The Bolivarian Republic of Venezuela is passing through the deadly economic turned humanitarian crisis. Venezuela's mix of political, economic and humanitarian crisis is now at its peak. This cancerous situation was resulted after the oil price collapse since 2014. Adding fuel to the fire, Maduro-led government adopted inappropriate economic policies to finance huge budgetary deficit.
Venezuelans protesting against Maduro government in Caracas with 'SOS' placards
The currency crisis: Shortage of essentials and nearly zero purchasing power have made the markets literally sluggish. Venezuela authority, however, is not able to cater the needs of the people through import as their oil based revenue steeply lost and their currency Venezuelan Bolivar is severely depreciated to 2.5 lakh against one US Dollar. Steep fall in government revenue and extreme undervaluation of the Venezuelan currency made the government unable to service its debts. It caused for the sudden degradation of the credit rating of Venezuela. Normal external debt sources will then be obviously closed. The foreign exchange reserve with the Venezuelan central bank tumbled to mere 2.2 billion US Dollar in early 2018 from a massive 30 billion US Dollar in 2010. It compelled the government cut imports by 75 per cent . This is absolutely associated with the oil price collapse since 2014 and significant fall in oil exports. While the torrential flow of internal price level in Venezuela has made the purchases not affordable on the one hand, the intense undervaluation of Bolivar has made the imports almost impossible. It made the Socialist government, which is being blamed for its fiscal mismanagement and idiotic policies, helpless.
Almost useless Venezuelan Bolivar which is deposited in waste bin
The refugee crisis: Tens of thousands are on their way to seek asylum in the neighbouring Columbia, Brazil, Peru, Ecuador and Argentina. As per the United Nations statistics as many as 2.3 million Venezuelans have already left the country seeking asylum since 2015. It is one of the largest people movements across borders in the world history. The figure is significant as it constitutes 7 per cent of Venezuelan population. The exodus of people from their homeland to the neighbouring countries as refugees has created unrest in the border regions and made them victims of abuses of various kind and physical assault. This has created an unusual situation of discomfort for the receiving countries as well. The neighbouring countries are yet to make a final decision on the refugee crisis. However, some countries have tightened immigration procedure. Brazil has deployed the army in the border towns and across the border. The ongoing mass migration is the hindmost effort to save their life from wide internal violence and drastic starvation. The Venezuelans have become the largest international community who sought asylum in the US. The reports show that some of the Venezuelans crossing the border is to do the employment in the border towns of neighbouring countries such as Pacaraima in Brazil, Cucuta and Pamplona in Columbia to bring the cash having value and bread to the inflation hit rich turned poor country. Since 2014 with oil price collapse and loss of income in Venezuela, crime rate and murder rate have significantly surged. Venezuela, in the backdrop of the current crisis, became world's one of the most dangerous countries with the the murder rate of 73 per day in 2017. With all the turmoil, Venezuela now has become a non-liveable country. It fuelled mass migration of the people to the neighbouring countries. (www.cfr.org/report/venezuelan-refugee-crisis).
Thousands flee the crisis-hit country everyday
The Health Crisis: The human rights violation has become quite common in Venezuela as the after effect of financial crisis. Surging crime rate and lack of food and medicines have made the things distressing. Lack of alternative source of income for oil and self sufficiency on necessary products made Venezuela unable to meet the hunger. Reuters reports that 90 per cent of the population are in starvation. The people are loosing their weights significantly without having adequate or nutritious food. It was estimated that Venezuelans have lost their weight by 8 kg on an average in 2016 and 11 kg in 2017. (www.reuters.com/article/us-venezuela-food/venezuelans-report-big-weight-losses-in-2017) The media reports show that people are eating food deposited in the waste bin kept along the street. The Venezuelan land, without much economic activities, has become a desert. The surged death out of starvation, starvation fueled crimes and extent of diseases are looking up Venezuela. Hospitals are virtually running out of medicines and doctors. Most doctors left the hospital due to lack of salary. This has further worsened the health crisis.
Emptied supermarkets imply severe shortage of necessary commodities
What has taken Venezuela into the fearful situation?
