Venezuela leaves hyperinflation behind
Venezuela is now trying to re-energise its own currency, the bolívar, which has been crippled by devaluation in recent years. How the war in Ukraine helped shape the recovery.
LEER EN ESPAÑOL
Venezuela achieved something that seemed impossible: to get out of the hyperinflation that spun out of control in 2017, and for which it had to apply two currency conversions, in 2018 and 2021, to facilitate operations.
Earlier this year, the Central Bank of Venezuela announced that the country was leaving hyperinflation to move on to another stage. Although it still has one of the highest index in the world, if the interannual variation is considered , it is at 11.4% so far in 2022.
In 2021, according to the Venezuelan monetary authority, the cost of living reached 686.4%. In the worst of years, 2018, inflation had reached 130,060 points.
The slowing down of hyperinflation is explained by several reasons, among them, measures adopted by the government that are clearly free-market, unusual and not expected for the socialist-oriented government headed by Nicolás Maduro.
The crisis had been unleashed in 2013, with the fall in oil prices, which contracted Venezuela’s economy. To this, were added the sanctions imposed by the United States, Canada and the European Union. Faced with this adverse context, the government implemented a sharp reduction in public spending, restrictions on bank credit and measures to freeze the exchange rate. In 2017, the fiscal deficit exceeded 20% of GDP.
Three years later, a study conducted by the Catholic University Andrés Bello, placed it in less than 8% of the product. Accompanying this process, the government lowered the subsidy on fuels, relaxed price control and opened the exchange market, which had been controlled for more than 16 years. Access to the dollar by a sector of the population allowed imports to be opened and generated a revival of industry and private investment.
Venezuela Inflation Rate. Source: tradingeconomics.com
The war in Ukraine and increased demand for oil are also contributing to Venezuela’s economic improvement. The delegation sent by the President of the United States Joe Biden to Caracas in March to probe a Venezuelan contribution to the global energy supply, partially decompressed the political tension and left the opposition in the background, especially to the self-proclaimed president in charge Juan Guaidó.
But in recent weeks, despite the improvement, the widespread use of US currency has set off an alarm light in the Maduro government, which fears the total dollarization of the economy. To avoid this, it decided to apply a 3% tax to purchases in dollars.
There are many economists and industry leaders who question this measure, anticipating that it may generate a new crisis that slows the recovery process. The implementation of the new tax is chaotic for businesses, and in April dollar sales fell to the lowest level since 2019.
Beyond these ups and downs, there are coincidences, from the IMF to Economic Commission for Latin America and the Caribbean (ECLAC), through private qualifiers like Credit Suisse Group, that Venezuela’s economy will grow markedly this year.
It will depend on the next steps taken by the government that the improvement becomes a real opportunity to exit the crisis, and if it also extends to politics.