DLAR De La Rue Plc

CARACAS—Millions of pounds of provisions, stuffed into three-dozen 747 cargo planes, arrived here from countries around the world in recent months to service Venezuela's crippled economy.

But instead of food and medicine, the planes carried another resource that often runs scarce here: bills of Venezuela's currency, the bolivar.

The shipments were part of the import of at least five billion bank notes that President Nicolá s Maduro's administration authorized over the latter half of 2015 as the government boosts the supply of the country's increasingly worthless currency, according to seven people familiar with the deals.

And the Venezuelan government isn't finished. In December, the central bank began secret negotiations to order 10 billion more bills, five of these people said, which would effectively double the amount of cash in circulation. That order alone is well above the eight billion notes the U.S. Federal Reserve and the European Central Bank each print annually—dollars and euros that unlike bolivars are used world-wide.

Four spokesmen from Venezuela's central bank didn't respond to calls and emails seeking comment.

Economists say the purchases could exacerbate Venezuela's economic meltdown: injecting large numbers of freshly printed notes is likely to stoke inflation, which the International Monetary Fund estimates will this year hit 720%, the world's highest rate.

Central-bank data show Venezuela in 2015 more than doubled monetary liquidity, a measure used to gauge all money in the economy, including bank deposits.

Printing more bolivars is weakening the currency further. This week, the bolivar broke the psychologically important level of 1,000 per dollar for the first time on the country's thriving black market.

The country has several official exchange rates, including 6.3 bolivars to the dollar. On Wednesday the country's trade and investment minister, Jesú s Farí a, called for an overhaul of currency controls. "It's evident that the current currency regime has exhausted itself," he said in an interview.

Venezuela's 30 million people can't seem to get cash fast enough, said Steve H. Hanke, an expert on troubled currencies at Johns Hopkins University. "People want cash because they want to get rid of it as fast as they can," he said.

While use of credit cards and bank transfers is up, Venezuelans have to carry stacks of cash as many vendors try to avoid transaction fees. Dinner at a nice restaurant can cost a brick-size stack of bills. A cheese-stuffed corn cake—called an arepa—sells for nearly 1,000 bolivars, requiring 10 bills of the highest-denomination 100-bolivar bill, each worth less than 10 U.S. cents.

Rigid state price controls have only made matters worse, economists say, generating a thriving black market for just about every good, from car tires to baby diapers, in which cash is the preferred form of payment.

The bank-note buying spree is costing the cash-strapped leftist government hundreds of millions of dollars, said all seven of the people, who have been briefed on the deals Venezuela has entered with bank-note producers.

The high cost of the printing binge is an especially heavy burden as Venezuela reels from the oil-price collapse and 17 years of free-spending socialist rule that have left state finances in shambles.

Most countries around the world have outsourced bank-note printing to private companies that can provide sophisticated anticounterfeiting technologies like watermarks and security strips. What drives Venezuela's orders is the sheer volume and urgency of its currency needs.

The central bank's own printing presses in the industrial city of Maracay don't have enough security paper and metal to print more than a small portion of the country's bills, the people familiar with the matter said. Their difficulties stem from the same dollar shortages that have plagued Venezuela's centralized economy, as the Maduro administration struggles to pay for imports of everything, including cancer medication, toilet paper and insect repellent to battle the mosquito-borne Zika virus.

That means Venezuela has to buy bolivars from abroad at any cost. "It's easy money for a lot of these companies," one of the people with details on the negotiations said.

The huge order for 10 billion notes can't be satisfied by any single printera single firm, the people familiar with the deals said. So it has generated interest from some of the world's largest commercial printers, each vying for a piece of the pie at a time when low profits in bank-note printing have pushed many of them to cut back on capacity.

According to the people familiar with the deals, the companies include the U.K.'s De La Rue, the Canadian Bank Note Co., France's Oberthur Fiduciaire and a subsidiary of Munich-based Giesecke & Devrient, which printed currency in 1920s Weimar Germany, when citizens hauled wheelbarrows of cash to buy bread. More recently, the German technology company was the source of security paper for Zimbabwe when it was stricken in 2008 with a hyperinflation episode in which prices doubled daily.

All of the printing firms declined to comment except the Canadian company, which didn't respond to requests to comment.

Currency experts say the logistical challenges of importing and storing massive quantities of bank notes underscore an undeniable truth: Venezuela is spending a lot more than it needs because the government hasn't printed a higher-denomination bank note—revealing a misplaced fear, analysts say, that doing so would implicitly acknowledge high inflation the government publicly denies.

"Big bills do not cause inflation. Big bills are the result of inflation," said Owen W. Linzmayer, a San Francisco-based bank-note expert and author who catalogs world currencies. "Larger bills can actually save money for the central bank because instead of having to replace 10 deteriorated notes, you only need five or one," he said.

The Venezuelan central bank's latest orders have been exclusively only for 100- and 50-bolivar notes, according to the seven people familiar with the deals, because 20s, 10s, 5s and 2s are worth less than the production cost.

Mr. Maduro and his allies say galloping consumer prices reflect a capitalist conspiracy to destabilize the government.

The president in late December changed a law to give himself full control over the central bank, stripping congressional oversight just as his political opponents took control of the National Assembly for the first time in 17 years.

"To stop excessive printing we have to undo that law and restore autonomy to the central bank," said Elí as Matta, an opposition lawmaker who focuses on state finances.

Central-bank data shows Venezuela more than doubled the supply of 100-, 50- and 2-bolivar notes in 2015 as it doubled monetary liquidity, a measure used to gauge all money in the economy, including bank deposits. Supply has grown even as Venezuela has fewer U.S. dollars to support new bolivars, a result of falling oil prices.

The flood of money has led some sectors of the economy, such as real estate and car sales, to effectively price their goods in U.S. dollars, though they do so on the sly because dealing in foreign currency is illegal. On the crime-ridden streets of Caracas, people in the security industry say, professional kidnap-and-ransom teams often demand U.S. currency instead of bolivars.

A color photocopy of a 100-bolivar bill costs more than the note. In an image that went viral on social media, a diner is shown using a 2-bolivar note to hold a greasy fried turnover because it is cheaper than a napkin.

Some ATMs limit withdrawals to around 6,000 bolivars a day—less than $6 on the unofficial market. Even so, the machines often run out of cash. And in a sign of how quickly freshly printed bolivars are rushed into the economy, the serial numbers on crisp bills dispensed by ATMs are often in sequential order.

What clear is that there is little respect for the beleaguered bolivar, regardless of what form it takes.

On a recent day, a 46-year-old slum-dweller named Mario walked the streets of a wealthy district of Caracas with a megaphone, calling on residents to sell him their coins, which he gathered into a rolling water cooler. The idea: to melt it down later.

"You can make an amazing ring," said Mario, who wouldn't give his last name but said he preferred to go by his nickname, Moneda, or "Coins."

(END) Dow Jones Newswires

February 03, 2016 20:25 ET (01:25 GMT)

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