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What is Hyperinflation?

Hyperinflation means out of control inflation or inflation happening at a very fast pace. Inflation means

the rise in prices and fall in the purchasing value of money. So, Hyperinflation is a situation when the

rise in prices is very wild and the purchasing value of money falls rapidly.

Hyperinflation can occur when the money supply has increased but GDP growth is absent, resulting in

an imbalance between money supply and money demand. It can also occur if the people have lost

confidence in the currency, resulting into rise in prices and hence hyperinflation.

Although a rare phenomenon, Hyperinflation has occurred about 56 times in the 20th century. Some of

the cases being Germany (1923), Greece (1944), Hungary (1946), Yugoslavia (1994) and Zimbabwe

(2008).
In recent times, Venezuela has been suffering from the worst economic crisis because of hyperinflation.

It is the 57th country which has experienced hyperinflation. The inflation rate in Venezuela has been

over 50 percent since 2014, with the annual inflation reaching 83000% in July, 2018. The IMF estimates

that the worst is yet to come and the country is going to face an inflation of 1 million % in 2018.

Economy of Venezuela

Venezuela officially called the Bolivarian Republic of Venezuela is a country located in the continent

of South America. It has a Federal Presidential Constitutional Republic form of government and is a

socialist economy.

Venezuela had a GDP of $320 billion in 2018 and ranks 47th in the world. Its economy is mainly based

on the petroleum and manufacturing sector. In 2014, the country’s exports accounted for 16.7% of GDP

and 95% of the exports constituted of petroleum products. Venezuela has the largest proven oil reserves

in the world.

The country has an estimated fiscal debt of about 35% of GDP in 2017. It is estimated that in 2017

about 87% of the population lives below poverty line as a result of the economic crisis. The

unemployment rate is estimated to be around 34.3% in 2018.

Timeline of the Crisis

The Venezuelan economy has huge reserves of oil, while it should have been a boon to them, it has

actually become the reason for their nightmares. The economy is heavily reliant on the export of oil in

order to make money and so over the period the economy has not put efforts into anything else. The

economy basically works by exporting oil and using that money to import all the demands of the

economy.

Hugo Chavez became the President of Venezuela in 1999 on the backdrop of making big promises to

the poor and middle class. As the global prices were soaring in between 2005 and 2014, he used the

huge profits to increase public spending. The money was spent on welfare programs and building houses
for the poor. The results too were positive, unemployment and poverty rates halved and infant mortality

also fell.

This gave Hugo a lot of support from others and ultimately a lot of power. But this power started to be

misused as he started to dismantle the courts and democratic policies and became authoritarian. His

successor Nicolas Maduro took over the presidency in 2013 and followed the same principles and

policies.

All was well until the oil prices began to fall in 2014. This led to a huge fall in the government revenue.

However, Nicolas did not stop the government spending on welfare programs, in order to prevent the

fall of his government. Instead, he ordered huge amount of money to be printed in order to support the

programs.

There was a huge increase in money supply, the GDP was falling. Also, import of goods had reduced.

This scenario led to a rapid increase in the prices of goods leading to hyperinflation. Things got worse

when the government in order to control prices set price control measures on basic goods, medicine and

food. These prices were way below what prevailed in the market as a result of which the private

manufacturers cut down on production and even shut down production. This led to further reduction in

availability of goods and hence increase in prices, causing worsening inflation.


Although, oil prices have risen since mid-2017 Venezuela has not been able to take advantage of it as

production has fallen about 35% on 2015 levels and 50% since 1999, owing to underinvestment in the

state oil company.

Effects on People and Economy

This crisis has led to a humanitarian crisis in Venezuela and has affected the people and the economy

in the following ways:

People:

1. There is a shortage of food, medicine and basic infrastructure.

2. Three-Fourth of the people have lost an average bodyweight of 11 Kg.

3. There have been increased cases of children dying from malnutrition.

4. Malaria cases have spiked due to a fall in treatment.

5. Hyperinflation has led to basic things like coffee costing a whopping a 2.5m bolivars.

6. There has been huge emigration of people, about 2.3 million have left since 2014.

7. There are huge power cuts and lack of running water in houses and businesses, this had led to

a lot of problem in hospitals.

