Introduction

Venezuela is currently in its 47th month of hyperinflation, accumulating between November 2017 and September 2021 a price increase of 56,101,493,440.73% (1). Although since the third quarter of 2018 the speed of price growth has slowed significantly, even registering percentage variations of one digit per month, it cannot yet be said that the hyperinflationary cycle in the country is coming to an end as year-on-year inflation levels are still in the four-digit range.

In August 2021, due to the persistent increase in prices, the regime decreed a new conversion of the bolivar via the removal of six zeros from its denomination. This is the third such currency conversion in Venezuela since 2007. In 2018, the Maduro regime carried out the second conversion by removing five zeros. In this note, we will explain the evolution and implications of this measure on the Venezuelan economy.

Much ado about nothing

The first conversion was announced in February 2007, when, in an attempt to curb rampant inflation, former President Hugo Chávez decreed a conversion of the Bolívar to become effective January 1, 2008. This conversion created the so-called “Bolívar Fuerte” by removing three zeros from the Venezuelan monetary unit. Yet, as it was unaccompanied by any meaningful economic reforms, this action did not ease the inflationary pressures.

Figure 1 shows that annual inflation remained relatively stable in the double-digit range from 2008 - 2014, reaching a high of 68.5% for the year 2014 (2). Likewise, the restricted public sector incurred a persistent deficit during this period, even when oil prices remained above US $ 90/barrel. In the same period, the increase in monetary financing of the fiscal deficit via inflation tax (3) increased significantly, reaching 13.2% of GDP in 2014, accelerating the speed of price growth in Venezuela.

Venezuel Graph 1.jpg

Between January 2015 and July 2018, prices increased by 30,350,509.4% (4) as a consequence of the decrease in the Venezuelan aggregate supply, the worsening of the shortage of basic necessities (especially food) due to the imposition of price controls (5); and the accelerated depreciation of the exchange rate in Venezuela (6). In view of the accelerated growth of prices, in August 2018 the Nicolás Maduro regime announced a set of measures such as a 6,000% increase in the minimum wage; an increase in the price of gasoline according to its international price; direct subsidies to the population through the “Carnet de la Patria” system; and a new monetary reconversion, which consisted of the elimination of five more zeros from the Venezuelan currency (7).

However, these measures also quickly proved to be ineffective in improving the economic situation in Venezuela (8). At the end of 2018, the average price growth was 130.4% (9) per month reaching in December of that same year an annualized increase of 1,698,860.1% (as seen in graphic 2 on panel 1), where monetary financing via inflation tax already represented 7,460.01% of GDP% (as seen in table 1 on panel 1), and economic activity fell 36.95% as compared to 2013 (10).

Venezuela panel 1-6b65a6.jpg

The hyperinflation created significant challenges for public transactions, given the low purchasing power of the existing banknotes. As can be seen in both graphs in panel 2, which illustrates the transactions carried out by the public in 2017 and 2018, the low-denomination banknotes, particularly the Bs. 100 banknote, were the most used, exceeding 25% of total transactions in both years. Given the loss of purchasing power of the lowest denomination banknotes, merchants and the public started to reject them at around this time. Another aspect to highlight, as shown in panel 2, graph 5 is that the difficulty of accessing cash has made demand deposits and transferable savings deposits the principal components of total transactional money (M1) with more than 90% of the total.

Venezuela Panel 2.jpg

Third attempt

In March 2021, the Central Bank of Venezuela controlled by the Maduro regime ordered the expansion of the monetary cone with the introduction of high-denomination bills. The Central Bank introduced bills of Bs. 200,000 (equivalent to US$ 0.05), Bs. 500,000 (equivalent to US$ 0.12) and Bs. 1,000,000 (equivalent to US $ 0.23) the one with the highest face value among all Venezuelan paper currency (11). Graphs 6 and 7 of panel 3 show that the introduction of the higher denomination banknotes last March contributed little or nothing to the normalization of the availability of cash in Venezuela. The medium and low denomination banknotes stand out once again as the pieces with the greatest circulation in the economy. This is also true for the components of transactional money, whereas as of May 2021 more than 90% of M1 still consisted of demand deposits and transferrable savings deposits, as can be seen in figure 7. At the time of this action, for the first time since October 2016 monthly inflation did decline to single digits (9.1%). Yet this due was more to a drop in the demand for goods and services than to the introduction of any credible economic stabilization plan (12).

Venezuela Panel 3.jpg

In August 2021, the Nicolás Maduro regime decreed a new conversion to the Bolívar, which suppressed six more zeros from the Venezuelan currency. This was supposedly intended to deepen the development of a “digital economy” in Venezuela, as well as its recovery (13). So far in 2021, as can be seen in graph 8, the rate of inflation growth has slowed (from around 4,000% in the first 3 months of 2021 to a bit less than 1,500% in September 2021), even registering monthly single-digit figures on more than one occasion, as in the case of the months of March, June, and September, where monthly inflation reached 9.1%, 6.4%, and 9.7%, respectively.

Venezuel Graph 8.jpg

Although the inflation numbers are lower, we cannot say that Venezuela is exiting the hyperinflationary cycle that began in November 2017, because the Venezuelan economy still experiences four-digit inflation rates in annualized terms, with an annualized inflation rate of 1,457% for September 2021. Another aspect to highlight is that the presence of the dollar in Venezuela has become much more important both in the regular transactions of the population and in the Venezuelan financial system. By the end of September 2021, 86.12% of foreign currency deposits were held by private banks (14), and it is estimated that cash transactions in Venezuela now exceed 65% of the total transactions. Likewise, due to the same effect of hyperinflation, studies by private agencies have found that the US dollar has lost 49% of its purchasing power in Venezuela during the second quarter of this year in comparison with the same period of the year 2020 (15).

