Venezuela Crisis: Is it going to be worse?

Why in news?

Venezuelan President Nicolas Maduro recenlty broke all diplomatic ties with the United States after his American counterpart Donald Trump recognised Opposition leader Juan Guaido as the South American country's interim President. Nicolas Maduro gave all US diplomatic staff in Venezuela 72 hours to leave the country.

The Venezuelan President accused the US government of attempting a coup d'etat. Maduro was sworn-in for a second term while Guaido, the head of the Opposition-controlled legislature, told tens of thousands of his supporters that he was declaring himself as the acting President.

Thousands of Venezuelans took to the streets in protest against Maduro. Venezuela has been in economic freefall for a number of years under Maduro's leadership.Hyperinflation and key shortages, including of food, has forced millions out of the country.

UNITED STATES–VENEZUELA RELATIONS:

United States–Venezuela relationship was traditionally characterized by important trade and investment relationship as well as cooperation in combating the production and transit of illegal drugs.Relations were strong under traditional governments in Venezuela, such as those of Carlos Andrés Pérez and Rafael Caldera.

However, tensions increased after the socialist President Hugo Chávez assumed elected office in 1999.

Tensions between the countries increased further after Venezuela accused the administration of George W. Bush of supporting the Venezuelan failed coup attempt in 2002 against Chavez,an accusation that was partly retracted later.

Earlier in February 2014, the Venezuelan government ordered three American diplomats out of the country on charges of promoting violence. On January 23, 2019, Venezuelan President Nicolás Maduro announced that Venezuela was breaking ties with the United States following President Trump's announcement of recognizing Juan Guaidó, the Venezuelan opposition leader, as the interim President of Venezuela.

Venezuela facing political and economic crisis.

Venezuela is a country with more oil than Saudi Arabia.

Earlier presidential regime of Venezuela was marked by an increasing authoritarianism and a gross mismanagement of the country’s oil. It currently faces rapidly declining foreign exchange reserves, poverty and hyperinflation. The inflation is projected to be 720% this year and 2069% in the next year, according to the IMF.

It has also been experiencing an acute shortage of food, medicine and other vital supplies.

REASON BEHIND THE ECONOMIC CRISIS?

Due to major fall in crude oil prices since 2014, the country has just $10.2 billion in reserves. As money was in short supply, the government started printing cash, which is also a factor contributing to spiralling inflation.

The revenues generated from oil industry was not invested or diversified to other sectors. So the economy was over-concentrated in oil while other sectors became uncompetitive and unproductive.

The economy became dependent on imports. Due to excessive price controls measures there was a misallocation of resources and a fixed exchange rate.

This further created opportunities for corruption among the regime’s elite.

REASON FOR THE POLITICAL CRISIS?

After the socialist leader, then President Hugo Chavez died in 2013, Nicolas Maduro, also of the United Socialist Party (PSUV), was elected president on a promise to continue Mr Chavez's policies.

Chavistas, the name given to the followers of the socialist policies of the late President. They praise the two men for using Venezuela's oil riches to markedly reduce inequality and for lifting many Venezuelans out of poverty.

But the opposition says that since the PSUV came to power in 1999, the socialist party has eroded Venezuela's democratic institutions and mismanaged its economy.

Whereas Chavistas in turn accuse the opposition of being elitist and of exploiting poor Venezuelans to increase their own riches.

Reasons for Hyperinflation?

Venezuela is rich in oil, and has the largest proven reserves in the world. But it’s this exact wealth which was genesis to many economic problems.

Because it has so much oil, Venezuela has never bothered to produce much else. It sells oil to other countries, and with the dollars it earns, imports the goods Venezuelans want and need from abroad.

But when the oil price reduced in 2014, Venezuela was faced with a shortfall of foreign currency. This in turn made it difficult to import goods at the same level as before, and imported items became scarcer.

The result: businesses increased prices and inflation rose.

Way forward

Years of excessive government spending on welfare programs, poorly managed facilities and dilapidated farms set the stage for the crisis.

The government is also struggling to get credit after it defaulted on some of its government bonds.

With creditors less likely to take the risk of investing in Venezuela, the government has again taken to printing more money, further undermining its value and increasing inflation.

With enormous amount of oil reserves, crypto currency (Petro) and unhappy citizen. Present state of Venezuela is quite chaotic.