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Case Study
Hyperinflation in Venezuela
LAKSHMI IYER AND FRANCISCO RODRÍGUEZ
September 2021
Synopsis: Venezuela entered hyperinflation at the end
of 2017, preceded by several years of large budget A Nation in Crisis1
deficits and declining oil revenues. Despite many policy
As of the start of 2021, Venezuela was in the midst
attempts to bring inflation under control, including
of a full-blown economic collapse. Gross domestic
currency redenomination, introduction of a new
product (GDP) had decreased by a cumulative 69.4%
cryptocurrency, allowing de facto dollarization, and
since 2014, and a hyperinflation that began in late
easing price controls, annual inflation rates exceeded
2017 continued to rage, with an annual inflation rate
2,000% in 2020. Food insecurity was widespread,
of 2,960% in 2020.2 Around 5.4 million people, nearly
millions of people had left the country, and the United
one-sixth of the country’s population, had left the
States had enacted stringent economic sanctions
country, making it one of the largest migrant crises in
against the government and President Maduro. Was the
world history. By early 2020, 9 out of 10 Venezuelans
Venezuelan hyperinflation the result of policy mistakes,
lived in poverty, infant mortality rates had increased by
external shocks, or economic sanctions? What
more than 40% since 2008, one-third of the population
measures could stabilize the economy?
was classified as food-insecure by the World Food
Programme, and nearly three-quarters of the population
Keywords: Macroeconomics, hyperinflation, inflation
had lost weight due to lack of food.3
dynamics, fiscal deficit, price controls, exchange
rates, money supply, inflation expectations, economic
Many previous policy measures enacted by President
sanctions, oil markets, Venezuela
Nicolás Maduro had failed to tame the hyperinflation and
Lakshmi Iyer is an associate professor of economics and global affairs at the University of Notre Dame. Francisco
Rodríguez is the director and founder of Oil for Venezuela, a nonprofit organization focused on finding solutions to
Venezuela’s humanitarian crisis. This case was written while Rodríguez was a visiting fellow at the Kellogg Institute
for International Studies at the University of Notre Dame.
This case was developed from published sources. It was peer reviewed through the Keough School’s Editorial Board.
Recommended Citation: Iyer, Lakshmi and Rodríguez, Francisco. Hyperinflation in Venezuela. Keough School of
Global Affairs Case Study Series. South Bend, IN: Keough School of Global Affairs, University of Notre Dame, 2021.
https://doi.org/10.7274/r0-z7wm-f385.
Contact: liyer@nd.edu
To receive the Teaching Notes for this case, please contact keoughschool@nd.edu.
HYPERINFLATION
IN VENEZUELA
economic collapse. At the center of the problem was a any “regime, authority, or law” deemed to go against
government with dwindling revenues and a large budget “democratic principles” and “human rights.”4
deficit financed by money printing. Constrained by
United States (U.S.) sanctions, political struggles with Chávez became one of the most important figures in
the opposition party, and continuing low oil prices, what Latin America’s so-called “Pink Tide” era of left-wing
options were left to Venezuela? resurgence. He introduced many populist and left-wing
policies such as land redistribution, low-income housing
programs, and community clinics staffed by Cuban
THE BOLIVARIAN REPUBLIC OF VENEZUELA
doctors. Many large companies were nationalized,
Venezuela is a former Spanish colony on the
including several foreign-owned firms in the oil, cement,
northern coast of South America. The country gained
steel, telecommunications, and electricity generation
independence in 1821, after a lengthy revolutionary
sectors. Controls on foreign exchange were imposed
war fought under the leadership of Simón Bolívar. The
in 2003, initially to impede capital flight during an
discovery of large oil deposits toward the turn of the
oil industry strike that had devastated government
20th century heralded its transformation into one of
revenues. Additionally, price controls were imposed on
the world’s most important producers of oil. Venezuela
around 400 basic products seeking to counter inflation
produced 2.5 million barrels of oil per day in 2011
and protect purchasing power. In response to the
and was a founding member of the Organization of the
resulting shortages, minimum production quotas were
Petroleum Exporting Countries (OPEC), an international
instituted in 2009 for 12 basic foods that were subject
cartel of oil producers. Oil is the major driver of
to price controls, including white rice, cooking oil, coffee,
Venezuela’s economy, accounting for 96% of exports in
sugar, powdered milk, cheese, and tomato sauce.
2012, prior to the economic collapse.
Over the 14 years of Chávez’s tenure, the economy
Following years of military dictatorships, Venezuela
grew at an average rate of 3.0% per year. Annual
transitioned to democracy in 1958 as a civilian-
inflation averaged 25% over these years, not unusual
military coup ousted right-wing military leader Marcos
by historical standards. This performance was driven by
Perez Jiménez. Continued economic stagnation,
higher oil prices, which rose more than ten-fold between
a failed attempt at economic reforms backed by
1998 and 2012 (Figure 1). However, import growth
the International Monetary Fund (IMF), and rising
masked a steep decline in productivity (an economy’s
perceptions of inequality all contributed to the country’s
efficiency in converting capital and labor inputs into
entrance into social and political disarray for the last
economic output), which fell at an annual rate of 2.2%.
decade of the 20th century. Amid this discontent, Hugo
Despite possessing the world’s largest oil reserves,
Chávez, a charismatic former lieutenant colonel who had
petroleum production stagnated and Venezuela lost
led a failed coup attempt in 1992, rose to prominence
market share relative to other oil producers, who were
and was elected president in 1998.
taking advantage of higher prices to produce more oil.
THE CHÁVEZ LEGACY In December 2012, Chávez was re-elected for an
Initially backed by many of the country’s elite, and additional term, his third under the 1999 Constitution.
commanding massive popular support, Chávez However, his health had deteriorated to the point that he
implemented several important reforms, starting with was unable to assume power for a new term in January
the creation and enactment of a new constitution 2013, leaving his vice president, Nicolás Maduro, in
(Venezuela’s 26th) in 1999. The new charter featured charge. Chávez passed away in March 2013, resulting
five branches of power (executive, legislative, judicial, in a new presidential election the following month.
accountability and electoral) and a six-year presidential
term; it further codified the right to rebellion against
2HYPERINFLATION
IN VENEZUELA
Figure 1: World oil prices (West Texas Intermediate & Brent, 1996–2020)
Source: Author calculations; Federal Reserve; Federal Reserve Bank of St. Louis.
