Venezuela’s Crumbling Economy - the How, When, and Why
Across Venezuela, thousands of people stand in line for basic necessities such as food, medicine and cash. Hospitals across the country lack doctors, tools, and medicine. The nationwide crisis is a consequence of the major budget deficit and soaring hyperinflation. Once one of the wealthiest countries in Latin America, Venezuela has caught world-wide attention as their economy continues to plummet due to diminishing oil reserves.
But how did this all came about?
Similar to Saudi Arabia, Venezuela’s economy heavily depends on the production of oil, the country’s main export. In 2013 and 2014, oil prices jumped to $100 per barrel, captivating the eyes of the nation’s leader, Nicolas Maduro. President Maduro bragged about having the largest proven reserves in the world, and skyrocketed the production of crude oil. The government, quickly showered in cash from newfound profits, began to invest the money in social programs, mainly to reduce the gap between rich and poor.
Oil is critical to the Venezuela's economy as it brings in about 95% of the country’s revenue. However, after a long period of exploitation and money-grubbing, the once bountiful oil reserves began to dry up. With no other income sources, the country’s revenues were slashed in half. Venezuela spiraled into a budget deficit, struggling to stay alive with more bills to pay than money coming in.
Immediately, the central bank began to print money. The hike in money supply led prices to rise, causing inflation. However, with a rate of 7,500% in mid-2017, and predictions from the International Monetary Fund to hit 13,000% by the end of 2018, the nation now experiences one of the worst rates of hyperinflation in the world.
What Does this Inflation Mean for the Country?
The Venezuelan bolivar is now basically worthless. Inflation within a country (especially hyperinflation) creates less demand for the bolivar, and hence, worse foreign exchange rates. According to CNN Money, $20 in 2013 equaled to 629 bolivars - while in 2017, $20 equaled to 195,755 bolivars. With such a depreciated value, the country can no longer afford to import simple food items such as milk, flour, and eggs from other nations. Last year’s statistics indicate that the extensive hunger (infamously named as “the Maduro diet”) has caused Venezuelans to lose an average of 19 pounds.
With a large amount of businesses going bankrupt, Venezuela currently has an unemployment rate of 21%, comparable to that of the U.S. during the Great Depression. But even those who are employed, such as members of the police and the military, are severely underpaid, causing crime and bribery to rise through the roof.
Short on cash, the government and private banks have set tightly restricted and undisclosed cash withdrawal limits on ATMs. Depending on the day, these limits could range anywhere from 5,000 bolivars per day to 30,000.
Stefano Pozzebon, a journalist living in the capital city of Caracas, described the Venezuelans’ attempts to withdraw cash from ATMs as “complicated, tedious and surreal, or just impossible.” With dozens of desperate civilians lining up in front of ATM’s, queues can uphold a minimum one hour wait time, or worse - run out of cash.
After Pozzebon tried for four hours to retrieve money from various ATMs, he ended up with 10,000 bolivars in hand. Shortly after, when he went out to buy coffee, his cappuccino cost 35,000 bolivars.
How Will Venezuela Recover?
Hope for the bolivar’s recovery has vanished into thin air after the currency lost 98 percent of its value. In an effort to increase money supply without returning to the printing machines, the government has launched its own version of bitcoin, a cryptocurrency called the petro.
According to BBC News, “Venezuela owes an estimated $140bn to foreign creditors and economists suggest Mr. Maduro is looking to pay them with Petros as he seeks to restructure the country’s debt.” This new cryptocurrency will be supported by the wealth from oil, gas, diamonds and gold.
The U.S., along with the European Union, has already imposed numerous sanctions on Venezuelan officials for destroying democratic order. The U.S. has forbid American workers to engage in business negotiations with the Venezuelan officials, while the European Union has placed an arms embargo on the country.
Over 3 million Venezuelans have fled into neighboring Latin American countries such as Brazil, Colombia and Peru. In Colombia, the presence of Venezuelan refugees is comparable in size to the amount of Syrian refugees currently in Germany.