Re-playing “beauty and the beast”
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Inflation is also rising in Sri Lanka
It was on September 2, 2018 that I wrote this column titled “beauty and the beast”. This week I could not resist myself to talk about it again. I was searching for some world economic data on the Internet. And, unexpectedly, I was stunned seeing the country with the highest inflation rate of 686 per cent for December 2021 – that is, Venezuela! However, it was the lowest rate of monthly inflation for the year, as it had escalated to 2,000 – 3,000 percentages in the previous months of 2021. And the country’s highest historical rate of inflation was reported to be over 350,000 per cent in 2019.
In 2018, I focused more on the causes of the hyperinflation problem of Venezuela, which has got worsened in the subsequent years. Today, I will focus more on its consequences, which ultimately fell upon none other than the average people of Venezuela.
We, the Sri Lankans living on the other side of the globe far away from Venezuela have no reason to notice anything that is happening in Venezuela; we have no significant economic relations with this country so that anything that happens there has little to do with our economic affairs.
Perhaps, Sri Lankans know about Venezuela because of the large number of Venezuelan beauty queens crowned at world beauty pageants many times; the country was known to be the “number one in the world” for producing the most number of beauty queens – in total, seven Miss Universe winners, six Miss World winners, eight Miss International winners and others.
There are, however, other reasons that could be added to the beauty of Venezuela. Located in the northern tip of Latin American continent, it is bordered by the Caribbean Sea from the north and surrounded by Guyana, Brazil and Colombia from other sides. It was once a prosperous country with beautiful nature, wildlife and people.
Bad policies
Venezuela was once the richest country among all of its neighbouring Latin American countries. It has the largest proven oil deposits among all of the oil producing countries in the world. This was, in fact, the major factor that led Venezuela to be one of the richest countries in the world.
But everything got messed up over the past 20 years. Politics has reduced the country to one of the most miserable status in the world. People who think that “when you have oil, you are rich” must see Venezuela. Oil did not save Venezuela, when “bad economic policies” have brought its economy to the most miserable status in the world.
The beauty of Venezuela has got washed away now, as the country draws world attention not to gaze upon the Venezuelan beauty, but its massive humanitarian catastrophe. These things didn’t change overnight. The change from prosperity to misery took over 20 years, starting from 1999 under two presidents. And the oil price crash in the world market has also played its part in the country’s economic catastrophe.
Due to growing commodity shortages in the local market, it was in 2010 that the then President declared an “economic war” which didn’t slow down the fall. The irony is that even after 10 years of fall, the government denied the crisis that was depicted in international reports including a UN report published in 2019. As the food prices were skyrocketing, the government withdrew the price controls which they were unable to manage in the face of hyperinflation.
Cutting down “zeros”
In response to the prolonged high inflation, the Venezuelan monetary authorities altered several times the currency unit – the Venezuela Bolivar and its exchange rate that was pegged to the US dollar. The original bolivar with the currency code VEB was replaced with a new bolivar currency (bolívar fuerte) with the code BEF as VEB 1,000 = VEF 1 in January 2008. In other words, this is like erasing the last three zeros from the previous currency unit.
It didn’t solve the inflation problem, though it made it easier for people to count in thousands instead of millions and, millions instead of billions. In 2016, the country entered a “hyperinflation” period which has lasted up to now. Even in the new currency – VEF –, people have to pay in millions and billions as the unit of local currency was fast losing its value due to hyperinflation.
The central bank, then decided in 2018 to adopt sovereign bolivar or bolívar soberano (VES) as equivalent to 100,000 former bolivar (VEF). This was like cutting down the last five zeros of the former currency unit, VEF, and re-naming it as VES. Last year in October too, the last six zeros of the bolivar was erased again, equating one million VES to one VES!
What about the exchange rate? Officially, the exchange rate of the bolivar was pegged to the US dollar, but this fixed rate changed continuously due to currency alteration as well as devaluation. Pegged or fixed exchange rates in developing countries were often subject to overvaluation due to inflationary pressure or the uncompetitive trade relations. Then, how could the bolivar faced with hyperinflation survive against the US dollar? In a nutshell, the exchange rate in Venezuela has run through from a few bolivars per US dollar to millions within the past decade, while the overvalued bolivar has created a black market for foreign currency as well.
Humanitarian catastrophe
What was the impact of such a speed of increase in prices on over 28 million Venezuelan population? Over 90 per cent of the people were said to have fallen into poverty, while a quarter of the population is said to be in need of humanitarian assistance. While people searching for food in trash piles is not unusual now, crime rates have become rampant. Out of about its 28 million population in Venezuela, more than five million people have fled the country, many on foot and mostly to two neighbouring countries – Brazil and Colombia.
The roads extending over 1,000 kilometers to neighbouring countries were filled with lines of walking Venezuelan migrants with no money to pay for any means of transport. While the majority poor have been on foot, more affluent migrants have fled to further countries such as Mexico, the US and, Costa Rica in the north and, Ecuador, Peru, Argentina and Chile in the south. Another humanitarian flow is in the sea on boats trying to reach some of the Caribbean islands.
The economic catastrophe has been instrumental in the political catastrophe as well. Election results in 2018 have been declared as “illegal” by the opposition, but the President continues to be in power using the military to crush the opposition. In fact, the important democratic institutions have become the arms of the government to decide what is right.
Too far and too deep
As of now, the oil prices in the world market have turned back in favour of oil-producing countries. At the same time, the state-run oil company with private participation has struck new deals to double the country’s oil production.
But it may not be the end of the story. In the hands of bad economic policies and bad governance, even oil has turned to be a curse for Venezuela rather than a blessing. The opportunity for doubling the oil production under regained world prices may provide some breathing space to some of the oil-producing nations in the world. But they will not find the fortune out of this turnaround without policies and regulations that would put the economy back on track winning both the producer and consumer confidence. The question in issue is that, when the things have gone too far and too deep, it is too difficult to pull the economy back without starting from scratch.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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