MADURO TAKES CONTROL Maduro had inherited a complex economic situation,
with fiscal and external accounts considerably over-
Nicolás Maduro, Chávez’s vice president, had taken the extended. The public sector deficit stood at 17.0% of
reins of government in December 2012 when Chávez GDP in 2012, despite oil prices being at an all-time high
flew to Cuba for a final unsuccessful surgery. He later (Table 1). While the current account stood at a moderate
won the presidential election held in April 2013, beating surplus of 0.7% of GDP, there were huge levels of
out opposition leader Henrique Capriles by a slim margin capital flight, with private sector entities transferring
of 1.2 percentage points. Capriles had also run against USD 8 billion abroad. To maintain the fixed exchange
Chávez in 2012, when he lost by a much larger 10.8 rate in the face of these pressures, the government had
percentage points. Maduro’s slim victory took many accumulated high levels of debt. By 2012, the country’s
observers by surprise, as polls had predicted that he external debt had risen to USD 132 billion, up from
would win easily and he was thought to benefit from a just USD 40 billion when Chávez took office. Many
sympathy effect in the aftermath of Chávez’s death. countries facing such balance-of-payments imbalances
Yet Maduro, a former union leader who lacked Chávez’s would approach the IMF for emergency assistance, but
charisma, proved a lackluster campaigner and an both Chávez and Maduro espoused a strong anti-IMF
economic crisis prior to the election contributed to his rhetoric; in fact, the last IMF regular economic report
loss of electoral support. on Venezuela was in 2004 and Chávez had considered
withdrawing Venezuela from the IMF in 2007.
3HYPERINFLATION
IN VENEZUELA
Jorge Giordani, head of the economics cabinet during a revision to guarantee the sustainability of the
most of Chávez’s 14-year tenure, accounted for the economic and social transformation.”5
reasons for these imbalances in a letter to Maduro in
early 2013: On February 8, 2013, the government decided to
devalue the official exchange rate, from 4.30 VEF/USD
“In this path of the Bolivarian process it was crucial (VEF refer to “strong” bolivars, or Bolívar Fuerte, the
to overcome the challenge of October 7, 2012 Venezuelan currency at the time) to 6.30 VEF/USD.
[presidential elections], as well as the [regional] The devaluation was likely less than needed—the black
elections of December 16 of that same year. It market at the time was trading at 27 VEF/USD—but it
had to do with the consolidation of political power was a step in the right direction. Yet the government also
as an essential objective for the strengthening closed a market for trading in secondary bonds, known
of the revolution and for the start of a new stage as Sistema de Transacciones con Títulos en Moneda
of the process. We found the way to overcome Extranjera (Foreign Currency Securities Transaction
these obstacles through a great sacrifice and an System, SITME), that had been used to sell some dollars
economic and financial effort that took access at a slightly more expensive rate of 5.3 VEF/USD, a
to resources to extreme levels that will require decision that would come back to haunt it.
Table 1: Inflation, money supply, GDP growth, and budget deficit (2011–2020)
Real GDP
Inflation Nominal M1 Nominal M1 Budget deficit Deficit M1
Year growth
(BCV) (Bs)* growth rate (%) (RPS, real 1997 Bs)* (RPS, % of GDP) (Real 1997 Bs)*
(%)
2011 4% 28% 4,266,000 57% (53,272) -9.2% 182,704
2012 6% 20% 7,019,000 65% (104,293) -17.0% 263,555
2013 1% 56% 11,997,000 71% (94,991) -15.3% 332,445
2014 -4% 69% 19,527,000 63% (53,994) -9.0% 385,292
2015 -6% 181% 39,321,000 101% (79,349) -14.1% 291,560
2016 -17% 274% 102,765,000 161% (110,499) -23.7% 159,047
2017 -16% 863% 1,263,616,000 1,130 % (105,145) -26.8% 246,816
2018 -20% 130,060 % 802,205,742,506 63,385 % (37,551) -11.9% 61,433
2019 -25% 9,585 % 40,522,951,090,319 4,951 % (20,925) -8.9% 12,210
2020 -19% 2,960 % 639,131,306,715,806 1,477 % (7,467) -3.9% 9,148
Note: M1 refers to the standard measure of money supply in the economy, measured as the sum of currency in circulation and demand deposits held
in commercial banks. “Bs” in the table above refers to sovereign bolivars, a currency introduced after a redenomination of the strong bolivar in August
2018. “RPS” refers to the restricted public sector budget, which aggregates fiscal accounts from the central government and state-owned enterprises.
Source: Author calculations, Central Bank of Venezuela (BCV), Petróleos de Venezuela (PDVSA), Securities and Exchange Commission (SEC), Bloomberg.
4HYPERINFLATION
IN VENEZUELA
PRICE CONTROLS, DISTORTIONS, AND claimed that Daka’s owners had obtained dollars at the
SCARCITY 6
official rate of 6.3 VEF/USD and were reselling the
The decision to close the SITME system—which some goods bought with these dollars at prices marked to
in the government saw as a hotbed for corruption— the black-market exchange rate, at the time at 104.1
generated mayhem in the retail sector. Importers of VEF/USD. The following morning, looting broke out as
non-essential goods had used SITME to obtain foreign several hundred people stormed a Daka store in Valencia
exchange; now, they had to choose whether to go to the and laid it bare.9 The government ordered the military
occupation of three large electronics retailers, sending
black market (which was illegal) or to halt operations.
