Venezuela: Maduro Announces Economic Reforms Including Monetary Reconversion, Tax Breaks & Currency Control Changes

The measures also transfer an entire oilfield from PDVSA to the Central Bank.

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Maduro meets with his economic cabinet, making announcements to the country (Miraflores Press)
Maduro meets with his economic cabinet, making announcements to the country (Miraflores Press)
By Paul Dobson
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 Mérida, July 26, 2018 (venezuelanalysis.com) – Venezuelan President Nicolas Maduro announced a series of economic reforms Wednesday which, he hopes, will contribute to stabilising the national currency and building international reserves, as well as stimulate the country's productive apparatus. The measures also point towards a further opening up of the fixed exchange rate system, which has existed episodically in Venezuela since 1983.

The announcements are Maduro’s first economic moves following his May electoral promise to resolve the country’s economic ills.

“The whole country is crying out for great economic changes, for stability, wealth generation, and the satisfaction of our people’s needs,” Maduro recognised from the presidential palace. “I ask for your confidence, I ask for your support, beyond ideologies and political positions, because Venezuela needs this change," he went on to say.

A recent Hinterlaces poll has shown that 58% of those asked would prefer that Maduro, rather than any other personality, be the person to resolve Venezuela’s economic woes.

The first of the economic measures he announced is a further postponement and modification of the planned monetary reconversion, which will replace the country’s Strong Bolivar (BsF) with the Sovereign Bolivar (BsS).

Following discussions with banking lobby groups -- who claimed that they were not ready for such a change -- the reconversion, initially scheduled for June 4, was postponed until August 4. Now Maduro says it will “definitely” happen on August 20. The reconversion will also be more radical than initially planned, knocking five zeros off the currency instead of the planned three.

In a similar vein, the president declared that the currency will be anchored in the new Petro cryptocurrency, whose value is itself linked to the price of Venezuelan oil. Launched in February, the Petro is still limited to international commerce and remains beyond the reach of Venezuelan citizens, despite official plans to extend its use. It is subject to a range of US-led international financial sanctions which bar US citizens and firms from trading in the crytocurrency.

Upon announcing the reconversion in May, Maduro claimed that it will address Venezuela’s spiralling inflation, which a recent International Monetary Fund report says could reach one million percent this year.

However, critics to Maduro’s left and right have doubted the effectiveness of the measure in isolation, suggesting that it will only work if accompanied by other inflation-tackling policies.

The end of currency controls?

As part of the series of measures announced this week, Maduro declared that he had introduced a white paper to reform the 2008 law on illicit exchange.

Without disclosing the content of the proposal, the president explained that it will “encourage foreign investment, as well as eliminate the barriers of illicit exchange which correspond to other times…[allowing] the free flow of this investment which the country needs.”

He added that the measure forms part of an overhaul of the national economy, and is “adjusted to the policies of the New Start.”

At present, Venezuela’s currency controls offer heavily subsidised foreign currency for strategic imports and prevent large-scale capital flight. However, limited access to official exchange mechanisms has given rise to a currency black market, which many small businesses use to determine prices. In recent years, the government has loosened currency controls in an effort to correct the economic distortions which the controls are believed to have caused.

Currently, one subsidised Euro can be acquired for 168,000 BsF, whilst the same would obtain over 4,000,000 BsF on the black market.

Central Bank gifted “ugly duckling” oil field

Speaking Wednesday, President Maduro also decreed that the Ayacucho II Bloc of the Orinoco Oil Belt in Bolivar state would henceforth belong to the country’s Central Bank, in a measure which he described as “historic.”

The bloc, which contains extra-heavy crude oil, has a capacity for 29,298 million barrels and previously belonged to the state-run oil company PDVSA.

Maduro claims the measure will “strengthen” the Central Bank’s international reserves, its “financial muscle,” and its “payment capacity.”

The Venezuelan state has suffered from numerous credit downgrades in recent years and is currently subject to a series of financial sanctions that hamper access to international loans. Recent efforts to strengthen the country’s financial backbone include the repatriation of assets and the banking of gold extracted in the controversial Mining Arc project.

PDVSA has attempted to offer the Ayacucho II oil field as collateral in debt negotiations many times in the past without success, Venezuelan journalist Pedro García Otero claims. Its expensive development requirements make it the “ugly duckling” of the Orinoco Belt, he alleges.

Tax breaks to stimulate private production

Amongst his package of new policies, Maduro also announced a tax moratorium for private sector prime materials importers.

“I proceed to exonerate, for one year, all [import] taxes for those who bring in capital goods, prime material, machinery, supplies, farming provisions, and repair parts,” he explained.

The measure looks to stimulate and “support” the country’s producers, making it cheaper for them to update their equipment according to Economic Vice-President Tarek El Aissami.

Venezuela’s private productive base has deteriorated in recent years, with many companies choosing to abandon the country rather than face hyperinflation, strong labour laws, expropriation threats, and supply problems.

Although promoting national production and breaking with the traditional oil-dependent economic model has long been a key part of the current government’s discourse, critics point to a lack of concrete measures backing up the well-received policy.

“Venezuela throughout the 20th century established an absolute dependence on oil income, and the Venezuelan bourgeoisie (…) was directly connected to an importing, underproductive economy which had as its objective the capturing of the petrodollars for their own wealth accumulation,” Maduro explained.

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