The money supply has expanded too much, and the cash supply too little
VENEZUELAN hawkers on the border with Colombia call it “money art”. The handbags, purses and hats they sell are made from nearly new Venezuelan banknotes and sold as mementos. Payment is in “real money”, meaning Colombian pesos. The handicrafts cost the equivalent of $5 or so. The raw material—banknotes in denominations of two, five and even 100 bolívares—are still legal tender in Venezuela. But inflation is so high they are worth more folded up into origami objects than as cash. The free-market exchange rate is about 3.5m bolívares to a dollar.
The worthlessness of Venezuela’s currency is the result of inflation, 46,000% a year, which in turn is largely caused by the printing of money to finance the government’s deficit of 30% of GDP. But there is also a shortage of banknotes. In the looking-glass world of Venezuela’s economy, cash itself trades at a premium to its face value, making it slightly less worthless than bolívares in other forms.
Banknotes, like other necessities, are mostly imported. Four foreign firms—including Crane from the United States and De La Rue, a British firm—print the bulk of them. The central bank’s own printer, near the city of Maracay, produces less than 5% of cash. Two years ago the bank’s then-president, Nelson Merentes, predicted that Venezuela would become an exporter of banknotes, but that never happened. The printer can barely keep enough workers to fulfil its modest domestic order book, probably because they are paid in the same near-worthless currency they print.
Domestic or foreign, the printers are losing the race against inflation. In December 2016 Venezuela’s president, Nicolás Maduro, decreed that the 100-bolívar note, then the largest in circulation, would cease to be legal tender within three days. Venezuelans thronged the banks to get rid of the notes, but the promised larger denominations never showed up. The government had put in the order late and paid late. Queues formed again outside banks, this time to withdraw the notes that had been given a stay of execution.
Days later, official television broadcast live the arrival of new 500-bolívar notes on emergency flights, along with commentary suggesting this would save the economy. Alas, too few came and inflation had already eroded the value of each note to 20 cents. By mid-2017 banks restricted withdrawals to the equivalent of a dollar a day.
In November last year 100,000-bolívar notes finally arrived, but not enough to meet demand. So, even as their value plummets, traders sell bundles of assorted banknotes for up to three times their face value. Consumers still need them for bus fares and coffee, among other things. A similar thing occurred in Zimbabwe in 2007, which also suffered a cash crunch.
Much of Venezuela’s economy now runs on debit cards and bank transfers. But tills with small screens cannot handle the billions of bolívares needed to buy, say, a television. Mr Maduro’s latest wheeze is to replace the “strong bolívar” (introduced in 2008) with a “sovereign bolívar”, worth a thousand times more. The new currency will fit more easily on screens, but will do little for the cash shortage and nothing for inflation. Again the government placed the order with the printers too late for the original launch date of June 4th. By the time sovereign bolívares appear, supposedly in August, they, too, will be nearly worthless. The biggest-value note in the new currency—500 sovereign bolívares—would be worth about 15 cents now.
Venezuelans’ misery has at least boosted business at foreign printers, who seem stunned by the windfall. “They just keep ordering more and more. Billions of notes. It never stops,” said a source close to one of them. Sadly, they will soon be more useful for making purses than purchases.