A cup of coffee in Venezuela now costs 1 million bolivars.
Which is equivalent to one-fifth of the monthly minimum wage.
One million bolivars when converted to US dollars, comes to 29 cents and around INR 20 for us.
Yes, such is the harsh reality for the South American country of Venezuela. Having the largest oil reserves in the world, this country instead of being filthy rich has children starving and people fleeing the country.
Venezuela is facing a situation of hyperinflation for 12 months now and it has climbed to a startling rate of 43,378%, according to Bloomberg.
Although a minimal amount of inflation is necessary for smooth functioning, at such an alarming rate inflation holds the complete power to destroy the economy of the country.
Savings are quickly wiped out. Expectations that saving will be fruitless deters people from investing, causing a recession and leading to capital flight. Nobody really knows how much their salary will be worth by the time they go to the store, so the entire labour system is thrown into chaos, messing the entire economic system thereafter. Facing inflation, a country has three options at its disposal to prevent the economy from coming to a complete halt. These options are- borrowing from the public in form of bonds, taking a loan from international governments or organizations and printing of more and more currency by the central bank.
Research studies zeroed in on deficit financing as the root cause of why the country is encountering this devastating phenomenon.
Hyperinflation has been driven up by the government’s willingness to print extra money and its readiness to regularly increase the minimum wage in an effort to repossess some of its popularity with Venezuela’s poor.
The government is also progressively attempting to get credit after it defaulted on a portion of its government bonds. With investors less inclined to go out on a limb of putting resources into Venezuela, the administration has again taken to printing more cash, decreasing its value and further swelling inflation.
There is no certain macroeconomic model that could help understand the situation and present possible solutions. Policy makers and researchers could only study the specifics of similar events of recent past and try to draw generalizations.
Understanding the situation, we now have one question in mind-
What will happen now?
While the fate of this South American nation remains uncertain, we have a general view of the future.
Oil prices have been rising and ought to infuse the much-needed money into the administration’s pockets. In any case, an absence of interest in its foundation implies state-possessed oil organization’s output has fallen, making it harder for it to recuperate.
Adding to that the way that a huge number of Venezuelans have left the nation, causing an enormous loss.800 flee to Brazil daily and 35K Venezuelans have crossed the border to flee to Colombia.
Keeping everything in perspective, the prospects are not looking brilliant.
So, the next time you go to Starbucks to get a cup of coffee, you might realize that it is not as expensive as in Venezuela!