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The Economic Nightmare of Venezuela

 4 min read / 

Last year was horrid for Venezuela. Low oil prices and global weakness battered the country for whom 95% of exports are oil related, with oil representing around 40% of annual government revenue. This year is not likely to be much better – the IMF predicts further economic contraction because the oil price collapse and years of economic mismanagement left Venezuela in shambles. If the recession was not enough, the IMF also forecasts consumer price inflation to be sky high, possibly reaching 720%.

With oil price hovering around 30 USD per barrel many countries, including Russia, Saudi Arabia and, of course, Venezuela suffer. Its 2016 budget is based on a price of 40 USD per barrel, which is currently unattainable due to the oversupply in the market. Venezuela ran an almost 15% budget deficit in 2014, which makes Greece deficit during the crisis appear small. The meeting on the 7th of February between Saudi and Venezuelan oil ministers was unproductive, as no agreement to lower the supply was reached.

Moreover, the Venezuelan oil and gas sector has been in trouble some time. In 2002, the conflicts between the government and employees of Petroleos de Venezuela S.A. (PDVSA), the country’s state-run oil and natural gas company, escalated, resulting in huge strikes and PVDVSA’s operations halted. This negatively affected the firm’s productivity, and the relatively professional management was changed into an incompetent one. The situation became even worse in the oil sector after President Chávez decided to nationalise all oil exploration and production in 2006, and over 16 firms were taken over. Lack of investments and inability to exploit the vast resources resulted in at least a quarter decrease of Venezuela’s oil production since the beginning of Mr. Chávez presidency in late 1990s. Therefore, a continued decline in oil production meant a loss of revenue for over a decade and now a weak economy has to face low oil prices as well.

Venezuela understood that it was running out of money and made a common sense lacking decision to print money. A lot of it. In fact, the central bank did its job so well that the currency lost 94% of its value since mid-2014. One US dollar can now be bought in a black market for 1,000 bolivares, compared to 200 bolivares just a year ago. While some analysts threaten Venezuela with hyperinflation, the central bank keeps financing the budget deficit by printing more money. The government tried to control inflation by setting price controls, but it resulted in shortages as imports became unprofitable. Prices of imported food and goods are inflated, and the supermarkets are nearly empty, with people queuing outside. The government tried to blame the black market and smugglers for the economic disaster, but it is clear that the thriving black market is a consequence of poorly run state and not vice versa. While prices are rising at a fast pace, wages cannot keep up, and people are suffering.

Mr. Maduro called the lack of medicine a humanitarian crisis, but at the same time the government accused their foes of exaggerating the issue. However, the fact that people cannot purchase antibiotics and the shortage of medicine for cancer and other serious illnesses speaks for itself. President Maduro recently encouraged people to grow the food themselves, in order to be independent of basic goods imports and reduce the food shortages. However, urban farming cannot be developed overnight and it will require investments which Venezuela’s government is currently incapable of making. The idea of differentiating the production and becoming less dependent on imports can prove to be beneficial for the economy in the long run, but it will not solve Venezuela’s current problems and macroeconomic imbalances.

Even as a disaster is looming for Venezuela, the country’s politicians cannot offer any sensible solutions. It may sustain itself for a couple more months with the help of Chinese loans, but even China is impatient to collect the debts. Venezuelan aversion to the IMF means that no help can be found there. Mr. Maduro made repaying the debt a priority, which will require a further decrease in imports. Unsurprisingly, people are unhappy and the possibility of social unrest is high. Therefore, unless the oil price recovers quickly, most analytics say that default is the only hope for Venezuela as it would threaten the regime and force the politicians to face the problems as well as take some delayed action.

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