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Venezuela's Hyperinflation Story
Ever imagined a daily life with an inflation rate of 1,000,000%? A rate at which the price of your coffee cup doubles between weekly paycheques! That’s exactly what is being faced by the citizens of Venezuela. The story of how inflation became hyperinflation involves more than economics; it’s a tale of self-serving politics, rampant corruption, price-fixing, a global commodity bust, and social unrest.
Blessed with the world’s largest oil reserves, the country had a constant flow of USD income and massive per-capita wealth. The nation’s economic development has been based on rising prices and profits in oil exports. Then Hugo Chavez came into power in 1998 and expanded social services, but rampant corruption and a steady decline in oil production reduced oil reserves and increased government debt. After Chavez’s ineffective attempts at economic reforms and his death in 2013, Nicolás Maduro assumed the presidency. As the economic crisis deepened from bad to worse, the government then declared a state of emergency in 2016 as the inflation rate hit 800% that year. But the question to be answered here is how exactly did the transition to hyperinflation take place.
The amount we pay for goods and services reflects not only the cost of production but also of the value of the currency we buy them in. By 2014 the value of the Bolívar, Venezuela’s currency, and the prosperity of its economy was highly dependent on oil exports with more than 90% of the country’s export earnings coming from oil. These export earnings were used by Hugo Chavez’s government (1999- 2013) to pay for social programs, like subsidies and health services, intended to combat poverty and inequality. With high obligations of government spending, government debt was also high. With the fall in global oil prices, foreign demand for the Bolívar to buy Venezuelan oil crashed in response. With the fall in currency’s value, the cost of imported goods rose and the Venezuelan economy went into crisis.
The new president Nicolas Maduro, who succeeded Chavez in March 2013, decided to print more money as a solution to keep the economy moving while it gets over a hump caused by a short-term price shock. However, the crisis just got worse as the oil price continued to fall and international investors began looking for other potential investments, driving the value of the Bolívar even lower. In these circumstances, printing more money added to the money supply, pushing the value of the currency even further down, and this cycle is what caused hyperinflation.
These circumstances led to quick changes in the currency market. In order to protect themselves, Venezuelans started to convert their savings into a more stable currency, like the US dollar. To stabilise the currency, the government issued currency controls, setting a fixed exchange rate to stop the official value of the Bolívar dropping against the US dollar, and making it difficult to get permission to exchange into US dollars. However, as the crisis deepened, large numbers of Venezuelans began to engage in the black market, sometimes taking subsidised Venezuelan goods like food across the border or crossing borders to make ATM transactions so that Bolívars could be exchanged for the dollars at the unofficial rate, making a tidy profit. But this doesn’t mean that Venezuela’s currency crisis is the fault of ordinary citizens, rather a big failure of government’s responsibilities.
Venezuela once made significant progress in reducing its infant mortality rate and pledged to do even better. But according to the research published in The Lancet Global Health journal estimated that the mortality rate for infants in Venezuela grew from 15 deaths per 1,000 live births in 2008 to 21.1 in 2016, which meant that Venezuela lost 18 years of progress. This can be attributed to the medical setbacks, such as, curtailing public spending because of low oil prices, increasing hunger and malnutrition, maternal and child mortality, infectious diseases, and unemployment, leading to anti-government protests. All of these factors contributed to 3 million Venezuelans’ decision to flee the country, causing one of the largest migration crises in Latin American history, driven by shortages of everything from food to Maduro regime’s oppressive treatment of dissent. Colombia deployed troops to their border after hundreds of thousands of Venezuelans had crossed into the country by early 2018 as the brunt of the burden fell on nearby countries.
The situation has gotten materially worse since time. With the reduction of foreign reserves from $30 billion in 2013 to less than $10 billion today, and FDI from the US steadily falling from $600 billion per year in 2011 to below zero today.The price of a cup of coffee is now more than 2,000,000 bolivars, as measured using Bloomberg’s Café Con Leche Index. The three-month annualized inflation rate is over 1,200,000% now. This kind of hyperinflation has not been seen in the world since Germany in the 1920s or Zimbabwe in 2008. Hyperinflation is very difficult to arrest once it starts. Even though the government raised the minimum wages 4 times this year, the average person cannot afford to live. The country’s finances are only going to get worse, running out of foreign reserves, losing access to foreign debt markets, and favour from other governments (except Iran) due to political corruption. The only option for the government to raise money is to issue local currency debt, however, the more money it prints, the more the currency depreciates.
Because of the COVID-19 spread, Venezuelan migrants’ needs are increasing. Those living in poor conditions and struggling for employment are now at high risk for contracting the disease and suffering its secondary economic and social effects. World Vision’s food aid and cash transfers have become a vital lifeline. As the crisis of all sorts in the country deepens, Venezuelans will have to continue to seek ways to survive the storm any way they can.
BBC News, Venezuela: All you need to know about the crisis in nine charts (4 February 2019), https://www.bbc.com/news/world-latin-america-46999668
BBC News, Venezuela crisis: How the political situation escalated (13 January 2020), https://www.bbc.com/news/world-latin-america-36319877
Independent, Venezuela: How the most oil rich nation on earth was brought to the brink of collapse (18 August 2018), https://www.independent.co.uk/news/business/analysis-and-features/venezuela-nicolas-maduro-economy-crisis-oil-prices-explained-history-hugo-chavez-a8494696.html
Siobhán O'Grady, Chris Alcantara and Armand Emamdjomeh, Venezuela’s crisis in 5 charts (Jan. 27, 2019), https://www.washingtonpost.com/world/venezuelas-crisis-in-5-charts/2019/01/26/97af60a6-20c4-11e9-a759-2b8541bbbe20_story.html
Valentina Sanchez, Venezuela hyperinflation hits 10 million percent. ‘Shock therapy’ may be only chance to undo the economic damage (AUG 3 2019), https://www.cnbc.com/2019/08/02/venezuela-inflation-at-10-million-percent-its-time-for-shock-therapy.html