By: Hana Kotb
Following the devaluation of the Egyptian pound almost two years ago, many Egyptians lost faith in their currency and worried about things getting even worse. While things have been relatively stable over the past year, our nightmare has been realized in Venezuela.
The International Monetary Fund foresee that prices in Venezuela will soar by an unimaginable 1,000,000% in this year. Every 18 days, prices has been doubling. Many people are hungry, and even more people are trying to flea the country. Everyone in Venezuela has lost faith in their currency.
“The central bank has been printing more and more money to try and pay the government’s bills, making the money already in the economy increasingly worthless,” says Jeremy Thomson-Cook, an economist at World First. They’re doing so because the government’s revenue from oil production has dropped sharply as production has fallen. Venezuela is in its fourth year of recession.
So what happens next?
This isn’t history’s first instance of hyperinflation. This happened in Germany in 1923, and more recently in Zimbabwe in the late 2000s. Zimbabwe devalued its currency, lopping several zeroes off its bills. Venezuela has done the same this week, removing five zeroes. Basically, they have new Venezuelan Bolivar notes. However, when Zimbabwe did this, it didn’t solve the problem. Zimbabwe ended up leaving behind its currency altogether and adopted the US dollar. This restored faith in the economy because it stripped the authorities of control over the currency and led to a rise in incomes.
So what’s Venezuela’s plan?
Other than removing five zeros and printing new money, their currency is now linked to a crypto currency called the Petro, which is related to the value of the country’s oil production. This plan has been criticized by many people because, one, the country’s oil production hasn’t been going as well as it use, and two, people are very critical of cryptocurrency after the value of the bitcoin soared then plunged. Many people see digital currencies as worthless.
What do economists think of this plan?
They think that the main problem isn’t being addressed: the instability caused by the fact that oil production levels have plummeted. Economists believe that there’ll be further economic pain and perhaps yet more attempts to change the currency.
However, the Socialist government in Venezuela is unlikely to do what Zimbabwe did and adopt the dollar because its the currency of its ideological enemy, the USA. Maybe the solution is a change of the government as a whole. This could be the only thing that restores faith in Venezuela’s economy.