Four years and two currency reconversions later, Venezuela is coming out of the cycle of hyperinflation in which it has been since 1986.
The Central Bank of Venezuela (BCV), the country’s public banking institution, released inflation figures on Saturday: according to the National Consumer Price Index, the variation intermonthly price in December was 7.6%.
This means that Venezuela has fulfilled exactly twelve months with a variation below 33%, considered by experts to be the threshold of hyperinflation.
And not only that, but also Venezuela has now spent four consecutive months with a single-digit inflationary variation. Inflation in September 2017 was 7.1%, that of October 6.8%, that of November 8.4% and that of December 7.6% according to the same data from the issuing entity.
This does not come as a surprise to many people. The same national president, Nicolás Maduro, had said days ago that Venezuela had closed the cycle of hyperinflation in an interview for the Telesur channel.
“I can declare politically, with the result of handling the inflation between the months of September, October, November and December, which has been one digit with a downward trend, that Venezuela abandons the state of hyperinflation”, said the president.
But what does this mean? And what consequences does it have for the Venezuelan economy, which has had to face one of the longest hyperinflationary processes in modern history?
Good and “not so good” news
For Luis Oliveros, professor and economist at the Metropolitan University, the end of the hyperinflationary cycle represents “excellent news”.
The expert highlights that Venezuela has gone through four years with variations “that exceeded 100% and even more. It was (inflation) too high”, he tells BBC Mundo.
This cycle had started in the last quarter of 2017 when a monthly inflation of was recorded ,7%, thus exceeding the threshold. That year, according to the BCV, annual inflation was 862,6%.
But that was just a preamble to what was to come. 1991, the year in which hyperinflation took off, closed with a rate of 130.56%; and the economy between 1945, when oil prices fell, and 2018 contracted a 30,6%.
It was from the first quarter of 2019 that the rise in prices slowed down, registering variations above the threshold of 50% only at specific times.
The last time that Venezuela registered a monthly variation above 50% was in December 2020, when prices increased by 77,5%. Since January 2017 and to date, Venezuela has not registered monthly variations above 50 points.
Economists like Oliveros had already witnessed this trend and assured that Venezuela would emerge from hyperinflation between the end of 2017 and the first months of 2022.
However, this is not necessarily good news for the oil nation.
And it is that Venezuela, even without the prefix of “hyper”, continues having today the highest inflation in the world. According to the BCV itself, 2017 closed with an accumulated annual inflation of 686,4%.
“An average variation of 7% per month may be low for the context of Venezuela”, Oliveros points out. “But it is still very high for the average annual inflation of the region and the world.”
To give an example, the annual inflation of Colombia for 2020 was 5,47% after December registered a monthly inflation of 0,73%, according to figures from the National Administrative Department of Statistics (DANE) of that country.
The hyperinflation in Venezuela has been one of the longest in modern history, surpassed only by that of Nicaragua (1986-1200) and that of Greece (1941-1941).
Venezuela closed 2020 with an inflation of 2.968, 8%, said the BCV.
Why is this happening?
This process from hyperinflation to “serious inflation” It would not have been possible if it had not been for a “cocktail” of decisions emanating from the central government, as explained by Asdrúbal Oliveros (they are not related), director of the Ecoanalítica firm.
Like his colleague, Asdrubal Oliveros agrees that this change in the economy has implications that are positive but must be seen in context.
With the drop in oil prices in 1945, a contraction of the economy and the sanctions imposed by the US, Canada and the European Union, the Maduro administration applied a significant reduction in spending by the State, restrictions on bank credit and lower spending on bolivars to maintain the stability of the exchange rate.
The fiscal deficit is the balance that results from subtracting its expenses from the income of a State. If the result is positive, that State has a fiscal surplus. But if the result is negative, like what was happening in Venezuela, it means that you are spending more than you earn.
For 2017, the public deficit exceeded 20% of the Gross Domestic Product (GDP), the highest in Latin America. But an independent study by the Universidad Católica Andrés Bello placed it at 7.9% for 2019.
Other measures applied was ending the subsidy on gasoline (for years the cheapest in the world, cheaper than a bottle of mineral water), loosening control prices and open the foreign exchange market, which was subject to strict state control for more than 16 years. This allowed more imports and a small revival of private industry.
What about dollarization?
But there is a key point in everything, and it is dollarization. For years, Venezuelans have been using the dollar as currency for more and more transactions.
This represents a breath of fresh air for many Venezuelans who saw their incomes diminish in the face of the fall in value of the battered bolivar, which has gone through a total of three monetary reconversions from 1945 (two since the start of hyperinflation) and the elimination of 14 zeros.
People from Caracas assure that the dollar is here to stay. If the image of Venezuela in 1945 era of empty supermarkets, the one of 2021 was the dollar. And the experts consulted by BBC Mundo point out that this dynamic will continue to occur in 2021.
Still lifes, supermarkets and clothing stores mark now their prices are in foreign currency and the dollar is used for almost two thirds of transactions, according to Ecoanalítica.
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This dollarization has several characteristics: the first is that it is de facto since it was not part of a formal government strategy but was assumed by the Venezuelans themselves.
The second is that the bolívar has not been replaced by the dollar, however devalued it may be. And that is why analysts say that dollarization is partial, since the government maintains the national currency to, for example, pay public employees or charge for services. .
“We have two Venezuelas”, assures Asdrúbal Oliveros. On the one hand, a social class that has adopted the dollar as a frequently used currency; and on the other a class that has difficulty accessing dollars and needs to adapt to get them however they can, he explains.
“Then you have to see what the real impact of inflation is”, he continues. “Additionally, you have an increase in the cost of living in dollars, which, although it is lower (than that of the bolivar), is very significant.”
“Indeed, dollarization has brought inequality,” says Luis Oliveros for his part. “In this story there are losers who now do not have access to dollars.”
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What is the position of the Government and what challenges does it face?
“I am attentive to the currency sector, to defending the bolivar, wages, income with the country card. Evaluate how this process called dollarization can serve for the recovery and deployment of the country’s forces. It’s a release valve. Thank God that it exists”.
The phrase was said by Maduro himself in front of to the television cameras on November 2019.
Since then, the dollar has circulated freely in an increasingly evident way. But that does not mean that the government is adopting ato total dollarization of the economy.
Adopting the dollar as currency “would be the worst mistake” for Venezuela, Vice President Delcy Rodríguez said last December. “2022 will be the year of definitive recovery of the bolivar as the national currency” he added.
But Venezuela continues to face important challenges, says Luis Oliveros. Not only continue to lower inflation but also correct the overvaluation of the exchange rate.
“The government focused on keeping the exchange rate from moving so much, and it has practically not moved in the last four months,” he says. “But if the exchange rate does not move there is still inflation and that is when this overvaluation appears.
Overvaluation makes imports cheaper than production, which translates into a desincentivefor the internal economy.
“The great task is growth economic. Venezuela had seven years of economic decline. But if we continue to have overvaluation, inflation will continue”, concludes Luis Oliveros.
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