Venezuela plunged into monetary chaos


On December 5, the new Venezuelan currency, called "sovereign bolivar", officially entered into circulation. The measure carried out by the government represents the umpteenth reform attempted in recent years with the aim of strengthening a weak and deeply devalued currency due to hyperinflation and the lack of reserves.

Based on the above as a basis, in what follows, we will comment on the causes and consequences of this fact. That is, what events have caused what the Venezuelan country is experiencing now.

How it all started?

The causes of the monetary chaos in which Venezuela has been submerged for years are varied and complex. However, we can highlight at least two of them.

Structural public deficit

The first is undoubtedly the public deficit, the consequence of a decidedly expansive fiscal policy based on the multiplication of public entities to direct the country's production and of all kinds of social subsidies. Subsidies ranging from guaranteed rents to subsidized prices for commodities. The result of these policies was a disproportionate increase in state spending. In addition, of course, an economy increasingly inefficient and dependent on periodic injections of public money.

This is how for years the Venezuelan economy was gradually accentuating its weakness. However, the rise in the price of oil on international markets made it possible to finance the imbalances. In this way, the excessive expenditures of Chavista economic policy were to some extent offset by the continued supply of dollars generated by "black gold."

The income obtained in this way reached a maximum of 90,000 million in 2008, which allowed maintaining economic growth rates of 5% while reducing public debt and keeping inflation at moderate levels. Moderate, we say, if we compare them with those registered in the country in the 90s. The corollary of these years of apparent bonanza was the fall in foreign investment, the contraction of the private sector and an increase in dependence on oil. whose income came to represent 45% of the total of the State.

A twist: falling oil prices

Everything changed after 2015, when oil prices began to fall in international markets and plummeted 77% from their all-time high. The result was an immediate contraction in state revenue. Which could not be compensated by tax increases or by the expropriations of private companies.

From then on, the Venezuelan authorities were given three alternative strategies with which to balance public finances:

  • Fiscal adjustment: The first, making a fiscal adjustment, was possibly unacceptable to the country's ruling class. It would have meant reducing public spending and, therefore, reversing the policies implemented until then. Ultimately acknowledging the failure of your program.
  • Issue debt: The second option was more difficult to carry out, since an essential requirement for a country to be able to issue debt at a reasonable cost is its ability to generate confidence in international investors. Something completely lost in the first decade of the 21st century. Consequence of the execution of numerous expropriations of foreign companies.
  • Monetization of the debt: This left the monetization of the deficit as the only possible way, which, as we will see, ended up constituting a real disaster in the long term.

This is how the country's economy began to walk along a path not very different from the one chosen by the failed Weimar Republic in the 1920s: to face unaffordable obligations (imposed by other countries in the German case, by the politicians themselves in the Venezuelan), the Central Bank multiplied the issuance of money without this increase being accompanied by a proportional increase in production or by foreign exchange reserves. The consequence was, therefore, an excessive growth of the money supply with respect to the real demand. Which, as the laws of the market indicate, can only have one possible consequence: the fall in the price of the product. In this case the price of the currency.

In this way, inflation rates skyrocketed and what we can now call a true monetary chaos began, testing theories as well established as the Phillips curve. The first products that practically disappeared from the lives of Venezuelans were naturally imported. But soon, the shortage also spread to nationals given the little diversification of the country's economy. This, as a consequence of price controls by the government, which discouraged production by forcing entrepreneurs to sell at prices below production costs.

Since then, prices have shot up, giving rise to a true state of hyperinflation, where the latest estimate made by Bloomberg - the government has already stopped publishing complete data on the general price level - speaks of 43.378% in the last twelve months , with a projection of 482.153% for next year. The IMF forecasts are not more optimistic either. Thus, according to the international organization, inflation in Venezuela could close at 1,370,000% this year and exceed 10,000,000% in 2019.

Currency and cryptocurrency reforms

The government's reaction to the monetary chaos has been complex, sometimes contradictory, and we could even say counterproductive. In recent years, the Venezuelan authorities have implemented a series of monetary reforms that have successively failed:

  • 2008: This year the bolivar was changed to the "strong bolivar" (removing 3 zeros from the nominal value of the currency)
  • 2016: Banknotes with the highest denomination were left out of circulation: 100 strong bolivars. A month later they were restored to validity for 1 year and a half.
  • 2018: In May 2018, the new currency was introduced: the sovereign bolivar. This time removing 5 zeros from the face value.

The latest occurrence of Bolivarian monetary policy was the introduction of the Petro, a cryptocurrency whose value is supposedly backed by the country's abundant oil reserves. In this way, prices and wages would be denominated in a more stable currency and would not suffer the effects of a continuous devaluation as has occurred up to now.

The problem with this solution - saving the evident contradiction that an official cryptocurrency presents, when currencies of this type precisely have their reason for being in the fact that they are not controlled by any government - is that although the value of a petro is equivalent that of a barrel of Brent, it is denominated in dollars. Which means that any upward movement in crude prices will necessarily devalue the national currency. In the same way, the fact that the bolivar cannot freely trade in the markets, and that it can only do so with the dollar through the petro, does not invite confidence (the price of this currency being set at the discretion of the government itself).

Is there a solution?

Meanwhile, the humanitarian situation has deteriorated terribly. More than 4 million people have already left the country due to the serious food shortage. Having resorted to its umpteenth monetary reform, the government continues to make headlines with increasingly extravagant occurrences such as the "Conejo Plan" or the "National Savings Plan."

The Rabbit Plan consisted of asking citizens to raise these animals at home to contribute to national food production. For its part, the National Savings Plan encouraged the population of a country where the minimum wage is not enough to buy a can of tuna to buy gold sheets. All of which leads us to the obvious conclusion that an improvement in the economy would be practically impossible without political change.

Will the solution lie in political change?

Unfortunately the realm of politics is outside the scope of this publication. What we can allow ourselves to reflect on.

If the Venezuelan economy suffers today it is not exclusively due to economic factors, but due to policies that have not worked. The increased prominence of the State as an economic actor, although it could have brought apparent benefits in the early years, ended up linking the economy to politics in such a way that today both seem inseparable realities. Given that, there is no use talking about the reforms that Venezuela could carry out to get ahead, if the decisions are not made by citizens in the markets but by bureaucrats from their offices.

That is the price of handing over control of the economy to the political class and thus entering a circle of intervention and arbitrariness from which it is almost impossible to get out, since not many rulers willingly give up the quotas of power that already exist. have acquired. For this reason, and regardless of the most convenient political solution for the country, with respect to the economic one we can assure one thing: it must necessarily go through the depoliticization of the economy.

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