, as it often happens, millions of people stand behind percents, indexes and economic terms and these people are not happy about free subway, cut working hours and millions in their pockets.  

Today The Coin Shark will tell about economy in Venezuela, severe economic crisis and about efforts to overcome it, including the issue of a state cryptocurrency called Petro.  

Contents:
(please, click the topic to scroll down to it)

  1. How did it start?
  2. What is the situation today?
  3. What does it have to do with cryptocurrency?
  4. What is Petro?
  5. Will the cryptocurrency help Venezuela’s economy?

1. How did it start?

In 2013 president of Venezuela Hugo Rafael Chavez died, he ruled the country since 1999. The winner of the next elections was Chavez’s comrade-in-arms and present president Nicolas Maduro Moros. Economic problems in Venezuela deepend significantly in 2014 already. It is an open secret that the Latin-American state is a major oil exporter and the country’s economy directly depends on the market price on the black stuff. So, for example, in 1973-1974, when the oil prices on the international market grew significantly, Venezuela’s export income increased 400%. It gave the government an opportunity to implement plans on agriculture, energetics and heavy industry development. In the connection to the slip in prices on oil in 2014-2016 the effect was inversely related to the previous one – economic crisis deepened, GDP started falling, national currency continued to cheapen and people started experiencing food shortages.

Source: Bloomberg.com

The deep crisis started from energy sector and then spread across the whole economy. Back to the peak of the energy crisis state employees worked only two days per week for the country to save up electricity. In summer, 2018, citizens of the capital city Caracas started using the subway for free, as the state company that printed tickets had no money to buy imported materials.

2. What is the situation today?

This is just one of the examples of how the government tries to save currency resources. In the interview to the Deutsche Welle a venezuelan economist Pablo Rafael Gonzalez mentioned that strict currency control implemented by the government fixed all the prices at the once conducted evaluation.  
He believes that it has lead to the failure that we can observe now – 1 dollar costs 2,5 million bolivars. It is 17 times higher than the official exchange rate. A Venezuelan’s salary is 5,5 million bolivars. A kilogram of meat costs 10 million. Minimum price for bread on the country’s biggest island (Isla Margarita) is 1 million 400 thousand bolivars, according to the expert.

May, 2018 the country held presidential elections resulted in the expected victory of the current President Maduro. Leaders of G7, as well as some Latin America countries did not recognize the elections. In Venezuela it also boosted political crisis and resulted in new clashes between protesters and the government. The active protest movement started back in 2014, and as the result, supporters of the ruling party lost parliamentary elections in 2015. The situation is still extreme and some media has already started headlining their articles like Venezuela is on the verge of civil war. Indeed, these conditions do not allow to talk about possible economic upturn. According to IMF, Venezuela’s economy has reduced by 50% within five years of the crisis, which is the world’s most significant economic downfall in the last 60 years.

3. What does it have to do with cryptocurrency?

August 20th, 2018 Venezuela’s government carried out huge denomination of the national currency – it chopped as many as five “zeros” from bolivar. At the same time, bolivar was to be pegged against the state cryptocurrency called Petro.

Maduro assured that Petro “will help the country increase its monetary sovereignty” and overcome economic blockade, first of all the U.S. sanctions. According to Maduro, the cryptocurrency could help process transactions to find new budget sources. Maduro announced the plan to issue cryptocurrency in December, 2017.

March, 2018, Maduro announced that Petro’s pre-sale attracted more than  $5 billion, reported a local media. The was not much enthusiasm about the issue of this cryptocurrency in the world, news agencies headlined it as scam and Donald Trump issued an order prohibiting American citizens to purchase or use Petro.

4. What is Petro?

The idea of a strong currency backed by raw materials belonged to former president Hugo Chaves, reports Al Jazeera, as referred to the white paper published by the government. Since the national currency is pegged against Petro, it aims to overcome sanctions adopted by the U.S. The country allocated 5 billion barrels of oil to back its cryptocurrency. On May 23rd, Maduro announced that all citizens and companies could purchase Petro in exchange for yuan, rouble, Turkish lira and euro, as well as for Bitcoin, Ethereum, NEM.

A part of the cryptocurrency community is rather sceptical about Petro and says that this is a fake cryptocurrency controlled by the government and subject to corruption. Wired writes that Venezuela’s financial system – the currency backed by the cryptocurrency that is backed by oil – is actually scam on top of another scam.

5. Will the cryptocurrency help Venezuela’s economy?

The government claims that investments attracted through Petro, would help the country pay a part of its debt. Foreign trade minister Jose Vielma Mora claimed some Brazilian companies agreed to export foodstuff to Venezuela using Petro, though there were no official comments from Brazilia. It is clear that given deep systemic economic problems in Venezuela (including problems related to economic undermanagement), severe political and social crisis, the issue of the state cryptocurrency will hardly change the situation for better. At the same time, the real economic effect of the recently launched cryptocurrency is probably still to be determined.

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