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  1. ITV Report

Venezuelan hyperinflation: What has gone wrong in the world's most oil-rich nation?

The financially crumbling nation of Venezuela has overhauled its currency by slashing five zeros off its value, in an attempt to battle the hyperinflation that is bringing the country to its knees.

Socialist President Nicolas Maduro is trying to restore normality to the South American nation where cash is becoming increasingly worthless and 90% of residents live in poverty.

A shocking example of hyperinflation could be found in the last episode of Venezuela's version of Who Wants to be a Millionaire, with the prize money of two million bolivars valued at less than £1,500. It now stands at 13p.

What does all of this mean and how has it happened to the world's most oil-rich country?

  • How did Venezuela get itself in this mess?
Hugo Chavez, seen here, died in 2013 and Nicolas Maduro took over. Credit: AP

Venezuela used to be a model for how a socialist government could support a growing society, providing welfare programmes and building houses for the poor.

This system worked because Venezuela, being the world's most oil rich nation, could recycle revenue made from fossil fuels and pump money into society.

Then, in 2013, the much celebrated president Hugo Chavez died of cancer and Maduro took over.

Venezuelan currency is to be overhauled. Credit: AP

Upon taking power he was faced with immediate crisis as global oil prices crashed, plunging the nation and the world into financial uncertainty.

While other countries cut back on spending to mitigate the impact, Venezuela simply started printing more money in order to pay workers and fund welfare schemes.

The move meant Venezuelans could, in the short-term, cope financially, but it also accelerated economic collapse and pushed hyperinflation into overdrive.

In an attempt to stop hyperinflation, Maduro has revalued the 'strong bolivar' by knocking five zeros off and renaming it the 'sovereign bolivar'.

  • Why knock five zeros off the bolivar?
The cost of food in Venezuela is hyperinflated. Credit: AP

For many Venezuelans hyperinflation means the price of food is well above what they can afford with their monthly wage. An example, as shown in the picture above, is that a block of butter can cost millions.

Inflation rose to 82,700% in July, in comparison, the level of inflation in the UK is 2.5%.

The International Monetary Fund (IMF), predicts if things do not change significantly, inflation will reach 1,000,000% this year.

By knocking five zeros off the currency Maduro aims to bring prices back down to normal and as a result, halt hyperinflation.

He has also raised the minimum wage 60 fold to try to ensure Venezuelans have enough money and he has anchored the new 'sovereign bolivar' to the controversial 'petro' to try to keep inflation static.

  • What is the petro?

The petro is a cryptocurrency thought up by Venezuela to try restore liquidity and get around US sanctions.

But it has been described by cryptocurrency rating site ICOindex.com as a "scam", and Luis Vicente Leon, director at polling organisation Datanalisis says "anchoring the bolivar to the petro is anchoring it to nothing".

Each petro is worth around £47, which in the new Venezuelan sovereign bolivar equals 3,600. The new minimum wage is to be fixed at half a petro.

  • Can Maduro's idea save Venezuela?
Supermarket shelves are empty in Venezuela as residents stockpile food. Credit: AP

Economists warn the huge increase in the minimum wage will send many companies under as they struggle to afford staff, increasing unemployment.

Alternatively, business owners will have to massively increase their prices in order to pay their staff, meaning hyperinflation will continue.

On top of this there are worries the currency overhaul could halt trading because old 'strong bolivars' will coexist with the new notes, something that is likely to cause confusion.

In some circumstances consumers with old notes will be in the odd situation of purchasing items valued at 10 bolivar, with notes that say they're worth 1,000,000.

This is also not the first time Venezuela has devalued its currency. Former leader Chavez tried it in 2008 by wiping three zeroes off the bolivar but hyperinflation continued.

Maduro's move should, in the short-term, help Venezuelans without bank accounts, who for months have been forced to carry around huge wads of cash in order to buy everyday items.

In response to sceptics, information minister Jorge Rodriguez said: "With oil income, with taxes and income from gasoline price hikes... we'll be able to fund our programme."

  • Venezuela has more oil than Saudi Arabia, why is it struggling?
Oil accounts for 96% of Venezuela's revenue. Credit: AP

There are several problems with Venezuela's oil industry that mean it hasn't been able to prop up the nation's economy.

Underinvestment in the state oil company means it has been unable to keep up with global production rates. Output levels at 1.69 million barrels per day are half of what they were in 1999 and 35% lower than they were in 2015.

Oil accounts for 96% of Venezuela's revenue, so production levels have a profound effect on the country's economy.

Despite inflation rates in the South American nation being sky-high, the price of oil has remained among the lowest in the world.

Maduro's plan to bring oil prices in line with the rest of the world would usually be something economists would advise, but it's a risk in such an unstable state.

"Gasoline must be sold at an international price, to stop smuggling to Colombia and the Caribbean," Maduro explained. This is an attempt to rake in as much money as possible from the country's leading export.

However raising the price of oil will have a huge impact on the finances of working Venezuelans, who are already fleeing on mass but struggling to find help elsewhere.

  • Why are Venezuelans struggling to resettle?
Dozens of Venezuelan immigrants wait from Ecuador authorities as to whether they will be allowed to enter the country. Credit: AP

The United Nations reports 2.3 million Venezuelans have fled since 2015 but Latin American nations are starting to close their doors to immigrants.

Venezuela's neighbours are struggling to cope with the huge influx of people and have tried to reduce such high levels, while those who do resettle often struggle to find work.

In Brazil, a target nation for many Venezuelans, many have been driven back to their homeland by angry locals.

As a result of tensions in the town of Pacaraima, troops have been sent to the border to prevent further immigration.

Ecuador has declared a state of emergency after taking in over half a million Venezuelans and Peru has announced border checks that require a passport for entry, something that is hard to obtain in Venezuela.

So for the many desperate Venezuelans facing increasingly worse problems at home, help from their nearest neighbours is not at hand.