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The Venenzuela Inflation Crisis


Hyperinflation being Venezuela’s biggest crisis has been marked by corruption, one of the world’s highest homicide rates, food and medicine shortages in the recent history of Latin America. The government headed by Nicolas maduro, who has presided over Venezuela since 2013, declared a state of emergency in 2016. That year the inflation rate hit 800%. Things have since gone from bad to worse. But what led the situation to this?


By 2014 the value of Venezuela’s currency, the bolivar, and the prosperity of the Venezuelan economy, was highly dependent on oil exports. More than 90% of the country’s export earnings came from oil. These export earnings helped the government from 1999 to 2013 to pay for social programs which intended to combat poverty and inequality. From subsidies for those on low incomes to health services and other such aspects, the government’s spending charges were high. Foreign demand for the bolivar to buy Venezuelan oil crashed, in the light of the fact that the global price of oil dropped due to a new, stronger US oil production capacity . As the currency’s value fell, the cost of imported goods rose and this resulted in the Venezuelan economy going into a severe crisis.


During this major economical setback, president maduro suggested printing more money as a solution to the ongoing upheaval. This, however, failed to help as the oil prices continued to fall. Printing more money made the conditions worse and proved to be a direct result of a weakening currency and inflation that soared at a rate of 2400% over the past years. Since the Venezuelan oil output was reduced, International investors began looking elsewhere, driving the value of the bolivar even lower. Venezuela’s economy is in its seventh straight year of recession and is forecasted to shrink another 20% this year due to the coronavirus and the collapse of oil revenue.


Previous attempts to bring stability to the currency by cutting off zeros and printing new bills have failed. On top of this, Venezuelans started to convert their savings into a more stable currency, the US dollar, which contributed into lowering the value of the bolivar even further. Authorities turned a blind eye to a greater number of transactions being carried out in US dollars which led to currency controls issued by the government. This intended to stabilise the currency by effectively shutting down all currency transactions. The increasing demand for monetary exchange, whose rate was about 250,000 bolivars to one US dollar, meant the black market price for greenbacks rose, creating a difference between the official exchange rate which was set by the government and the unofficial going rate with Ecoanalitica estimating that 60% of all purchases were done using greenbacks. To make things worse, it was reported in 2014 that certain groups were crossing borders to use ATMs situated in Colombia. They could use their Venezuelan accounts to withdraw funds as US dollars at the official rate, making profits in the process. Government officials also had access to exchange through such practices. This resulted in the price of US dollars going up, and bolivars’ going down. The crisis continued to grow worse and large numbers of people engaged in unofficial currency market.


More than a decade of political mismanagement and failed economic policies means the national mint has to overcome a series of additional hurdles to introduce the new bill. President maduro called the informal exchange process an “escape valve” while blaming US sanctions for the economy’s severe distress.


Venezuela has been suffering from hyperinflation since 2017, depriving most citizens of access to the most essential goods. Considering the economically shattering consequences of this incessant crisis, Venezuela’s central bank is planning to introduce a banknote worth one million bolivars equivalent to about 52 US cents at the current official exchange rate. The bank claims for these bills to “complement and optimize” the current denominations to meet the requirements of the national economy. The nation’s economy has been in a downward spiral for 7 years as critics continue to point towards the interventional policies of maduro and his socialist predecessor, Hugo Chavez which leads us during his time in power.


Chavez became president in 1999, and managed to reduce levels of inequality by price control which aimed at making basic goods more affordable by the poor. However, these controls backfired as Venezuelan businesses stopped production because they no longer made a profit, eventually resulting in shortages. The means of production which worked under a capitalist framework was to blame here. This led to a lack of investment in infrastructure further exacerbated by the more recent US sanctions on Venezuela's oil sector that crippled this key industry, which provided almost all of the nation’s government revenue. The current situation in Venezuela finds its roots in all the issues mentioned above.


~ Risika Singh


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