Chavista disaster: after cutting rates, Venezuela approaches hyperinflation again

The economic disaster of chavismo in Venezuela is so great that the government celebrated the fact that the country closed 2022 with an inflation rate of 305.7%, one of the highest in the world, but representing less than half of the previous year when the accumulated variation of prices was 660%.

By the end of 2021, Venezuela had rid itself of hyperinflation, completing 12 months with monthly variations below 50%.

In previous years, the country had faced absurd inflation rates, recording an unbelievable 130,060% price increase in 2018.

The sharp drop in inflation was caused by decisions such as curbing public spending and credit restrictions.

“I can declare politically, with the result of the management of inflation between the months of September, October, November, and December, which was single digit with a downward trend, that Venezuela is coming out of the state of hyperinflation,” said president Nicolás Maduro in January last year.

However, the country seems to be about to plunge back into hyperinflation.

When the independent Venezuelan Observatory of Finance (OVF) released its 2022 inflation forecast in January, it warned that despite the better-accumulated result compared to 2021, in December, the Venezuelan rate stood at 37.2%, 15.3 percentage points higher than in November and the highest level in 22 months.

This week, the OVF reported that the inflationary acceleration continued in January, with a monthly rate of 39.4% and an inter-year change of 440%.

“These figures suggest that the Venezuelan economy has entered a phase of strong inflation acceleration, as an expression of the macroeconomic instability that has been observed, especially since the government has been unable to continue to maintain the stability of the exchange rate it applied until August 2022,” the observatory pointed out in a statement.

“As a consequence of the higher inflation levels, public sector salaries have been pulverized,” the OVF added.

In January, thousands of Venezuelan civil servants took to the streets in the country’s main cities to demand readjustment in their salaries, eroded by inflation.

The observatory pointed out that the appreciation of the dollar, both in the parallel exchange rate (which is taken into account by Venezuelan companies) and in the official exchange rate, which the government had been holding back with foreign exchange interventions, is one of the main factors in the acceleration of inflation.

The bolivar accumulated 2022 a 73% devaluation against the American currency in a highly dollarized economy.

“[…] exchange rates, both parallel and official, have denoted a significant upward trend that feeds back into the expectations of devaluation and inflation generated in the absence of an economical program that promotes stability and growth,” the observatory pointed out.

“Thus, the economy is unanchored and without a clear reference to guide price formation in the face of the abandonment of the exchange rate anchor due to the loss of international reserves that the BCV [Central Bank of Venezuela] registered during the years 2020, 2021, and 2022.

Therefore, Venezuela faces a clear danger of entering again a moment of hyperinflation,” warned the OVF.

In an interview with Colombian channel NTN24, Venezuelan economist Jose Manuel Puentes said the Chavista regime has “artificially anchored the exchange rate” and that the country is unlikely to break out of the cycle of high inflation rates until there is political openness.

“There is no way to give Venezuela macroeconomic stability, especially to change it, if it does not achieve a minimum of social peace and political agreements,” he justified.

“Nobody believes the [official] exchange rate because it is too cheap, the government has some inconsistencies in economic policy, and the country’s Central Bank has the lowest level of international reserves in the world,” he added.

With information from Gazeta do Povo