A few months ago, the International Monetary Fund (IMF) was forecasting a 12,000 percent inflation for Venezuela through the end of the year. At first glance, that number looks absurdly high, but the most recent IMF projections indicate that it may have, in fact, been far too low. The IMF now believes that Venezuela could be on track for 1 million percent inflation!
Indeed, over the past six and a half years, Venezuela’s currency has lost 99.9997 percent of its value. A major part of the problem has been Venezuela’s attempted solution to hyperinflation and paying its bills: print more money. And then print some more, and some more after that.
Already, Venezuelans are struggling to acquire basic goods, and those pains are unlikely to be alleviated in the near future. The near worthless currency makes it difficult to purchase international goods and services. Before things get better, they’re probably going to get worse. The IMF is projecting that the Venezuelan economy could contract by as much as 18 percent. The IMF believes that, in total, Venezuela’s economy has contracted by as much as 50 percent over the last five years.
To put that into perspective, when the Great Depression struck the United States, the economy contracted about 10 percent in the first year. Over the full course of the Great Depression, the economy contracted by about 50 percent. In 2009, at the height of the Great Recession, the American economy contracted by about 2.9 percent. So yeah, things are quite bad in Venezuela right now. Venezuelans are, quite literally, going through their own Great Depression.
Somewhat ironically, Venezuela is one of the world’s richest countries in terms of natural resources. The country sits on vast oil deposits, although some of it is locked in deep-sea wells that Venezuela lacks the technology and capital to tap. Add in crippling sanctions, and it’s difficult for Venezuela to generate oil revenues.
Following the elections back in May, which many international observers labeled as a sham, the American government slapped a new round of sanctions on Venezuela. These sanctions forbade American companies and individuals from buying debt from various companies and organizations linked to President Nicolás Maduro. This includes state-owned oil company Petróleos de Venezuela.
Still, the sanctions against Venezuela are much more lax compared to, say, Iran. Venezuela should be able to extract revenues via oil production. However, adverse actions by international actors in combination with bad decisions at home have decimated the nation’s oil industry.
Under former leader Hugo Chavez, who groomed Maduro, thousands of oil sector employees were sacked for opposing the government. This lead to a collapse in the country’s oil talent base. Further, Chavez was quick to divert money from the oil industry to social programs. Finally, efforts to nationalize the oil industry scared away international companies.
Personally, I am all for diverting a nation’s natural resources to spur development and fuel social spending. Norway has used its oil resources to fund its vast social welfare program. Malaysia, likewise, has used revenues generated by PETRONAS to build an infrastructure that rivals many “first world” infrastructures, and helped support the emergence of its “tiger economy.”
However, Venezuela has found itself in an untenable position. With the oil industry in a coma and on life support, there simply aren’t enough funds to fuel the once-popular social welfare programs. This is only going to worsen instability in Venezuela. Indeed, this should-be-rich nation is now the source of one of the world’s largest outflows of refugees.