As U.S. President Donald Trump tightens sanctions on the Nicolás Maduro regime, Venezuela's economy, which had once shown signs of recovery, is rapidly contracting again. This year's inflation in Venezuela is expected to surge from 50% to as high as 600%, fueling concerns that hyperinflation could return around next year.
According to the New York Times (NYT) on the 26th (local time), economists predicted that Venezuela's inflation would soar more than about 12 times this year, and the International Monetary Fund (IMF) projected that Venezuela will enter negative growth in the 3% range next year. Venezuelan economist Professor Francisco Rodríguez said, "Venezuela is a country that has proven that even if you destroy the economy, the regime does not change," adding, "The poorer the economy becomes, the stronger the government gets."
Earlier, in about August, the United States officially designated Venezuela, where the Maduro regime has been in long-term power, as a "drug cartel," and continued military and economic pressure, including dispatching a U.S. fleet to the Caribbean. As the inflow of dollars decreased, the currency value plummeted, and with the worsening local power shortages and ongoing turmoil, citizens shut their wallets and began so-called "dollar hoarding." Venezuela's average monthly income is about $250 (about 360,000 won), below half the cost of basic groceries.
In fact, excluding countries at war, Venezuela has experienced the deepest recession over the past 10-plus years. Excessive planned economy, corrupt politics, and U.S. sanctions combined to trigger hyperinflation (130%) in 2018, prompting millions of people to flee abroad to escape poverty and famine.
The Trump administration is blocking the Maduro regime's channels for foreign currency inflows while pursuing a strategy to induce political fissures inside Venezuela. In particular, changes to operating rules for U.S. oil company Chevron are seen as having decisively contributed to the sharp drop in Venezuela's foreign currency. In March, the U.S. Treasury revoked Chevron's rights to operate oil projects in Venezuela, which produce about 20% of the country's oil, and ordered tariffs on crude oil importers, dealing a direct blow to the regime.
In response, the Maduro government is pushing "cryptocurrency economization." For the first time this year, it opened a state-approved cryptocurrency exchange and has been receiving a significant portion of oil export payments in stablecoins (dollar-pegged cryptocurrencies) to inject into the economy. Led by Vice President Delcy Rodríguez, the strategy is regarded as a workaround financial system that exploits blind spots in U.S. sanctions.
In practice, state oil company PDVSA has been paying some subcontractors in stablecoins since this year, and private corporations are also providing cryptocurrency incentives to employees. Citizens, meanwhile, are exchanging bolívars for stablecoins through the cryptocurrency exchange Binance instead of the black market where dollars were traded, leading some analysts to say that about half of all foreign currency is flowing in as cryptocurrencies.
However, supplying liquidity through cryptocurrencies is triggering another vicious cycle of price increases. The gap between the official exchange rate and the black-market rate has widened to more than 50%, and the government appears caught between depleting foreign reserves and imposing price controls to maintain the exchange rate. If the real value of public sector wages and soldiers' pay, the foundation of regime stability, plunges, there are also observations that the Maduro government could abandon currency defense and tighten old-style price and exchange-rate controls.
Professor Rodríguez said, "If Maduro chooses devaluation, the regime's foundation will be shaken, and if he chooses price controls, the economy will collapse," adding, "The Maduro regime will probably stick to a 'holding out strategy,' but living standards could again deteriorate severely."