soldiers and inspectors to mark down prices and to
The result was increasing scarcity and inflation in both
organize the long lines of people who wanted to buy the
essential and non-essential goods. Imports fell by
electronics at below-market prices.10
24.8% between 2012 and 2014, while annual inflation
rose from 20% to 56% from 2012 to 2013 and the
This campaign, which became known as the Dakazo,
central bank’s scarcity index7 shot up from 14.2% to
was a political success. For most Venezuelans, the idea
20.8% in the same period. Shortages of food and basic
that retailers should not raise prices for goods that
staples, from toilet paper to sugar, became prevalent.
the government had effectively decided to subsidize
The shortages hit hardest in goods subject to price
through preferential foreign exchange access made
caps, where retailers were unable to raise prices to
perfect sense. Maduro’s approval rating rose from 41%
make markets clear at the lower supply levels.
in September to 50% in November, and government
It was this mini economic crisis, more than anything else, candidates won the municipal elections in December
that almost cost Maduro the presidency. Or at least he with 49% of the national vote.
seems to have thought so, judging by his reluctance to
devalue over the following years. Almost three years OIL PRICES HEAD SOUTH
would pass until the government devalued the currency After the looting and fire sale, store shelves went bare
again in January 2016, and even then it would only be as many retailers were terrified of suffering the same
a small adjustment. Over the next five years (February consequences. Accelerating inflation and increasing
2013 to January 2018), the nominal exchange rate scarcity continued taking a toll on the government’s
depreciated at an annual rate of just 10% while prices approval: By August 2014, Maduro’s approval rating
were rising by 242% a year.8 was down to 30%.
Price controls could be a very effective political tool, Then global oil prices began to fall. Between June and
as Maduro discovered in 2013. His approval ratings November of 2014, the price of Venezuelan oil dropped
had been falling steadily through the year in view of the from $100 a barrel to $71 (Figure 1), mainly due to a
increasing scarcity, inflation, and economic slowdown. In surge in oil production from shale rock fragments in the
the face of the close election result in April, opposition U.S., where daily oil production rose from 5 million to 9
leaders started viewing Maduro as beatable and decided million barrels between 2010 and 2014. In November,
to present the December 2013 municipal elections as a OPEC producers decided that they would not cut
referendum on Maduro’s government. production, essentially initiating a price war against
shale oil.
On November 8, 2013, Maduro went on national
television and accused the owners of Daka, one of the What followed was the largest sustained price drop
country’s largest electronics retailers in Venezuela, of in the history of oil prices, and the largest external
price gouging, claiming that they were selling products shock suffered by Venezuela in its history. By February
at more than 1,000% above cost. The government 2016, Venezuelan oil prices had fallen to $24 per
5HYPERINFLATION
IN VENEZUELA
Table 2: Fiscal accounts (% of GDP)
Central Government Restricted Public Sector
Primary Financial Primary Financial
Year Revenues Expenditure Revenues Expenditure
Surplus Surplus Surplus Surplus
2008 32.2% 33.7% 0.1% -1.6% 41.3% 44.7% -1.6% -3.5%
2009 23.6% 29.1% -4.1% -5.5% 27.1% 36.0% -7.3% -8.9%
2010 24.1% 28.6% -2.6% -4.5% 26.4% 38.2% -9.6% -11.8%
2011 28.2% 33.2% -1.6% -5.0% 37.3% 46.5% -6.4% -9.2%
2012 28.0% 33.5% -2.4% -5.6% 30.7% 47.7% -13.1% -17.0%
2013 31.8% 33.9% 1.4% -2.1% 34.6% 49.8% -11.0% -15.3%
2014 34.8% 35.6% 2.0% -0.9% 43.0% 52.1% -5.2% -9.0%
2015 35.6% 33.9% 3.3% 1.7% 29.8% 44.0% -11.9% -14.1%
2016 39.5% 32.2% 8.0% 7.3% 24.1% 47.9% -16.4% -23.7%
2017E 29.0% 23.8% 11.2% 5.2% 11.6% 38.4% -14.7% -26.8%
2018E 32.1% 43.5% -11.3% -11.4% 36.3% 48.2% -10.2% -11.9%
2019E 10.0% 19.9% -9.9% -9.9% 14.5% 23.3% -8.3% -8.9%
2020E 13.9% 18.7% -4.2% -4.8% 19.5% 23.4% -1.8% -3.9%
2021F 14.7% 18.1% -3.3% -3.5% 19.4% 23.0% -3.1% -3.6%
2022F 35.6% 39.5% -3.9% -3.9% 40.8% 44.9% -4.1% -4.2%
Note: “E” represents estimated data; “F” represents forecasts. Primary surplus is the difference between fiscal revenues and non-interest
expenditures; financial surplus equals primary surplus minus interest payments. Restricted public sector aggregates fiscal accounts from the
central government and state-owned enterprises (including Venezuela’s oil company, PDVSA).
Source: Author calculations, BCV, PDVSA, SEC, Bloomberg.
barrel, a 76% drop since 2014. Faced with this fall But the 2015 elections took place after two years of
in revenues, the government had no option but to cut recession during which the economy had contracted by
imports dramatically. Goods imports, which had stood a cumulative 10%. The coalition of opposition parties
at USD 66.0 billion in 2012, fell to USD 33.3 billion captured 112 of the Assembly’s 167 seats. This two-
in 2015 and USD 16.4 billion in 2016. Nevertheless, thirds majority gave the opposition the power to carry
the budget deficit skyrocketed to 23.7 percent of GDP out radical political changes, including the removal of
(Table 1). In the meantime, the government, fearing that Supreme Court justices, the appointment of electoral
a devaluation would cause higher inflation, insisted on authorities, the firing of government ministers, and
maintaining the overvalued official rate while enforcing the convening of elections for an all-powerful National
even stricter rationing of goods. Constitutional Convention with the authority to dissolve
all other branches of government.11
ELECTIONS AND POLITICAL CRISIS
Taken by surprise, Maduro’s Socialist party did not
In December 2015, Venezuela’s coalition of opposition
immediately question the results. Yet 10 days later, it
parties scored a stunning political victory. For the
announced that it would contest their legality on charges
previous 15 years, the country’s legislative power
of vote-buying. The Electoral Chamber of the Supreme
had been controlled by pro-government parties,
Court accepted hearing a demand on the legality of the
whose absolute majority in the country’s unicameral
results, and approved a protective measure suspending
legislature had effectively turned it into a rubber stamp.
