Economy First Look

Why is Venezuela taking 100-bolivar notes out of circulation?

The decision shines a light on Venezuela's own version of a border drama.

A customer holds a stack of 100-bolivar notes at a bakery in downtown Caracas, Venezuela, on Monday, Dec. 12, 2016.
Fernando Llano/AP
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Venezuela withdrew its 100-bolivar notes on Thursday, promising to introduce new banknotes to replace the bill that makes up almost half of the country’s circulating bank notes, just 72 hours after the policy was announced by President Nicolas Maduro.

The switch is an attempt by Mr. Maduro’s government to tamp down inflation rates, estimated at around 500 percent, by targeting smugglers who traffic state-subsidized goods on the black market, which has mushroomed as the rest of the oil-based economy has fallen. Maduro accuses Colombia-based smugglers of hoarding bolivars outside of the country in order to buoy the black market, part of a larger effort he describes as an “economic war.”

Critics say the government’s longstanding price and currency controls are the real root of the economic crisis, and call the campaign against black marketeers a distraction. The campaign has aggravated Venezuela’s own version of an ongoing border drama with Colombia, one that has flared at times into xenophobia and put the spotlight on the cross-border trade of household goods by criminal mafias.

The conflict has played out most acutely in the border state of Tachira, where ties with Colombia have historically been stronger than with Caracas, as The Christian Science Monitor reported in 2014.

"Price controls on goods such as cooking oil, milk, and toilet paper, coupled with a weak currency, have increased the flow of goods across the border," Sibylla Brodzinsky wrote for the Monitor:

In San Cristóbal, Oscar Guzmán, a bodyshop worker, got up at 4 a.m. recently to be second in line outside a supermarket that opens at 8 a.m.  He was there to see if he could find corn flour, which is used to make traditional arepas, or corn cakes. Mr. Guzmán was in luck: the store had the special flour in stock, but with the shelves nearly bare, he was allowed to purchase only one kilo. In his family of five, this wouldn’t last for long, but he said he would take what he could get.

Meanwhile, across the Colombian border at the central market in Cucuta, stacks upon stacks of the very flour Guzman needed are unloaded from trucks. The bags were brought across the border from Venezuela by what locals on both sides of the frontier call criminal mafias, and in Colombia are sold for a profit. At wholesale in Cucuta, the package that sold for one cent in San Cristóbal now sells for $1.25, a small fortune for most Venezuelans. 

This is just one example of contraband crossing the border, but it can include everything from cooking oil and motorcycles to gasoline.

Since an August 2015 attack that wounded three Venezuelan soldiers – an attack that Maduro blamed on right-wing paramilitary groups – the border with Colombia periodically been mostly closed, with restrictions lifted to allow locals to stock up on basic supplies, as Al Jazeera noted in September.

In announcing the currency swap this week, Maduro also extended the closure of the Colombian and Brazilian borders for another 72 hours to keep hoarded cash from re-entering the country.

"I have given the order ... to close immediately, all the terrestrial and aerial maritime possibilities so that they do not return all those notes that were taken from Venezuela," Maduro said, according to UPI.

And he announced the discovery of a warehouse near the Colombian border that was being used by an unidentified NGO to store contraband bills, according to Univision.

"There exists a permanent center of attack to our currency and exchange system with the extraction of notes," he said.

The change has so far proven chaotic for many Venezuelans, who lined up at banks to deposit bills that would soon become worthless but were unable to take out new bills that haven’t yet been received by many banks.

"Many countries in the world have changed their currencies but afforded enough time to exchange the old notes with new ones," said a Caracas man identified as Carlos by the Guardian, in an interview with the site. "Think of Europe and the euro. And when [late ex-president Hugo] Chávez changed the Venezuelan bolivar to Strong bolivars both currencies could be used for several years."