Poverty and inequality take hold in Venezuelan society

According to the results presented by the Universidad Católica Andrés Bello (UCAB) of the National Survey on Living Conditions 2021 (ENCOVI), extreme poverty for the year 2021 increased by approximately 10 percentage points in the 2019-2020 period to 86.6% of the surveyed households. Furthermore, as can be seen in graph 9 on panel 4, for the same year the per capita food consumption decreased compared to the previous year, with the extreme poverty population experiencing the greatest decrease. This group of the population has decreased its food consumption by 6.6% compared to 2020, with the consumption of dairy products, cereals, and sugars being the most affected (16).

Venezuela Panel 4.jpg

In addition to the above, it is also worth noting that inequality in the distribution of income in Venezuela has increased significantly (with 2017 as an outlier observation due to the beginning of the hyperinflation). For the year 2021, the Gini inequality index (as seen in graph 10 on panel 4) increased by 0.06 basis points compared to the previous year. Also notice that the Gini is still higher than 0.5, which implies that more than half of the income is concentrated in the richest stratum of the population (17).

Final thoughts

The third monetary reconversion of the Chavez-Maduro regime will have the same empty results as previous attempts. It is not accompanied by any credible fiscal and economic reforms, and the expectation is that the crisis that Venezuela is going through will continue notwithstanding this measure. According to the latest International Monetary Fund World Economic Outlook (18), Venezuela’s GDP will contract by 5% in 2021. Although this is a much better figure than in previous years, it does not necessarily mean that there will be a recovery in the future.

The prolonged economic recession that Venezuela is going through, also exacerbated by the COVID-19 pandemic, has reduced the quality of life of its population. For example, between 2018 and 2020, approximately 27% of the Venezuelan population (about 7,800,000 inhabitants) presents problems of malnutrition (19), with the child population being the most affected (30.35% of children under five years of age are shorter than expected according to their age)(20).

The outlook regarding the COVID-19 pandemic is not very encouraging either. At least 1,000 cases of people infected by the virus are reported daily (21), and it is also reported that health centers do not have the supplies required to care for both those affected and patients with chronic diseases (22). The efficient and transparent control of the wave of infections by the virus is also a fundamental variable for the Venezuelan economic recovery since it would allow the reactivation of all the economic sectors of the country. Without advances on this front and a sound economic policy, Venezuela will not achieve harmonious and sustainable economic growth.

References:

  1. Source: Central Bank of Venezuela; Venezuelan Observatory of Finance; own calculations.
  2. This was the highest annual inflation level recorded since 1996 when at the end of that year the consumer price index registered an increase of 103.2%.
  3. The inflation tax refers to the action of the public sector in indirectly extracting resources from other economic agents as money loses purchasing power due to inflation. However, this tax is not regulated by legislation, nor is it formally collected by any public entity, but rather consists of the erosion of the purchasing power of the currency (see: Manzano, O, R. Mendez, J. Pineda, and G. Rios (2021). Macroeconomics and Natural resources. Kendall Hunt).
  4. Source: Source: Central Bank of Venezuela; Venezuelan Finance Observatory; own calculations.
  5. See: Abadi, A. & García Soto, C. (2016). El control de precios en Venezuela (1939-2015): de la Segunda Guerra Mundial a la “guerra económica”. CEDICE Libertad.
  6. See: https://www.efe.com/efe/america/economia/claves-de-la-ineficacia-del-control-precios-frente-a-inflacion-venezolana/20000011-4252176; ECLAC Economic Study of Latin America and the Caribbean (2016).
  7. See: https://www.bbc.com/mundo/noticias-america-latina-45229828; http://www.minec.gob.ve/presidente-maduro-anuncia-nuevo-sistema-salarial-y-reconversion-monetaria/.
  8. See: https://devtechsys.com/insights/2018/11/12/the-failing-economic-recovery-program-of-president-nicolas-maduro/.
  9. Source: Central Bank of Venezuela; Venezuelan Finance Observatory; own calculations.
  10. Source: Central Bank of Venezuela; own calculations.
  11. See: http://www.bcv.org.ve/billetes-y-monedas/ampliacion-del-cono-monetario-2021.
  12. See: https://cedice.org.ve/observatoriogp/portfolio-items/la-inflacion-se-desacelero-en-marzo-2021/.
  13. See: http://www.bcv.org.ve/billetes-y-monedas/nueva-expresion-monetaria.
  14. See: https://www.elnacional.com/economia/la-banca-privada-capta-8612-de-las-operaciones-en-divisas-en-venezuela/.
  15. See: https://cronica.uno/avanzan-las-transacciones-en-divisas-67-paga-con-dolares-y-otras-monedas/.
  16. Source: Encuesta Nacional de las Condiciones de Vida 2021.
  17. According to the information provided in the results of the National Survey of Living Conditions (ENCOVI) for the year 2021, the richest stratum are the deciles 9 and 10 of the population.
  18. Source: International Monetary Fund World Economic Outlook, October 2021.
  19. Source: https://cronica.uno/78-millones-de-personas-presentaron-desnutricion-en-venezuela-entre-2018-y-2020/.
  20. See:https://eldiario.com/2021/10/16/inseguridad-alimentaria-pobreza-venezuela/
  21. As of October 25, 2021, the Nicolás Maduro regime reported that 748 new infections and 12 new deaths were registered in Venezuela, reaching the figure of 401.259 infected people and 4.822deaths (source: https://covid19.patria.org.ve/estadisticas-venezuela/)
  22. See:https://eldiario.com/2021/09/29/sistema-salud-venezolano-urgencias-cardiovasculares/; https://eldiario.com/2021/10/08/venezuela-tercera-ola-contagios-covid-9/.