6HYPERINFLATION
IN VENEZUELA
the election of all four legislators elected in the rural, (BCV) was involved in negotiations with Deutsche
sparsely inhabited, southern state of Amazonas. 12
This Bank in order to make liquid some of its gold reserves,
prevented the opposition from having a supermajority in National Assembly President Julio Borges sent a letter
the National Assembly. to the bank’s CEO requesting that the bank reject
the deal. Deutsche Bank did not go through with the
Annulling the results of the Amazonas elections was transaction, which turned out to be a wise choice from
only one of the avenues through which Maduro used his a public relations standpoint. A less prudent competitor
institutional control to offset the opposition’s legislative took a different route and paid a significant public
power. In December 2015, the lame-duck legislature, relations cost. In May 2018, Goldman Sachs’s asset
which was controlled by the governing Socialist party, management arm decided that it wanted to raise its
moved to appoint new justices to 13 of the Supreme position in Venezuelan debt, in anticipation of a potential
Court’s 32 seats, filling positions that would otherwise change of government. It purchased USD 2.8 billion in
have been appointed by the new Assembly.13 Between bonds at a deep discount—70 percent of face value—
January and July of 2016, the Supreme Court reviewed from BCV. The purchase caused an uproar. Two days
the constitutionality of six laws and four other decisions after the Wall Street Journal broke the story about the
of the National Assembly and annulled all but one of bank’s involvement, Venezuelan protesters convened
them. The grounds alleged for the annulment of these at Goldman Sachs’s headquarters in New York to decry
laws were varied, but the pattern was unequivocal. the bank’s helping to finance the Maduro government.
Borges wrote to Goldman CEO Lloyd Blankfein
In the meantime, the opposition settled on a different criticizing the firm’s decision “to make a quick buck off
avenue for ousting Maduro, invoking the right of voters the suffering of the Venezuelan people” and vowing that
to request a recall referendum to determine whether a future government would not recognize the bonds.14
an elected official can serve out the remainder of his
term. Article 72 of the Constitution allowed 20%
ECONOMIC SANCTIONS
of registered voters to request the holding of such a
The opposition also sought international support and
referendum. As the recall attempt advanced, electoral
found a ready ear in the administration of President
authorities began placing roadblocks to the effort.
Donald Trump. While there had been individual sanctions
Finally, on October 20, 2016, several regional courts
on Venezuelan officials in response to the country’s
announced that they were invalidating the signature
crisis since 2015, it was Trump who took the first step
collection process in their states, effectively killing the
toward broader economic sanctions. In August 2017,
recall effort.
President Trump issued an executive order prohibiting
Opposition leaders were enraged and called for street any U.S. person from purchasing any new debt issued
demonstrations. As the country’s political crisis by the government of Venezuela or PDVSA (the state-
deepened, the opposition evolved from the belief that owned oil firm) or of previously issued debt held by
it could defeat the government by playing within the the government or entities under its control. It also
existing institutional rules to the conviction that those barred dividend payments to Venezuela, impeding the
rules were hopelessly biased in favor of the government. government from using the profits from its offshore
This increasingly meant opting for tactics that it would subsidiaries to fund its budget. The sanctions had a
not have previously considered. chilling effect on the oil sector, among other things,
because they impeded multinationals who had joint
One such tactic was to target the government’s access ventures with PDVSA from seeking financing. The
to external financing. At the beginning of 2017, when 2017 sanctions were specifically motivated by the
it became known that the Central Bank of Venezuela government’s decision to carry out elections for a
National Constitutional Convention (Asamblea Nacional
7HYPERINFLATION
IN VENEZUELA
Constituyente), designed to strip away all powers from business with non-U.S. actors that do business with
the opposition-controlled National Assembly, on July 30 Venezuela—a practice known as secondary sanctions.
of that year. Secondary sanctions were implemented in February
2020, on the heels of an international tour designed
On January 23, 2019, the U.S. decided to recognize to showcase Guaidó’s global support that culminated
National Assembly President Juan Guaidó as the in an appearance at President Trump’s annual State
country’s interim president, and its announcement of the Union address. U.S. authorities sanctioned two
included a direct exhortation to Venezuelan subsidiaries of Rosneft, the Russian energy company
security forces “to accept the peaceful, democratic, that carried out more than 70 percent of Venezuela’s
and constitutional transfer of power” to the new oil sales, as well as two Mexican companies that had
government.15 Five days later, the U.S. added PDVSA to signed oil-for-food deals with the country. The Trump
the list of sanctioned entities maintained by the Office of administration announced that such measures would
Foreign Assets Control. National Security Advisor John continue as long as Maduro refused to give up power.17
Bolton said at the time that he expected PDVSA to lose Rosneft was also in charge of importing gasoline into
USD 11 billion in export proceeds—a number equivalent Venezuela at the time, as the country’s refineries
to more than a third of the country’s oil exports at the experienced multiple failures due to years of disrepair
time—as a result of the sanctions.16 and lack of maintenance. Not surprisingly, shortly after
the Rosneft sanctions, gasoline imports stopped, and
Additionally, the U.S. explicitly pressured some of the country faced massive fuel shortages.
PDVSA’s other clients so that they would not increase
oil imports from Venezuela. While the U.S. had no
jurisdiction to restrict trade between Venezuela and
other countries, it could prohibit U.S. firms from doing
Figure 2: Monthly inflation rate, 2013–2020 (log scale)
Source: Central Bank of Venezuela, National Assembly.
