The Broken Bolivar

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By: Farhah Aziz

Turn on your TV channels today or browse through your daily newspaper articles, stories about Venezuela’s crippling economy is omnipresent. There is no war or intense political conflict in Venezuela. Well, then why do we see miles-long queue of people purchasing basic goods or why thousands of Venezuelans are taking the risk of crossing the borders to seek a better life in neighboring Colombia or even the Portuguese-speaking Brazil? WHY IS THERE AN ECONOMIC COLLAPSE IN VENEZUELA?

Just a few years ago, Venezuela was cited to be one of the economic miracles of the Andean region. It essentially has the largest oil reserves in the world, even bigger than the one in Saudi Arabia. It was doing rather ok politically with the late socialist revolutionary strongman Hugo Chavez’s intense grip on power keeping everyone happy with stable and often soaring petrol price which helped lift many Venezuelans out of poverty.  Life was generally good. Even during the 2008 economic crisis plaguing the West, Venezuela was untouched.

Death by oil and other thing

Then, 2012 arrived and Venezuela just did not see it coming. The commodity market especially that of oil had to experience a rude awakening. The oil price dropped phenomenally by half from $100 barrel to a mere $50 a barrel. For an economy that was relying enormously (almost 96%) on petrol money and foreign debt to finance its colossal public spending, that was a huge blow financially to the state’s coffers. Plus, the passing of Chavez as well as the corruption legacies that he left behind for his protégé, Nicholas Maduro to inherit also did not help with the economic health of the South American country.

Apart from that, Chavez’s contempt towards capitalism which was manifested in his nationalization policy of almost 1200 private companies has left some of the financially-sound industries such as that of the profitable cane sugar to go bust. The once-richest country in South America also experienced a major trust deficit among investors and global lending institutions for its infamous reckless public spending, making it a high-risk debtor and cutting its access to international capitals.

With all of these miseries, one would ask how worse can it get? Well, a whole lot worse!

Hyperinflationary Tale of Woes

So, one would assume that Venezuela would have learnt

the lesson the hard way by taking the necessary measures of imposing austerity in the form of cutting the public spending, led by example perhaps first and foremost by the presidential palace. But, no!

Famous for its historical fiscal mismanagement, the government of Maduro had taken the path every legit economist and financial analyst had warned of coming close to especially if your financial track record has been patchy in the past.  It decided to print more Bolivars in order to pay off its mountains of debt and to boost domestic consumption.  Thus, the price levels skyrocketed and the same tale of hyperinflation ensued.

One would not expect Venezuela under Maduro out of all countries to be consistently transparent in publicly releasing its inflation rate. According to the IMF, the inflation level is expected to rise to 1,642 per cent this year while others predicted a spike of up to 2,200 per cent this year. Yes, that’s 4 digits in an inflation percentage.

To add insult to injury, Venezuela topped the misery index of 2013, a metric that summed up a country’s inflation and unemployment rate.

The Consequences

Just with any fiscal mismanagement at the hands of the government, the real payers of those bad policies are again the ordinary Venezuelans just wanting to survive another day. If just a few years ago, an ordinary middle-class Venezuelan family have the common financial concerns on how to pay off car or house loans, now they have to think of a way of how to get first in line to grab the highly-priced basic commodities such as sugar and rice rationed by the government and protected by armed guards.

Venezuela is a classic example of a nation that suffers no war or any real political instability but can simply shift from boom to bust because the government simply has too much say when it actually has very little relevant expertise. The story of Venezuela also demonstrates the volatility of the fiat monetary system that is not backed with any real store of value, thus rendering it worthless papers once, the public’s confidence has wavered. And boy how easily those Bolivars wavered eh?

Sources:

Venezuela releases new banknotes in cash crisis.

http://www.news.com.au/finance/economy/world-economy/venezuela-releases-new-banknotes-in-cash-crisis/news-story/29a3a193148226ad841621a0a9549a7c

Hunger and panic.

https://news.vice.com/story/venezuelas-continuing-currency-crisis-pushes-country-to-brink-of-collapse

Entering a ‘world of economic chaos,’ Venezuela struggles with hyperinflation.

http://www.miamiherald.com/news/nation-world/world/americas/venezuela/article120451593.html

 

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