Essay Example about Venezuela's Inflation

Published: 2022-02-22
Essay Example about Venezuela's Inflation
Type of paper:  Essay
Categories:  Economics Inflation
Pages: 7
Wordcount: 1864 words
16 min read

Venezuela is a country located on the northern coast of South America. It is the world's leading oil reservoir, producing over 300 million barrels of oil every day. For decades Venezuela's economy has been the strongest and the envy of many nations worldwide; however, for the past two decades, Venezuela's economy has been facing many challenges (Clark, 2010). Mismanagement of its oil reserves and public debt has resulted in hyperinflation, shortages of food, as well as shortages of foreign currency and essential good. This article, therefore, attempts to explain the effects of inflation in Venezuela, giving empirical proof of how inflation has damaged the economy of the country as well as the feasible remedy strategies for the same.

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Venezuela has been under military rule until 1959 when a democratic system of governance was established. Since the election of president Maduro, the democratic institutions in the country have been obliterated, and in 2017, the president established a repressive dictatorship (Buxton, 2018). There have been reports of massive corruption in the country coupled with poor leadership, which have played a key role in enhancing inflation in the country. Today the once most robust economy is faced with a severe humanitarian crisis with over five million of its citizens reported to have left the country.

Inflation in Venezuela has skyrocketed from 21% in 2012 to 2,688,670% in 2018. The country's economy shrank between 2013 and 2017 by around 18%. IMF predicts that the country's inflation may hit 10 million by the 2nd half of 2019 (Kulesza, 2017). This, therefore, begs the question of how did the country get here. It is without a doubt that Venezuela has the largest oil reserves. The sale from oil sustains the proceeds of oil finance the government the Venezuelans economy. The government, for many years, introduced several free services and training to its people and even introduced a socialistic type of governance thanks to the good fortune brought by its oil reserves (Buxton, 2018). The effort to diversify the country's economy so as not to depend on oil have failed therefore leaving the country to the mercies of oil prices which they have no control over.

In 2000, the oil prices started to rise; this rise in oil prices was sustained for the better part of the decade. As a result, the country's inflation went down, and its economy grew twofold. The then president took advantage of the good fortune to harness the wealth from oil (Buxton, 2018). Because of the massive wealth, the government of the time comes up with programs aimed at eradicating poverty and increasing equality among the citizens of Venezuela. In 2014, the fortune turned against them when oil prices declined, between 2014 and 2018, oil prices reduced from $93.13 in 2014 to $52.87 in 2019 per barrel. Such a decline in oil prices is devastating to a country whose 50% of GDP depends on oil (Ruprah & Luengas, 2011).

The United States further aggravated Venezuela's woes by imposing sanctions on the economically struggling country. They imposed sanctions that restricted trading in Venezuelan bonds thus locking the country from trading in credit markets (Ruprah & Luengas, 2011). As a result of these sanctions, Venezuela has defaulted in paying its debt thereby putting it in an unhealthy relationship with its lenders. A United Nations report blamed US sanctions for the shortage of food, medicine and other essential amenities needed in Venezuela.

In as much as the economic sanctions and low fuel, prices are to be blamed for the massive inflations experienced in Venezuela (Levingston, 2014). Venezuela is to be blamed for its woes. Poor leadership, corruption, over-dependent on oil whose prices are beyond their control and inability to strengthen and build infrastructures that would help finance the economy during their glory years are the shortcomings of the Venezuelan government and are the key contributors to the economic crisis faced by the country today.

Why inflation is an essential economic crisis facing Venezuela

In 2014, citizens of Venezuela could walk into the market and buy sufficient fruits for only 100-bolivar notes; by then this was the country's highest currency. Today most businesspersons and women cannot accept 100, 500, or even 1000 bolivar notes; this is because the one's strongest currencies have lost value and can no longer purchase even a single fruit (Mehrotra & Yetman 2014). Today businesspersons and women all around the markets of Venezuela can only accept the 100,000-bolivar note. Due to the increasing demand for this note, the note has become hard to come by in the country.

The inflation which has grappled Venezuela for the last five years have made millions of people unable to afford basic food and healthcare. Most supermarkets in the country either are closed or have empty shelves. This has resulted in insecurity as many are struggling to find ways of feeding their families (Mehrotra & Yetman 2014). Millions of people have left the country in fear of starvation, the brilliant men and women who can create jobs have gone in search of a better future elsewhere. The minimum wage for Venezuelan working citizen is 41 dollars, however not every working person is paid at this rate; most are paid at rates lower than that. As a result, many resorts to black-market where they earn a dollar (Levingston, 2014). The minimum wage cannot even buy food to feed a family for three days that is without factoring in medical emergencies.

