Crisis in Venezuela

Venezuela’s most of the macroeconomic outcomes that shaped the economic and social
policies over the past decades for the managerial economy was the heavy reliance on the oil
rents. The Venezuelan economy's rentier nature means that its growth and development have
become dependent on economic activities that are volatile in nature like the oil rents, which
are risky in makes whole country vulnerable to hyperinflation

“The disclosure of oil in the mid twentieth century empowered Venezuela to encounter its
brilliant years between the 1920s and the 1970s. In any case, oil incomes began to fall in the
last part of the 1970s, which decreased impressively the wellsprings of fare 7 and financial
incomes. A decrease in oil creation converted into a fall in the portion of oil in GDP, which
tumbled from a normal of more than 40% somewhere in the range of 1965 and 1974 to 20
percent somewhere in the range of 1985 and 1994, preceding expanding again to more than
25% somewhere in the range of 1995 and 2000. The decrease in the significance of oil was
not, in any case, supplanted by other flourishing fare ventures. The absence of elective fare
areas and absence of ability to grow new fare businesses because of a fall in oil incomes
implied that Venezuela was unfit to recuperate from the antagonistic oil stun. Hence,
following 50 years of quick monetary development, the Venezuelan economy entered a
significant stretch of financial decrease with per capita GDP falling by a combined 18.6
percent somewhere in the range of 1978 and 2001”

“Think about visiting a shop and finding that no thing has a fixed cost or even a sticker price.
All things being equal, you take it to the clerk, who will ascertain the cost for you. “What you
pay could be twice so much or more than what you paid an hour prior”. That is, expecting
there is anything left in stock. This is the financial reality of Venezuela's current "political
emergency," notwithstanding the way that the emergency has been continuous for quite a
long time. Some espresso presently costs in excess of 2,000,000 bolivars.”

Price Rise

The government of Venezuela introduced the crypto currency called the Petro and promoted
it because it’s original currency the Bolivar had lost all its value when compared to be US
dollar. The government in July increased its money supply in 2017 by 14%. Even though the
new crypto currency was introduced it was due to the lack of funds to print new paper
currencies. Inflation was at the high and the IMF predicted that the inflation would rise to
13,000 % in 2018 and this made the people of Venezuela to start using eggs as a mode of
currency. In January 2017 eggs carton costed about 6740 bolivars while comparing it to the
current cost of was worth 250,000 bolivars.

“Similar to the great depression in U.S the unemployment in Venezuela marched to 21%.
President Hugo Chávez had imposed price controls on medicine and food which is one of the
main reasons for when salad to become such a mess. “The domestic companies ran out of
business because of the mandated price was so low and as a result the government footed the
bill for imports.” The country had to depend for its economic prosperity on its oil reserves
and oil exports, the value of the country’s currency bolivar and its economy’s prosperity all
was depended on it’s oil exports. Oil accounted for more than 90% of the country's export
earnings. The global price of oil then fell. Foreign demand for the bolivar to purchase
Venezuelan oil has plummeted. Imported goods became more expensive as the value of the
currency fell”

“It reduced revenue for the state-owned oil companies. When the government ran out of
money, it began to print more. President Nicolas Maduro is continuing unsustainable policies
rather than changing his dangerous price and wage controls. By August 2018, Venezuelan
currency was worth so little that it was better to use cash for toilet paper rather than buy toilet
paper.”

Venezuela's foreign debt is estimated to be around $100 billion as of 2019. Its annual
inflation rate has reached 10,398 percent. With its economy continuing to deteriorate, the
country is confronted with a massive debt repayment problem.

The nation has nearly exhausted its unfamiliar stores, lost admittance to unfamiliar obligation
markets, is disliked with different governments (aside from Iran) because of political
defilement, its nationalized economy is unpleasantly wasteful, and its residents are in a real
sense starving in the roads. Any financial backer's biggest dread is the deficiency of genuine
investment funds because of excessive inflation.

