Venezuela and US Inflation Essay

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Venezuela and US Inflation Essay

Economic Situation

• Foreign trade

The United States supplies more than one-third of Venezuela’s food imports. Recent government import policies have led to a shortage of goods throughout the country. During the crisis in Bolivarian Venezuela, Maduro decided to purchase hundreds of military vehicles to be used against large waves of protests instead of purchasing goods for Venezuelans, allocating only 15% of the necessary amount of funds to buy goods for supermarkets.

• International assistance

In January 2015, Maduro toured countries in Asia seeking support following the steep decline in oil prices since June 2014, asking for financial agreements and the cut of production by OPEC. Despite statements by Maduro saying that multibillion-dollar agreements were made, few details were given, oil prices fell another 8% and his tour was described as a failure.

In May 2016, the National Assembly passed a law compelling the executive branch and Nicolás Maduro to accept foreign aid for healthcare and medical supplies, including medicines that have experienced supply shortages. This law intends to offset the decline in services and supply shortages. Every citizen and resident in Venezuela is entitled to healthcare as both a human and constitutional right and guaranteed by law.

• Economic sanctions

Economists have stated that shortages and high inflation in Venezuela began before US sanctions were directed toward the country. The Wall Street Journal says that economists place the blame for Venezuela’s economy shrinking by half on ‘Maduro’s policies, including widespread nationalizations, out-of-control spending that sparked inflation, price controls that led to shortages, and widespread graft and mismanagement.’ The Venezuelan government has stated that the United States is responsible for its economic collapse. The HRW/Johns Hopkins report noted that most sanctions are ‘limited to canceling visas and freezing assets of key officials implicated in abuses and corruption. They in no way target the Venezuelan economy.’ The report also stated that the 2017 ban on dealing in Venezuelan government stocks and bonds allows exceptions for food and medicine and that the 28 January 2019 PDVSA sanctions could worsen the situation, although ‘the crisis precedes them’. The Washington Post stated that ‘the deprivation long predates recently imposed US sanctions’.

On 9 March 2015, Barack Obama signed and issued an executive order declaring Venezuela a national security threat and ordered sanctions against Venezuelan officials. The sanctions did not affect Venezuela’s oil company and trade relations with the US continued. In 2017, Trump’s administration imposed additional economic sanctions on Venezuela. In 2018, the United Nations High Commissioner for Human Rights (OHCHR) documented that ‘information gathered indicates that the socioeconomic crisis had been unfolding for several years before the imposition of these sanctions’.

According to the Wall Street Journal, new 2019 sanctions—aimed at depriving the Maduro government of petroleum revenues—are the most significant sanctions to date, and are likely to affect the Venezuelan people. In 2019, former UN rapporteur Alfred de Zayas asserted that US sanctions on Venezuela were illegal as they constituted economic warfare and ‘could amount to ‘crimes against humanity’ under international law’. His report, which he says was ignored by the UN, was criticized by the Latin America and Caribbean program director for the Crisis Group for neglecting to mention the impact of a ‘difficult business environment on the country’, which the director said ‘was a symptom of Chavismo (Chavez’s ideology) and the socialist governments’ failures’, and that ‘Venezuela could not recover under current government policies even if the sanctions were lifted.’

• Currency

The growth in the Central Bank of Venezuela’s money supply accelerated during the beginning of President Maduro’s presidency due to massive currency printing, which caused more price inflation in the country. The money supply of the Bolivar in Venezuela increased by 64% in 2014, three times faster than any other economy observed by Bloomberg at the time. Due to the rapidly decreasing value of the Bolivar Fuerte, Venezuelans jokingly called the currency ‘bolivar muerto’ or ‘dead bolivar’.

In September 2014, the unofficial exchange rate for the Bolivarian Cúcuta reached 100 Bs.F. per 1 USD. In May 2015, the Bolivar lost 25% of its value in a week, with the unofficial exchange rate being at 300 Bs.F. per 1 USD on 14 May and reaching 400 Bs.F. per 1 USD on 21 May. The Bolivar dropped sharply again in July 2015, passing 500 Bs.F. per 1 USD on 3 July and 600 Bs.F. per 1 USD on 9 July. By February 2016, the unofficial rate reached 1,000 Bs.F. per USD.

In November 2016, the Bolivar saw its largest monthly loss of value ever. The Bolivar to the United States dollar conversion rate passed the 2,000 Bs.F. per 1 USD on 21 November 2016, reaching nearly 3,000 Bs.F. per 1 USD only days after it passed the 2,000 mark. On 29 November 2016, the conversion rate increased to over 3,000 Bs.F. per 1 USD. The Bolivar lost over 60% of its value.

The main currency of Venezuela since 20 August 2018 has been the bolívar soberano (sovereign bolivar).

It will replace the bolívar fuerte after a transition period. The primary reason for replacement is at a rate of 1 Bs.S. to 100,000 Bs. F was hyperinflation.

• National cryptocurrency

In December 2017, Nicolas Maduro announced that Venezuela would issue an oil-backed state cryptocurrency called the ‘Petro’ in an attempt to shore up its struggling economy.

Effects of flawed policies

1. Economic crisis: three years of recession

Venezuela is in its third year of recession. Its economy is expected to contract 10% this year, according to the International Monetary Fund. The IMF forecasts Venezuela will be in recession until at least 2019.

