The inflationary fire in Venezuela is slowly extinguished

The increase in prices is losing steam after a harsh adjustment that has further impoverished wage earners. The country expects a moderate economic expansion thanks to the easing of international sanctions

Stall selling cheese in a market in Los Palos Grandes, in Caracas.Carlos Becerra (Bloomberg)

After a hyperinflationary storm of historic proportions for Latin America, and which unleashed an unprecedented price hike that destroyed the economy starting in 2016, price indexes in Venezuela are finally beginning to ease up. The Central Bank’s data showed an average inflation rate of 3.2% in November, the lowest in many months and a continuation of an evident decline in October and September.

With these steps, Venezuela is on its way to giving up first place in the inflation ranking. The current annual average stands at 185%, which is still tremendously high, but far from the crazy years of 4,000% and 6,000% in 2016 or 2017.

Experts such as Henkel García, director of the consulting firm AlbusData, believe that, if the political conflict does not get out of hand — which remains to be seen — the country could finally end 2024 with a double-digit inflation rate.

Meanwhile, after a modest growth rate in 2023, the economy is expected to expand in 2024 thanks to higher tax revenues due to the lifting or easing of sanctions by the United States. Francisco Rodríguez, an academic at the University of Denver, estimates that GDP growth could be in the range of 2% to 6%. Other experts make even more optimistic calculations.

A hostile policy of nationalization, together with tighter exchange, fiscal and trade controls implemented by Nicolás Maduro when he assumed the president’s functions in 2013 to continue the legacy of Hugo Chávez — and in addition to widespread corruption at almost all levels — produced an exchange rate debacle in 2014 that deepened the shortages and created a serious drain on foreign currency in Venezuela.

During almost the entire 20th century, the country had an enviable exchange rate stability that lasted several decades and, until 1980, some of the lowest inflation rates in the world. The international sanctions applied by the United States, the European Union, and other actors against the Maduro administration ended up intensifying the storm created by Chavismo and tied the hands of the executive. It also precipitated the collapse of Petróleos de Venezuela (PDVSA), the state oil company that was already afflicted by corruption.

“After a hard adjustment of almost two years, inflation is finally subsiding. Society has paid a very high cost to mitigate this phenomenon because the adjustment carried out by Maduro has been very contractionary and has greatly hurt the quality of life of workers,” says economist Leonardo Vera of the Central University of Venezuela.

Vera points out that inflation is subsiding because, contrary to what was done in 2014, 2015 and 2016, when salary increases were cheerfully decreed without a solid fiscal basis, the government has been careful not to make the same mistake again, and the salary scale, currently the lowest in Latin America, has remained unchanged.

“The banking reserve, which remains at 73%, and which must be the largest in the world, ended up killing credit in Venezuela, but it had consequences. On the other hand, anchoring the exchange rate has had an effect, but it has limited local production, and it has an unstable framework,” says Vera.

After years of withholding the economic figures and refusing to show the accounts to parliament, which was controlled by the opposition until 2020, Vice President Delcy Rodríguez, in charge of economic affairs, has presented the 2024 budget — which foresees an increase in national revenue — to the legislature.

“Inflation has slowed down, it did so in November compared to October, it will do so in December, and also in January,” says the financial analyst Henkel Garcia. García agrees with Vera about not decreeing wage increases as one of the causes of weaker price hikes. “The country’s tax revenues have increased a little and that has allowed some exchange stability. Of course, the workers are paying for that.”

The current Venezuelan economy, a very reduced expression of its traditional self, survives today thanks to its oil revenues from just 800,000 barrels of production per day, its gold production, income from remittances, and a lukewarm recovery in its production of iron and steel, following disastrous management in which millions of dollars were lost. Industries are operating at 30% of their capacity and serve a much smaller market, after the massive exodus of these past years. The construction industry remains in decline. Bank loans, which were pulverized by inflation, are only now reappearing on the market again.

The realization of these economic expectations will depend on the outcome of tensions between the Maduro government, the Venezuelan opposition and the United States. The arrest of Roberto Abdul, director of the non-profit group Súmate, could deliver a fatal blow to what was agreed in Barbados between the government and the opposition, and the return of full sanctions against Venezuela is a definite possibility.

The analysts consulted by this newspaper doubted the imminent return of sanctions, even despite this new crisis in the dialogue. “My impression is that the sanctions will be relaxed even if the Barbados agreements fail,” says the economist Francisco Rodríguez. “I believe that an important part of the current U.S. government wants to normalize relations with Venezuela and is very aware of the failure of the sanctions policy. There are problems with the immigration crisis and they have an interest in Venezuelan oil. There may be gray areas in the interpretation of the sanctions, between what was agreed in Barbados and some partial agreements.”

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