Hyperinflation in Venezuela

~ Titiksha kumar
6556 BMS 1st year

Venezuela was once the richest country in Latin America. It has the largest known oil
reserves in the world and its democratic government was once praised worldwide. But
in 2018, Venezuela’s democratic institutions and its economy were in shambles. The
country had the highest inflation in the world, making food and medicine inaccessible to
most Venezuelans. Over the last five years, its GDP had fallen 35%, which is a sharper
drop than the one seen during the Great Depression in the US. The country’s murder rate
had surpassed that of the most dangerous cities in the world. These conditions have
sparked months of protests against the president, Nicolas Maduro. And it’s easy to see
why: the country has become measurably worse since his election in 2013.
Before we discuss Venezuelan hyperinflation, let’s begin with a discussion of what
hyperinflation is in general. Simply put, hyperinflation is very high, rapid, and
continuous inflation. In a hyperinflation situation, the prices of goods and services in an
economy quickly rise to a level so high that they become difficult to afford for most
people. While experts cannot agree what that exact level is, economist Michael K.
Salemi states that hyperinflation is generally used to “describe episodes when the
monthly inflation rate is greater than 50 percent.” He gives the example that “at a
monthly rate of 50 percent, an item that cost $1 on January 1 would cost $130 on January
1 of the following year.”
The hyperinflation in Venezuela was significantly higher than the rate cited by salami.
According to an august 2018 BBC article, prices of goods have been doubling every 26
days on average and the annual inflation rate reached 83,000% in July
One source reported that a cup of coffee cost 450 bolivars less than 2 years ago but then
it costed a shocking 2.5 million bolivars.
But wildly high priced are not the only serious effect of hyperinflation. As a Guardian
article notes, the “problem comes when the supply of paper money in an economy
outstrips demand for goods and services, causing the value of the currency to fall.”
Venezuela turned to increasing its money supply because it had no other means to pay
its debts.
Venezuela ended up in its hyperinflation situation due to a combination of several
factors:

1. High government spending

President Hugo Chavez ran Venezuela from 1999 until his death in 2013.
In 2004 when oil prices surged Venezuela’s petroleum dependent economy
started booming and Hugo Chavez went on to spend billions from the profits on
the social welfare programs for the poor
Chavez and his administration implemented social programs called the
Bolivarian missions that was supposed to improve living conditions for the poor
by redistributing wealth and reforming the way land was used. There was also an
attempt to promote economic democratization through the establishment of
 worker-owned cooperatives. Data from the center of economic and policy
research (CEPR) indicates that Chavez achieved a high degree of success with
these programs. He was able to reduce unemployment from 14.5% in 1999 to 7.8%
in 2011. The poverty rate also dropped from 50% in 1999 to 31.9% in 2011, while
extreme poverty dropped from 19.9% to 8.6% in 2011. Unfortunately, this
prosperity came at a high financial cost. The social programs were good for the
people but bad for the economy. Chavez spent more money on these social
programs than the country could really afford. According to CNBC, public
spending accounted for more than 50% of Venezuela’s GDP in 2012. He also
borrowed money from other countries to keep the programs going. By 2013,
Venezuela’s foreign debt climbed to a little over $106 billion. To make matters
worse, Chavez and his administration failed to save money for future economic
crises, which quickly emerged in 2014.

2. Low oil prices

Venezuela’s economy is mainly based on selling only one commodity: oil.

