la has suffered from the rapid reduction in the price of oil, compounded by the global financial crisis and remains susceptible to international volatility. This has been compounded by scarcity of goods and a deteriorating security situation that has deterred investors.
Venezuela experiences high inflation. The government introduced a new currency in January 2008, known as the bolivar fuerte, to replace the old currency, known simply as the bolivar, at a rate of 1 bolivar fuerte = 1000 bolivars to deal with the rampant inflation. Annual inflation soared to around 64 per cent in 2014, rising from 41 per cent in 2013 as a result of deteriorating domestic productive capacity, tight currency restrictions, high fiscal spending and several currency devaluations.
In a bid to reduce Venezuela’s dependence on imports and improve the country’s fiscal position, the government has undertaken several currency devaluations since January 2010. The most recent devaluation took place in February 2013, from 4.3 bolivares fuertes to 6.3 bolivares fuertes to the US dollar. This was praised by the International Monetary Fund (IMF) as an important measure to reduce the country’s macroeconomic imbalances, particularly its fiscal deficit of 16 per cent of GDP. However, as was the case with previous currency devaluations, the process increased the cost of imports, putting pressure on domestic industries and inflation. Due to Venezuela's dependence on oil revenue, the government's economic strategy has been to increase revenue by controlling output, working primarily through OPEC and other oil-producing allies.
In February 2014 Venezuela introduced a dual-rate currency exchange system which was later amended a few times, which critics describe as a currency devaluation in disguise. The dual system maintained the existing rate of 6.3 bolivares fuertes to the US dollar for essential goods such as food and medicine, but initially increased the rate to 11.7 bolivares fuertes to the US dollar for tourists, remittances and US dollar auctions, among other things.
Despite a number of flagship foreign investment projects, restoring and sustaining investor confidence remains an important issue in Venezuela. This is unlikely to occur in the near term however, as a challenging operating environment and uncertainty over contract and property rights persists.
In July 2012, Venezuela joined Mercosur, the Southern Common Market formed in 1991 between Argentina, Brazil, Paraguay and Uruguay. Venezuela’s membership of Mercosur expanded the market to 283 million people (2013) with a gross domestic product worth US$3.2 trillion (2013). Venezuela assumed the Presidency of the trading bloc in July 2013.
Venezuela's main source of income continues to be Petróleos de Venezuela (PDVSA), the state-owned oil company. Its revenues give the PSUV the ability to fund wide-scale social reforms such as free health-care clinics, discounted food centres in poor areas and secondary and tertiary education programs.
Venezuela was hit hard by the global financial crisis, with GDP contracting 3.2 per cent in 2009 and 1.5 per cent in 2010. High inflation, falling public expenditure due to low oil prices, a weak investment outlook, deteriorating infrastructure and a major breakdown in security are contributing factors to this slowdown.
The United States is PDVSA’s main full cash export market. Most other exports go to political allies that receive oil shipments on long-term credit agreements at concessionary interest rates (such as Nicaragua or Cuba), or constitute payments for previously received loans (as in the case of China). The company has also revived plans to expand natural gas production for export to Argentina.
Also, while Venezuela boasts one of the region's more developed physical infrastructure, the quality has deteriorated in recent decades because of underinvestment—in spite of a prolonged oil bonanza—stemming largely from a lack of effective administrative capacity. This has been most evident in the electricity sector, where a failure to invest in extra capacity and in im