THE ROOT CAUSE FOR THE VENEZUELAN

HYPERINFLATION

The Total Debt of the Venezuela

One of the main reasons why we see a hyperinflation in Venezuela is because of the
large amount of borrowing that it has with the rest of the world. The hyperinflation in
Venezuela has a fairly standard cause. Venezuela owes the rest of the world
more than 100 billion dollars.

If it owed 100 billion bolivars this would not be a problem because the
Venezuelan government can create as many bolivars as it needs to pay off its
bolivar debts. While that might cause inflation, the inflation would reduce the
value of any remaining debt. Hence the inflation would not become
hyperinflation because the inflation would destroy the debt.
Unfortunately for Venezuela the same is not true when the debt is a dollar debt.
Venezuela cannot create dollars. When the price of oil was high, it was able to
earn the needed dollars to service its debt. However when the oil price dropped,
it could no longer earn enough dollars to service the debt. Consequently it had
to create bolivars to buy the dollars on the foreign exchange markets in order to
pay its debt. While the exchange rate of the bolivars to that of the dollars was
2V but due this lead the exchange rate to increase upto more than 248209 VEF

This made bolivars lose value on the foreign exchange markets (inflation in
other words) because no one needed that many bolivars but it had no effect on
the Venezuelan debt because that debt is not a bolivar debt. Hence why the
bolivar inflation has become a bolivar hyperinflation. Some of the other factors
that lead for Venezuela suffer from hyperinflation are listed down below.

http://ycharts.com/indicators/venezuelan_bolivar_exchange_rate

https://en.wikipedia.org/wiki/Venezuela
OIL BEING THEIR ONLY SOURCE OF REVENUE
The Effect of Oil Prices on Oil Exporting Countries
Oil exporting companies depend a lot upon the oil prices and its hike to fuel
their economy. They are not among the list of the worlds largest consumers of
oil. Oil and the economic health of a country have quite a different relationship
, while the relationship is quite different when it comes to the U.S. economy. the
price of oil and Venezuela's economy move pretty much in lockstep. When oil
prices are high, Venezuela enjoys good economic times. When oil prices drop,
economic disaster ensues for the South American country.

Oil Is Major Part of GDP

Oil comprises 95% of Venezuela's exports and 25% of its gross domestic
product(GDP), so high prices provide a boon to the country's economy. The
period from 2006 until the first half of 2014, except for a brief dip in late 2008
on the heels of a global recession, saw oil prices mostly hover between $100 and
$125 per barrel. During that time, Venezuela used its revenues from high oil
prices to fund its budget and wield political power. By providing subsidized oil
to as many as 13 neighboring Latin American countries, most notably Cuba,
Venezuela extracted political favors and attempted to build a coalition against
rival nations, namely the U.S.
At the more granular four-digit Harmonized Tariff System (HTS) code level,
Venezuela’s most valuable exported products are crude oil followed by refined
petroleum oils, acyclic alcohols then iron ores and concentrates.
1. Mineral fuels including oil: US$26.6 billion (91% of total exports)
2. Organic chemicals: $532.6 million (1.8%)
3. Iron, steel: $350.8 million (1.2%)
4. Ores, slag, ash: $333.4 million (1.1%)
5. Aluminum: $327.5 million (1.1%)
6. Fertilizers: $173.9 million (0.6%)
7. Fish: $151.6 million (0.5%)
8. Inorganic chemicals: $135.8 million (0.5%)
9. Copper: $60.3 million (0.2%)
10. Plastics, plastic articles: $60.1 million (0.2%)
The above categories account for 98.3% of Venezuela’s total exported goods by
value.
Among the top 10 Venezuelan exports above, the leading increase from 2016
to 2017 was a 47.2% improvement for organic chemicals.
In second place was exported plastics and plastic articles up 44.8%. Aluminium
appreciated by 39.9%.

Venezuela's Oil Situation as of 2018

Because of the economic crisis and shortages of food, medication and basic
necessities, more than 2 million people have fled the country since 2014.
According to the IMF, the Venezuelan economy shrank by 30% from 2013
through 2017, and the IMF is forecasting a fall in real GDP of 18 percent in 2018
alone. This mass migration has diminished the workforce, including those who
work in the oil industry. As a result of this lack of labor and other
issues, Venezuela's oil production has fallen to its lowest point in more than 70
years. In June 2018, production fell to 1.34 million barrels per day, an 800,000
barrel drop from the previous year. Because the country's economy is tied so
closely to its oil production, this reduction will most likely further deteriorate
their economic
This type of the dependency of the Venezuelan economy on the oil industry only
lead to for its decline when the oil prices declined in 2014 which lead for their
revenue to decrease considerably and in leading for the government to not being
able to cover its debt taken from the world but not having enough monetary
resources to pay of the same the government was tempted to deal with high
levels of debt by printing more money. This increase in the money supply can
cause inflationary pressures to increase. Suppose markets fail to buy enough
gilts to finance the deficit, the deficit can always be financed through
‘monetisation’. i.e. creating money. This creation of money creates inflation,
reduces the value of exchange rate and makes foreign investors less willing to
hold that countries debt.

