It is difficult to be precise about the rate of inflation in Venezuela since the government has significantly reduced its publication of economic data. The Economist recently quoted a current rate of 46,000% per year, other estimates put it closer to 100,000% and the IMF estimates it will rise to 1 million per cent by the end of the year! The impact of such a rate mirrors what happened in Germany in the 1920s, Hungary in 1946 where inflation at one point reached 150,000% PER DAY, and Zimbabwe’s two episodes of hyperinflation in the last ten years. In Germany, workers were paid twice a day, and given breaks to buy things before prices went up even further, using wheelbarrows and suitcases to carry their money to the shops. Although the Venezuelan president, Nicolas Maduro, has blamed opposition activists, officials in Washington and criminal gangs for the hyperinflation, independent observers suggest it is caused largely by the government printing money to pay its budget deficit, currently running at 30% of GDP. Ironically in Venezuela today, almost everyone is a millionaire but 4/5 of the population live in poverty and their average weight is falling because they cannot afford enough food. There are reports of shoppers falling ill because the only meat they can afford is discounted because it is no longer fresh.
The effects of such high levels of inflation on the metro in Caracas (capital of Venezuela) epitomise the problems caused by hyperinflation. The metro, built in 1983, was once heralded as a sign of the efficiency and progress of the economy. It was highly efficient and ran on time. The price of a ticket was fixed at 4 bolivars by the government which now equates to only a tiny fraction of 1p but, even if they wanted to, travellers cannot pay the government has run out of the paper needed to print them so all the ticket machines are marked as being out of order and people travel for free. However the journey is unlikely to be trouble-free. Demand has risen since people cannot afford taxis or fuel for private cars and the system now transports 2.5m people a day, three and a half times the number it was designed for. Only half the trains are working. Despite there being 11,000 workers officially employed, there is a shortage of workers since pay is only around 50p per week.
In Venezuela at present, it is more profitable scavenging for food in rubbish dumps than working. Output is falling for the third successive year and, despite having rich reserves of oil, which should make Venezuela one of the richest South American economies, oil production, which accounts for 95% of export earnings in the country and a quarter of gross domestic product, (total output of the country) fell by a half between January 2016 and January 2018. Venezuela has been unable to stop a six-year-long production decline, caused by inadequate investment, US sanctions and a lack of skilled workers who have left the country for a better standard of living elsewhere.
There was even a shortage of banknotes which are imported. Last year the banks were forced to limit cash withdrawals to the equivalent of one US dollar a day. Increasingly, transactions are made electronically but those trying to make even a medium-sized purchase via a debit card found that many screens in shops or on their phones were too small to handle the large number of zeros needed. One of most popular television programmes, a Venezuelan version of “Who wants to be a Millionaire”, was abandoned because of the fall in the value of the currency – were it being broadcast today, the top prize would be worth 13p!
To solve the problems caused by hyperinflation, the government has raised the minimum wage by 3,500%, and President Maduro has announced plans to reduce the government’s budget deficit (the amount the government borrows) from 30% of GDP to zero by increasing VAT and the price of fuel, which is currently very heavily subsidised, therefore admitting implicitly that high government borrowing and the printing of money was a key cause of the hyperinflation. In addition, in August, the government devalued the currency from 250,000 to the US dollar to the black market rate of 6m to the dollar and then introduced a new bolivar, converting 100,000 old bolivars to 1 new bolivar. However the future does not look promising since the value of the new currency fell by 18 % on the black market in the first two weeks after devaluation.