Venezuela resorted to desperate measures to arrest an economic collapse on Monday, lopping five zeros off the bolívar, devaluing it by 95 per cent and tying it to an obscure state-run cryptocurrency.

Opponents of the socialist government of Nicolás Maduro called for strikes and protests on Tuesday, when shops and financial institutions reopen after a bank holiday was used to put the drastic reform into effect.

As it tries to curb hyperinflation - which, by some measurements, is the worst in Latin American history - the government is also slashing fuel subsidies and raising the minimum wage by 3,000 per cent.

80,000% inflation

Annual inflation is running at over 80,000 per cent and the International Monetary Fund has predicted it will hit 1m per cent this year. Prices are doubling every four weeks, making life desperately hard for millions of poor Venezuelans, many of whom are going hungry or fleeing the country.

We have no idea what’s going to happen or what prices are going to be like now”

“We have no idea what’s going to happen or what prices are going to be like now,” said Ramón Suarez, a 37-year-old restaurant worker as he prepared for what promises to be tumultuous week marked by confusion, frustration and possibly unrest. “We might be better off if we just close the business altogether.”

“I want the country to recover and I have the formula. Trust me,” Mr Maduro told Venezuelans in a televised address on Friday night.

On Tuesday, Venezuelans will see the introduction of new banknotes, re-named “the sovereign bolívar”. The largest denomination note - 500 bolívars - will be worth 50,000,000 old bolívars - around €7 at the current black market rate. Adding to the potential for confusion, the old and new bolívars will run in parallel for a while until the old ones are phased out.

Mr Maduro says the new bolívar will be pegged to the petro, a state-run cryptocurrency he launched amid much fanfare this year. There will be 60 new bolívars to the petro, which in turn is worth $60 (€52), he said. That implies a currency devaluation of around 95 per cent from the state’s official exchange rate of just under 250,000 old bolívars to the dollar.

Farcical

Analysts attacked the plan for being farcical, noting the petro is not quoted on any recognised trading platform and can by issued at will by the government.

“He [MR MADURO]might as well have chosen pegging it to unicorns,” said Russ Dallen, head of Caracas Capital, an investment bank.

Steve Hanke, an expert on inflation at Johns Hopkins University in the US, said hyper-inflation would persist until the Maduro government adopted a currency board or accepted dollarisation - something Caracas is loath to do as it views Washington as the root cause of its economic woes.

EM Funding, a London-based consultancy, says Venezuela has set two unwanted records in recent years: the highest inflation rate ever recorded in Latin America and “the steepest plunge in activity endured by any Latin American country in the past 40 years”.

Citing IMF data, it said July’s annual inflation rate of 83,000 per cent beat the previous record set in Nicaragua in early 1991, while the Venezuelan economy had contracted 47 per cent over the past five years - worse than the deep recessions in Peru in the early 1990s and in Argentina in the early 2000s.

Impossible to forecast

Henkel García, an analyst at Econométrica in Caracas, said he was now forecasting inflation of between 300,000 and 400,000 per cent in 2018 “but in truth it’s impossible to make forecasts with a variable that’s so volatile”.

The big rise in the minimum wage is to compensate workers for the dizzying price increases and will come into force next month. It will take the monthly minimum wage from less than a dollar to around $30. Business owners say it will have a devastating impact on the number of people they can afford to employ.

“It’s almost like an expropriation. How can we possibly absorb a wage rise of that size?” asked Elizabeth Goncalvez, who runs a car park in a small shopping centre in Caracas. “We employ 13 people at the moment. We’re going to have to cut it to six.”

Cuts to fuels subsidies will be phased in. Until now, subsidies have been so generous that petrol is virtually free in Venezuela, creating a vast trade in contraband fuel that is taken over the border into Colombia and sold at profit. Mr Maduro says the trade costs Venezuela $18bn a year.

At times it feels like we’re dancing on top of a barrel of gunpowder”

He says he wants to increase pump prices to international levels and redirect the subsidies directly to individuals through bonuses paid via electronic transfers to their “Fatherland Card” - a state-issued identity card introduced last year. Some 17m Venezuelans - over half the population - now have the card.

Critics say the measure is just another way for the state to control who receives subsidies and who does not, according to their political loyalties.

“At times it feels like we’re dancing on top of a barrel of gunpowder,” said Juana González, a 66-year-old pensioner. “At some point it’s going to explode.” – Copyright The Financial Times Limited 2018