While the economy shrinks, the price of goods is skyrocketing.

2. Venezuela’s broken engine: oil

Things got really bad when oil prices started to plunge in 2014. Venezuela has the world’s largest oil reserves, but the problem is that oil is the heart of Venezuela’s economy. It makes up over 95% of Venezuela’s revenue from its exports. If it doesn’t sell oil, the country doesn’t have money to spend.

Oil prices were over $100 a barrel in 2014. In 2016, they hovered around $50 a barrel, after dropping as low as $26 earlier this year.

The problem is that Venezuela has not taken care of its cash cow. It has squandered opportunities to invest in its oilfields when times were good. Also, because the country has neglected the upkeep of its oil facilities, production has dropped to a 13-year low.

Venezuela’s state-run oil company, PDVSA, hasn’t paid the companies that help extract its oil, such as Schlumberger (SLB). In the spring, Schlumberger and other companies dramatically reduced operations with PDVSA, citing unpaid bills.

PDVSA warned that it could default on its debt if bondholders didn’t accept new payment terms. Just enough investors accepted a new deal that will allow PDVSA to likely avoid default that year. However, experts say it has only delayed a default by a small period.

3. Soaring food prices & broken hospitals

Venezuela’s food shortages became extremely severe from 2016 onwards. Venezuelans went weeks, in some cases months, without basics like milk, eggs, flour, soap, and toilet paper.

Despite a crashing currency and falling oil revenue, the government continued enforcing strict price controls on goods sold in the supermarkets. It forced food importers to stop bringing in virtually everything because they would have had to sell it for a major loss.

In the first half of 2016, food imports were down by nearly 50% from the same time a year ago, according to several estimates.

Only recently has the government stopped enforcing price controls, and food has returned to supermarket shelves. However, prices are so high that few Venezuelans can afford the food.

Medicine remains in short supply too. Venezuelans hunt for penicillin and other remedies at pharmacies everywhere, often without any success. The country’s public hospitals have fallen apart, causing people, even infants, to die due to the scarcity of basic medical care.

4. Running out of cash and gold

Venezuela is running out of cash quickly. It doesn’t have enough money to pay its bills for too long.

The math just doesn’t add up: It owes $15 billion between now and the end of 2017, while the nation’s central bank only has $11.8 billion in reserves. At the same time, Venezuela’s only other cash source, PDVSA, is pumping less oil and risking default.

Most of its reserves are in the form of gold. So, to make debt payments this year, Venezuela has shipped gold bars to Switzerland.

China used to bail out Venezuela and loan it billions of dollars. But even China has stopped giving its Latin American ally more cash.

5. Hyperinflation

From 2006 to 2012, the government of Hugo Chávez reported decreasing inflation rates during the entire period. Inflation rates increased again in 2013 under Nicolás Maduro and continued to increase in the following years, with inflation exceeding 1,000,000% by 2018. In comparison to previous hyperinflationary episodes, the ongoing hyperinflation crisis is more severe than those of Argentina, Bolivia, Brazil, Nicaragua, and Peru in the 1980s and 1990s, and that of Zimbabwe in the late 2000s.

In 2014, the annual inflation rate reached 69%, the highest in the world. In 2015, the inflation rate was 181%, again the highest in the world and the highest in the country’s history at the time. The rate reached 800% in 2016, over 4,000% in 2017, and about 1,700,000% in 2018, with Venezuela spiraling into hyperinflation. While the Venezuelan government ‘had essentially stopped’ producing official inflation estimates as of early 2018, inflation economist Steve Hanke estimated the rate at that time to be 5,220%. In April 2019, the International Monetary Fund estimated that inflation would reach 10,000,000% by the end of 2019. The Central Bank of Venezuela (BCV) officially estimates that the inflation rate increased to 53,798,500% between 2016 and April 2019.

Lessons learned

Many lessons can be learned from Venezuela’s crisis.

Belief in incentives more than ideology: You cannot create a new economy out of a flurry of decrees. A law that forces companies to produce and sell goods at a loss with unrealistic price controls will lead companies to stop producing.
Learn fiscal restraint: Having a lot of money poorly managed is worse than having less money. Saving and investing wealth for the future is extremely important. Also, the crowding-out effect of government spending has to be taken into account.
Printing money at will is harmful: Economists can go back and forth about the roots of inflation, an academic debate in countries where inflation is just a few percentage points and where the economy is soundly managed. If you print money with no backing by another currency or real economic growth then, inflation will speed up quickly. Venezuela has the highest inflation on earth.
Excessive Nationalisation/Expropriation is disastrous: Firms were often expropriated on a whim, and state-owned endeavors were launched without careful thought or planning. This led to a bloated bureaucracy, growing corruption, and a long-term decline in key sectors. State-owned enterprises often ended up in the hands of corrupt bureaucrats who made them into their domains, and then milked them dry. A key example of this was in 2010 when Chavez launched an offensive in agriculture by expropriating hundreds of farms and food industries. Given that these enterprises were often undercapitalized and unproductive, state intervention was necessary. But most of the firms were then handed over to bureaucrats who had little preparation or oversight. The result was complete mismanagement, and a drastic decline in food production thereafter.