VENEZUELAN CRISIS

Venezuela is a country on the northern coast of South America. More than 2.3 million Venezuelans have fled the country’s hyperinflation (extreme high prices for everything) and severe shortages.

What’s wrong with Venezuela?

Venezuela was blessed naturally with a huge resource of oil, the largest in the world. Due to the ever-increasing demand and prices of oil globally, the Venezuelan economy had an easy source of income and growth and gradually stopped producing other goods. They slowly became too dependent on imports even for their daily needs.

However, oil prices took a huge dip around 2014, and as foreign inflows reduced they felt a severe shortage of foreign currency to pay for their expenses. Their industry did not have local replacements. Companies took advantage and started increasing prices of goods leading to hyperinflation and the need to buy more and more foreign currency. More recently, most of their old oil rigs have become inoperable and covered in weeds and the government has made no significant effort to improve oil production. So gradually output has fallen to about 1.278 million barrels per day (bpd) in July 2018, which is roughly down more than 500,000 bpd since the last quarter in 2017, thus further reducing foreign currency inflows. They have been unable to pay their foreign currency debts, reducing their credit rating and ability to borrow internationally. The USA also barred its companies from investing in Venezuela.

This has taken a huge toll on their currency, the Bolivar. One US dollar is equal to 248,520 bolivars today. What this means for the citizens is that they are paying in millions for even their basic necessities like coffee, grains and rice. Experts say their crisis can only be rectified with the government getting their act back together with better monetary policies, avoiding unnecessary expenditure and giving incentives to citizens for local manufacturing. They have made a beginning by devaluing the bolivar and introducing a new currency called the Sovereign Bolivar.

Only time will tell how the country is able to recover from this crisis, internal controls made by the government will be closely watched by the world.

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