Venezuela’s Crisis Explained

Venezuela went from one of the wealthiest oil rich countries in South America to one of the poorest countries in the world. Millions of Venezuelans have left the country after struggling with food and medicine shortages, currency hyperinflation, power cuts and expensive fuel costs. 

How did this happen to a country with plenty of natural resources? What has truly happened  to Venezuela’s so called “great” economy? 

Hyperinflation is what ultimately destroys a currency and has happened multiple times throughout history. It even happened to the first fiat currency that was created in 1024AD in China.

This has been the largest problem facing the Venezuelan people, meaning spiralling costs for food and energy. The value of the currency is constantly dropping while the cost of living increases.

The opposition, National Assembly have claimed that Venezuela’s inflation rate over 12 months to November 2018 had reached 1,300,000%. The average living costs were doubling every 19 days on average. This has caused millions of Venezuelans to leave the country.

How did this crisis happen?

Venezuela’s economy was heavily reliant on Oil – 96% of exports; so when the price of crude oil plunged in 2014, Venezuela’s economy was hit hard. The country faced little investment from foreign countries which made it hard to obtain imports as it was before. The government decided to print enormous amounts of money which then declined the value rapidly. The socialist government wanted to gain popularity with the poor people of Venezuela by regularly increasing the minimum wage. This further devalued the currency and made goods more expensive.

When the government defaulted on a few of it’s own government bonds, other countries and banks became unwilling to lend the country money. With no outside investment, the government printed more money to pay for services which further devalued it’s own currency. Now many people can not afford to buy fuel, pay for bills and many have resorted to eating rotten meat.

Who is to blame for the Venezuelan crisis?

Many people believe that the Venezuelan crisis proves the socialist system does not work. The socialist government has been in office since 1999, first under Hugo Chavez and now Nicolás Maduro. In 1999 there was huge inequality, therefore the idea of socialism appealed to many. Chavez tried to implement policies to help the poor, but ended up putting many companies out of business. Price caps on good made it unprofitable for local businesses. 2007 – Chavez passed the most extreme program what would nationalise the oil industry. International oil projects were transferred to these so called “mixed companies”, where the state would have a controlling and majority share. This pushed foreign companies away, further decreasing investment. However, The country did benefit for a short time and made a huge amount of money. This socialist dream eventually failed in 2014 with the price drop of oil and the government could no longer pay for state benefits.

Others blame US sanctions on the country or opposition groups.

What has the government been doing to fix the situation?

The government created a new currency after hyperinflation destroyed the old one. The new sovereign bolivar took five zeroes off the end of the old currency and was linked to the cryptocurrency – petro.

This has made little difference with inflation still rising and the currency value falling yet again. The IMF (international Monetary Fund) says that inflation in Venezuela could reach 10,000,000% by december 2019.

Is Gold saving Venezuela?

In 2011 Venezuela had 372.93 tons of gold, but now the reserves have dwindled to 161.2 tons. While the currency value has dropped dramatically, gold has kept its worth and has been a fantastic form of wealth insurance for the country. The country has been selling off it’s gold reserves to prevent the country from facing total collapse.

Now the country is trying to repatriate 16.5 tons of gold (worth $550 million) from the Bank of England’s vaults in London. The Bank of England, so far, is refusing to return the gold after concerns over money laundering were raised.

Last year Washington imposed further sanctions specifically against gold exports from Venezuela. They believe the Venezuelan government are looting the states precious metals for own personal gain. The restrictions prevent US individuals and companies from buying gold from the country.

Gold has certainly helped the Venezuela during this crisis. It is astonishing that countries such as Canada and Norway have sold off their gold reserves, when it is clear that precious metals can be vital in a crisis. Hyperinflation can happen to any country, and eventually all fiat currencies will revert to the true value of zero. Gold will always have a store of value.

 

Nicolas Maduro, Venezuela's president, speaks as he touches a stack of 12 Kilogram gold ingots during a news conference on the country's cryptocurrency, known as the Petro, in Caracas, Venezuela, on Thursday, March 22, 2018. U.S. President Trump banned U.S. purchases of the Petro as part of a campaign to pressure the government of Maduro. Photographer: Carlos Becerra/Bloomberg via Getty Images

What is everyday like?

Empty shelves in supermarkets, power cuts, expensive fuel and lack of medicine are just some of the problems Venezuelans face. The government now can’t afford to invest in the crumbling infrastructure. People who cannot leave the country now spend days looking for medicine and food they need. It’s hard to imagine not being able to afford basic things like toilet roll, but this is the harsh reality for the 32 million Venezuelans still living in the country.

It is claimed that Venezuela’s poverty rate is between 76%-87%, up from 48% in 2014.

 

CARACAS, VENEZUELA - JANUARY 13: Shoppers walk past nearly empty shelves at a supermarket due to a long term shortage in Caracas, Venezuela on January 13, 2015. Sliding oil prices have sent Venezuela on a downward spiral and sent President Nicolas Maduro on a trip to China to make an urgent appeal for cash. Country's economic woes have triggered severe shortages of some staple product, with government-controlled supermarkets now limiting the amount of certain products customers can purchase. (Photo by Carlos Becerra/Anadolu Agency/Getty Images)
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