8HYPERINFLATION
IN VENEZUELA
HYPERINFLATION ARRIVES country entered hyperinflation in December 2017
Venezuela entered hyperinflation at the end of 2017. and had its last month of over 50 percent inflation in
Hyperinflation is usually defined as a period when December 2020 (see Figure 2). According to the AN,
monthly inflation surpasses 50 percent (corresponding the hyperinflation began in November 2017 and last
to an annual rate of 12,875%).18 While the country had hit over 50 percent monthly inflation in January 2021.
lived through decades of high inflation since the 1980s, AN inflation is somewhat higher on average than BCV
there had been only two brief instances of accelerations inflation (56.2% since it was launched in January 2017
into year-on-year triple-digit inflation: for one month in as opposed to the BCV’s 43.5%), though the pattern is
1989 and for seven months in 1996, both taking place far from uniform: In roughly one-fourth of the months,
after large exchange rate adjustments. In late 2015, BCV inflation has been higher than that of the AN.
inflation began accelerating, breaking triple digits in
Hyperinflations are typically preceded by large
July 2015 and reaching 181% by the end of that year.
increases in the money supply used to finance
Monthly inflation, which had averaged 4.1% in 2013–
government deficits. Venezuela was no exception. Over
14, rose to 9.0% in 2015 and 11.7% in 2016.
the seven-year period ranging from 2012 to 2018, the
Two official entities reported inflation in Venezuela: the consolidated public sector deficit averaged 16.6% of
Maduro-appointed Central Bank of Venezuela (BCV), GDP and was never lower than 9.0% of GDP for any
and the opposition-controlled National Assembly single year (Table 1). At the start of that period, the
(AN) elected in 2015. According to the BCV, the government was able to “sterilize” the effect on the
money supply by depleting its foreign asset holdings
Figure 3: Liquid asset holdings, quarterly data, 2008–2020.
Notes: “Other liquid assets” includes credit tranches because of bilateral agreements, cash holdings in companies owned
abroad, and non-reserve bank deposits.
Source: Ministry of Finance, BCV, PDVSA, Torino Economics.
9HYPERINFLATION
IN VENEZUELA
(see Figure 3); thus, inflation did not accelerate that Inflationary financing was paying for a large part of
rapidly. Sterilization consists of the purchase or sale of the deficit.19 As shown in Table 3, seigniorage—the
foreign currency (typically by a central bank) to affect resources that the government was able to capture
money supply. In this case, dollars held by Venezuela in from money printing—provided the government with
foreign holdings were sold in local markets to contain 6.7% of GDP in financing annually between 2013
the expansionary effects of deficits on money supply. and 2015. At the same time, the government was
However, by the end of 2015, the bulk of these assets depleting external assets by 6.2% of GDP on average
holdings was depleted and it proved impossible to in those years. Notably, Venezuelan law forbids
contain the monetary impact of the large deficits, the BCV from monetizing the deficit (i.e., directly
leading prices to skyrocket. From 2019 on, sanctions purchasing bonds from the government). Article 320
led to a freezing of external assets, so that the only of Venezuela’s Constitution expressly prohibits the
liquid assets available to the country were its central bank from “validating or financing deficit-prone fiscal
bank’s international reserves. policies.” However, this law was interpreted as posing
Table 3: Real seigniorage
Pure seigniorage Inflation tax Total seigniorage
Year Inflation % of RPS % of RPS % of RPS
% of GDP % of GDP % of GDP
expenditures expenditures expenditures
2011 28 % -0.5% -1.1% 2.5% 5.4% 2.0% 4.4%
2012 20 % 1.6% 3.4% 1.6% 3.4% 3.3% 6.8%
2013 56 % 1.9% 3.9% 3.0% 6.1% 5.0% 10.0%
2014 69 % 5.0% 9.7% 3.4% 6.6% 8.4% 16.2%
2015 181 % -4.8% -10.9% 11.3% 25.8% 6.5% 15.8%
2016 274 % -4.0% -8.4% 9.6% 20.0% 5.5% 10.8%
2017 863 % 3.4% 8.8% 8.1% 21.0% 11.4% 28.5%
2018 130,060 % -10.9% -22.5% 12.7% 26.4% 1.9% 3.9%
2019 9,585 % -0.5% -2.1% 1.9% 8.0% 1.4% 5.8%
2020 2,960 % -1.3% -5.5% 1.4% 5.9% 0.1% 4.4%
Note: RPS: Restricted public sector.
Pure seigniorage is the real income created from money printing. Inflation tax refers to the real government incomes coming from the loss of value
of money in the hands of the public. Total seigniorage is the sum of pure seigniorage and inflation tax. “Bs” refers to sovereign bolivars, the currency
in August 2018.
Mt Mt-1
Pure seigniorage: Pt - Pt-1 ; where Mt is the monetary base in current Bs for a given year and Pt is the price level (CPI) of that same year; Mt-1 and
Pt-1 represent the corresponding values for the previous year.
M
Inflation tax: πt t-1 ; where πt is the annual inflation rate (% change in prices between December of the given year and December of the previous
year). Pt
Source: BCV.
10HYPERINFLATION
IN VENEZUELA
no impediment on its buying bonds from state-owned During his administration, Maduro had announced
enterprises such as PDVSA. Thus, in practice, the several attempts to stabilize the currency, including
central bank flouted the constitutional restriction many reformulations of price control laws,21 and at
by financing PDVSA, which in turn transferred the least 34 increases in the minimum wage between
funds to the government in the form of higher fiscal 2014 and 2020 to “protect our beloved working class’s
contributions. 20
. . . salaries from capitalist thieves.”22 Despite these
increases, the cumulative effect of hyperinflation meant
Part of the dynamics of hyperinflation entail a decline that Venezuela’s minimum monthly wage of USD 33
over time in the capacity of the government to fund remained dramatically below the USD 386 minimum
its spending. High inflation rates meant that taxes wage of its neighbor Colombia.
