Hyperinflation Devastating Venezuela Economy

Venezuela's inflation rate has hit a new high, according to university research, with consumer prices in the crisis-ridden country rising by more than 40,000% annually for the first time on record.

Steve H. Hanke, an applied economics professor at Johns Hopkins University, told Business Insider that annual inflation in the country has risen as high as 41,838%. Hanke, who calculated the inflation figure, has tracked prices in the country for more than two decades.

Venezuela's government has largely stopped reporting economic data, including internal measures of inflation. The central bank of Venezuela has not independently released inflation figures in at least a year.

President Nicolas Maduro has passed blame for the roiled economy onto others, including opposition activists and officials in Washington. At a campaign rally in May, he blamed hyperinflation on "criminal mafias".

But economists point out that Maduro runs the unorthodox policies they say have pushed the country into economic crisis. The socialist leader has repeatedly refused international aid to Venezuela.

"It's internal", Hanke said. "Government spending continues to accelerate and the sources of revenue start drying up."

The government has defaulted on a majority of their outstanding bonds, which economists estimate add up to about $60 billion. Foreign exchange reserves have fallen by about $2.5 billion in the last three months, according to analysis by Capital Economics.

Hyperinflation

As state-run oil industry PDVSA falls apart, economists say a rise in global oil prices is adding to the pain. Brent crude oil is up more than 64% this year. The international benchmark has rallied more than 8% this week.

Production at PDVSA—which accounts for 95% of export earnings in the country and a quarter of gross domestic product—was cut in half from January 2016 to January 2018, according to the US Energy Information Administration. And as the crisis deepens, operations are continuing to wane. Those conditions, Hanke said, have all but killed investor sentiment.

"There's an expectation part of it, too," Hanke said. "Everyone who has a bolivar wants to get rid of it like a hot potato because they expect it's not going to be worth anything tomorrow."

The International Monetary Fund estimated in January that Venezuela's inflation rate could rise as high as 13,000% for all of 2018. Hanke was unsurprised by the discrepancy, saying no one can "accurately forecast the course or the duration of a hyperinflation."

But economists and activists say hyperinflation's presence now is clear. A recent university study found that about 90% of civilians were living in poverty last year and most of those surveyed had lost an average of 25 pounds in body weight.

"The hyperinflation is devastating the economy," said Andres Abadia, a senior economist at Pantheon Macroeconomics. He expects the economy to contract in 2018, for a fifth consecutive year, and sees no turnaround in the near-term.

Abadia said Venezuela is a "disaster area" and that as long as Maduro is in power, the economy will "continue to collapse". But Maduro reaffirmed a tight grip on power last month, as he easily won another six-year term in what was widely condemned as a fraudulent election.

Maduro tripled wages earlier in June to three million bolivars per month, which Reuters reported at the time was equal to just more than a dollar at the black-market exchange rate.

Alternative Solution?

Considering the declining economic conditions, citizens naturally pursue alternative means of storing value. In early 2017, the country experienced a cryptocurrency boom which saw a record exchange of 805 bitcoins in one week. This figure dropped afterwards, but has surged again in the first quarter of 2018 as revealed by trading volumes on LocalBitcoins.

Despite the recent hyperinflation of the bolivar in recent weeks, one would expect that bitcoin trading volume will increase in coincidence. But this is not the case as the weekly trading volume has remained almost at the same level. According to the founder of BitcoinVenezuela.com, Randy Brito, this may be as a result of the recent regulations imposed by government, among other reasons.

Brito said: “Logic would make us think that the volume (measured in BTC against the USD) should increase with the rampant inflation of Venezuelan’s bolivar, but it doesn’t look like it is happening. This could be due to the real number of users that hasn’t increased much, or the total value they transact hasn’t actually increased much. Maybe it was caused by the stricter trading and mining regulations imposed by the government recently”.

There are plans already on ground to overhaul the bolivar by the government by removing three zeros and devaluing the currency. This is now slated to happen on Aug. 4. The impact that this will have on the economy remains to be seen as citizens continue to seek alternative store of value.