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HomeFresh TakeThe Venezuelan Crisis: From Boom To Bust

The Venezuelan Crisis: From Boom To Bust

By Aashna John

Venezuela is in the midst of the worst economic meltdown in its history. It is suffering from food, health and energy crises that have worsened at a ludicrous pace. There is a widespread shortage of basic necessities and people are dying of easily treatable diseases due to a severe lack of medicines. The army has been put in charge of rationing supplies and guarding empty racks in the supermarkets. Venezuela’s regional neighbours such as Colombia have not done much other than opening their borders so that Venezuelans can buy basic supplies.

President Maduro has claimed that the country is dealing with an “economic war” and has declared a state of emergency to combat it.

In fact, Venezuela has been declared as the only failed state in the region. The rest of South America has been accused of indifference and standing as mere spectators while an entire country spirals into chaos. President Maduro has claimed that the country is dealing with an “economic war” and has declared a state of emergency to combat it.

However, the curious fact is that Venezuela happens to have the world’s largest number of proven oil reserves. So how did this petrostate, once a model for socialism under the charismatic Hugo Chavez, go from boom to bust so rapidly?

An Oil-dependent Economy

To an agonisingly large degree, Venezuela’s catastrophe is the government’s own making. One way to analyse the crisis would be to view it in terms of a domino effect. The first block to collapse and begin this chain reaction of impending disaster was a fall in the oil prices.

Historically, the Venezuelan economy has been heavily dependent on oil as its primary resource commodity. Former President Chavez once called it an ‘instrument of national development’. In fact, a majority of the country’s social programs were oil-funded. This was possible because, during that period, oil was valued at $100 a barrel. Since then, prices have taken a massive dive with one barrel selling at $88 in 2014 and $44 in 2015. In May of 2016, the price stood at less than $30 per barrelThese continuously falling oil prices have hampered the ability of the government to import necessary goods.

An Import Oriented Economy

The Venezuelan economy is not differentiated or diverse. The country grows and produces very little and therefore relies solely on imports to feed its people. Such a phenomenon where a country is dependent on one extremely profitable sector, leading to the neglect and decline of other developmental sectors is called the Dutch DiseaseIn Venezuela’s case, a booming oil industry led to the neglect of other economic sectors like agriculture.

Furthermore, the extensive slashing of prices of essential commodities exacerbated the crisis in the long run. Chavez, in his generosity, had reduced the prices of basic commodities to make them easily affordable. But, the unintended consequence was that producers were forced to operate at a loss and subsequently, domestic production in the country came to a standstill. As a result, the need for imports increased leading to a severe lack of foreign currency.

The Problem of Inflation

Venezuela: Times of turmoil?

Venezuela is suffering the worst economic crisis in its history. | Photo Courtesy: The Federalist

The lack of foreign currency inflow, critical scarcity of fundamental necessities and the general plethora of poor economic decisions inevitably resulted in inflation. Prices of imported goods escalated exponentially. The situation worsened when the government decided to print more of the national currency, the Bolivar. The government failed to understand a basic economic concept: when the rate of supply of money increases faster than the production of goods, the result is inflation. Thus, food prices rose to 30% in a single month. Today, the inflation rate is at 700% with the International Monetary Fund (IMF) predicting that in 2017,  the numbers will enter the four-digit hyperinflation regime

Columbus had once described Venezuela as ‘the land of hope and grace’. Economists today term it as the land of the world’s worst inflation. 

Rising Foreign Debt

Today, the Maduro administration is forced to hack imports and sell the country’s gold in order to survive.

Another factor that has pulled Venezuela further into the quicksand of chaos and turmoil is the huge amounts of foreign debt that the country owes. During his presidency, Chavez borrowed heavily as a result of the tremendous cash inflow due to rising oil prices. Today, the Maduro administration is forced to hack imports and sell the country’s gold in order to survive. According to the IMF, the country’s reserves have dropped by almost a third over the past year. The priority at this point is payment of the international debt to prevent an outright default. Furthermore, the debt crisis has hampered the country’s access to any form of international capital.

Finding A Solution

An immediate possible solution at this juncture could be to stabilise the fluctuating exchange rate. The country’s official exchange rate is 10 bolivars for a dollar. But, the country is host to a massive black market, since currency is sold solely by the government, in which the exchange rate can go as high as 1,000 bolivars for a dollar. As a result of the rampant dysfunction and currency speculation in the black market, it is hard to know the real market value of the Bolivar. Unifying the exchange system into a single floating rate that everyone, including the government, will use, would result in some fiscal stability and allow Venezuelans to trade in their country’s own currency. This may be the only silver lining in a sky of dark clouds for Venezuela.

Unifying the exchange system into a single floating rate that everyone, including the government, will use, would result in some fiscal stability and allow Venezuelans to trade in their country’s own currency.


Aashna John is a fourth-year undergraduate student at Symbiosis Law School, Pune and she is currently pursuing a BBA LLB.

Featured Image Source: Barn Images

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