Buenos Aires Weather | Venezuela breaks one of the longest episodes of hyperinflation in the world

Venezuela ended a four-year hyperinflation crisis, one of the longest in the world, as the socialist government slowed the pace of money printing and the US dollar became the country’s preferred currency.

Prices rose 7.6% in December from November, the central bank said, marking a full year with monthly inflation below 50%, the threshold most economists commonly use to define hyperinflation. On an annual basis, Venezuela ended 2021 with inflation of 686.4%.

“Venezuela’s hyperinflation went as it came,” Ronald Balza, an economics professor at the Catholic University of Caracas, said on Friday. “The government didn’t take any action, it just stopped doing what was causing it, which was funding itself via accelerated money printing.”

The reduction in money printing stems from lower government spending, which effectively reduced the budget deficit to less than 10% of gross domestic product last year, from around 30% of GDP when hyperinflation began in late 2017, according to Luis Oliveros, a professor of economics at the Central University of Caracas.

Instead of the bolivar, which is the national currency, the country has unofficially adopted the US dollar. Over 60% of all transactions take place in the currency.

“While bolivar inflation is still important, it doesn’t capture all the information about what’s happening with prices,” Oliveros said. “We have to be careful with dollar prices.”

Despite emerging from hyperinflation, the country still suffers from one of the highest inflation rates in the world.

While official government data in Venezuela is notoriously unreliable, a parallel inflation index collected by opposition lawmakers also showed a significant drop in prices last year. BloombergThe Cafe Con Leche Index – which tracks the price of a cup of coffee in Caracas on a weekly basis – shows increases have also leveled off, particularly since the government renounced its currency, losing six zeros from to the previous bolivar.

The central bank has increased its interventions in the foreign exchange market, keeping the digital bolivar – as the new currency is called – relatively stable. Since October, it has more than doubled its supply of dollars to the market, pumping up to US$100 million a week and artificially keeping the exchange rate below five bolivars to the dollar.

Some wonder if the government will have the money to continue the policy. Central bank reserves fell below $6 billion, the lowest in at least 30 years, excluding IMF funds to which the government does not have access. Analysts said the government is likely to use oil revenues and other sources of hard currency revenue to intervene in the foreign exchange market.

“Sooner or later we’re going to see a big adjustment in the exchange rate, and that will have an impact on prices,” said José Manuel Puente, a professor at IESA’s Public Policy Center.

by Nicolle Yapur, Bloomberg

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