On January 15, 2016, following a report that Venezuela’s economy contracted by more than 7% in 2015, President Nicolas Maduro declared an economic emergency. It would be easy to point to a lingering bear market in oil, which is the lifeblood of Venezuela’s economy, as the primary cause. However, most oil-producing countries, while struggling economically, are not on the verge of economic collapse. Many global economists are predicting a complete meltdown of Venezuela’s economy by the end of 2016, due to circumstances so entrenched they can’t be easily reversed.

Depressed Oil Prices

Although it is not the only reason for Venezuela’s troubles, depressed oil prices have crippled the country’s ability to conduct international commerce. Oil accounts for 95% of Venezuela’s exports, which means it is the country’s primary source of revenue. For every $1 drop in oil prices, the government lost $700,000 million in revenue. It is estimated that revenues from oil exports have fallen by more than two-thirds since 2014, but the price drop is only part of the problem. Ever since the government’s takeover of the country’s main oil producer, foreign investment has fallen dramatically, resulting in a 25% reduction in oil production. In addition, a large portion of the country’s production doesn’t make it to the international market, because it is used to subsidize the cheap gas and free housing promised to the people of Venezuela. Of the oil production that does make it out of the country, a sizable portion goes to China as a repayment on $50 billion of loans, and another portion goes to Cuba in exchange for medical care.

Many economists have concluded that, even if oil prices were to recover to $100 a barrel, it wouldn’t be nearly enough to lift the economy out of its tailspin. It could be helped along, however, with a return to free market policies and a lifting of the subsidies at home, both of which would require a complete political makeover.

Runaway Inflation and a Bloated Currency

Venezuela has been experiencing high inflation for a couple of decades. However, the consumer price index in Venezuela skyrocketed to triple digits in 2014 and hasn’t dipped since. Some economists are predicting inflation will top 200% in 2016. The country’s runaway inflation was fueled in large part by the government’s response to a mounting budget deficit, which was to print more money. As of April 24, 2016, one U.S. dollar costs 9.95 bolivars, up from 6.50 bolivars in 2015. On the black market, where much of Venezuela’s currency resides, one U.S. dollar will buy 1,142 bolivars, a 300% increase from 2015. The combination of inflation and government-controlled currency has led to a scarcity in basic needs, including medical care.

Venezuela’s ability to print an unlimited amount of its currency makes it nearly impossible for the country to buy the import what it needs, so it relies heavily on its foreign currency reserves, which is normally set aside for debt repayment. This, coupled with the lack of revenue from oil production, is the circumstance many economists believe will eventually lead to a credit crisis much deeper than the one experienced by Argentina in 2001.

Food Shortages and Public Unrest

Nothing can sink an economy faster than a complete lack of confidence in the government by the citizenry. With the poverty rate hovering around 90%, Venezuelans are nearing the peak of suffering, which has been amplified by the lack of food and supplies. When the food shortages began to mount in 2013, the government instituted a fingerprint registry for purchasing food and supplies, to prevent hoarding. However, the shortages became more widespread, resulting in five- to six-hour food lines and food riots. In an effort to control food production and consumption, the government took over farms and established sales outlets. Farmers were forced to sell large portions of their products to the state at lower prices, resulting in less food production, or more food being sold on the black market.

The early stage of hyperinflation begins when the people lose complete confidence in their government and their currency. The inability of the citizenry to buy basic necessities is a precursor to widespread public unrest, which, if it doesn’t bring down the government, will likely lead to a black market economy, rendering the currency virtually worthless.

Economic Mismanagement

When pointing to the reasons for the economic plight of Venezuelans, an all-of-the-above choice would only be partially correct, because it would leave out the catalyst behind them. Although the government can’t be blamed for depressed oil prices, it is fully responsible for the degradation of its oil production and the mismanagement of its reserves, which have driven its oil revenues into the depths. When the government must replace oil revenue with cheaper bolivars, it could result in runaway inflation. When the government is forced to prioritize its spending on foreign debt repayment over internal needs, it could cause economic and political strife. When the government of Venezuela realizes it can’t do either, there could be economic chaos.

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