Inflation in Venezuela: Causes and Consequences
Inflation is defined as a prolonged increase in the overall price level of goods and services offered by a specific economy. It is commonly reported as a percentage per year, however monthly and quarterly numbers are also available. In general, when there is inflation, the value of money falls greatly and the prices of products and services rise dramatically. Despite the fact that there may not be a single reason to explain why a given level of inflation may be observed in a given economy, numerous hypotheses may be advanced to explain why a given level of inflation may be observed in a given country. Venezuela, a country in Southern America, has recently suffered significantly high levels of inflation of up to 500% under the leadership of President Nicholas Maduro. The paper presents the macroeconomic factors that may explain these alarming trends in the inflation in Venezuela.
The Current State of Venezuela's Economy
Recent statistics on the state of Venezuela's economy indicate that the country's inflation figures reached 481% by the end of last year and are expected to reach a staggering 1642% by the end of 2017 (Gillespie 2). These IMF statistics indicate that the economy is running out of hand and urgent intervention to adjust the macro-economic dynamics is required. If appropriate intervention is not sought about, the economy is set to undergo a hyperinflation that may leave it totally tattered. Despite the fact that Venezuela rarely publishes economic data of their current state of their economy, IMF estimates that the economy may experience close to 21% levels of unemployment by the end of 2017. It is suggested that such a level would drive the economy into a deep depression since the last time such level of unemployment were recorded in the US, there was depression.
Factors Contributing to Inflation in Venezuela
From a macroeconomic perspective, there are several factors that may be highlighted to explain the cause of inflation in Venezuela. There is a significant and rapid loss in the country's local currency due to an increase in the number of black market transactions. Recent statistics indicate that the US dollar's equivalent of the Venezuela's currency has skyrocketed to more than 1125 bolivars in the black market where the majority of people go for foreign exchange (Gillespie 3). Last year, the dollar rate was only 258 bolivars in the black market. Thus, one of the reasons the country's inflation rate is going out of hand is because there is an increase in the illegal money trade in the country coupled with a rapid loss of the country's currency compared to the foreign currencies (Cerra 24).
The Impact of Low Oil Prices
Venezuela has a heavy reliance on oil as its main export. In fact, it ranks as number five amongst the world's largest exporters of oil amongst the OPEC countries. Its budget is heavily based on the proceeds from oil sales (Gillespie 2). Despite the fact that increases in the prices of oil are associated with an increase in price inflation, in Venezuela's case, it is the low prices that have created havoc. There has been a significant decrease in the overall prices of oil in the OPEC countries. For instance, recent data indicates that the price of a barrel of oil has fallen to as low as 28.36 dollars, the lowest in close to 12 years. Since the economy majorly depends on oil proceeds, the country gets little money from the sale of its oil. These low prices mean that the country does not get enough money to service its debt obligations most of which are foreign, paying for goods and its heavy bureaucracy.
Scarcity and Demand-Pull Inflation
Furthermore, since the country has a limited ability to purchase goods, mainly consumption goods, there is a growing shortage in the demand for everyday commodities. For that reason, the government has resorted to rationing the few goods to ensure that everyone gets something. Such scarcity has created a demand-pull inflation where people are demanding more than what the market can provide.
Such a heavy demand for the few products on the market has led to an increase in the overall prices of goods further increasing inflation in the country. The rising black market has also led to several people using the current trends in inflation to their benefit by charging higher prices (Capistrán 349-362). However, even with the high prices, the country does not have enough money in circulation to enable people to buy the goods. It has been suggested that the country is ironically too broke to even print money for running its economy. They have resorted to selling their foreign reserves, treasury bonds, and gold to finance their foreign debt and to pay for foreign goods. This is mainly because the economy does not have revenues to keep it running yet the declining value of the bolivar has made it prohibitively expensive to pay for imports.
Evaluation of the Article
Evaluation of the article reveals that there are a mix of short and long terms reasons to explain the shortfalls in the country's economy and the resulting inflation. Nevertheless, it tends to draw a lot of conclusions on the commodity prices, falling value of the bolivar, decrease in oil prices as the causes of inflation. In other words, the article highlights demand-pull factors as the primary causes of inflation in Venezuela. Little or nothing is mentioned about the cost-push factors that may lead to inflation.
Source: www.investmentu.com
Works cited
Capistrán, Carlos, and M. A. N. U. E. L. RAMOS‐FRANCIA. "Inflation Dynamics in Latin America." Contemporary Economic Policy 27.3 (2009): 349-362.
Cerra, Valerie. "Inflation and the Black-Market Exchange Rate in a Repressed Market: A Model of Venezuela." (2016).
Gillespie, Patrick. "5 reasons why Venezuela's economy is in a 'meltdown'." CNN Money 20 January 2016. .
—. "Venezuela: the land of 500% inflation." CNN Money 12 April 2016: 1. .