8. The lack of basic facilities has forced pregnant mothers to cross borders to give birth and to get

their babies vaccinated.

9. According to a study, in 2016 27,479 people were killed which is an all-time high, indicating a

massive increase in crime and violence.

10. Businesses face a huge problem because of the continuous increase in the prices, restaurants

don’t have printed menu and supermarkets do not display prices on shelves.

Economy:

1. The rapid rise in prices combined with a fall in oil production has led to the IMF estimating

that the economy will further shrink by a fifth in 2019 following two continuous year of

shrinkages.

2. The Scenario has reached a level where prices are doubling every 26 days on average.
3. The IMF also estimates that inflation could reach 1,000,000 percent by 2019.

4. The country has already defaulted on several loans and hence cannot expect further loans.

5. The foreign exchange reserves have fallen from a peak of $43 Billion in 2009 to less than $9

Billion, making it difficult to import basic goods.

Measures that failed

The Venezuela government has taken up several measures in order to reduce inflation and revive the

economy, but have failed. Some of them are:

1. The government tried to anchor the Sovereign Bolivar to a new virtual currency, Petro which

the government says is linked its oil reserves.

The Petro was not able to solve the problem as it was not considered to be a credible crypto

currency. People do not have faith in the Venezuela economy and the government and hence it

was a failure. Also, the US banned any transactions linked to the Petro citing it as a scam,

further adding to its woes.

2. The government announced that gasoline should be sold at international price in order to stop

its smuggling to the nearby states.

While such a measure is normally suggested by economists but not in this case. Here such a

case would throw a lot of people out of jobs as the price of gasoline would increase. Also, in a

crisis hit country such a measure would leads to riots and further complications.

3. Raising the minimum wage to 34 times its previous level.

The already suffering businesses would not be able to support such a policy and hence would

lead to a huge firing of employees.

4. Raising VAT from 4% to 16%.

This would negatively affect businesses who have already cut production as the economy is not

in good shape.

5. The government removed five zeroes from the “Strong Bolivar” currency and named the new

currency, “Sovereign Bolivar”.


This step was taken in order to reduce the problem of paying huge cash even for small items. It

is a good idea only if it is accompanied by economic reforms. Alone it will not be able to solve

the issue of hyperinflation.

The way forward

A new government which has the mandate of the people needs to be formed through fair elections. In

order to save Venezuela from the humanitarian crisis and recover its economy, the world at large will

need to put efforts.

Some measures that can be adopted to save the Venezuelan economy are:

1. The government has to get emergency financial and technical assistance from organisations

like IMF. Also, developed countries need to contribute towards its recovery.

2. The government needs to setup a regulatory board to regulate the currency and form policies

that are in favour.

3. There has to be also the easing of price controls on fuel and other goods and their regulation

and maintenance of supply.

4. Medical treatment programs to help the people need to be initiated by international agencies

along with the local civil society groups.

5. The oil sector which is a major resource needs to be revived through financial and technological

investments.

6. Going further, the government can also take long term loans to grow other sectors and move

towards a self-sustaining economy.


Bibliography
https://www.slideshare.net/Naila_sharmin/macroeconomic-analysis-venezuela

https://www.thehindubusinessline.com/opinion/columns/the-cheat-sheet/hyperinflation-at-100000-

per-cent-and-eggs-for-bonus/article24811762.ece

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investors-dump-bolvar-like-hot-potato/articleshow/64822383.cms

https://economictimes.indiatimes.com/news/international/business/imf-sees-venezuela-inflation-at-10-

million-per-cent-in-2019/articleshow/66139421.cms

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https://www.bbc.com/news/world-latin-america-36319877

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currency/?noredirect=on&utm_term=.8a15e295e9af

https://www.boeckler.de/pdf/v_2017_11_10_kulesza.pdf

https://venezuelanalysis.com/analysis/14037

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