Venezuela experienced an extreme 12-month inflation rate of 54% last month and shortages of basic goods. Venezuelan President Nicolas Madura has responded to extreme inflation by forcing managers of local businesses to lower their prices with arrests and armed forces. The socialist leader stated that the seizure of these stores was just the tip of the iceberg and that he will take over more businesses. These events could have a major effect on Venezuela’s economy, including an outflow of foreign investment and firms.
This past Friday, Madura seized five Daka outlet stores, equivalent to a Best Buy, and forced them to lower their prices. After the prices were slashed, people lined up outside the store and looting began. Madura stated, “This is for the good of the nation. Leave nothing on the shelves, nothing in the warehouses…. Let nothing remain in stock.” Currently he is trying to win decree power in Congress in order to take over more businesses.
One reason Venezuela has experienced such high inflation is due to its money supply growing 70% in the past year. As a result, the value of the Venezuelan bolivar continues to drop in value and is making it difficult for citizens to buy basic goods such as food and toiletries. Retailers are finding that it is very expensive to exchange bolivars for U.S. dollars, making their costs of goods very high. The extreme exchange rate set by the government has created a black market in exchanging bolivars for dollars. Retailers may be over charging for their goods because of the extreme exchange rate and lack of dollars in the economy.
The government is creating an unfair business environment in Venezuela. By setting the exchange rate at very high levels, the government is creating a shortage of dollars and forcing business owners to go to the black markets. Madura blames the black markets and business owners for its economic position and is blocking websites that display the “black market exchange rate.” Business owners state that without the black markets, they would have to price inventory at levels that are not profitable. If Madura continues to seize businesses Venezuela could see a massive outflow of foreign investment and begin to see foreign firms leave the country.
For more information on Venezuela’s government, visit globalEDGE’s government page.