Hyperinflation is a difficult obstacle to overcome. It occurs in only a few economies, and it

is difficult to stop without drastically reducing government spending. Venezuelans will have
to continue to look for ways to survive the storm as the country's political crisis worsens.
Reasons for Hyper-Inflation in Venezuela

1. Over reliance on Oil exports

The world’s largest oil reserves belongs to Venezuela but oil is the country’s only major
source of revenue. Oil exports account for more than 95 percent of Venezuela's revenue. The
country has no money to spend if it does not sell its oil.

3. Dependency on Imports

During the oil price boom the reliance over consumer goods and food imports increased at a
major pace. The increased reliance on imports particularly of production inputs led to the loss
of competitiveness in the nonoil sectors which led to the country be dependent on the
economy’s ability to import rather than on local production.

2. Large fall in Productivity

Since the end of the 1970s, private investment has been declining. Overcapitalization resulted
in declining profitability and, as a result, discouraged investment. While the
overaccumulation contention has some legitimacy in clarifying the exceptionally quick
expansion in private speculation starting in the mid 1970s and its resulting breakdown in the
last part of the 1970s, it can't clarify the very low degrees of private venture that continued
during the 1980s till 2000s.

4. Socialist Policies by Hugo Chavez

In the late 1990s, Chavez established a number of social programs known as the Misiones,
which aimed to combat poverty and inequality with the help of oil money generated in the
country, but the money was not saved for infrastructure projects. As a result of all of this, the
petroleum industry was unable to expand its capacity, resulting in a national economic crisis.
In the mid-2000s, he also provided subsidized oil to several countries in the region, but the
volume of petroleum that Venezuela was exporting was not coming in; instead, it was being
spent away to allies at extremely low rates, resulting in a shortage of revenue generated.
These governments' socialist policies backfired when they attempted to make goods
affordable to the poor at low prices, but this also meant that Venezuelan businesses producing
those items no longer found it profitable to make them, resulting in a shortage of supply,
which led to price increases and inflation.

5. Restrictive Monetary Policy:

“In order to protect their profit margins firms start rising their prices due to the rising
production cost and there was high wages and higher input costs in it since 1974 and since
1975, in combination with rising financing cost due to the restrictive monitory policy.
Furthermore, in August 1979, price controls were partially lifted, which contributed to an
increase in inflation rates from 9.2 percent in 1979 to 20.1 percent in 1980.”

6. Currency Devaluation

“The major reason for the government to devalue the bolivar and to impose control on
exchange with numerous exchange rates which lasted till 1973 was due to the outbreak of the
Latin America debt crisis in the 1980’s led to negatives views on the Venezuela’s repaying
capacity on its external debt. In 1986 the collapse of the oil price exacerbated Venezuela’s
external position significantly even though the economy began to recover in 1984. The
current account balance has deteriorated from a $3.3 billion surplus to a more than $2 billion
deficit.”

7. Exchange Rate Policy Changes:

“Venezuela had to finally make an adjustment in 1989, even though they were able to restrict
the intervention of IMF during the crisis of 1983 which included increasing macro-economic
disequilibria in the late 1980s, due to the accumulation of increased external debt and
increasing private capital forced the country to make the adjustment. In Venezuela the IMF
adjustment program sought to restore the macroeconomic equilibrium by limiting
government spending, eliminating price controls, instituting a single floating exchange rate
and liberalizing trade. In this programme the exchange controls were lifted in March 1989
and a single floating rate equal to the free-market rate of 40 bolivars (Bs) per US dollar was
introduced. This implied another significant devaluation of the country’s currency which is a
huge adjustment in the exchange rate and already the country facing with increase in the
prices of public services and goods, elimination of subsidies and price controls, rising cost of
investment financing as interest rates and increase in nominal wages created a significant
impact on the economy and prices which led to inflation rate reaching 84% in 1989.”