Venezuelan President Nicolas Maduro announced Friday that he would be implementing a new currency overhaul in an attempt to end the prolonged economic turmoil in the country. However, critics are afraid the move will exacerbate hyperinflation in the country, reports CNBC.
Maduro and his administration are set to implement economic reforms, one of which will introduce new banknotes that lop five zeros off the bolivar. Despite warnings from the International Monetary Fund that the move will greatly increase Venezuela's inflation rate, banks are set to close on Monday to implement the new "sovereign bolivar."
The change in currency will devalue the Venezuelan bolivar by 96 percent, raising the exchange rate from 285,000 per dollar to six million. Other reforms have included raising minimum wage 3,000 percent, implementing a higher corporate tax rate, and increasing the price of fuel to international levels to prevent fuel-smuggling across borders.
Economists expect that the proposed measures will worsen the economic situation even after the government has been forced to default on their bondholders and face the possibility of increased U.S. sanctions.
President of the Caracas-based pollster Datanalisis Luis Vicente Leon expects the reforms to cause problems for domestic business, according to a tweet he posted on Friday.
"The transition to apply the concrete elements of the proposal: exponential increase in salaries, massive requests for advancement of benefits and increase and change of frequency of tax payments puts companies in a situation of catastrophic cash flow."
Despite the warnings and criticism, Maduro is confident that the new measures will help the crisis-stricken country.
"I want the country to recover and I have the formula. Trust me. They've dollarized our prices. I am petrolizing salaries and petrolizing prices … We are going to convert the petro into the reference that pegs the entire economy's movements," he said in a speech broadcast on Friday evening.
When Maduro replaced Hugo Chavez in 2013, he maintained the overvalued exchange rate and increased control over the U.S. dollar, making it difficult for Venezuelans to exchange their currency. The result increased the number of bolivars available but caused a decrease in imports. Ultimately, lower import rates raised domestic prices and caused Venezuela to end up in the economic crisis that it is now facing, according to CNBC.
As problems continue to arise in Venezuela, many citizens are fleeing the country. According to data from the United Nations, 1.5 million people have left since 2014. Unfortunately, people leaving the country only worsens economic problems as the labor force takes a hit.