THE HIGH LEVELS OF THE IMPORTS OF THE COUNTRY

In 2017 Venezuela imported $9.1B, making it the 97th largest importer in the
world. At the more detailed four-digit Harmonized Tariff System code level,
Venezuela’s costliest imported products are processed petroleum oils followed
by corn, wheat, ethers, medication mixes in dosage then rice.

1. Mineral fuels including oil: US$2 billion (22% of total imports)

2. Machinery including computers: $1.4 billion (14.3%)
3. Cereals: $790.7 million (7.8%)
4. Electrical machinery, equipment: $572.3 million (5.7%)
 5. Articles of iron or steel: $372.8 million (3.7%)
6. Vehicles: $356.9 million (3.5%)
7. Organic chemicals: $319.1 million (3.2%)
8. Pharmaceuticals: $245.5 million (2.4%)
9. Animal/vegetable fats, oils, waxes: $220.3 million (2.2%)
10. Cereal/milk preparations: $199.5 million (2%)
Venezuela’s top 10 imports accounted for almost two-thirds (64.8%) of the
overall value of its product purchases from other countries.
Imported cereal/milk preparations (up 84.7%) and mineral fuels including oil
(up 12.6%)

https://atlas.media.mit.edu/en/profile/country/ven/#Imports

Venezuela imports about 9.1 Billion while the population is just 10.1 million in
the country. The country not only imports refined petroleum and machinery but
also a large amount of cereals that make the staple diet of the people also

lncluding dairy which sums up to 2% that is 199 million dollars which creates a
very big amount in the Venezuelan currency that is the bolivars. As we learn
from the earlier part we know that Venezuela is one of the largest oil exporting
countries and therefore most of it revenue is from this exports therefore when
the oil prices were at its boom the country was able to finance all it imports but
when there was a drastic downfall of the oil prices 2014 onwards the
government was not being able to finance the imports as the revenue Venezuela
earned lesser revenue out of exporting the same amount of the output while the
amount still remaining the same as the aggregate demand remains still the same
therefore to counter this the Government again chose to increase the money
supply by creation of more bolivars instead of reducing the imports and making
the country self-sufficient by producing the imported goods by and within the
country reducing the debt on the country and thereby reducing inflation. From
2000 to 2015, the manufacturing sector contracted by 14% (Spanish), and
agriculture and services such as restaurants and hotels by 9%, according to data
compiled by researchers at Harvard University’s Center for International
Development. Instead this creation of the more bolivars only lead for a decline
in the value of Venezuelan currency on the exchange market and while most of
the debt were financed in dollars the government could not combat this problem
which lead to hyperinflation in just 4 year time.

THE RAISE IN THE MINIMUM WAGE RATE

Venezuelan workers who earned a pittance are now earning a slightly larger
pittance, thanks to a big increase in the minimum wage. What they may not
have are jobs. More than 7 million employees are guaranteed 1,800 bolivars a
month -- worth about $20 at the black-market rate. President Nicolas Maduro
intended the mandate as political boost, but it’s having the opposite effect as
company, already hit by Venezuela’s epic economic contraction, tell workers
they can’t afford to keep them.
The increase in minimum wage led to an increase in the cost of products and
services as the companies needed to fulfil the minimum wage requirement and
hence the only way to increase turnover is to increase prices.

The increase in the prices of the products were not matched with the amount of
increase in the purchasing power, as the products stopped selling people were
redundant. These people were willing and able to work, however could not find
jobs, causing the unemployment rates to rise. The reason people were made
redundant, because the industries and companies had to maintain and follow a
budget, which had blasted due to high costs of goods sold. The increase in the
price rates as well as the unemployment rates caused the economy to face
stagflation along with hyper-inflation. This can be depicted through the
rightward shifting of the Phillip Curve, which showcases the relationship
between the inflation rates as well as the unemployment rates. A.W Phillips
stated that the inflation rates and the unemployment rates showcase an inverse
relation, where the increase in either of the factor causes the other to fall.
However, when both increase simultaneously, it causes the situation of
stagflation to creep in.