EspañolThe value of the Venezuelan bolívar has plummeted in the past month, depreciating from 102.56 to 159.02 per US dollar on the black-market exchange. November’s decline indicates that Venezuela now flirts with hyperinflation.
The rule of thumb among economists is that hyperinflation occurs when inflation — the declining purchasing power of a currency as measured by a rise in the price level — exceeds 50 percent on a monthly basis. As deduced from the black-market exchange rate and the US Consumer Price Index, Venezuela’s inflation for November reached 55.27 percent.* Even the highest denomination of the bolívar, the 100 Bs. note, is now worth a mere 62.9 US cents.
If Venezuela were to continue November’s free-fall trajectory for the bolívar, its annual compounded inflation would reach 19,633 percent.
While DolarToday is the most commonly referenced website for the bolívar’s informal exchange rates, Aguacate Verde and Lechuga Verde both uphold the trend (at 146 Bs. per US dollar). Of the three, DolarToday is the only one that offers a publicly available data record (Excel), enabling comparisons between past and present exchange rates.
The Bolívar’s Disappearing Act
In a country with three fixed official exchange rates — all with rationed supplies of foreign currencies — the informal rate has become the most accurate gauge of the bolívar’s underlying purchasing power.
“The black market rate is a very good indicator of what the exchange rate should be,” says Boris Ackerman, an economist and professor at Simon Bolívar University in Caracas. “Public expectations and speculation continue to drive the rate up despite strict financial controls enacted by the government.”
In an economy defined by crisis, Venezuelans are scrambling from the bolívar to take refuge in the US dollar, which offers a relatively more stable alternative and store of value. In response, President Nicolás Maduro has worked to steadily decrease the availability of US dollars within the country, even going so far as to outlaw transactions in greenbacks.
This year, the Chavista regime also introduced the third SICAD II rate, in an attempt to curb the thriving black market. However, the measure has since backfired, and the black-market exchange rate has more than doubled since SICAD II’s introduction in March.
Venezuela’s financial woes have come under immense criticism, including from prominent outlets such as the Economist, which described it as “probably the world’s worst-managed economy.”
“The path forward is clear,” says Ackerman. “The government needs to remove price controls and increase gas prices if it wants to reverse this trend… They need to generally liberalize the economy, but I don’t see that happening anytime soon. It would be crazy to expect a complete change in behavior when all that has been demonstrated is the complete opposite.”
No End in Sight for Inflationary Pressure
Despite fracturing within the United Socialist Party of Venezuela, those at the helm of the regime have remained committed to the “Bolivarian Revolution” of Chavismo. In fact, in a sign of loyalty to 21st-century socialism, President Maduro this year appointed Orlando Borrego — a Moscow-educated battle comrade of Che Guevara in the Cuban Revolution — to his team of economic advisers.
In November, Maduro signed 45 laws and reforms to compensate for plummeting state oil revenue. That includes new taxes as Venezuela, endowed with the world’s largest crude oil reserves, now risks default and has had to resort to importing light crude from Algeria.
“I don’t think that Venezuela has crossed that threshold into hyperinflation, but it’s certainly open for debate,” said Ackerman. “It’s tough to nail down a definition for hyperinflation, but if the government doesn’t act now we’ll certainly be there soon.”
Venezuela suffers from the world’s highest inflation rate, and is the first country to suffer the signs of hyperinflation since Iran in 2012. Venezuela’s inflation is being monitored via the Cato Institute’s Troubled Currencies Project, which seeks to estimate inflation rates in countries undergoing extreme economic hardship.
*Read an explanation of the calculation method here. Fergus Hodgson contributed to this article.
Español The calculation of inflation, the "ongoing fall in the overall purchasing power of the monetary unit," is no easy task. Authoritarian regimes also tend to resist reporting it, or they misreport it when they do. So readers are clear on how one arrives at the conclusion that November represented a period of hyperinflation for the Venezuelan bolívar — in excess of 50 percent inflation in one month — let me lay the method on the table. Essentially, it is taken straight from the Troubled Currencies Project of the Cato Institute, led by Steve Hanke (under methodology). Hanke "collects black-market exchange-rate data for these troubled currencies and estimates the implied inflation rates for each country." I have simply replaced the formula's annual numbers with monthly numbers. The underlying data is the black-market exchange rate between the Venezuelan bolívar and the US dollar, from DolarToday, and the inflation rate in the United States, from the US Bureau of Labor Statistics (PDF). The logic behind the formula is that if the US dollar experienced a measured level of inflation over a particular period, we can assess the purchasing power of another currency by comparing its value on the exchange market over that same period. If, for example, the US dollar had 20 percent inflation over a year, and its exchange rate with another currency remained unchanged in that time, we can infer that the other currency also experienced 20 percent inflation. If the US dollar gained ground on the exchange market, we can infer that the other currency had a higher rate of inflation, and vice versa. The one key assumption here is purchasing power parity, that "the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency." Although there may be departures from this, it is a reliable assumption given goods traded across two jurisdictions, smuggled onto the black market if necessary. A distilled version of the formula used goes like this: (1 + the monthly inflation rate in troubled-currency country) = (1 + the monthly inflation rate in the United States) × (1 + the monthly percentage change in the exchange rate). The monthly rate for the United States is 0.14 percent, from the November BLS release, and the average over the past year. (The monthly rates ranged from -0.2 to 0.4.) The change to the exchange rate, between November 1 and December 1, is 55.05 percent. It started at 102.56 per US dollar and finished at 159.02. That equates to 55.27 percent inflation for November, or an astounding 19,633 percent per year. On this basis, the Venezuelan bolívar has exceeded the 50 percent rule-of-thumb threshold for hyperinflation in a month. One should note that the data is not seasonally adjusted, and that should temper the implication that the rate will remain this high. In saying that, Venezuela has been verging on hyperinflation for the past couple of years, and it exceeded an annual rate of 300 percent over a year ago. The pressure towards ever-higher levels of inflation has been building for a considerable period of time. One element of the formula that might come into question is the US measure of inflation, that perhaps the actual rate in the United States is higher than reported by the Bureau of Labor Statistics. Unfortunately for holders of the Venezuelan bolívar, any higher level of inflation in the United States would only amplify the estimated rate for Venezuela. In fact, to get the November rate below 50 percent, the United States would have to have had deflation of 3.3 percent.