The excessive dependence on oil exports and failure to find an alternative source of income have been the root causes for the present crisis along with its wrong policies on money supply. It is argued that corruption in the administrative level has aggravated the crisis in Venezuela. Venezuela became one of the richest in Latin America following the significant and steady oil price hike during 2004 and 2014. The consequence of significant oil price drop in 2014 severely affected the Venezuelan economy as a whole since over 90 per cent of government's revenue comes from oil trade in the country and over 90 per cent of the total exports constitutes crude oil. The halved production of crude oil in early 2018 from an average of 30 lakh barrel per day in 2010 is clearly the reflection of subsided price and reduced export demand from its largest crude oil purchaser US (www.google.co.in/amp/s/www.forbes.com/sites/rrapier/2018/06/08/). During the boom period, before oil price collapse, the then President Hugo Chavez declared massive welfare measures in the country. He provided subsidy for food, education for free and health services to the people. The collapse of oil price since 2014 has broke all plans of the Chavez' successor Maduro-led government. New currencies were printed significantly to finance the budgetary deficit emerged out of loss of governmental revenue owing to the distressed oil sector. It has triggered the rate of inflation to an alarming level in Venezuela. The extreme undervaluation of the Venezuelan Bolivar has further deteriorated the situation since 75 per cent imports were cut. It left the once one of the wealthiest countries in Latin American continent in extreme shortage of food and medicines. In short a fall in the price of oil, along with massive inflation, widespread corruption and a crash in the Bolívar, were all factors in the financial crisis.
Printing of too much currency triggered hyperinflation in Venezuela
What ahead?
Venezuela can follow two back to back measures in this intense situation. One is printing high denomination notes and another one is use of dollar or any other stronger international currency as the legal tender. The latter is technically termed dollarization. It was implemented in a few countries in emergencies and helped stabilize wildly fluctuating price level.
Issue of higher denomination notes can be adopted to counter hyperinflation as the immediate response. But only higher denomination note printing is not going to help the country anymore as internal instability is not the only crisis in Venezuela. They had issued higher denominations of 500, 1000, 2000, 5000, 10000 and 20000 Bolivars subsequent to the economic crash in 2016. Because of either lack of its adequacy or lack of effective follow-up measures, the crisis further deteriorated. The external instability which is created by extreme undervaluation of the Bolivar to 2.5 lakh per US Dollar as in September 2018 made the imports almost impossible and impractical. Venezuela is a country which absolutely depends on the import of everything except oil. However, food and medicine held a major position in Venezuela's import list.
Second and the follow-up measure before the hyperinflation-hit Venezuela is dollarization. It is the process of adopting a foreign country's currency with legal tender status instead of home currency. US Dollar has been the most dollarized country in the world to fight hyperinflation. Ecuador's substitution of home currency by US Dollar in 2000 has helped tackle hyperinflation and brought the control back on the economy. The same happened in Zimbabwe subsequent to the hyperinflation up to 79.6 billion per cent in November 2008. The adoption of US Dollar first on experiment basis and later on absolute basis in Zimbabwe has brought the price stability back. The current Venezuelan crisis can be quite compared with that of Zimbabwe. The hyperinflation in both countries was triggered by government's printing of too much currency to meet the increased demand for money due to steep fall in export receipts and national output.
However, Venezuelan government needs to ensure the presence of workers for oil drilling and related works to regain the lost production level at any cost without further delay. For the time being they do have the advantage over oil production comparatively. Later on they could explore and set alternative sources of income.
Internal instability: The hyperinflation of around 100,000 per cent as of August 2018, which can not bearable by any country, has been literally brandishing awfully the Venezuelan economy and Venezuelans. According to IMF, the inflation in the once South America's one of the wealthiest countries is supposed to touch one million per cent by the end of 2018. (www.forbes.com/sites/stevehanke/2018/07/31). The inflation rate has been surging phenomenally ever since the beginning of collapse of the oil-dependent economy with steep fall in international crude oil prices and oil exports since 2014. The collapse of the Venezuelan economy was in fact befell as an inevitable phenomenon since they did not find any alternate source of income for crude oil. 100 per cent inflation in 2015 has become 1 lakh per cent in 2018 September. The economic cum humanitarian crisis in the Latin American country is literally unparalleled. It has left the people in the financial ravage. The food and medicine shortages made the living in Venezuela vulnerable. The shelfs of supermarkets remain emptied. Many shops were shut down due to lack of commodities and customers. The entire economic transactions in the country have been slumped or stagnated. The plunge of Venezuela's GDP by 35 per cent between 2014 and 2017 is exactly correlated with oil price drop. GDP per capita unprecedentedly fell from around $17,000 in 2014 to $8,000 in 2017. (Annual Statistical Bulletins by OPEC). Figures in 2018 are yet to out. Whatever, it is obvious that the figures to come out will not make the Latin American country happy anymore.
