Howa Spiraling Inflation Has Impacted The Venezuelan Economy

In 2015, Venezuela ordered more than 10 billion bank notes to combat rising inflation. It was reported that De La Rue, a currency maker in the United Kingdom, sent a notice of payment not received to the Central Bank of Venezuela. The money owed by Venezuela for the printed money was reportedly $71 million. Venezuela is on the verge of economic collapse and terrible policymaking has largely been blamed. Venezuela’s leadership has failed in basic economic policymaking that include controlling prices and printing money to combat inflation.

In 2003, employees of Venezuela’s state-run oil company Petróleos de Venezuela, S.A. went on strike, which halted oil production for several months. With the vast majority of export revenues coming from oil, Venezuela became cash-strapped. The value of the local currency dropped and then President Hugo Chavez decided the solution to the problem was to fix the exchange rate between the bolivar and the U.S. dollar. Even after the strike ended and oil production resumed, Chavez kept the fixed exchange rate in place and was continued by his successor, Nicolás Maduro. It was all fine and dandy while the price of oil remained high and oil export revenues were streaming into the country. Then the price of oil collapsed in the summer of 2014.

The massive drop in oil prices caused revenues to decline and Venezuela’s government became cash-strapped once again. This time with the price of oil remaining low for the foreseeable future, this was a much bigger problem that would require a big solution. Unfortunately for Venezuela, Maduro essentially did nothing and the fixed exchange rate put in place by Chavez would have devastating effects on the country. With limited U.S. dollars due to declining oil revenues, the value of the dollar went up and as a result, the bolivar declined. It should be noted that is what happened in terms of the black market value. The artificially fixed price of the dollar and bolivar by Venezuela’s fixed exchange rate inevitably created a huge black market where Venezuelans would pay large amounts of bolivars for a single U.S. dollar. The ratio of the black market exchange rate far exceeded the government’s exchange rate, resulting in an influx of bolivars. Too many bolivars equaled higher inflation. In late 2016, the 100-bolivar note, which is the most widely used Venezuelan note, was worth approximately 2 cents.

The rapidly rising inflation made the local Venezuelan currency worthless, which prevented importers from purchasing basic needs. To make matters worse, Maduro instituted price controls on goods to fight rising inflation, and even threatened to imprison retailers and suppliers if they hoarded or overcharged their products. Basic economics tells us that controlling prices leads to either a shortage or a surplus. In this case, Maduro set a price ceiling on goods to keep them affordable for consumers. As expected, demand rose and supply dropped. This resulted in long lines at supermarkets suffering from severe food shortages. In the midst of all of this, Venezuela printed billions of new bank notes in another failing effort to slow down inflation. Combined with a worthless bolivar making it impossible for importers or the government to purchase food, food shortages have caused social unrest and a country on the brink of collapse.

Once a proud and wealthy country, Venezuela as a functioning country is holding on by a thread. Much of the blame falls on the failed economic policies of Chavez and Maduro. Venezuelan leadership has taken every wrong step to remedy their economic situation and has only doubled down on their mistakes. Implementing price controls and carelessly printing more money, Venezuela has squandered its massive wealth and decades of relative stability.