Venezuela has the largest oil reserves in the world. The world atlas states that it
has 300,878 billion barrels of proven reserves. According to oil sands magazine,”
most of Venezuela’s proved oil reserves are located in the Orinoco petroleum
belt. Another oil rich area in the country is the area near Lake Maracaibo, which
is actually a brackish tidal bay located near the Caribbean Sea. One source
estimates that the “lake’s basin supplies about two-thirds of the total
 Venezuela’s output. With the discovery of oil in Venezuela in the early 1900’s, the
country relied more and more on it as a revenue source. Today Venezuela derives
over 50%of its GDP from petroleum exports which represents about 95% of total
exports” according to a Forbes article this meant that when oil prices were high,
life was good. For instance Venezuelans enjoyed a high standard of living when
oil prices spiked in the 1960s and 1970s. An online magazine called
Foreignpolicy.com describes how “Venezuela was considered rich in the early
1960s as it produced more than 10%of the world’s crude and had a per capita GDP
many times bigger than that of its neighbors Brazil and Colombia and not far
behind that of the United States.” Conversely, when oil prices went low in 2014,
life was bad, the price of oil dropped sharply from $100 to about $70 a barrel, and
the price decline continued “to a low of around $33 dollars a barrel in early 2016”
according to the American institute for economic research(AIER). The slump in
oil prices sent Venezuela into an economic downward spiral.
Lower oil prices brought with it a reduction of Venezuela’s foreign reserves, and
AIER states that this in turn reduced the government’s ability to “subsidize basic
goods and services for its people”

3. Continuing economic mismanagement

The Venezuelan government under the control of Nicolas Maduro, dealt with the
budget gap the way other countries in a similar situation did in the past when
 they had no other ways to pay their debts – print money. AIER notes that printing
money set the wheels in motion for hyperinflation: “the budget shortfall was
closed by printing money. Hyperinflation took hold, destroying the savings of
individuals and making productive business investment nearly impossible.”

A comment made by a nurse named Maigualida Oronoz helps you understand

what living with hyperinflation is like for the average citizen living in Venezuela.
In an interview with the guardian, she says, “We are millionaires, but we are
poor…..we can just about eat, but if some health emergency happens we’ll die
because the prices of medicines are sky-high and rise every day.”

According to economist Theodore Cangero, hyperinflation continues under Maduro

because “he is continuing the disastrous economic policies of the late President
Chávez.” Earlier this year, Reuters reported that Maduro seemed to be in denial about
Venezuela’s hyperinflation.

A large number of Venezuelans decided that they no longer want to live in the country
where all of the social gains of low poverty and low unemployment recklessly bought by
Hugo Chavez have been wiped out by incompetent leadership, poor financial planning,
and widespread corruption. They fled from Venezuela in droves. According to the
Guardian, “nearly two million people have fled Venezuela’s economic and political crisis
since 2015.
In an interview with Reuters, Rodrigo Cabeza, Hugo Chavez’s former finance minister,
said that “Venezuelan President Nicolas Maduro has refused to recognize the country’s
hyperinflationary problem and has no plan to address it.”

But he did come up with course of action.

President Maduro has decided to play games with the value of Venezuela’s dying bolivar
currency in a desperate effort to give the appearance that hyperinflation is
disappearing from his country.

The Peterson Institute for International Economics (PIIE) outlines his current plans for
the bolivar. His proposed monetary reform has three pillars:

(1) slash five zeros from prices—so a product that costs 100,000 bolivars would now
cost 1 bolivar—and give the currency a different name, the “sovereign bolivar”

(2) devalue the currency by 95 percent; and

(3) Peg the bolivar to the petro, Venezuela’s digital currency backed by oil
introduced in February 2018.”

He then planned to combine these monetary reforms with yet another round of
questionable government interventions.
CNBC reports that he “hiked the minimum wage by over 3,000 percent, boosted the
corporate tax rate, and increased highly-subsidized gas prices.”

PIIE and other economic experts are skeptical that these measures will work to reduce
hyperinflation because they don’t address the underlying problems that are causing the
hyperinflation in the first place.

PIIE argues that “there is no substantial fiscal reform in the works, no attempt to rebuild
dismantled institutions, and no announced shifts in economic policymaking.”

PIIE even forecasts that Venezuela “looks set to beat Zimbabwe, a country that managed
to have an annualized inflation rate of 79 billion percent in November 2008.”

The economists interviewed by CNBC also have a dire outlook for Maduro’s monetary
plan. They think it will make the hyperinflation in Venezuela even worse:
“Amid this aggressive devaluation and monetary expansions due to salaries and
bonuses, we are expecting a much more aggressive stage of hyperinflation.
All the more so in a context where the elimination of excessive money printing is not
credible.”
The worst of all worlds, said Venezuelan economist Asdrubal Oliveros of consultancy
Ecoanalitica. As Venezuela is still in crises.