assessed in nominal terms were considerably lower
in real terms by the time they were collected. This In December 2017, the Maduro administration
illustrates one of the limits of inflationary financing: announced with great fanfare that it would launch a new
Once you pass a certain threshold, the more money you cryptocurrency, the petro. The currency, the government
print, the less you will be able to pay for. This is because claimed, would be backed by the country’s oil and
printing money is like taxing people, and if taxes are mineral reserves. According to a white paper released by
too high people will do whatever they can to get away the government, the value of the currency would “tend
from it. At very high rates of inflation, people will try to to behave in a stable way,” due to its being “backed by
hold less money, and the decline in real money holdings a basket of Venezuelan commodities.”23 Details of how
limits the government’s capacity to finance itself. As holders could verify that backing were absent from the
shown in Table 3, by the end of 2018, total seignorage description. It was also believed that the currency would
had declined from 11.4% of GDP in 2017 to 1.9% in allow the government to circumvent U.S. sanctions.24
2019 and 0.1% in 2020. Literally, people were trying
to get rid of the money faster than the government could According to a February 2018 poll by local pollster
print it, and hyperinflation therefore continued even Datanálisis, 45.8% of respondents believed the petro
though the government was getting relatively little real wouldn’t “help with their current economic situation,”
financing from money printing. while 36.8% didn’t know the effects it could have; a
mere 16.6% thought it would actually help. On March
2018, the Trump administration issued an executive
STABILIZATION ATTEMPTS
order barring transactions with the petro or any other
Strategies for dealing with hyperinflation often take one
Venezuelan government-backed cryptocurrency, putting
of three forms. Sometimes countries introduce a new
an end to hopes that it could serve to circumvent
currency and peg its value to that of a stable currency
sanctions. By the end of 2020, the petro was used only
such as the U.S. dollar. This was the case of Brazil’s
for the payment of some public administration tolls and
Real Plan of 1993 and Argentina’s Convertibility Plan of
levies, as well as to pay taxes by some firms on account
1991. In other cases, governments let the new currency
of fiscal incentives associated to their use.
float, but use a restrictive monetary policy and a credible
fiscal adjustment to realign expectations toward price In August 2018, Maduro announced an “Economic
stability, as Bolivia did in 1985. Sometimes, there is Recovery Program” aimed at definitively ending
full substitution of the domestic currency with another the hyperinflation. The plan featured a “monetary
country’s currency such as the U.S. dollar, as Zimbabwe reconversion” in which the unit of account was renamed
did in 2008. In all of these cases, a strong commitment from bolivar fuerte (“strong bolivar”) to bolívar soberano
to reducing the fiscal deficit and to end money printing (“sovereign bolívar”), and five zeros were lopped off the
was part of the policy mix. currency. The sovereign bolivar would be pegged to
11HYPERINFLATION
IN VENEZUELA
the petro. The plan included a 60-fold increase in the 12 months before the reforms, averaged just 9% in
minimum wage, which would now also be indexed to the 2020, and was even negative at times (Figure 4).
petro, a commitment to a zero fiscal deficit, an end to
deficit monetization, and the adoption of full currency The August 2018 plan was followed by the central bank
convertibility (i.e., lifting of exchange controls).25 moving to a much more contractionary monetary policy,
implemented via significant increases in the reserve
This was the first time that the Maduro government requirements. However, it was very difficult to know
recognized the links between the fiscal deficit and whether the government kept or even tried to keep its
inflation, and made a commitment toward fiscal fiscal promises. Venezuela had not published detailed
discipline. The other notable element was that the fiscal data since 2013 and as of January 2021, there
convoluted device of pegging the new currency to the was no official data to verify whether the deficit rose or
petro implied an exchange rate of 60 sovereign bolivars fell after 2018 (the estimates in Table 1 are based on
to the dollar. On the date of the announcement, the calculations by the authors26).
dollar was trading at 59 sovereign bolivars to the dollar.
In other words, the government had, for the first time The use of the U.S. dollar gained speed after March
in more than 15 years, stopped trying to enforce an 2019, when a series of nationwide blackouts made
overvalued exchange rate. The black market premium, electronic transactions in bolivars less reliable given the
which had reached a surreal 350,000% average in the lack of a stable electricity supply. By February 2020,
Figure 4: Ratio of black market exchange rate to the official exchange rate (log scale)
Notes: 100% represents parity value. Values above 100 mean that the black market exchange rate (Bs per USD) was higher
than the official exchange rate, and vice versa.
Source: Ministry of Finance, BCV, PDVSA, Torino Economics.
12HYPERINFLATION
IN VENEZUELA
local economic consulting firm Ecoanalítica estimated Had Maduro’s plan addressed the root causes of the
that 80% of transactions made in Venezuela’s capital, Venezuelan hyperinflation? Was the economy on a path to
Caracas, were carried out in USD cash.27 stability, or was the country doomed to continue the cycle
of high inflation, falling output, and rising human misery?
In a remarkable change from its previous stances, the
Maduro government embraced de facto dollarization as
DISCUSSION QUESTIONS:
a positive turn of events. When Maduro’s opponent in the
• Who is to blame for hyperinflation in Venezuela?
2018 election, Henri Falcón, proposed full dollarization
of the economy, Maduro had reacted by accusing him • Why exactly is high inflation a problem?
of wanting “to sell Venezuela out to imperialism.” But by • What advice would you offer the Venezuelan
November 2019, Maduro said that he saw “nothing wrong government about how to reduce the country’s
with it” and called dollarization an “escape valve” to aid inflation?
the economic recovery of the country.28 However, the
Maduro administration refrained from opting for formal
dollarization, insisting on maintaining a dual-currency
system.29 In January 2021, the government increased the
range of transactions allowed via local USD-denominated
accounts, which were legal but remained underused in the
economy.30
By the end of 2020, 114,000 cases of COVID-19 had
been confirmed in Venezuela, as well as 1,028 deaths.
Independent reports suggested that these numbers may
be underestimates due to the lack of proper testing.31
Inflation rates in Venezuela had fallen from the 2018 peak
of 131,000% to 2,960% in 2020, despite the major
blow to government revenues from oil sanctions and the
COVID crisis in 2019 and 2020. However, sluggish world
energy demand took a huge toll on the country’s economy.
According to the IMF, the Venezuelan economy shrank
by 30% in 2020, by far the largest GDP decline in the
region.32
13HYPERINFLATION
IN VENEZUELA
Notes
We thank Adolfo De Lima and Juan Vera for excellent research assistance. All errors remain our responsibility.
