Situated in South America, Venezuela is a federal presidential republic whose economy relies heavily on petroleum exports (CIA, 2015).
As reported by Krauss (2015), oil prices have been falling since 2014, forcing numerous oil companies out of business and causing thousands of workers to lose their jobs. Even though declining oil prices represent a threat to all exporting nations, Venezuela has been experiencing particularly negative consequences due to its strong dependence on oil export revenues to import essential goods from foreign countries, fund its housing projects and meet its incumbent financial obligations (Schipani, 2015).
As a result of that, the current Administration has implemented a number of measures aimed at preventing a major economic collapse, as well as a political crisis (Schipani, 2015). In spite of that, inflation has been growing at a worryingly fast pace, to the extent that numerous analysts believe that hyperinflation and a debt default are quickly approaching (Bloomberg Business, 2015).
From an analysis of recent statistics, it is found that between 2010 and 2012 the Government managed to reduce inflation by introducing strict price controls (Reuters, 2013). However, price caps combined with frequent devaluations turned out to be highly unsustainable solutions, to the extent that the nation’s inflation rate has been rising steadily since 2012, reaching its peak at 62,1% in 2014 (World Bank, 2015).
However, Pons & Chinea (2015) observed that the official figures released by the Venezuelan Government tend to minimize the gravity of the current economic situation. To be more precise, they reported that according to various analysts, inflation was nearly at 120% in July 2015 and is likely to reach 150% or even 200% by the end of 2015 (Pond & Chinea, 2015).
According to economist Luis Oliveros, this is mainly due to President Maduro’s decision to keep controlling consumer prices and limiting exchanges, which is only going to encourage Venezuelans to buy more US Dollars on the black market as their Bolivares seem to be losing their value day after day (Martin, 2015).
Oil makes up for approximately 96% of Venezuela’s exports and around 50% of its fiscal revenues (World Bank, 2014). As a result of that, falling oil prices have resulted in a grave economic crisis, which had contributed to shedding light on the misguided economic policies introduced by the Government during the past decade. For example, PDVSA is a state-owned oil and gas company which used to be well-managed; however, under the Chavez administration, PDVSA’s revenues started being used to finance a variety of social programs, thus damaging the company’s efficiency and profitability (Ghitis, 2015). Following various expropriations, other oil companies became remarkably politicized, providing the Government with a significant amount of resources which were invested in unrelated activities, rather than oil production, production expansion, exploration or equipment maintenance (Ghitis, 2015).
In view of the above considerations, it can be inferred that one of the reasons why decreasing oil prices have had such a detrimental impact on the Venezuelan economy is because both the former and current administrations have failed to make the most out of the nation’s vast oil and gas resources by investing in innovation and production expansion. Moreover, the country’s reliance on oil exports should have been minimized through ad hoc policies aimed at boosting other economic sectors, especially the manufacturing one, which could also contribute greatly to Venezuela’s exports. That being said, it is crucial that the Government should allocate resources in a more reasonable way, so as to achieve long-term economic growth rather than enhancing the nation’s vulnerabilities.
From a monetary perspective, the complex currency exchange system developed by the Venezuelan Government in order to strengthen the economy has turned out to be a major cause of the country’s current economic challenges. Specifically, ever since the Government began manipulating the Venezuelan Bolivar in 2003, the currency has been devalued several times and new exchange rates have been created, thus fueling corruption and speculation (Bloomberg business, 2015; Ghitis, 2015).
As a nation that needs to import a variety of essential goods and whose GDP relies heavily on oil exports (about 11% as of 2014), Venezuela uses a significant portion of its oil income to import agricultural products, pharmaceuticals, metals and construction materials, to name but a few. (CIA, 2015). In order to tackle the country’s growing shortage of US dollars, the Government has been printing a significant amount of money, thus causing the Bolivar to decline and inflation rates to rise even further (Hodgson, 2015). In order to gain a better understanding of the detrimental impact that failing oil prices combined with the Government’s expansive monetary policy have been having on inflation, suffice to say that as of August 2015, a single US dollar was worth 687 Venezuelan Bolivares, whereas last year it could only buy 82 Bolivares (Gillespie, 2015; Hodgson, 2015).
Even though the Venezuelan Government has recently introduced a new market-driven currency exchange, this only accounts for a very small portion of the US dollar exchanges due to limitations imposed by the current Administration on exchange banks (Minaya, 2015).
In view of the trends and data reported in the above sections, it can be inferred that a series of misguided economic policies combined with falling oil prices are among the main causes of Venezuela’s current economic crisis. It is strongly suggested that the current administration switches to a market-driven currency system, removed price controls and promotes efficiency in order to achieve economic sustainability.