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  • Writer's pictureAbir Mohammed

Venezuela: A Modern Hyperinflation Crisis

Venezuela - a warm holiday escape located just south of the equator offering stunning natural beauty and exotic foods. That was reality prior to 2016, a year that marked the beginning of the nation’s social, economic, and political downfall. Following the election of President Nicolas Maduro, the inflation rate skyrocketed from 800% in 2016 to 2,000,000% in 2018. Yes, you heard that right, a 2 million % inflation rate. That means an item that cost $1 at the start of the year cost $2,000,000 by the end. So just how did the country find itself spiraling into a modern economic catastrophe?

A Brief History

Even prior to Venezuela’s current hyperinflation trends, the country was experiencing high inflation rates since the 1980s. In 1982, world oil prices collapsed due to a loss of demand, creating a large surplus of oil supplies. This led to Venezuela’s inflation rates doubling to 12% in just a few years and reaching 84% in 1989.

A few years later in 2003, the nation’s government made the poor decision of suspending all foreign exchange trading and created a system with set exchange rates for the provision of international trade. The major issue here was that the set exchange rates were unable to follow the realistic and continuous changes of the international market and always left the country one step behind. This is particularly true with regards to investments since corporate investors felt lower confidence with injecting FDI into a country with a restricted system of international trade. This led to inflation rates remaining high and becoming the highest in the world by 2014 at 69%.

Maduro’s Fatal Mistakes

There’s always been a bold economic red flag with the structure of Venezuela’s economy- the fact that over 90% of the country’s exports were oil. This huge overdependence meant dips in oil prices have drastic consequences on the economy. Following one such drop, Venezuela’s new president- Nicolas Maduro- thought the solution was to print more money. Injecting more money into an economy simply drives the price of the currency lower, as can be understood by a simple supply and demand model.

However, this wasn’t the sole reason for the beginning of the hyperinflation spiral. It was this mistake combined with the continued fall of oil prices, as well as reduced Venezuelan oil supplies, that led to decreased international FDI and created a number of other vicious cycles that drove inflation further up.

Maduro noticed the high inflation rate of his country and, in a move of mere desperation, decided to protect the government’s funds by converting most of it to US dollars. This just meant more Venezuelans converting their bolivares to dollars for ease of transactions. This repeated process was so terrible for the currency, that by 2018 it was better to use cash for toilet paper rather than buying it.

Current Conditions

Although the inflation rate has massively decreased from 2,000,000% to 9986%, it is still the highest in the world by a large margin. Poverty in the country has been steadily rising and won’t stop until the economy can recover. However, with tensions arising between the federal state and gangs, along with the poor state of a post-pandemic world economy, it seems that Venezuela will remain in a state of financial dismay for decades to come.

On a more positive note, the rise of cryptocurrency has offered citizens of the nation a legal and more optimal way of processing and sending transactions, preventing thousands from going into the black market and crime. As the world of digital currency keeps growing, there might just be a glimpse of hope for a nation that has been in a free-fall since the 1980s.

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