Steve H. Hanke Professor of Applied Economics at The Johns Hopkins University in Baltimore
In January, the International Monetary Fund (IMF) told us that Venezuela’s annual inflation rate would hit 720 percent by the end of the year. The IMF’s World Economic Outlook, which was published in April, stuck with the 720 percent inflation forecast. What the IMF failed to do is tell us how they arrived at the forecast. Never mind. The press has repeated the 720 percent inflation forecast ad nauseam.
Since the IMF’s 720 percent forecast has been elevated to the status of a factoid, it is worth a bit of reflection and analysis. We can reverse engineer the IMF’s inflation forecast to determine the bolivar-greenback exchange rate implied by the inflation forecast.
When we conduct that exercise, we calculate that the VEF/USD rate moves from today’s black market (read: free market) rate of 1,110 to 6,699 by year’s end. So, the IMF is forecasting that the bolivar will shed 83 percent of its current value against the greenback by New Year’s Day, 2017. The following chart shows the dramatic plunge anticipated by the IMF.