The Hyperinflation in Venezuela

Where are the problems?

According to the International Monetary Fund (IMF) Venezuela is heading towards a 1 000 000 percent hyperinflation. One of the reasons for the bad condition of the Venezuelan economy was the slump of the Gross Domestic Product (GDP) in 2014, caused by the dramatic fall of the oil price and the continuous decline of the economic performance. Nearly the whole economy depends on the domestic oil industry and even 95 percent of Venezuelan export revenues can be traced to the black gold.

According to experts even with rising oil prices, there will be no relief for the Venezuelan economy anytime soon. Venezuela invested too little into the necessary infrastructure, which leads to an inevitable diminishing of the production volume of the state-owned „ Petróleos de Venezuela“ (PDVSA). This makes it even more difficult to successfully tackle the inflation. The situation is aggravated by a massive brain drain, by the hostile attitude of the government towards foreign investors and by the repeated increases of the minimum wage in order to maintain the support of the population. In addition, there is an inability to repay the government bonds, which leads to unpaid loans. Furthermore, allegations of corruption discourage potential investors. As a result more and more money is being reprinted, which is undermining the value of the money and fuelling the hyperinflation.

The Venezuelan President Nicolás Maduro reacted to the bad economic situation by introducing a new currency, the “Sovereign Bolívar” (Bolívar Soberano). It was introduced on the 20th of August 2018 and has five zeros less than the original money. Thereby President Maduro hopes for a radical change of the financial and monetary situation of Venezuela.

Experts doubt if this measure will improve the situation, since the problems of the Venezuelan economy would be mainly of a structural nature. Those are e.g. the expropriation of large companies, the government's fixing of prices and exchange rates, and the collapse of the oil industry and the associated infrastructures. A solution would ask for more than the introduction of a new currency, but for a fundamental restructuring of the Venezuelan economy.

The controversial re-election of President Maduro in May 2018 prompted 14 Latin American states to not recognize the results. Furthermore the USA and the EU questioned the results of the election as well and therefore introduced punitive measures and economic sanctions against Venezuela. Only China and Russia are still in support of Venezuela, but overall the country cannot count on the support of the international community in the fight against the hyperinflation.

For several years, experts have been describing the political situation in Venezuela as alarming, because the country becomes more and more autocratic and elections are only used as a democratic disguise. The increasing cut backs of pluralism and of institutional controls are accompanied by a growing political persecution and repression. The opposition therefore fears, that the latest drone-attack on President Maduro could be used to oppress the adversaries of the current regime even more. Nevertheless, many experts feel that the attack made the Venezuelan President look weak. However, it would still be difficult to estimate how long the reign of the Maduro Regime will last, but the international community should continue to exercise pressure on Venezuela.