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Maduro has a plan to fix Venezuela’s inflation — which may make things worse

Customers shop for food at Las Pulgas market in Maracaibo, Venezuela, on Sunday. (Fernando Llano/AP)

CARACAS, Venezuela — With President Nicolás Maduro’s radical new plan to curb runaway inflation poised to come into effect Monday, Venezuelans braced for what experts say could soon be a deeper plunge into economic chaos for this broken South American nation.

Maduro late Friday outlined a dramatic effort to curb inflation that has been spiralling toward 1 million percent, raising the minimum wage by more than 3,000 percent and officially devaluing the already nearly worthless bolívar by more than 90 percent. He additionally said in a televised address that the currency, which was already scheduled to shed five zeros Monday, would now be backed by Venezuela’s petro, a virtual currency linked to oil reserves that the government created in February and that experts have called a sham.

But analysts said the plan failed to address the fundamental problems causing inflation – the willy-nilly minting of bolívares, collapsing oil output and a complete lack of confidence in the government.

As Venezuelan President Nicolás Maduro’s economic plan for more than 90 percent currency devaluation is set to start some fear it could lead to price hikes. (Video: Reuters)

Few Venezuelans appear to have faith in the fix, with many expressing broad fears that it may only make the situation worse. In the capital, Caracas, residents rushed to supermarkets and gas stations on a gloomy Sunday, desperate to stock up on basics. Some shop owners – unsure of what to charge their customers – fretted over whether to open their doors this week at all.

The divided opposition called for a national strike Tuesday, asking businesses to remain closed and people to take to the streets.

In a country in a deep economic crisis, the announcements left people here wondering how much worse the situation could get, with many afraid of losing their jobs as businesses scrambled to either adapt or close down completely.

“I don’t understand what Maduro said or what is happening, but everyone says things will get worse,” said Julio Ramirez, a 60-year-old worker in a crowded eastern Caracas supermarket on Sunday. “Tomorrow we will open, but I don’t know what is going to happen after.”

During a national television broadcast Aug. 7, Venezuelan president Nicolas Maduro said he is seeking to extradite "responsible parties" linked to drone attack. (Video: Reuters)

Antonio Bastidas, 48, manages three restaurants inside private clubs in Caracas that he said are at risk of closing. “We will open for eight days with the food that we already have,” he said, “but don’t know how much our providers will increase their prices after, or how much customers are willing to pay for dishes now that we have to increase salaries by so much.”

“We have reached a limit,” he added. “It makes me sad, because of our hundred employees. It’s depressing to see how the system is sinking what we’ve dedicated our lives to create.”

Maduro, who blames the crisis on an “economic war” waged by the United States and other “imperialist” countries, is urging people to trust him. “Slowly, slowly, we will implement the new policy and once you understand it, you will like it,” he said Friday.

But a lack of credibility is one of the main reasons why experts expect the plan to fail. The measures, they say, can only be superficial as long as the central bank continues to print money to cover government spending — the original cause of the problem that has brought the annual inflation rate to an all-time high.

Maduro said his plan aims to balance the country’s fiscal deficit by increasing income through higher taxes and gasoline prices. But success seems unlikely, experts said, with the country’s main source of income, its oil company, producing less than it did three decades ago, and the government promising to pay private businesses’ wages for three months and to transfer bonuses to those who hold pro-government IDs.

“What the government gave was a confusing contradictory statement, like most things in today’s Venezuela,” said Steve H. Hanke, a professor of applied economics at Johns Hopkins University and an expert on hyperinflation. He served as an adviser to Venezuela’s president, Rafael Caldera, in 1995-96.

“Whatever the course of inflation is now, it will continue after these statements,” Hanke said. “There may be volatility in the exchange rate for a period of transition, but it’ll go back to its normal course when people figure out it was all a scam.”

Francisco Rodríguez, chief economist at Torino Capital, an investment bank in New York who had devised a plan to dollarize the country’s economy as part of presidential candidate Henri Falcon’s campaign earlier this year, said: “There are many serious problems with the plan, but I essentially think it will fail because no one believes the government will stop printing money. People will keep raising their prices and the government won’t be able to keep its promises.”

People are already buying dollars on the black market at a 30 percent higher price than on Friday before the announcements.

Alejandro Diez, who owns 85 fast food restaurants and three food factories nationwide, said that he will open Tuesday with a 60 percent increase in prices and that he estimates 50-fold price hikes in the next month. “It’s possible that we will have to reduce our number of employees, now at 1,800, and that we have to close some of our stands. We anticipate a deep fall in sales, too,” he said.

Members of the Venezuelan Chamber of Shopping Centers said they were surprised by the announcements. “We’re awaiting more information but we believe it’s going to be an uphill battle for businesses in our centers to sustain themselves with these new measures,” executive director Claudia Itrago said.

As economic woes appear set to deepen, neighboring nations are dealing with a historic exodus of Venezuelan migrants seeking food and shelter. After arrivals numbering in the tens of thousands, Ecuador and Peru in recent days have imposed new rules requiring passports for entry — something most Venezuelan migrants lack.

After the stabbing and robbery of a local merchant by Venezuelans on Saturday, residents of the Brazilian border town of Pacaraima chased Venezuelan migrants out of makeshift camps, then burned and bulldozed their belongings.

The Brazilian military said Sunday that 1,200 Venezuelans have returned to their country after authorities suggested they do so for their own safety before the deployment of additional troops to the area to keep the peace. Residents of Paracaima are reporting that the city’s streets are empty Sunday.

Maduro, who in May won elections that dozens of countries and the opposition called a fraud, has barely 20 percent popularity, according to polls. Earlier this month, he was the target of an alleged assassination attempt during a speech, when drones exploded near the stage where he was speaking.

A dozen people, including a young lawmaker and two top military officials, have been jailed in response. But critics have cast doubts on the government’s version of the events.

On Monday, five zeros will disappear from ’ accounts, which will hold a newly named currency: the “Sovereign Bolívar.”

Venezuela, whose hyperinflation ranks 23rd compared to other nations in world history, is just one more troubled country where zeros have been slashed from currencies. Hungary’s currency lost 29 zeros between 1945 and 1946, and Yugoslavia’s lost 27 zeros from 1990 to 1994, said Hanke, the economist.

“It’s typical in currency reforms but if you don’t change monetary policy, nothing changes. It’s like going to a plastic surgeon and getting a face lift. You’re superficially altered but you’re still the same,” he said.

Faiola reported from Manaus, Brazil.

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