INFLATION IN VENEZUELA  |
WHAT ARE THE ECONOMIC PROBLEMS IN VENEZUELA?
Venezuela is experiencing the worst economic crisis in its history since its money is nearly worthless and its cash crisis is only
getting worse.Venezuela depends heavily on its oil. It has the largest
oil reserves in the world and oil revenue has sustained Venezuela's economy for
years.The billions of dollars in revenue were used to finance social programs including health care, education, transport, and food subsidies.But when the price of oil fell, those programs and
subsidies became unsustainable.
Also,inflation has soared to 4,115% compared with a year
ago which leads millions of Venezuelans to find out how much money they need to buy
groceries.Soaring prices also force
Venezuelans to wait hours in line at the ATM and the supermarket just to get
some money and hopefully there is something available to buy on the shelf.
Today, Venezuela has one of the poorest major economies in Latin America – and as the current crisis rides itself out, the IMF foresees it getting far worse. By 2022, the organization predicts Venezuela’s GDP per capita (PPP) will be just $12,210,which would be a massive economic setback – the Venezuelan economy would be even poorer than it was many years before the Chávez era started
WHAT'S THE CAUSE OF INFLATION
In the past decade, with the leaders in that era aiming to spread wealth
to people by taking money from the rich and distribute to the poor. Instead of
supporting the poor to compete with the rich. This leads to businessman don’t
dare to invest.
In 1976, President Carlos Andres Perez issue an economic policy called La
Gran Venezuela, a concept of seizing energy business that has been
privatized into the government. Then set up the PDVSA: Petroleos de
Venezuela S.A. to oversee all business.
In the beginning, the business goes well since it is based on the
experiences of executives and technicians who have worked for multinational
companies. The PDVSA have become
a source of great benefits to the government. It is a source of income for
support government projects and a source of job creation , since many people
want to get a chance to work in this organization. This leads to people who do
not have ability but just have connections can work here. Finally, it results
in additional costs and regressed performance. Eventually, debt problems began.
The government took the benefit of the nation to share the people, it
would be good. But it would be better if they create the necessary social
welfare such as education, health insurance and job creation, but if used in
the populist project to hopefully vote. It may not be good in the long run.
Hugo Rafael Chavez Fras is the former president who is the founder of
more than 4,000 projects. The concept of project development is to appease poor
people such as cheap house building projects, cheap product projects, and so
much more but only a few projects have resulted in tangible results.Lastly,it
gives President Hugo Chvez the overwhelming votes from the poor.
In 2003, President Hugo Chvez issued a monetary control by prohibiting the use of foreign currency in domestic
transactions and set the exchange rate such as importing goods to the high
exchange rate while trading in the country is low. It sounds like the idea is
good ,but setting different exchange rates leads to the shortage of foreign
currency.
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Price control policy began in 2003 as well. At first the poor were happy
about it but later on, the problem of
inflation and food shortages increases because this forces sellers to sell at
lower prices. Sellers didn’t want to sell the products and If there are
products, it is sold in some stores as mandated by the government. The rest is
hidden behind the store and sold at a higher price and finally caused the rise
of black market.
Subsidy policy for energy makes the price of Gasoline so cheap
(Benzene91 is 2 Bolivar per liter and Benzene95 is 6 Bolivar per liter, while
the price of drinking water is about 500 to 600 Bolivar per liter.) Also,
electricity is cheaper than the real cost.This causes the problem of
inefficient use of energy and the accumulation of losses from electricity
policy had become a constraint to the quality improvement. Together with the
electricity policy, that mostly (70percent) depends on hydroelectric power
causes Venezuela to suffer from frequent power outages during the dry season.
What had been there for a decade causes people to be addicted to
populist projects and if the government cancel any project, people will protest
against it and will have and effect on the popularity of the government.
In 2012 PDVSA was in the crisis because there is no productivity
increase in the past decades. Fundings were spent on purchasing fighter
aircraft and used in the government. And in 2013, the government need to borrow
money from China and Russia because of the increase of government debt.
Banknote printing to stimulate economic is no longer the right choice. Because inflation rate is expected to hit 700 per cent the following year, making the cost of note printing higher than the value of it.
The situation is getting worse and worse and only miracles will help.
WHY ARE THERE BLACK MARKETS FOR CURRENCY
EXCHANGE IN VENEZUELA?
EXCHANGE IN VENEZUELA?
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As Venezuela
is one of the world’s largest exporters of crude oil and a founding member of
OPEC,it can produce crude oil for more than a million barrels per day. The
Former President of Venezuela, Hugo Chavez, has been in duty since 1999 and carried citizen’s mind by his Populism policy. One of the policies
was to set price of the domestic products as low as possible to support the lower
class which is the majority of the country. This leads to the crucial
problem-the inefficiency of the market. Once the product price was set lower
than its cost, no one would want to produce or even sell them, which cause the
country to rely mainly on the import product. Besides, what the sellers done
were kept most of the products themselves and sold in ‘Black market’, which
gave them a considerably higher profit.
This
problem was getting worst in 2014, when crude oil price unprecedented plummet down like never before. The
country was now lack of foreign currency. Since Venezuela rely most of its good
from the import, the lack of foreign currency brought them a big change. First
of all, the shortage of food spread across the country. Not everyone who had
money can buy food and many had to skip meals. Next, the good prices soar
higher and higher. This leads to the problem of not only ‘inflation’ but
‘hyperinflation’. And because the currency exchange rates are not reliable
anymore, black markets for currency exchange were there to solve the problem.
For example, one USD can be exchanged for higher bolivars in black market. This
was due to the overrated value of money that Venezuela government set.
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 Currency conversions are tricky in Venezuela given its byzantine multiple exchange-rate system. 50,000 bolivars can turn to $5,000 for government rate, but in the black market ,where most dollars are acquired, the real exchange rate is less than $0.5. This is the main reason why the black markets play the main role in Venezuela. |
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Citations:
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/ie.jl..0au_U/v0/1200x801.j
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http://www.aljazeera.com/indepth/features/2017/05/venezuela-worst-economic-crisis-wrong-
170501063130120.html https://townhall.com/columnists/bgascmetals/2016/06/07/causes-of-venezuelas-hyperinflation-n2174301 http://money.visualcapitalist.com/richer-poorer-venezuela-economic-tragedy/ |
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