Venezuela is heading for bankruptcy, why can it happen?

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Hundreds of thousands of Venezuelans have fled abroad in search of a better life following the worsening economy of the South American country since mid-2017.

The International Monetary Fund (IMF) predicts the inflation rate in Venezuela could reach 13,000 percent in 2018.

Since January 2016, President Nicolas Maduro set an economic emergency status to overcome the severe conditions in the oil-rich country.

But until now Venezuela’s political and social conditions have become increasingly unstable. Anti-government protests expanded to a peak in mid-2017 and killed dozens of people.

Citing news from CNN, here are five reasons that can at least explain why Venezuela’s economic crisis continues to deteriorate:

  1. The fall in world oil prices

Most of Venezuela’s economy depends on petroleum commodities. At present, world oil prices have dropped to US $ 28.36 per barrel. The lowest price since the last 12 years.

The fall in crude oil prices since 2013 has also hurt the Venezuelan economy. Some economists assess as long as oil prices remain low, Venezuela will find it difficult to rise from adversity.

 

  1. Weak Bolivar Exchange Rate

The Venezuelan currency exchange rate, Bolivar, has continued to fall in recent years. In 2015, US $ 1 was equivalent to 175 Bolivars. At present, US $ 1 is equivalent to nearly 40,000 Bolivars.

A number of parties said the decline in the exchange rate was caused by a policy error taken by the government of President Nicolas Maduro. However, the president who has served since 2013 blames international sanctions, especially from the United States, as a trigger for the country’s economic downturn.

 

  1. Domestic Political Crisis

The political crisis began in 2016. At that time, the opposition party, Democratic Unity, held 109 majority seats in Congress compared to the Maduro socialist party which only occupied 55 seats.

The majority allowed the National Assembly, the Venezuelan Parliament dismissed members of the Maduro cabinet and passed a reform law that the 55-year-old man could not cancel.

Maduro also appointed a new Supreme Court judge just before the National Assembly came to power. The Supreme Court then overturned parliamentary law and resulted in a deadlock in Venezuelan politics.

Since then Maduro has been seen wanting to expand his authority and power as president. In the middle of 2017, Maduro insisted on holding inter-election to form a new National Constituency Council.

Not only that, Maduro also asked the new National Constituency Council to rewrite the country’s constitution in order to remain in power to become the number one person in Venezuela following the period of his administration which will end this year.

 

  1. Bankrupt State

President Maduro finally admitted that his government was unable to pay all state debt, early last November.

Maduro said the oil company had paid a debt of US $ 1.1 billion. This amount is very large for a country that at that time only had US $ 10 billion in state cash.

The same thing happened in 2016, when Venezuela was almost bankrupt because it barely generated enough income from their oil exports to cover its debts.

Barclays financial institutions say bankruptcy is difficult to avoid Venezuela.

The only thing that can save the Latin American country from bankruptcy is an increase in world oil prices or assistance from Caracas allies – like China, Russia, Iran to guarantee Maduro’s government.

 

  1. Food Crisis

The economic crisis and political turmoil also affected a number of other sectors, including food.

Amid the low burden of state debt and exchange rates, the government cannot import staple foods such as flour, eggs and milk. In these conditions, many supermarket shelves are empty because they no longer have food supplies.

Around 2015 ago, fast food restaurants, McDonalds in Venezuela ran out of french fries because of the food crisis.

The food crisis has increasingly tormented the Venezuelan people, triggered violence and crime.