World Economy

IMF Predicts Venezuela Inflation at 2000% by 2018

IMF Predicts Venezuela Inflation at 2000% by 2018IMF Predicts Venezuela Inflation at 2000% by 2018

Venezuela’s ongoing political and economic crisis has seen escalating violence and inflation, now at 700% with the possibility of reaching 2000% next year, coupled with severe food and medicine shortages.

Adding to the flames of political instability, economic instability has deepened. Foreign businesses were already wary of the socialist inclinations of President Nicolas Maduro before the crisis, and now capital flight has accelerated. On April 19 General Motors announced it was shutting down its business in Venezuela, after the government seized its plant, joining companies such as Exxon Mobil, Clorox, Owens-Illinois and Kimberly-Clark, news outlets reported.

According to an IMF report, unemployment is set to surpass 25% this year, possibly reaching 28% next year, while Venezuela’s economy shrank 18% last year, its third year of recession. If Venezuela remains on its current path, the IMF predicts inflation will rise over 2000% by 2018.

Massive protests have erupted against Maduro with growing demands for his ouster through fresh elections. Maduro has called the protests an “economic war” waged by elite business interests. But much of Venezuela’s problems are the doing of its own leaders, as confirmed by history.

Hugo Chavez, the former president, came to power in 1998 promising to fight poverty and inequality through socialism. He soon nationalized huge amounts of private assets, including oil companies, and expanded social spending on food, housing, education, etc.

To fund these programs, Chavez made use of his nation’s oil reserves, the biggest in the world, at a time when oil prices were at historic highs. Petroleos de Venezuela, SA, a state-run firm that controls all oil production in Venezuela, was tasked with the job of exporting oil to spend the revenues on social welfare.

As a result, Venezuela’s poverty rate fell from 50% in 1998 to 30% in 2012. This apparent prosperity, however, was only short lived. As oil prices slipped from well over $100 in 2014 to as low as $27 in 2016, the flow of dollars stopped and the government could no longer fund its social spending except by borrowing freshly created bolivars from the central bank.

Venezuela’s money supply thus grew from 10.6 billion bolivars in 1998 to 290 billion bolivars ($28.69 billion) in 2010, and later reached 7,513 billion bolivars by 2016. The result was rapid domestic price inflation and a drop in the bolivar’s value that crippled most Venezuelans.

Further, the government’s approach in dealing with rising price inflation, particularly under Maduro, aggravated the crisis. The prices of essential commodities such as food, medicine, toilet paper, etc. were capped, which in turn led to shortages fuelled by excess demand and a steep drop in supplies as business profits declined. According to reports, 75% of Venezuelans lost at least 19 pounds in 2016 due to shortages.


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