Venezuela’s hyperinflation and collapsing currency

I have blogged in the past about the ongoing problems in Venezuela of hyperinflation, food shortages and social unrest. One of the consequences of hyperinflation is the loss of confidence in its economy which leads to an outflow of money and a lack of foreign investment. The result of these events is the fall in the Venezuelan currency – the bolívar. One way of monitoring its decline is the use of The Economist’s Big Mac index – it is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad – the video explains PPP and shows how undervalued / overvalued an exchange rate is relative to a Big Mac exchange rate.

According to the Big Mac index the price of Big Mac in
Caracas = 145,000 bolívars
USA = US$5.28

Purchasing Power Parity
Purchasing power parity (PPP) is when an amount of money in one country can be exchanged for a quantity of foreign currency, and the two amounts will buy identical baskets of products in both countries. So if we take the above example the PPP exchange rate is:

145,000 bolívars ÷ US$5.28 = 27,462 bolívars

However the Big Mac index seems to underestimate the slide in the Venezuelan currency as the black market is estimated to be around 260,000 bolívars. A US based website called DolarToday provides black market exchange rates that are updated daily for Venezuelans who cannot exchange currencies with the Venezuelan government for the dwindling supply of the US dollar. According to DolarToday, the estimated exchange rate is 230,228.36 VEF/USD in Venezuela’s free market as of 21 February 2018, which makes it the least valued circulating currency in the world – see graph from Wikipedia. Notice the reduced time for the bolívar to lose 90% of its value.

The company bases its computed exchange rates of the Venezuelan bolívar to the Euro or the United States dollar from the fees on trades in Cúcuta, Colombia, a city near the border of Venezuela. Currently, with no other reliable source other than the black market exchange rates, these rates are used by Reuters, CNBC, and several media news agencies and networks.

Therefore traders in Caracas check the DolarToday rate before presenting the bill to their customers. But local goods have no reference price and don’t keep up with the collapsing value of money – a monthly mobile phone tariff is 38,000 bolivars = 15 cents and a haircut is 25 cents. The minimum wage has increased regularly and it now stands at 800,000 bolívar = less than US$4 at the black market exchange rate.

If wages were perfectly indexed, it would serve only to speed up inflation. But their slow and uneven adjustment means the pain of hyperinflation is shared haphazardly. As Juan Perón of Argentina supposedly said, if prices take the lift, wages cannot take the stairs.

Sources:
The Economist – Hyperinflation in Venezuela – January 27th 2018
Wikipedia – Venezuelan bolívar

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