Effect of Inflation on Housing

Since the year 2000 when Chavez was the president of Venezuela, the country has been grappling with a shortage of houses. Despite the government's attempt to build more houses, they were unable to build sufficient houses for all their citizens (Levingston, 2014). In 2011, there was the government instructed the poor to occupy unused land, this resolution negatively affected the housing sector of the country as millions of people lived as squatters occupying the majority of the free land in the country. Due to inflation, the government of Venezuela was unable to build houses nor pay constructors in the housing sectors.

The housing shortage worsened in 2014, the government, therefore, declared that all the abandoned cars were to be collected, melted, and used to build rubber houses. In a desperate move to solve the housing problem in the country, the government also decided to force the rich who owned residential houses in the country to sell their residential units at a specified price set by the government itself (Yavari & Serletis, 2011). Those who did not comply with the government directives were fined and their properties forcefully confiscated and given to the poor. As a result, there was a protest against the government's directive further crippling the already stretched economy. Despite the government attempt to help elevate the living standard of their people by securing descent-housing systems amidst skyrocketing inflation, millions of Venezuelans are still living in less than decent houses with little to nothing to eat wondering about tomorrow.

Effects of Inflation on Venezuelan Debt

As of November 2017, the total debt Venezuela owed stood at $105 000, 000,000, within its reserves, the country only has had 10 billion us dollars. The total debt is divided into four categories depending on the type of debt were borrowed. Venezuela's public debt is estimated to be 55% of the country's total debt; these include bank loans, treasury bills as well as foreign and domestic bonds (Yavari & Serletis, 2011). The government also borrowed millions of dollars from the (PDVSA) petrol de Venezuela, which is a government-owned oil and gas company. The company is responsible for exploring, refining, and exporting oil. The amount the government owes this company makes up 21% of the total debt.

The Venezuelan government has also borrowed from the Chinese fund billions of dollars to help fund its projects, which had stalled due to the high inflation it has been experiencing over the last five years. This fund accounts for 15 % of the total debt (Yavari & Serletis, 2011). With the hard economic times in the country, the government's ability to pay these debts was highly compromised, and they have defaulted payments on many occasions. In 2017, the US government imposed a sanction on the Venezuelan debt making it impossible for the government to neither restructure their debt obligations nor negate with their lenders.

Effects of inflation on GDP

According to a report released by the central bank of Venezuela, from the 2015 economic crisis experienced in the country, the Venezuelan economy shorts down by 5.7%. In2016, the economy further shrank by 18.6%. This drop in GDP was because of a decline in oil prices (Kulesza, 2017). Oil accounts for over 50% of the country's GDP; therefore, the drop in oil prices played a key role in crippling the country's economy. In response to the economic crisis facing the government, the people organized demonstrations across the country further destabilizing the country's economy.

The government's attempt to smuggle in food, medicine, and other essential commodities has faced challenges as the vehicles carrying these products have been burnt and looted by the rioting citizens (Kulesza, 2017). The reduction in the country's GDP has also resulted in increased criminal activities, looting of shops and supermarkets have been the order of the day in an attempt to put food on the table. The people no longer eat fancy food as they used to; they now eat wild fruits and vegetable; a balanced diet is no longer feasible (Buxton, 2018).

Effects of inflation on employment

The hyperinflation facing Venezuela has resulted in the collapse of many companies that employed millions of Venezuelan people. This has resulted in the loss of jobs increasing the country's level of unemployment (Kulesza, 2017). Most companies have also left the country to venture into a more economically viable region. The government, which is the most significant employer, can no longer sustain essential programs nor can they pay their employees (Buxton, 2018). The rate of unemployment in Venezuela is alarming and is believed to be the primary reason for increased criminal activities.

In response to the toll inflation had on the economic status of its population, the government of Venezuela increased the salaries of its workers. The increase was not sustainable as most if not all the companies were unable to raise the wages of their employees and make a profit at the same time(Kulesza, 2017). In response, the existing company's fired millions of people to cut cost and remain relevant. By January 2016, the rate of unemployment in Venezuela was at 18.1%, and its economy was the worst in the world.

The social crisis resulting from inflation


According to a study conducted by three Venezuelan universities, 75% of the citizen are said to have lost over 8killograms of weight in 2016 because of poor diet. In 2017, the study reported that 64% of the population had lost 11kg because they could not access a balanced diet (Kulesza, 2017). When oil prices were high, the government of Venezuela solely depended on imported food; the government feeds its population using food from outside because they could afford it. During this time, the people enjoyed a surplus of a well-balanced food which in some instances was given for free or at a subsidized price. Food was extremely accessible to all, and there was no day that a Venezuelan could spend without accessing a balanced diet (Buxton, 2018).

When the oil prices fell, the government imposed food rationing; people had to spend an entire day in line waiting for food and some hard to go without getting any food. The children wards within public hospitals were fill...

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