5 Ways Political Turmoil has Affected Venezuela’s Currency and Economy
The Venezuelan economic crisis may rank amongst the worst to affect any country in recent years. News reports about Venezuelan President Nicolas Maduro outline how bad things are right now. Venezuela’s political situation has severely affected its economy and currency.
5 WAYS POLITICAL TURMOIL HAS AFFECTED VENEZUELA’S CURRENCY AND ECONOMY
- Misuse of Public Money
- Extreme Corruption
- Central Bank Keeps Printing National Currency
- Out-of-Control Drugs and Crime
- Humanitarian Crisis
When Hugo Chavez, the last president, was in power, he relied on oil to build the economy. Venezuela imported everything else, from food to clothing. Then, in 2013, Maduro replaced Chavez. Unfortunately, things went from bad to worse. First, global oil prices fell. Then, Venezuelan oil production slumped because of insufficient investments and poor maintenance.
The drastic loss in oil revenue is not the whole story. Five other major issues have contributed to Venezuela’s present struggles.
1. Misuse of Public Money
The government of Venezuela has misused public money to pad private pockets. News coverage of the misuse of public money for private gain focuses on Maduro’s government, but this singular focus on deciding whom to blame is misleading.
First, corruption permeates almost all institutions in Venezuela, not just the government. Second, the history of corruption started long before Maduro assumed power, going as far back as the early twentieth century when Venezuela discovered oil. Over the years, political corruption got worse from one government to another. This corruption led to inflation, and runaway inflation has created a variety of crises. Today, chaos impacts Venezuela’s politics, economics, and society.
Inflation started before Chavez was president and continued unabated into Maduro’s presidency.
Hyperinflation has led to the following problems:
- High unemployment
- A low minimum wage
- Massive emigration
- Capital flight
- Rising crime rates
- Higher death tolls
- Epidemics
- Widespread starvation
2. Extreme Corruption
The level of corruption in Venezuela is amongst the highest in the world. Since the 20th century, misuse of public money has resulted in many economic crises. According to a 2013 Gallup poll, 75% of the people believe the entire government is corrupt. Nothing gets done unless people bribe a government official.
Rampant, often blatant, government corruption has led to political and socio-economic crises. One that stands out in recent memory is the Bolivarian Revolution. Opposition aligned-groups cite recent protests as proof of public discontent with corruption. Protests also occurred in 2014 and then again in 2017.
Interestingly enough, there is a way to measure the level of corruption in a country. In 1995, Transparency International created the Corruption Perception Index based on expert opinions and public opinion surveys. In 2017, Venezuela ranked 169 out of 180 countries for corruption.
3. Central Bank Keeps Printing National Currency
The Central Bank of Venezuela keeps printing more of the national currency. The Banco Central de Venezuela (BCV) is the official name of the country’s central bank. It has implemented a simple strategy to keep the nation afloat: Keep printing more money. When Austria did this from 1919 to 1923, the results were disastrous. By increasing the money supply by 14,250%, the Austrian crown went from $831.6 million to a staggering $12.1 billion. Money became worthless, and people starved.
The same perils of hyperinflation are now unfolding, and Venezuela currency news frequently discusses the possibility of economic collapse.
4. Out-of-Control Drugs and Crime
An out-of-control illegal drug market increases crime and corruption. Venezuela’s social unrest is not only about distrust of the government, and it is not only about protests to express dissatisfaction with the economy. Another big problem the country faces is a flourishing black market in illegal drugs.
The country is a nexus of cocaine trafficking. The illegal drug trade originates in Colombia, flows through Central America and Caribbean countries, and like a meandering river arriving at the ocean, it ends up in the United States—where dealers make the biggest sales.
The United Nations has investigated how cocaine drug trafficking passes through Venezuela. They discovered that it was bad in 2002 but got worse three years later. In 2005, Venezuela accused the United States Drug Enforcement Administration of tradecraft because it believed DEA representatives acted as spies. After Venezuela evicted DEA agents, the country attracted drug cartels and became a haven for underground drug deals. Unfettered by vigilant enforcement agencies, crime and corruption flourished in Venezuela. In 2008, Venezuela ranked fourth in the world for cocaine seizures—but by 2012, it had fallen to the sixth ranking.
5. Humanitarian Crisis
Venezuela is experiencing a humanitarian crisis. One critical issue that arises when cash has lost much of its value is that people can’t afford to buy food. Maduro tried to prevent this in early 2018 by introducing the bolivar soberano. Unfortunately, his efforts did not preserve Venezuela currency value, and his failure culminated in a humanitarian crisis with Venezuelans starving in the streets.
When there is a humanitarian crisis, the International Monetary Fund (IMF) often steps in, providing loans to the government to ease widespread suffering. But intervention in Venezuela has been difficult because the International Monetary Fund cannot decide whom to trust with the money. Should they recognize Maduro, who appears to be rapidly losing political influence? Or should they support Juan Guaido, the opposition leader who boldly promises to stabilize the country? This global monetary fund organization awaits member guidance on what direction they should take.
Common Questions about the Venezuela Currency
If you’re a foreign currency investor, Venezuela currency can be confusing. Online reports about Venezuela currency exchange rates may not make much sense. You may also be curious about the relationship between Venezuela currency to USD dollars. With this in mind, here are some answers to frequently asked questions:
What Currency Does Venezuela Use?