The currency crisis: Shortage of essentials and nearly zero purchasing power have made the markets literally sluggish. Venezuela authority, however, is not able to cater the needs of the people through import as their oil based revenue steeply lost and their currency Venezuelan Bolivar is severely depreciated to 2.5 lakh against one US Dollar. Steep fall in government revenue and extreme undervaluation of the Venezuelan currency made the government unable to service its debts. It caused for the sudden degradation of the credit rating of Venezuela. Normal external debt sources will then be obviously closed. The foreign exchange reserve with the Venezuelan central bank tumbled to mere 2.2 billion US Dollar in early 2018 from a massive 30 billion US Dollar in 2010. It compelled the government cut imports by 75 per cent . This is absolutely associated with the oil price collapse since 2014 and significant fall in oil exports. While the torrential flow of internal price level in Venezuela has made the purchases not affordable on the one hand, the intense undervaluation of Bolivar has made the imports almost impossible. It made the Socialist government, which is being blamed for its fiscal mismanagement and idiotic policies, helpless.
The refugee crisis: Tens of thousands are on their way to seek asylum in the neighbouring Columbia, Brazil, Peru, Ecuador and Argentina. As per the United Nations statistics as many as 2.3 million Venezuelans have already left the country seeking asylum since 2015. It is one of the largest people movements across borders in the world history. The figure is significant as it constitutes 7 per cent of Venezuelan population. The exodus of people from their homeland to the neighbouring countries as refugees has created unrest in the border regions and made them victims of abuses of various kind and physical assault. This has created an unusual situation of discomfort for the receiving countries as well. The neighbouring countries are yet to make a final decision on the refugee crisis. However, some countries have tightened immigration procedure. Brazil has deployed the army in the border towns and across the border. The ongoing mass migration is the hindmost effort to save their life from wide internal violence and drastic starvation. The Venezuelans have become the largest international community who sought asylum in the US. The reports show that some of the Venezuelans crossing the border is to do the employment in the border towns of neighbouring countries such as Pacaraima in Brazil, Cucuta and Pamplona in Columbia to bring the cash having value and bread to the inflation hit rich turned poor country. Since 2014 with oil price collapse and loss of income in Venezuela, crime rate and murder rate have significantly surged. Venezuela, in the backdrop of the current crisis, became world's one of the most dangerous countries with the the murder rate of 73 per day in 2017. With all the turmoil, Venezuela now has become a non-liveable country. It fuelled mass migration of the people to the neighbouring countries. (www.cfr.org/report/venezuelan-refugee-crisis).
The Health Crisis: The human rights violation has become quite common in Venezuela as the after effect of financial crisis. Surging crime rate and lack of food and medicines have made the things distressing. Lack of alternative source of income for oil and self sufficiency on necessary products made Venezuela unable to meet the hunger. Reuters reports that 90 per cent of the population are in starvation. The people are loosing their weights significantly without having adequate or nutritious food. It was estimated that Venezuelans have lost their weight by 8 kg on an average in 2016 and 11 kg in 2017. (www.reuters.com/article/us-venezuela-food/venezuelans-report-big-weight-losses-in-2017) The media reports show that people are eating food deposited in the waste bin kept along the street. The Venezuelan land, without much economic activities, has become a desert. The surged death out of starvation, starvation fueled crimes and extent of diseases are looking up Venezuela. Hospitals are virtually running out of medicines and doctors. Most doctors left the hospital due to lack of salary. This has further worsened the health crisis.
What has taken Venezuela into the fearful situation?
