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Experts say it is unlikely President Nicolas Maduro will be able to reverse Venezuela's hyperinflation. (Photo: Minci)
Wednesday, August 15, 2018

Venezuela Hyperinflation Reversal Unlikely

Solutions exist, but will likely not be implanted by current government.

Inter-American Dialogue

The International Monetary Fund projects inflation in Venezuela will skyrocket to one million percent by the end of the year, with GDP falling approximately 18 percent as oil production stalls. With President Nicolás Maduro in power and no political changes in the foreseeable future, how can Venezuela pull out of its hyperinflation spiral? What measures can the government take to prevent further damage to the economy? What lessons can Venezuelan officials draw from the hyperinflation experiences of other countries in the region, such as Brazil and Peru, as they draft economic policy in the months ahead?

Claudio Loser, founder and CEO of Centennial Latin America and former director of the Western Hemisphere Department at the International Monetary Fund:  Today, Venezuela is the worst performing economy in the region, if not the world. No country has fallen so far and so persistently from prosperity to dismal poverty. At the center of the crisis is the collapse of monetary and fiscal policy, even now with higher prices for petroleum—virtually the only export item left. At present, the government is talking about monetary reform, and will eliminate five zeros from its currency effective immediately. As things stand, the government would need to reform its currency again by early 2019 or so. Venezuela’s numbers show that per-capita GDP has been cut in half since 2013, with no comparable debacle elsewhere in the region, and inflation is unmeasurably high—with estimates being only an educated guess. As notable, the fiscal deficit is about one-third of GDP, while the external current account is in surplus. In the dysfunctional foreign exchange rate in place, oil enters for almost free in the budget, but the foreign exchange is not directed to the poor. It is channeled through to privileged sectors—the party, the army and friends—who sell it a premium, or hoard it abroad, while the government prints its way out of its problems. The solution will have to be an overhaul of the exchange system, with a rational pricing and allocation of oil receipts, a deep reform of the fiscal policies, together with a targeted and intelligent support system of the poor. This is easily said, and also doable, but difficult to envisage in the current political regime.

Alejandro Grisanti, economist and director of Ecoanalítica in Caracas:  In Venezuela, you don’t talk about the ‘perfect storm’ anymore. The extent of economic destruction has reached such severe levels that now one refers to the ‘perfect hecatomb.’ According to Ecoanalítica, June inflation was at 134 percent, and we estimate that it will close the year out at 1.4 million percent. What’s making Venezuela’s economic crisis so severe is not only that the country is firmly in the grips of hyperinflation, but also that the economy and the oil industry are steadily shrinking. After more than 20 quarters of economic contraction, the government has destroyed almost 50 percent of the GDP and more than 60 percent of the country’s oil production. Unfortunately, nothing indicates that the government is planning to change its course. It’s continuing to maintain its subsidy of gasoline and the main public services; continuing to implement its system of controls, which has all but strangled the private sector; continuing to spend more than the revenues it’s taking in and closing the budget gap by printing money. It’s true that the government plans to announce some adjustments, and possibly a measure or two that may be pointed in the right direction, but which fall far short of what’s required for a stabilization plan. A new government has to raise financing to stabilize the economy. The need for fresh resources is so significant that it will be impossible to meet without the backing of an IMF program and without restructuring foreign-currency liabilities. It will be necessary to create an emergency plan that re-establishes access to food and medicine to those most in need. We say a new government, because the current government’s ideology and the way the international community has isolated it makes it impossible to create a stabilization plan with international financing.

Leonardo Vera Azaf, professor and researcher at UCV- FACES in Caracas: Whether in terms of output losses or increases in prices, Venezuela constitutes the largest economic catastrophe in the hemisphere of the last century. Undoubtedly, the biggest obstacle to overcome is hyperinflation. This type of phenomenon occurred in the region in contexts of great financial isolation, extremely high external debt service, internal conflicts and fiscal deficits that could only be financed by the disorderly printing of money. In the case of Venezuela, additional problems have emerged since the economy has been highly regulated and distorted by controls in the exchange market and in the price system. A stabilization program to reduce the inflation rate to tolerable levels will require a great effort to get the country out of financial isolation and a shortage of foreign currency. International aid and cooperation will be very important—the country needs financial resources. The elimination of exchange controls and the return to a functional and stable exchange market would help neutralize the explosive dynamics of the black market and anchor expectations. In the same direction, the control of the monetary printing process would also help. For the latter, it is necessary to solve the fiscal gap with transitory financial resources coming from abroad and also with some initial fiscal adjustment. The regime of price controls, which today have become distortions that produce desynchronized adjustments, must be lifted once and for all. Maduro has very little room to maneuver and to deal with the crisis. The government lacks credibility, resources and skills to design a stabilization and reform program. The most Maduro can do is open up to foreign investment, making certain conditions more flexible and eliminating legal obstacles. A radical and credible change in the regime that regulates investment and exploitation in the oil sector can help obtain resources to alleviate the fiscal crisis, but indeed there is not much that he can do. 

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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