Inflation In Venezuela

Running head: VENEZUELA’S HISTORY OF INFLATION 1

Venezuela’s history of Inflation

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VENEZUELA’S HISTORY OF INFLATION 2

Venezuela’s history of Inflation

Venezuela ranks fifth among the OPEC member countries in terms of oil production.

Petroleum products constitute 95% of its total exports translating to more than 50% of the

country’s GDP (Cerra, 2016). Between 1950s and early `80s, Venezuela’s economy was

considered the strongest in the entire South America. Currently, the country has one of the

world’s most repressive regimes, especially regarding property rights.

As of 2014, Venezuela’s inflation rate stood at 57.30%. Its economy has been rocked

with inflation for several years. Between 1973 and 2014, the inflation went up to as high as

115.18%. Its annual rate of inflation has gone beyond 100% for two episodes. The first

episode was in 1989 June when the inflation rate rose to 103.29% and the second episode was

in July 1996 when the inflation rate rose to 108.13% and stayed there for seven months till

January 1997 when it slightly dropped to 103.24% (Cerra, 2016). The country is currently

experiencing a stagflation with many economists predicting it could beat the mark of the

century to hyperinflation. The greatest worry to the Venezuelans is that since late 1980s, the

country’s annual rate of inflation has often been above 20%.

Some of the root causes of Venezuela’s hyperinflation include; vulnerability to

external shocks by the country’s oil-based economy. A greater percentage of Venezuela’s

exports are oil products which is quite susceptible to external shocks. With the oil prices

dropping to $40 per barrel in 2015 from $111 per barrel in June 2014, Venezuela had to

experience reduced foreign income which literally made the country run out of cash since the

country had not taken good care of its oil cash cow when times were good (Biller, 2016).

Secondly, Venezuela is in economic crisis with expected three years of recession

according to the IMF. The country is currently in the third year of recession where its

economy could possibly go down by 10% this year. This recession is forecasted by the IMF

VENEZUELA’S HISTORY OF INFLATION 3

to last up to at least 2019 (Biller, 2016). With the shrinking economy, the prices of

commodities are going extremely high with an expected inflation of 475% by the end of this

year.

Lastly, soaring food prices is another reason for Venezuela’s hyperinflation. The

country has experienced severe food shortages in 2016 with her citizens going weeks and in

some cases months with no basic food like flour, eggs, milk, sugar or soap (Biller, 2016). In

fact, Coca-Cola had to stop its production in Venezuela due to lack of sugar. Despite the

country’s falling oil revenue and crashing currency, the government still enforces stringent

price control mechanisms on sellers which discourage food importers from bringing food into

the country since they will suffer losses.

With regards to Venezuela’s hyperinflation, the country’s benchmark interest rate was

recorded last at 21.19% (Cerra, 2016). The country’s interest rate reached an average of

23.69% between 1998 and 2018, with February 2002 being the toughest economic year with

an interest rate of 83.73% and April 2006 recording the lowest rate at 12.79%.

Though Venezuela is struggling to redeem its once rich economy, there are no

noteworthy measures undertaken by the country’s leadership in a bid to realize the country’s

long lost economic glory. However, it can be concluded that there are a few measures that

when undertaken by the country’s leadership, can help bring up the country from its knees.

Such measures include but not limited to abolishing price controls, fixing the exchange rates

to prop up the country’s currency, abolishing subsidies to reduce government expenditure,

and seeking financial and economic advice and support from the international agencies like

the IMF.

VENEZUELA’S HISTORY OF INFLATION 4

References

Biller, D. (2016). IMF Sees Venezuela Inflation Rocketing to 720 Percent in 2016.

Bloomberg News.

Cerra, M. V. (2016). Inflation and The Black Market Exchange Rate in a Repressed Market:

A Model of Venezuela. International Monetary Fund.

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