1
Out of 54 episodes of hyperinflation in history, Hanke and Krus (2012) estimate the average hyperinflation lasted
2
24 months. The longest lasting was that of Nicaragua, with 70 months. See: Steve Hanke and & Nicholas Krus.
“World Hyperinflations,” “The Handbook of Major Events in Economic History,” Randall Parker, and Robert Whaples,
eds., Routledge Publishing, CATO Working Paper. (2012): https://ssrn.com/abstract=2130109
Carmen Singer, Erica Sánchez, Joe McCarthy. “7 things you should know about the crisis in Venezuela,” Global
3
Citizen (2019): https://www.globalcitizen.org/en/content/venezuela-crisis-facts-to-know-poverty/, World
International Homepage. “Fighting malnutrition in Venezuela” (2020): https://www.wvi.org/stories/venezuela-
crisis/fighting-malnutrition-venezuela, Luke Graham, “Venezuela’s crisis causes its people to cut meals and lose
weight,” CNBC, (2017): https://www.cnbc.com/2017/02/20/venezuelas-crisis-cause-its-people-to-cut-meals-
and-lose-weight.html, and Jenny García, Gerardo Correa, Brenda Rousset. “Trends in infant mortality in Venezuela
between 1985 and 2016: a systematic analysis of demographic data,” The Lancet Global Health, 7(3), (2019):
331–336 https://doi.org/10.1016/S2214-109X(18)30479-0.
Article 350 of the Venezuelan Constitution. Asamblea Nacional Constituyente, Constitución de la República
4
Bolívariana de Venezuela (1999): https://pdba.georgetown.edu/Parties/Venezuela/Leyes/constitucion.pdf.
Dinero. “Carta de Giordani a Nicolás Maduro tras su salida del gabinete [Letter from Giordani to Nicolás Maduro
5
following his dismissal from the cabinet],” (2014): http://www.dinero.com.ve/din/destacados/carta-de-giordani-
nicol-s-maduro-tras-su-salida-del-gabinete.
The following sections borrow from chapters 2, 3, and 6 of Rodríguez, Francisco (2021) Scorched Earth: The
6
Political Economy of Venezuela’s Collapse, 2013–2020 (unpublished book manuscript).
The BCV scarcity index tracked the lack of availability in a sample of retail stores of goods in the representative
7
basket used to form the Consumer Price Index (CPI). The index ranged from 0—if all goods were available—to 100
when no goods were available.
The government did ultimately introduce another tier that would replace the SITME system. That exchange rate
8
would be at 3,341 Bs/USD on January 2018, or 1.4% of the parallel market rate of 236,000.
Euronews. “Watch: Looting in Venezuela after government launches attack on ‘bourgeois parasites,’” (2013):
9
https://www.euronews.com/2013/11/12/watch-looting-in-venezuela-after-government-launches-attack-on-
bourgeois-paras.
10
Andrew Cawthorne. “Venezuela arrests looters, store bosses in ‘economic war,’” (2013): https://www.
reuters.com/article/us-venezuela-economy/venezuela-arrests-looters-store-bosses-in-economic-war-
idUSBRE9A90G520131111.
14HYPERINFLATION
IN VENEZUELA
The approval of a binding censure vote on any member of cabinet requires only a three-fifths majority.
11
Sala Electoral del Tribunal Supremo de Justicia de Venezuela. “Sentencia nº 260 [Ruling number 260],” (2015):
12
https://vlexvenezuela.com/vid/nicia-marina-maldonado-titular-593315122.
El Nacional. “En gaceta nuevos magistrados del TSJ [New TSJ magistrates in Gazzette],” (2015): https://www.
13
elnacional.com/venezuela/politica/gaceta-nuevos-magistrados-del-tsj_35603/. The designation also included 21
alternates.
Angel Alvarado. “Carta de @JulioBorges presidente de la @AsambleaVE a CEO de @GoldmanSachs por compra
14
de bonos #PDVSA22, apoyando la DICTATURA y la REPRESIÓN [Letter from Julio Borges, president of the National
Assembly, to Goldman Sachs CEO for PDVSA22 bonds purchase].” (2017): https://twitter.com/AngelAlvaradoR/
status/869207429128605699?s=20.
C-SPAN. “Bolton announces U.S. sanctions on Venezuela’s state-owned oil company,” McClatchy, (2019): https://
15
www.mcclatchydc.com/news/nation-world/world/latin-america/article225199605.html.
Karen DeYoung, Steven Mufson, Anthony Faoila. “Trump administration announces sanctions targeting Venezuela’s
16
oil industry,” The Washington Post, (2019): https://www.washingtonpost.com/national/health-science/trump-
administration-announces-sanctions-targeting-venezuelas-oil-industry/2019/01/28/4f4470c2-233a-11e9-
90cd-dedb0c92dc17_story.html.
Argus Media. “Scant imports leave Venezuela bereft of motor fuel,” Argus Media, (2019): https://www.argusmedia.
17
com/es/news/2033597-scant-imports-leave-venezuela-bereft-of-motor-fuel?backToResults=true, Axios. “U.S.
targets Russian oil giant in escalating campaign vs. Venezuela,” (2020): https://www.axios.com/us-sanctions-
rosneft-russia-venezuela-oil-exports-abe6f4ce-eebc-485d-86af-904921ed5306.html; Lucia Kassai. “U.S.
Slaps Sanctions on Mexican Companies Helping Venezuelan Oil,” Bloomberg, 2020: https://www.bloomberg.
com/news/articles/2020-06-18/u-s-slaps-sanctions-on-mexican-companies-helping-venezuelan-oil; Saleha
Mohsin, Peter Millard, “U.S. Sanctions Second Rosneft Subsidiary for Backing Maduro,” Bloomberg, (2020): https://
www.bloomberg.com/news/articles/2020-03-12/u-s-sanctions-rosneft-subsidiary-for-backing-venezuela-s-
maduro.
Phillip Cagan. “The monetary dynamics of hyperinflation.” Studies in the Quantity Theory of Money, Friedman, M.
18
(ed.), Chicago: University of Chicago Press (1956).
