The government chaired by Nicolás Maduro dictated a series of economic measures among which are the reduction, and possible rationing, of the subsidy on the price of gasoline; a fluctuating and freer exchange rate in which the currencies of natural and legal persons would be auctioned and not those of the State as had been done up to then; in addition, it also announced an increase in the Value Added Tax (VAT) of 4%, for which said tax will increase from 12% to 16%; a wage increase that brought the national minimum wage from 3,000,000 VEF to 180,000,000, proposing that, in turn, the State will be responsible for paying the wage differential to the private sector during the next 90 days. All this was done within the framework of the monetary reconversion that proposes to change the Bolivares Fuertes (Strongs Bolivars/VEF) for the Bolivares Soberanos (Sovereigns Bolivars/VES), carrying out a reduction of five zeros.
The first thing the government has done is to make the monetary conversion, change VEF for VES, each Sovereign Bolivars equals 10,000 VEF, this has already happened, on Tuesday, August 21, all bank accounts at the national level updated their amounts stipulated in the new Sovereign Bolivars.
The key to understanding the set of economic measures applied by the government is to understand the objective it wants to achieve, and the objective that the government wants to achieve with this series of policies is to reduce the fiscal deficit.
Why does the State want to reduce the fiscal deficit?
When a State spends more money than it enters, it must obtain the money from somewhere, usually the money is obtained from the debt, by issuing sovereign bonds in international markets, and in other cases, the State obtains it from the issuance in cash or in digital of new money; in this case, bolivars obtained from the Central Bank.
By issuing new bolivars and introducing them into the national economy through the various mechanisms that the State has to spend money, there is an increase in the money supply, and if this increase is not accompanied by an increase in production, which is most likely, money is devalued with respect to the available products, causing inflation.
For years the Venezuelan government has promoted an economic program that requires immense public sector spending, much more than it can earn through taxes or the sale of oil, thus, a policy of indebtedness and monetary expansion was used, which generated a lot of inflation, and the government decided to control the exchange rate with a rather rigid monetary control, which originated and favored the parallel market, causing the currency will be constantly devalued.
It was then that confidence in the bolivar was lost and the economy was dualized, the dollar became the way to measure revenues and establish prices for merchants, and gradually the nation's economy fell into a hyperinflationary vortex that destroyed all the foundations that a stable economy needs.
The original problem, then, is the budget deficit of the government, therefore, reducing the deficit must be the priority to begin to solve the underlying problem.
This is where the new economic policies come in.
The government chaired by Maduro has tried to camouflage a series of austerity policies as a revolutionary and innovative project, but don't be fooled, it's just a fiscal cut policy.
The interesting thing about these policies is that they do not seem to be policies of austerity, but rather policies of spending and increase of the public sector, this is due to the apparent rise in wages, however, it is wrong to assume that and I will explain why.
The government intends to reduce, and probably ration, the gasoline subsidy, which represents, according to government figures, 18,000 million dollars a year, and according to The World Factbook, by 2017 the workforce of Venezuela was 14.21 million people, figure that has probably been declining, so it is feasible to assume that only with the reduction of a percentage of the subsidy of gasoline the State could face the payment of the wage differential that would occur in the private sector without having the need of increasing public spending, in fact, it would decrease it.
Then the government will inject into the economy for 90 days, according to my estimate, around 700 or 800 million dollars through salaries, and people will spend this money in a decentralized way buying goods and services, mainly from producers of food goods, for what ultimately entrepreneurs should receive that amount of money and from there keep their business.
With the increase in VAT, despite being probably the most insignificant movement of all, it will allow them not only to contribute to reducing the deficit, but also to help withdraw money in circulation.
On the other hand, maintaining a more open currency market and a price more in line with the economic reality, it will allow the private sector to reestablish its international operations, but unlike the year 2003 (where capital flight occurred), this time the incentives are not given for that to happen, but quite the contrary. Although the private sector will be able to acquire hundreds of millions of dollars for 90 days, and when the time comes to take charge of paying the payroll, the national currency will have been devalued due to inflation; paying wages and maintaining the business will require, possibly, an importation of capital, something that the private sector can do if it decides, which may help slow the devaluation a bit. After all, the payrolls calculated in dollars do not really mean a very large weight; Venezuela, even with the salary increase, would still have the lowest salary in the region. The nation has become a low-cost labor force, something that could be of interest to capitals from China, with whom Maduro's government maintains relations.
The monetary reconversion, finally, is not about an aesthetic movement, but logistics, it will facilitate the use of the systems, it will reduce the cost of storing and transporting cash, as well as it will probably put into operation again the ATMs, which were practically in disuse.
The economic measures taken by the government, this time, are not all bad, they are austerity policies. By economic measures like these, probably, protests would be generated in Europe, the government has made a massive cut on the gasoline subsidy, has increased taxes, has raised the rates of public services, and has camouflaged it with a wage increase that represent just thirty dollars per person. In fact, this same type of austerity policy, perhaps a bit more rigid, is what it demands, the one so feared by the government; International Monetary Fund.
The problem with all this is that to move from theory to practice requires a great leap, if the government does not articulate well each of the policies that it wishes to implement, or if it's not able to implement one of them in the same way that the others require, everything could fall apart, and mean a true economic chaos for Venezuelans. The biggest problem, of course, is the lack of confidence that the Petro generates as an instrument to anchor the Sovereign Bolivar, and if it does not generate the trust that the government expects, would compromise its entire economic proposal.
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