Venezuela : Is it taking a step towards the Dragon’s pit ?

In Economics, Inflation is a sustained increase in price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, Inflation reflects a reduction in the purchasing power per unit of money. One such instance in the current age would be

Venezuela, which is living a Hyperinflation nightmare

The country has the world’s largest proven oil reserves and should be fabulously wealthy. Instead, children are starving.

Now, Venezuela is the latest country to experience this rare and devastating phenomenon. Data is hard to come by, but some estimates put that country’s Inflation rate has breached 25000 percent. Venezuela was a powerhouse of South America in the 1990s. Former President Bill Clinton made it his first stop on a trip to the region in 1997.

But inequality grew extreme. A small elite class controlled everything while the increasingly impoverished masses fumed. That is when the country turned towards socialism in 1999, which gave power to the late Venezuelan President Hugo Chavez.

Venezuela’s oil revenues account for about 95% of its export earnings. This means that when oil prices were high, a lot of money was flowing into the coffers of the Venezuelan government. But when oil prices dropped sharply in 2014, the government was suddenly faced with a gaping hole in its finances and had to cut back on some of its most popular programmes.

In order to make basic goods more affordable to the poor, his administration introduced price controls — capping the money people pay for such staples as flour, cooking oil and toiletries. But this meant that many companies no longer found it profitable to produce these items, driving them out of business. This, combined with a lack of foreign currency to import the staples, led to shortages.

Before he died, Chavez picked Nicolás Maduro to succeed him.

Maduro kept up the regime’s practices. His administration also stopped publishing any reliable statistics, including on economic growth and Inflation. It accepted millions in bribes for construction projects and racked up debts that it is still struggling to pay. Venezuela has borrowed billions of dollars from Russia and China, primarily through oil-for-loan deals. Meanwhile, the only commodity Venezuela had left began to plunge in value leading to severe cash crunch.

As the economy is taking a tumble there is also a severe political crisis brewing in Venezuela as Nicolás Maduro banning major political parties from elections and also placing Opposition Leader under house arrest. Venezuela’s former chief prosecutor asked the International Criminal Court to capture and try President Nicolas Maduro and other top officials for crimes against humanity creating more doubts upon the already troubled incumbent government, it is now facing the heat of other nations saying that they will not recognise the new government, among them Brazil, Canada, Chile and Panama.

Oil prices have been rising and should inject much-needed cash into the government’s coffers. But a lack of investment in its infrastructure means state-owned oil company PDVSA’s (Petroleum of Venezuela) output has dwindled, making it harder for it to recover.With the government’s hostility towards private businesses has let to alienation by potential foreign investors

Add to that the fact that hundreds of thousands of Venezuelans have left the country, causing a massive brain drain, and prospects are not looking very bright.Now with the economy facing the point of no return it has led the government to turn towards new alternatives

The petro, or petromoneda, launched in February 2018, is a cryptocurrency developed by the government of Venezuela. Announced in December 2017, it is claimed to be backed by the country’s oil and mineral reserves, and it is intended to supplement Venezuela’s plummeting currency-Venezuelan Bolivar, purportedly as a means of circumventing U.S. sanctions and accessing international financing. Venezuela’s cryptocurrency, the Petro, is reported to have raised $5 billion from its initial coin offering (ICO). If true, the amount makes this the most successful ICO in history, according to TelSur. While the Venezuelan leader claims the Petro is a step forward, various Venezuelan lawmakers seemingly don’t agree. The country’s opposition-run congress has said the Petro’s sale is an “illegal and unconstitutional” instrument to mortgage the country’s oil reserves. The country’s National Assembly denounced it as a fraud and claimed it could be a risky investment.

On the other hand, Chinese credit rating giant Dagong claimed the Petro “may help the global currency system.” To bolster adoption, Maduro has ordered the country’s airlines to accept the Petro and other cryptocurrencies for tickets.

Despite the controversy, Venezuela is set to auction the Petro to private companies via its Dicom foreign exchange platform. Maduro claimed a Petro Gold — a cryptocurrency backed by precious metals — was going to be launched around early 2018 as quoted by the President Nicolás Maduro.

The idea for the petro came from Hugo Chavez, who had foreseen a “strong currency backed by raw materials”, according to the government’s white paper on the petro. So is Venezuela heading towards economic and political armageddon or will things turn positive for the troubled socialist state, that would be for time to tell.