Jose Saboin. “Seigniorage, (Hyper)Inflation, and Money Demand in Venezuela in the XXI Century: A First Estimation
19
Attempt,” GMU Working Paper in Economics No. 18–39, (2018): https://dx.doi.org/10.2139/ssrn.3301032.
Gaceta Oficial de La República Bolivariana de Venezuela, “Decreto con rango, valor y fuerza de ley de reforma
20
parcial de la ley del banco central de Venezuela,” Number 6.211, (2015): http://www.bcv.org.ve/marco/decreto-
ley-del-banco-central-de-venezuela.
15HYPERINFLATION
IN VENEZUELA
Telesur. “Conozca las medidas que garantizan precios justos en Venezuela [Get to know the measures which
21
guarantee fair prices in Venezuela],” Telesur (2015): https://www.telesurtv.net/news/Conozca-las-medidas-
que-garantizan-precios-justos-en-Venezuela--20151022-0065.html, and El Sol de Margarita, “Todo listo para
hacer cumplir nuevos mecanismos de fijación de precios [Everything ready for compliance on new price fixing
mechanisms],” (2015): http://www.elsoldemargarita.com.ve/posts/post/id:158545/Todo-listo-para-hacer-
cumplir-nuevos-mecanismos-de-fijaci%C3%B3n-de-precios.
El País. “Maduro aumenta un 30% el salario mínimo por una inflación del 80%,” (2015): https://elpais.com/
22
internacional/2015/10/16/actualidad/1444988425_302094.html
Gobierno Bolivariano de Venezuela and Superintendencia Nacional de Criptoactivos y Actividades Conexas. “Petro:
23
Hacia la revolución digital económica [Petro: to the digital economic revolution],” p. 5, (2017): https://www.petro.
gob.ve/assets/descargas/petro-whitepaper.pdf.
EFE. “Maduro anuncia la creación del Petro, la criptomoneda de Venezuela [Maduro announces creation of the
24
Petro, Venezuela’s cryptocurrency],” (2017): https://www.efe.com/efe/america/economia/maduro-anuncia-la-
creacion-del-petro-criptomoneda-de-venezuela/20000011-3457023.
Guillermo Olmo. “La Venezuela del bolívar soberano: en qué consiste el plan de Nicolás Maduro contra la
25
hiperinflación y que opinan los que creen que la empeorará [The Venezuela of the sovereign bolívar: what Nicolás
Maduro’s plan against inflation consists of and what those who think he’ll worsen it think about it],” BBC, (2018):
https://www.bbc.com/mundo/noticias-america-latina-45242215.
We estimate the public sector accounts for 2018 after using the scant published fiscal data and other public
26
information. We use published year-end tax collections, the central government budget, estimates of oil sector
taxes based on crude production, export levels, the exchange rate, realized government financing, and empirical
historical regularities to approximate fiscal results.
Ahiana Figueroa. “Ecoanalítica: Pagos con dólares en efectivo en comercios bajó de 80% a 51,4% [Ecoanalítica:
27
cash payments in USD in retail down from 80% to 51.4%],” Tal Cual, (2020): https://talcualdigital.com/
ecoanalitica-pagos-con-dolares-en-efectivo-paso-de-80-a-514/.
Sofía Espina, “Nicolás Maduro: La dolarización informal es «una válvula de escape» [Nicolás Maduro: informal
28
dollarization is a “scape valve”],” CNN en Español, (2019): https://cnnespanol.cnn.com/2019/11/17/alerta-
maduro-la-dolarizacion-informal-es-una-valvula-de-escape/.
Ministerio del Poder Popular de Economía, Finanzas y Comercio Exterior. “Delcy Rodríguez: El bolívar está a la
29
vanguardia del modelo de protección social para el pueblo [Delcy Rodríguez: the bolívar is at the forefront of
the people’s social protection model],” 2020: http://www.mppef.gob.ve/delcy-rodriguez-el-bolivar-esta-a-la-
vanguardia-del-modelo-de-proteccion-social-para-el-pueblo/, and Ronny Rodríguez. “Delcy Rodríguez anuncia
impuesto a las transacciones en divisas [Delcy Rodríguez annouces a tax on foreign currency denominated
transactions],” Efecto Cocuyo, (2020): https://efectococuyo.com/economia/delcy-rodriguez-anuncia-impuesto-
a-las-transacciones-en-divisas/.
16HYPERINFLATION
IN VENEZUELA
Banca y Negocios. “Gobierno autorizará masiva apertura de cuentas en divisas convertibles [Government to
30
authorize masive creation of convertible foreign currency bank accounts],” (2021): https://www.bancaynegocios.
com/gobierno-autorizara-masiva-apertura-de-cuentas-en-divisas-convertibles/.
Isayen Herrera. “La contabilidad en negro de la pandemia [Accounting in Black of the Pandemic],” Armandoinfo
31
(2020): https://armando.info/Reportajes/Details/5650, and Nicolle Yapur. “Venezuela’s Access to Vaccines
Imperiled By Seized Virus Tests,” Bloomberg, (2021): https://www.bloomberg.com/news/articles/2021-01-21/
venezuela-s-access-to-vaccines-imperiled-by-seized-virus-tests.
IMF. Real GDP growth – Venezuela (2021): https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/
32
ADVEC/WEOWORLD/VEN.
This work is made available under a Creative Commons
Attribution-NonCommercial 4.0 International license (CC BY-NC
4.0). https://creativecommons.org/licenses/by-nc/4.0/
17HYPERINFLATION
IN VENEZUELA
Annex
GDP Gross Domestic Product
U.S. United States of America
IMF International Monetary Fund
SITME Sistema de Transacciones con Titulos en Moneda Extranjera (Foreign Currency Securities Transaction)
PDVSA Petroleos de Venezuela
BCV Central Bank of Venezuela
SEC Securities and Exchange Commission
Bs Sovereign Bolivars
RPS Restricted Public Sector
AN National Assembly
VEF Bolivar Fuerte (predecessor of the Sovereign Bolivar)
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