Venezuela’s Hyperinflation - 6 minutes read
Venezuela’s Hyperinflation
This is one of the most trending topics in the world, the country like Venezuela who said to have most significant oil resources in the world have this condition, and you already know the importance of oil in the economy, so why? A country like this is going through hyperinflation we are going to discuss this.
According to Oxford Dictionaries
‘Monetary inflation occurring at a very high rate.’
Hyperinflation is a situation when there is a rapid and often uncontrollable currency devaluation causing the prices of goods and services to rise by a rocket speed in a short amount of time.
In simple words, it is a situation where the prices of goods and services rise more than 50% a month, and Venezuela’s inflation has crossed 25,000% in May 2018.So how Venezuela did got trapped in this situation?
The main problem from my point of view is Venezuela’s economy which started to depend upon oil export, and that began to create problems for them as oil prices began falling in 2014.Let’s look at Venezuela’s economy.
As I said earlier Venezuela’s economy is over-dependent upon the Oil sector, as the manufacturing sector was only contributing about 15% of total GDP in 2009, and the Agricultural sector is contributing 3% of GDP. So due to these factors, the income source of the country is mainly an oil sector, and this situation is dangerous because if that particular sector collapses, the country’s economy will also collapse, and this has happened with Venezuela which is still continuing.
When you talk about a country facing the problem, there can’t be a single reason like the economy there are many numerous factors as I am mentioning few.
1. Falling of PDVSA –
Petróleos de Venezuela S.A. is the Venezuelan state-owned oil and natural gas company working from 1st Jan.1976 and soon after became the world’s 5th largest oil exporter company. At his peak company had produced 3.5 Million barrel of oil per day in 1998 and production fell in 2013 by 1 Million barrel per day to 2.5 Million barrel per day, and currently have approx. 90 Billion US$ in debt.
Paraguaná Refinery Complex is the world’s 3rd most massive refinery complex which is said to work on its 15% capacity.
One of the Plant managers said that ‘There is no maintenance; they sucked everything they could from PDVSA without investing, there’s nothing left to squeeze.
They also employed unskilled and inexperienced people, causes the downfall of the company.
2. Falling oil productions –
When you are an oil-centric economy, then you should keep on pressure on the peddle of oil production, but it seems reverse situation in Venezuela. Oil production has seen a decline in production and estimated that it is up to 1.8 million barrel per day which is half in comparison to starting productions. Production of oil which has kept on dropping and this becomes a significant factor of Venezuela’s Hyperinflation.
3. International relations –
When you are an oil-based economy, good relations with other nations is essential as ties affect the demand and supply for goods, and there are many unions and groups of countries, and if any country has a bad relationship with the state, the whole group can abolish buying from that particular country. For, e.g., Venezuela's relations with the US have been contentious for much of the last 20 years Due to this India also thinks twice when Venezuela offer them oil at 30% discount than market price (There are many reasons for not accepting this, but you cannot neglect the USA’s aspect.)
4. Decreasing in the foreign reserves and also the decreasing value of Bolívar –
Foreign reserves are significant to any country as they can influence the exchange prices etc. So having the foreign reserve in the country’s central bank is beneficial for the nation but Venezuela also lacks in this aspect. Many economists said that Venezuela’s foreign reserves have dropped $10 Billion.
This directly affects the value of a currency, and it has shown a direct impact on the amount of Bolivar. Value is declining day by day, and it is now fragile compared to other foreign currency.
5. Printing of money and currency collapse and debt problem –
To counter devaluation of currency Venezuela’s Govt. starts printing money which creates more problems and liquid money act as a petrol in the fire and inflation turns into Hyperinflation. Venezuela’s central bank issued 6 new bills in Dec.15 worth between 500 and 2,000 bolivars, which is 200 times more than the most significant measure of 100.
Due to this Inflation in Venezuela is expected to rise to nearly 500% this year and to a whopping 1,660% in 2017, according to the International Monetary Fund. And now it is said to hit 10.00.000% in future.
To understand more let’s see how it affected regular prices in Venezuela (at its peak)
1 Litre milk Bs 1,63,069
12 eggs large Bs 3,03,427
1 Kg Tomato Bs 2,49,185
1 Kg Potato Bs 1,90,319
Things do not stop here Venezuela has a debt problem also Venezuela has about $60 Billion (£46bn) in outstanding bonds. That includes debt issued by the Venezuelan government as well as bonds issued by the companies such as the state oil company PDVSA.
But that is not all Venezuela owes. Its total external debt, which also includes loans from countries like Russia and China, is thought to be as much as $140 Billion.
Due to its crisis, many firms and country are starting to ask for repayment of their debt, and this is an additional problem faced by Venezuela.
Above are some critical factors which led Venezuela into Hyper Inflation. So Venezuela has to look after them, but the problems are not only those, there are also various problems facing by Venezuela, Following are few:-·\
Venezuela’s unemployment rate is forecasted to 33.35% till Dec 2018 and 44.31% till Dec. 2023.
Caracas is a capital city of Venezuela and ranked worlds 2nd dangers city with murder rate.
Approx. 87% of the population is poor, and 60% of those live in extreme poverty.
In 2017 more than 27 protect per day is registered.
Since 2015 approx. more than 8,000 people died protesting.
Above issues also have to be faced by Venezuela’s Govt.
To counter this situation Venezuela’s Govt. used Crypto-currency named as Petro to increase the investment in their economy and they backed 1 Petro with 1 Barrel of Oil, but Trump banned this currency in his country, and Venezuela’s opposition declare it illegal. Many of European Nations also criticized the currency. Most of the economist said that it is a trap and the last step taken by Venezuela’s Govt. to push on some more days.
Conclusion –
Venezuela is in deep trouble as this hyperinflation needs more bailout packages than ever before but due to weak international relation its seems hard and as per my predictions it will need more than 5 years to completely washout this effects and regularise their economy the time period can be increased than I anticipated. But as you know nothing is impossible Venezuela can fight back if they utilized their resources well and take the proper decisions.
If you want to get more information reagrding this topic read my book.
Venezuela's Hyperinflation & how to counter it & can Petro become a game changer
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