Venezuela: The perils of hyperinflation

As Venezuela approaches Zimbabwe-heights of inflation, Nicolas Maduro fired the Central Bank president: Venezuela central bank head replaced amid corruption claims. What does it mean for Venezuela’s economy? Steve Hanke explains,

Steve Hanke, a professor of economics at Johns Hopkins University in the US and chief economic adviser in the mid-1990s to the then president of Venezuela, Rafael Caldera, told CentralBanking.com that a change at the top of the central bank will be “completely irrelevant” to the problems faced by Venezuela’s economy – chief among them annual inflation running at almost 240%, according to the Troubled Currencies Project, which Hanke runs in conjunction with the Cato Institute.

Hanke said the central bank is seen in Venezuela as a fourth source of funding for the government, after oil revenues, tax collection and the bond market – none of which have the capacity to fund the level of social spending enacted by Maduro’s government, in the same vein as the late Hugo Chavez before him.

There are two ways of halting inflation, according to Hanke: a currency board, or dollarisation as has been pursued in Ecuador. A currency board would allow Venezuela to keep its own national currency, the bolivar, but would “put a hard budget constraint in the system and fix the fiscal affairs”, Hanke said, adding: “You can’t go to the central bank and have them printing money” with a currency board in place.

The corruption in the political system also stems, said Hanke, from the monetary regime. “You have exchange controls put in to conserve scarce foreign exchange reserves,” he said, “but they’re also an invitation for massive corruption and favouritism.”

“The gross profit now from the black market is around 600%,” Hanke said, “a huge incentive to try to break the system. So we know, in short, that the current monetary arrangements will require that they retain some kind of exchange controls and capital controls, and that will invite massive corruption – and it has.”

According to Transparency International, Venezuela ranks 165 out of 176 countries, placing it among the 12 most corrupt countries in the world. Rest assured the corruption will continue.

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