This is a great question. What is the Venezuelan bolívar? Is it the bolivar soberano—the recently issued sovereign bolivar? Or, is it the bolivar fuerte — the original bolivar dating back to 1879?
Since August 20th, 2018, the legal tender has been the bolivar soberano. The Venezuelan currency used to be the bolivar fuerte, whose coins were in denominations called centimos. Since the bolivar fuerte (the strong bolivar) was made obsolete by inflation, it was replaced by the bolivar soberano after a transition period.
What is Venezuela’s Currency History?
A study of Venezuela currency history reveals a consistent theme: Various governments have struggled to curb currency devaluation due to inflation. Unfortunately, good intentions to save the Venezuela currency have not been successful. Launching any hard currency in a volatile economy is an uphill battle. A hard currency is one that will not depreciate or wildly fluctuate in value. Trying to create a fixed exchange rate is difficult when competing with a thriving currency black market.
After Maduro came to power in April 2013, the official currency fell 99.99% against the dollar on the black market. His government’s efforts to reduce capital flight also failed. Chavez, his predecessor, had imposed currency controls to curb economic recession that did not work. Reviewing Chavez’s failure, the Constituent Assembly in Caracas, Venezuela tried the opposite approach—relaxing the stringent currency controls throttling the economy. But their plan to salvage the economic model made little difference.
Why Does Every Currency Name Sound Similar?
This is a common source of confusion. If the government issues new currencies to reset the economy, why is every currency name similar? Why do recently elected governments not come up with more distinct names when issuing a new Venezuela currency?
Venezuelans call all their currencies bolivars because the nation owes its independence to Simón Bolívar. This Venezuelan military and political leader liberated many neighboring countries from Spain, freeing Bolivia, Peru, and Ecuador from the oppression of Spanish hegemony. Bolivar was the penultimate freedom fighter. In fact, he was so influential, he even changed the sacrosanct flag of Venezuela, adding an eighth star for Angostura province (now called Guyana).
Did the Venezuelan Government Issue a Digital Currency?
Another currency in Venezuela is the petromoneda, or petro. The government issued this Venezuela cryptocurrency market in February 2018. They planned to link its value to the bolivar soberano to be introduced later that year.
What Is the Venezuela Currency Exchange?
A Venezuela currency converter will reveal something interesting about the country’s currency exchange rates. The most popular exchange rate is the bolivar to USD rate. VEF is the currency code for Bolivares, while the Venezuela currency symbol is Bs. It will also reveal how the currency in Venezuela compares to other currencies of the world. Most countries view Venezuela currency as the least valuable currency. Investors, too, want nothing to do with it because as a foreign currency, it’s considered almost worthless.
The low value of the Venezuela currency becomes clear when you observe the dollar to bolivar soberano ratio on a Venezuela currency chart. The Venezuela currency exchange rate between 1 USD to VEF is huge. For a single US dollar, you can buy 5,192.50 Venezuelan bolivars. This vast discrepancy between Venezuela currency to USD shows the enormity of Venezuela currency devaluation. Still, the official exchange rate of Venezuela currency to dollar value is far better than that of the black market currency exchange. The Venezuela currency to the dollar exchange rate on the black market runs to millions of bolivars per dollar.
Understanding Venezuela Currency
Venezuela is a petrostate. In the 1920s, geologists discovered Venezuela was home to the largest oil reserves in the world. The country appeared destined for greatness—but, today, it faces possible economic collapse. How did it get here? What happened to Venezuela?
The Trump administration blames the Venezuelan crisis on President Maduro. But it’s not that simple. A new Venezuelan government is unlikely to solve its economic crisis. US support for opposition leader Juan Guaidó may not be enough to stop the hyperinflation that’s ruining the currency, the widespread corruption of the economy, or the drug cartels.
Venezuela is experiencing issues common in petrostates. Venezuela’s problems have also happened in other nations. This is not immediately obvious because these problems have happened elsewhere only to a mild or moderate extent. Similar problems have occurred in Middle Eastern countries like the United Arab Emirates, Saudi Arabia, Qatar, and Iran. They have occurred in African nations like Nigeria, Libya, Chad, Cameroon, and Algeria. And they have occurred in countries as culturally dissimilar as Russia, Indonesia, and Ecuador. Venezuela’s problems are just an extreme example of the perils faced by a petrostate.
Usually, three political and economic occurrences show up in a petrostate. First, the government heavily depends on its income from the export of oil. Second, an elite minority seize political and economic power. Meanwhile, the rest of the citizens experience exploitation and poverty. And third, those who serve political institutions become corrupt. Over time, governments become ineffective and irresponsible. Enforcing law and order and protecting institutions becomes less of a priority.
Today, Venezuela is at a critical stage. Inflation is hovering around the one million percent mark. The economic recession is in its fifth year. The country has almost depleted its foreign reserves, lost access to the international trade market, and eroded the confidence of potential allies. Venezuela’s money is almost worthless, and its national economic policies are in shambles. All this chaos has now resulted in a political, social, economic, and humanitarian crisis that can hopefully be resolved.