Venezuela – Hyperinflation and Fallout for T&T
In economics, hyperinflation occurs when a country experiences very high and usually accelerating rates of inflation, rapidly eroding the real value of the local currency, and causing the population to minimize their holdings of the local money. The population normally switches to holding relatively stable foreign currencies.
There are concerns that the economic crisis engulfing Venezuela, if allowed to fester, could have a negative spill over effect on Trinidad via migration, the creation of an underground economy, and crime. One senior banker told C-TV it’s more than an economic crisis. It is a humanitarian one and this is worrying many policy makers, and regional central bankers:
Despair and violence is taking over Venezuela. The economic crisis sweeping the nation means people have to withstand widespread shortages of staple products, medicine, and food. To make matters worse, dry weather patterns have left the dams that drive the hydroelectric power plants with water levels that are dangerously low. As a result, the Maduro administration began rationing electricity, leaving entire cities in the dark for up to 4 hours every day, discontent gave way to social unrest. Additionally, public servants were placed on a two day work week, crippling the delivery of many services.
On April 26, people took to the streets in three Venezuelan states, looting stores to find food. Maracaibo, in the western state of Zulia, is the epicenter of thefts. Venezuelans raided pharmacies, shopping malls, supermarkets, and even trucks with food in seven different areas of the city. In Caracas, the Venezuelan capital, citizens reported looting in at least three areas of the city. Twitter users reported that thefts occurred throughout the night in the industrial zone of La California, Campo Rico, and Buena Vista.
They assured that several locals were robbed and that there were people on the street shouting “we are hungry!” The same happened in Carabobo, a state in central Venezuela. The crimes and waves of protests are facilitated by prolonged power rationing and outages in multiple parts of the country.
Purchases in supermarkets are rationed through a fingerprint system that does not allow Venezuelans to acquire the same regulated food for two weeks. Due to the country’s mangled economy, millions must stand in long lines for hours just to purchase basic products, which many resell for extra income as the country’s minimum wage is far from enough to cover a family’s needs.
On Wednesday, the Venezuelan Chamber of Food (Cavidea) said in a statement that most companies only have 15 days worth of stocked food. According to the union, the production of food will continue to dwindle because raw materials as well as local and foreign inputs are depleted. In the statement, Cavidea reported that they are 300 days overdue on payments to suppliers and it’s been 200 days since the national government last authorized the purchase of dollars under the foreign currency control system.
Venezuelans Are Eating less. The latest Survey of Living Conditions (Encovi) showed that more than 3 million Venezuelans eat only twice a day or less. The rampart inflation and low wages make it increasingly more difficult for people to afford food. “Fruits and vegetables have disappeared from shopping lists. What you buy is what fills your stomach more: 40 percent of the basic groceries is made up of corn flour, rice, pasta, and fat”. But not even that incomplete diet Venezuelans can live on because those food products are hard to come by. Since their prices are controlled by the government, they are scarce and more people demand them. The survey also notes the rise of diseases such as gastritis, with an increase of 25 percent in 2015, followed by poisoning (24.11 percent), parasites (17.86 percent), and bacteria (10.71 percent).
While the food is running out, the country has addressed its cash liquidity problem by simply printing more money. Its Central-bank data shows Venezuela more than doubled the supply of 100-, 50- and 2-bolivar notes in 2015. While this supply has grown, because of low oil prices, the stark reality is that Venezuela has fewer U.S. dollars to support new bolivars. One US Dollar can purchase well over 1000 Venezuelan Bolivars on the black market, as the Bolivar is now viewed as worthless.
Maduro in late December 2015, changed a law to give himself full control over the central bank, stripping congressional oversight just as his political opponents took control of the National Assembly for the first time in 17 years. Unfortunately, that did nothing for the imploding economy and country, whose morgues are now overflowing due to rampant social violence. The other problem is that Venezuela needs to pay in hard dollars to print its rapidly devaluing domestic currency. In fact, among the sources of funds to purchase its own money was the liquidation of its gold reserves, which Venezuela has been quietly selling to willing offshore buyers.
Whiles shortages in Venezuela have been well documented over the last few months, it is about to face its greatest challenge and risk – no money. “It’s an unprecedented case in history that a country with such high inflation cannot get new bills,” said Jose Guerra, an opposition law maker and former director of economic research at the central bank. Late last year, the central bank ordered more than 10 billion bank notes, surpassing the 7.6 billion the U.S. Federal Reserve requested this year for an economy many times the size of Venezuela’s. Venezuela had prudently diversified its money printing relationships, and ahead of the 2015 congressional elections, the central bank tapped the U.K.’s De La Rue, France’s Oberthur Fiduciaire and Germany’s Giesecke & Devrient to bring in some 2.6 billion notes. Before the delivery was completed, the bank approached the companies directly for more. De La Rue took the lion’s share of the 3-billion-note order and enlisted the Ottawa-based Canadian Bank Note Company to ensure it could meet a tight end-of-year deadline.
As Venezuela’s full implosion emerges, the answer has now become obvious, and companies are backing away. With its traditional partners now unenthusiastic about taking on new business, the central bank is in negotiations with others, including Russia’s Goznack, and has a contract with Boston-based Crane Currency, according to documents and industry sources.
It is expected these last ditch efforts to obtain much needed paper currency for the hyperinflating nation will break down shortly, forcing Venezuela into one of two choices: do away with cash entirely and resort to barter, or begin printing high-denomination bills which in turn will only facilitate even faster hyperinflation as there will be no actual physical limit on how much something can cost; as of right now the very physical limit is how many 100 bolivar bills one can put on a wheelbarrow.