Venezuela’s continuing currency crisis pushes country to brink of collapse
An ongoing economic fiasco in Venezuela has left its population desperate. Lower oil prices and hyperinflation have had wide reaching consequences for the entire population. Here’s a summary of what Venezuela’s citizens have been dealing with in recent months:
- Government imposed limits on food supplies mean that supermarket shelves are often empty
- Food is transported by armed guard
- Formal rolling electricity blackouts are the norm
- Drought has hit the water supply, forcing some to steal it from local pools
- Inflation will hit close to 500 percent by the end of 2016
- The country is lacking 80% of the most basic medical supplies
Now a currency crisis is threatening to push the nation into further jeopardy — a remarkable situation given that Venezuela used to be known as the richest country in Latin America.
In early December, Venezuelan President Nicolás Maduro announced government plans to withdraw the largest banknote from circulation in an effort to stop “mafias” hoarding the currency.
The 100 bolivar note – worth around three U.S. cents today – accounts for 77 percent of all currency in circulation. Maduro also closed the borders to stop people holding onto currency in neighboring countries.
After protests, the government has backtracked, saying the 100-note will remain in circulation until January 20. It plans to deal with the crisis by introducing six new denominations, including a new 20,000 bolivar note.
— The Goodman Report (@TheaGood) December 7, 2016
Under former President Hugo Chavez, Venezuela was committed to reining in capitalism. This aim saw most large and medium-sized businesses brought under state control – which critics say stifled innovation and growth. Chavez was able to maintain steady popularity throughout his time in office because of huge oil reserves in the country – the profits of which were used to lift citizens out of poverty.
Why is there an economic problem now?
Venezuela’s oil reserves account for 96 percent of its export earnings and half of its federal budget. This was fine when oil was selling for over $100 a barrel, but today – with prices hovering around $50 a barrel – the government has been forced to limit many previously generous social initiatives, meaning that Maduro has not been able to maintain the popularity that Chavez enjoyed.
Venezuela did budget for a price of $40 per barrel, but surplus accrued when prices were high has now been spent or stolen — with two former cabinet ministers alleging that up to $300 billion of oil revenue was embezzled over the last decade.
A drought earlier this year has also exacerbated problems in the country, given that over 65 percent of the country’s electricity supply comes from a single hydroelectric power dam.
Maduro’s main solution to the growing crisis has been to print money, but this has simply served to send inflation through the roof.
The government has stopped publishing official figures, but the International Monetary Fund (IMF) says inflation in the country will reach 481 percent by the end of the year, and 1,642 percent by next year. Other predictions see it reaching 2,200 percent.
Today a 100 bolivar note is worth around 2 U.S. cents on the black market — meaning people are forced to carry their money round in bags — and the devaluation of the currency has made it close to impossible for the state or private companies to buy supplies. The government has even resorted to trading oil for food with Jamaica. The result is food rations and a burgeoning black market where a bag of pasta can cost the equivalent of $300.
Who’s to blame?
Critics say that Maduro must resign, citing government mismanagement as the main cause of the financial crisis. “The unrest and violence in Venezuela are entirely the doing of the Maduro government, which has spent years suppressing the opposition and imposing arbitrary currency controls that have made a once prosperous economy one of the world’s most dysfunctional,” the New York Times editorial board said in December.
Maduro insists that the U.S. government is to blame. He has suggested that U.S.-backed “mafias” are hoarding the Venezuelan currency abroad to destabilize the country, while also claiming that planes bringing the new 500 bolivar notes into the country had been delayed by the U.S. government. He has called the alleged plot Barack Obama’s “death throes.”
What happens next?
Attempts to oust Maduro earlier this year failed, when a recall referendum — which saw 1.85 million citizens sign the petition — was blocked by those loyal to the president.
The problem for those who oppose Maduro and his Chavismo policies is that the Venezuelan constitution states that, if the president is removed from office within the final two years of his term, the presidency automatically passes to the sitting vice-president. That would be Aristobulo Isturiz – another loyal Chavismo.
The deadline for forcing an election is January 10, 2017.
Quite possible first overseas crisis confronting Trump administration will not involve Russia, China, N Korea, Isis or Iran but Venezuela
— Richard N. Haass (@RichardHaass) December 18, 2016
This crisis could herald a rapprochement with America. Despite the Venezuelan president’s long-held animosity towards the country, U.S. Under Secretary of State Thomas Shannon flew to Caracas in June to open a dialogue with Maduro’s government. During his campaign, President-elect Donald Trump pledged to “stand with the oppressed people of Venezuela yearning to be free,” but gave no details on exactly what this might mean.
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