October 29, 2020
venezuelan hyperinflation

Venezuelan Hyperinflation

Hyperinflation, in economics means a situation of extremely high inflation. A situation where prices of commodities rise uncontrollably over a defined period of time; money become worthless.  World’s 57th episode of hyperinflation: Venezuela hyperinflation peaked with monthly inflation rate of 219.7% on 30th November 2016. What makes the Venezuelan economy more vulnerable is its rentier nature. Venezuela is the country on the northern coast of south America whose development and growth depends on oil rents which is volatile and subject to external forces. More than 90% of the country’s export comes from oil. Major part the government’s spending- from social program to curb poverty and inequality to subsidizing the poor and the health sectors was dependent on the income from oil export and suddenly the global price of oil dropped drastically. With the fall in the price of oil, there is less foreign demand of the Venezuelan currency (Bolívar) to buy oil. Value of Bolívar falls in the global market and as the result, price of imported goods rose since the price of goods and services we consume, not only depends upon the cost of production but also on the value of currency. The only solution feasible Venezuelan government (headed by the new president Nicolas Maduro, who succeeded Chavez in March 2013) think of is to print more money. Situation became more worse as oil prices continued dropping compounded by the other output including fall in the Venezuelan oil output. International investors began looking for alternate suppliers which further reduces the worth of Bolívar. In this condition printing money actually make the situation worse but when the price of imported goods rises, government print more money and this cycle of continuously printing more money is what causes HYPERINFLATION. According to the IMF, the Venezuelan economy shrank by 30% from 2013 through 2017, and the IMF is forecasting a fall in real GDP of 18 percent in 2018 alone.

The fact that citizens of Venezuela lost trust in their currency worsened the situation. People began to protect themselves by converting their savings into more stable currency, like the US Dollar. This distrust leads to the further devaluation of Bolívar. To this condition, the action of government was expected. They issued currency controls so as to prevent the value of Bolívar to drop against the US Dollar. The main idea behind this move was to stabilize the currency by shutting down all the currency transactions but this restriction of conversion leads to a greater black market transaction. People start buying US Dollar through the black markets. This increase in the black marketed demand of US Dollar resulted in the difference between the official rate(set by government) and the unofficial illegal exchange rate – opening opportunity for some people to withdraw US Dollar at the official rate and get it converted into Bolívar at an unofficial rate, making a small profit. No matter how opportunist this condition sound, but it made the situation more worse by pushing the dollar price a bit higher. As the crisis take deep roots in Venezuela, more and more people engaged themselves in the unofficial currency market. They even tried to sell the subsidized food off the border which adding to this extreme crisis created the shortage of food within the country making price go up even further but it is not the Venezuelan people who were to be blamed for this. In economics, we have always studied people look for what’s best for them, even if it means selling off the subsidized food for survival. After all, what’s more human than the fight for survival?

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It was often mocked by saying that the situation of hyperinflation in Venezuela was so deeply rooted and worse that it was prudent to use cash for toilet paper rather than actually using the toilet paper. Hyperinflation usually takes the country to the loophole of printing money without even realizing that the more they print money, the worsened the situation will be. The 3 month annualized inflation rate in Venezuela was more than 1,200,000%.this inflationary rate had made Bolívar practically worthless. Hyperinflation like this is not seen in the world since Germany in the 1920s or Zimbabwe in 2008. By the time Venezuela realized of this vicious trap of hyperinflation, it was almost running out of the foreign reserve with no access to the foreign debt market; its economy became horribly inefficient and people starving. The minimum wage in Venezuela (18,000 bolivars) was only 6 US Dollar at an official rate.

The impact of hyperinflation on Venezuelan citizen is too deep. People completely lost trust in their own currency even after government tried too hard to regain it. The government tried the currency devaluation, under the presidentship of maduro by 95%. Given the government was neglecting other major socio-political issues, Venezuelans were not convinced with the devaluation idea. Many blame the country’s woes on President Nicolás Maduro, who in turn alleges that Venezuela is on the receiving end of an “economic war” waged by the United States and Europe. Geoff Ramsey, assistant director for Venezuela at the Washington Office on Latin America quoted: “The paradox is that this is a country undergoing a deep inflation crisis and yet nobody actually has any cash.” Tired of the economic disparity, masses of Venezuelans have fleeted to other places including Columbia and other border countries. The government’s increasing authoritarianism, including interfering with the constitution and elections, also signaled it was not to be trusted. Despite being the major exporter of oil Venezuela is in the midst of crisis as the country’s oil industry is beset with bad management, a lack of investment, cash flow problems and a crumbling infrastructure. Hyperinflation is the very difficult hole to come out from, only few countries in the world had experienced it and it’s very hard to stop it without chopping off the government spending. Venezuelans are still searching for ways to survive this huge crisis – be it by selling goods and currency in the unofficial market or by migrating to other nations. But it takes more than just the currency value fall for hyperinflation to occur. It is the result of the mismanagement in system, socio-political tension in economy, unstable revenue system that leads to such a huge mess. The future does not look too bright either, as the IMF projects the inflation rate to reach 4684.8 percent in 2022. However, there is still hope if Venezuela can settle its large imbalances and have some fiscal disciplines it can regain the trust of its citizen in the currency system.

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