How can Venezuela counter Hyperinflation?

How can Venezuela counter Hyperinflation?

In my last blog I have discussed Venezuela’s hyperinflation, and what are the reasons for it, now I am going to talk about how Venezuela can counter this. These are my personal thoughts. Many of you can have a contrasting view than me.

Countering inflation is not easy it and steps taken to control it will not show its effects on economy quickly.

To counter the situation, I divided this into two parts. The first thing the Govt. should stop spreading inflation and after that hyperinflation can be lowered.

1.      How to stop spreading of Inflation –

                                                           The first aim of the Govt. is to stop spreading inflation more than a current percentage. It is an essential step as when an increase in the inflation rate will get lower; the situation will start to come under control. It’s always been a challenge to control inflation, but we are talking about hyperinflation which will be harder. So following are some steps that I am thinking will help to stop spreading inflation.

 ·         Reduction in money supply –

                                                As I said earlier in my blog increased money supply in an economy act as petrol in a fire, and this led to increases in inflation. So if the increase in money supply caused rise then, a reduction in money supply can be counted for that situation. Basically, Inflation occurs when people have disposable income, so we have to cut it down, many of you will say Venezuela’s people are already impoverished, and you are suggesting to a reduction in the supply of money how this can work?

I am saying reduce money supply which is raised in the country and limit the money so that the money which in the hands of people will start gaining worth, same the rule of demand and supply when supply is more prices is less and vice versa.

Venezuela’s Govt. is said to raise money supply by 14% in Dec. 17 and they keep printing money.

                                                                                                                             Banco Central de Venezuela

 

As you can see in the above graph how the money supply is increased, Due to this currency in the hands of people start losing its value, and now we can see inflation. So by reducing the quantity of money can help to stop rising of inflation.

·         Reduction in public expenditure –

                                                       Reduction in public expenditure can help to stop rising inflation, As Public spending is utilized to boost the economy to get out of recession so if reduce the federal spending it can help to reduce inflation. As Venezuela’s Govt. spends almost 40% of their GDP on public expenditure so if public expenditure is lowered increase will also get reduced for, e.g., when Govt. devote money in public goods people use them and spend more and that circulate money in the economy and we have to slow down these process of spending. So reducing public expenditure can help reduction in inflation.

2.      Counter Hyperinflation –

                                         Since inflation is not rising anymore it’s time to counter it and take your economy back on track, it is also equally important Govt. will start to make some more serious steps.

·         Ask for bailout packages –

                                            This is most commonly used tool in the world when any country or any company is stuck in a situation where it is hard for them to recover by their self and in urgent need for external help to improve from their position. Many companies and countries don’t need this, but when it is a severe problem, then it became a need. You can ask help of The World Bank and IMF etc. which provides loans some of the cash-rich countries also help by giving loans but usually they have a hidden intention while providing loans so selecting of loans provider is also important when you take credit. As I said, The World Bank and IMF will be a more reliable source for bailout packages.

 ·         Increase numbers of private companies –

                                                                  Increase in the number of private companies can help to reduce inflation let me discuss how it will affect. When a private company is started in the country it provides jobs to the people, and it is liable to pay taxes to Govt. so people and Govt. gets income and that firm also earns profit due to business and if that firm start international business then it can help the country more. Many small industries even start, and many people also have a family business, etc. and when some companies are starting raising competition is also raised, and people will get excellent products at a reasonable price. Due to private companies Govt. get taxes and that will help to inject money into the economy. The private sector also contributes heavily to the income of a country. Many people are also work in a private firm and when there are an individual and public firm a healthy competition is started in the economy.

·         Invest heavily in PDVSA –

                                            When you have a state-owned company like PDVSA, you have to utilize it. The oil industry needs investments and improvement on a daily basis. Oil resources in Venezuela are buried in the earth’s crust than usual, so it needs more cost to compare to another country to produce it, and oil prices are fluctuating, so investing in new technology is necessary to do so it needs to invest in PDVSA. As PDVSA is earning you income so investment in it is required and it usually exports oil so due to this income also can be generated and help to reduce inflation. Many of you will say how to invest in PDVSA?

Govt. can sell Bonds to people and also can take loans for this.

·         Improving international relations –

                                                             Many of you will ask how improving international relations will effect a reduction in inflation. I would say when international ties get better countries will also get flexible in payments and import and export taxes. Better relation led to increase in demand and repeat purchases and due to demand jobs will be created and foreign exchange reserve also increases.

·         Selling of Govt. bonds –

                                        Selling Govt. bonds to people will reduce money in the hands of people and Govt. also gets money in exchange of a paper and when people buy bonds that amount of money will be removed from the economy and that reduce cash will lower the inflation. Govt. also sell it to banks, and that will also reduce the credit making ability of bank due to this loan availability will also get lowered. This money can be utilized to invest in PDVSA etc.

·         Increase in Value of Bolivar –

                                                 After investment in PDVSA and selling bonds country will start gaining international currency and with the help of those currencies Govt. can manipulate the value of Bolivar. Private companies and international relations will also help the Govt. to increase global currencies. When Bolivar’s value rises, inflation will also get lowered.   

·         Improve other sectors –

                                       This also a significant factor as you guys read in my earlier blog how Venezuela is heavily dependent on the Oil sector, so when other areas like the Agricultural and Manufacturing sector start contributing to the GDP country will have a strong economy and factors, like reduce at the price of oil, will not affect the economy that hard. Improving other sectors is not an easy task it needs planning, time and money, etc. but I am pretty sure that this can help reduction in inflation.

Above are some factors from my point of view can help Venezuela to reduce its hyperinflation, there are many other factors also that can help Venezuela. These are my personal thoughts many of you can oppose this.

Conclusion – 

Countering Hyperinflation is not easy it needs a lot of work and time as you know you cannot reach Mars by next morning. Same it will be a non-stop continuous work for at least 5 years to counter this under preferred circumstances. This can be more than I expected, but as I said earlier nothing is impossible, and Venezuela can get back on track.