Hyperinflation in Venezuela
Introduction
In economics Inflation is a general idea of increase in prices over a given period of time. Generally, there are two types of inflation
1. Demand Pull inflation- A situation when the aggregate demand of an economy grows at unsustainable rate leading to increased pressure on the scarce resources and an output gap in the economy.
2. Cost push inflation- It is a situation that occurs when firms basically increase their prices to protect their profit margins from rising input costs.
Inflation to Hyperinflation
Hyperinflation is an economic term that defines a very high or accelerating inflation. It is a situation where the real value (the actual value of a good in a particular point of time without being adjusted for inflation) of a currency quickly erodes as the prices of all goods increases rapidly. It is usually a situation when there is an excessive increase in the money supply and demand pull inflation.
The Case study of Venezuela
Venezuela had begun encountering continuous and uninterrupted inflation since 1983, with double digit inflation rates. However the inflation rates reached its peak under Nicolas Maduro’s governance in 2014 i.e. around 69% which was highest in the world and continued to massively rise in the following years. In 2018 the country had experienced the worst case scenario in the world economic history with an annual inflation rate being around 1300, 000%. After that the Venezuelan government had stopped publishing annual interest rate. However the International Monetary Fund has predicted that time that it could possibly move towards 10,000,000% by the end of 2019. But the Venezuelan Government under Maduro in 2019 lifted several economic controls which could possibly tame the hyperinflation to some extent.
Figure- Annual Inflation Rate
Why did hyperinflation occur in the economy?
The Venezuelan economy is massively reliant on oil rents, which has shaped its socio- economic policies and macroeconomic decisions in the economy which means that the economy's development and growth is majorly dependent upon oil rents which are subjected to external factors and are beyond the control of the economy and thus leaving the economy in an utter state of vulnerability.
The discovery of oil in early 20th century led to golden years of the Venezuelan economy from 1920 to 1970. But soon after 1970 the oil revenues started to fall and the economy could not produce alternate source of export revenues. With this the private investment in the economy fell by huge percentage. The economy started experiencing supply shocks given that many sectors in the Venezuelan economy faced supply constraints which were accommodated through high imports. Following supply shock the cost of production started to rise causing a high rate of inflation in the economy. These incidents started having ripple effect on other macroeconomic indicators of the economy.
Figure- Private Investment(share of GDP %)
In 2003, a labor strike occurred at the state owned oil company which had crippled the economy by reducing its GDP by 27%. This has caused, weakening of the Venezuelan Bolivar (Bolivar if the official currency of Venezuela).
By 2013, the Venezuelan government was heavily spending on social affairs and other measures across the country. it was possible due to high revenues generated from oil exports. Oil exports generated 90% of the economy's revenue. But when oil price crashed in 2014 the Venezuelan economy shrank by 30% over the next three years
In March 2013, Nichloas Maduro succeeded Hugo Chavez as president. Maduro held the same views as Chavez that money printing was the solution to almost every problem in the economy. After 2013 the money supplies increases at a rate of 76% yearly. Printing money can sometimes help in short run shock run price shock but it was not the case in Venezuela. Oil prices as well as output continued to fall. Because of all this situation investors exited Venezuelan economy and this had pushed Bolivar further down. With more money printed supply boomed and demands for Bolivar fell heavily. People started shifting to hold US Dollar (as it was stable) from Venezuelan Bolivar.
Now with more money printed every year ,supply heavily exceeded demand, prices were skyrocketing , exchange rate massively depreciated making bolivar worthless, all other macroeconomic indicators were at worst possible positions and hyperinflation sets in i.e. in 2018 inflation spiked at around 1300,000%.
Since 2019, the government combined several measures to fight up hyperinflation such as fiscal, monetary exchange rate policies. These policies brought down monthly inflation from around 200% to 30%, taking the country out of hyperinflation. By now the country's annual rate of inflation stands around 2000% , which is still incredibly high inflation and could descend into hyperinflation any moment if any of economic indicators turns out to get worse as it would had ripple effect on all other indicator.
In summary hyperinflation in Venezuela was caused by several stances which had ripple effects on other economic indicators.
Conclusion
Venezuela has taken multiple steps and policy measures to curb hyperinflation in the economy but however currently there is still no long term strategies have been put into place. The current annual rate of inflation in the Venezuelan economy is around 2000% which is still an exceptionally high rate and could induce very high inflation rate in long term. Through this it is reflected that expectation of future higher inflation remains high.