There is no escaping the fact that OPEC member Venezuela is in a very serious mess. In 2017, the economy contracted by around18 percent, the third year in a row the national output had shrunk by a double-digit figure. Meanwhile, as the far-left government of President Nicolas Maduro frantically prints fresh bolivars, inflation is running at an estimated 50 percent each month. Economics textbooks generally give this as the tipping point for hyperinflation.
The government no longer publishes inflation figures for the very good reason that you cannot count the hairs on a bolting horse. When much milder inflation gripped Turkey in the 1980s, the Central Bank governor used to send someone out to the street to find out the black market rate for the lira. Such an exercise is pointless today in Caracas. Everybody, including central bank employees, knows the value of their salaries is already halving by the month. Many imported goods are unaffordable even when they appear in shops which have fewer and fewer goods to display on their shelves.
The Maduro government has tried to crack down on what is calls “profiteering”. But historically all around the world, punishing traders and seizing goods has been a counsel of despair and a clear indication of a government that has run out of ideas. So too is a re-denomination of the currency which Maduro plans to do next month by dropping two zeroes from the bolivar. And even this plan currently looks doubtful since running off the new banknotes on the overheated state printing presses at the Casa de la Moneda Venezuela and distributing them to the banks has apparently run into snags.
The beleaguered administration is very largely the author of its own misfortunes. The late Hugo Chavez, Maduro’s mentor and predecessor, organized radical wealth redistribution in response to serious economic distortions which had seen wealth and power concentrated in an elite while the working classes were kept in abject poverty. The country’s state oil company Petróleos de Venezuela had been nationalized in 1976 but run as a reasonably efficient independent enterprise with beneficial links to foreign oil companies. In 2006, PDVSA workers were told they had to reelect Chavez or lose their jobs. There was also an active policy of hiring only the president’s admirers. These individuals did not include enough competent administrators and engineers to replace the exodus of experienced employees. Since this time last year, oil production has slumped by almost a million barrels a day and, absurdly, Maduro has now sent in the military to run the company.
The president is blaming the international financial markets, not least their champion, the United States, for the deepening economic crisis. Since he and Chavez went out of their way to alienate them, he should not be surprised at their indifference to his government’s fate. But in one respect, Maduro is right. The value of a currency, like any other asset, varies with the degree of confidence it generates.
The International Monetary Fund has just put the boot in. Maurice Obstfeld, its head of research, told journalists Venezuela’s hyperinflation now rivaled Zimbabwe and Germany between the wars. He didn’t give a figure. He didn’t have to. This week the headlines were screaming Venezuelan inflation would hit one million percent by the end of the year, a prophesy very likely to be self-fulfilling.