The excessive dependence on oil exports and failure to find an alternative source of income have been the root causes for the present crisis along with its wrong policies on money supply. It is argued that corruption in the administrative level has aggravated the crisis in Venezuela. Venezuela became one of the richest in Latin America following the significant and steady oil price hike during 2004 and 2014. The consequence of significant oil price drop in 2014 severely affected the Venezuelan economy as a whole since over 90 per cent of government's revenue comes from oil trade in the country and over 90 per cent of the total exports constitutes crude oil. The halved production of crude oil in early 2018 from an average of 30 lakh barrel per day in 2010 is clearly the reflection of subsided price and reduced export demand from its largest crude oil purchaser US (www.google.co.in/amp/s/www.forbes.com/sites/rrapier/2018/06/08/). During the boom period, before oil price collapse, the then President Hugo Chavez declared massive welfare measures in the country. He provided subsidy for food, education for free and health services to the people. The collapse of oil price since 2014 has broke all plans of the Chavez' successor Maduro-led government. New currencies were printed significantly to finance the budgetary deficit emerged out of loss of governmental revenue owing to the distressed oil sector. It has triggered the rate of inflation to an alarming level in Venezuela. The extreme undervaluation of the Venezuelan Bolivar has further deteriorated the situation since 75 per cent imports were cut. It left the once one of the wealthiest countries in Latin American continent in extreme shortage of food and medicines. In short a fall in the price of oil, along with massive inflation, widespread corruption and a crash in the Bolívar, were all factors in the financial crisis.
What ahead?
Venezuela can follow two back to back measures in this intense situation. One is printing high denomination notes and another one is use of dollar or any other stronger international currency as the legal tender. The latter is technically termed dollarization. It was implemented in a few countries in emergencies and helped stabilize wildly fluctuating price level.
Issue of higher denomination notes can be adopted to counter hyperinflation as the immediate response. But only higher denomination note printing is not going to help the country anymore as internal instability is not the only crisis in Venezuela. They had issued higher denominations of 500, 1000, 2000, 5000, 10000 and 20000 Bolivars subsequent to the economic crash in 2016. Because of either lack of its adequacy or lack of effective follow-up measures, the crisis further deteriorated. The external instability which is created by extreme undervaluation of the Bolivar to 2.5 lakh per US Dollar as in September 2018 made the imports almost impossible and impractical. Venezuela is a country which absolutely depends on the import of everything except oil. However, food and medicine held a major position in Venezuela's import list.
Second and the follow-up measure before the hyperinflation-hit Venezuela is dollarization. It is the process of adopting a foreign country's currency with legal tender status instead of home currency. US Dollar has been the most dollarized country in the world to fight hyperinflation. Ecuador's substitution of home currency by US Dollar in 2000 has helped tackle hyperinflation and brought the control back on the economy. The same happened in Zimbabwe subsequent to the hyperinflation up to 79.6 billion per cent in November 2008. The adoption of US Dollar first on experiment basis and later on absolute basis in Zimbabwe has brought the price stability back. The current Venezuelan crisis can be quite compared with that of Zimbabwe. The hyperinflation in both countries was triggered by government's printing of too much currency to meet the increased demand for money due to steep fall in export receipts and national output.
However, Venezuelan government needs to ensure the presence of workers for oil drilling and related works to regain the lost production level at any cost without further delay. For the time being they do have the advantage over oil production comparatively. Later on they could explore and set alternative sources of income.
Conclusion
The crisis in Venezuela was emerged a result of lack of prudent policies by the Chavez and Maduro led socialist governments. The idiotic act of printing too much currency to fill budgetary gap without any effective or sustainable effort fueled the rate of inflation to unmanageable level. They failed to derive a sustainable source of income for the oil rich nation. Governmental mismanagement worsened the condition. Nonetheless, the financial crisis has turned to humanitarian one. The country now is just running out of food and medicine. It pulled the entire nation into starvation, criminalization and the feel of insecurity. It has triggered one of the largest people movements across international borders in the Latin American history. The effective immediate monetary adjustments are required to stabilize the the teetering Venezuelan currency and economy.
Good article. We india facing similar problems
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