What is the current state of Venezuela’s economy?
Venezuela, a country with more oil than Saudi Arabia, currently faces rapidly declining foreign exchange reserves, poverty and hyperinflation — projected at 720% this year and 2069% next, according to the International Monetary Fund. Under President Nicolás Maduro, Venezuela has been experiencing an acute shortage of food, medicine and other vital supplies. Malnourishment, disease incidence, infant mortality and maternal deaths have been rising and Venezuela is in the throes of a political crisis that is inextricably linked to its untenable economic situation.
What was oil’s role in this?
A quarter of Venezuela’s GDP and 95% of its export earnings are from crude oil, the price of which has plummeted since 2014 when it was trading at over $110 per barrel to under $30 per barrel last year. As a result Venezuela’s GDP and U.S. dollar reserves fell; the country has just $10.2 billion in reserves. As money was in short supply, the government started printing cash — a factor contributing to spiralling inflation. Venezuela has borrowed at least $55 billion from allies such as like Russia and China in recent times. As the price of oil fell, more oil was required to honour the oil-for-financing deals and Venezuela has not been able to keep up with these shipments. The country’s sovereign bonds and those of its oil company, PDVSA, are being traded at highly discounted levels because of the sovereign default risk. Mr. Maduro has been criticised for prioritising debt servicing over feeding his people.
How did the Chávez regime contribute to this situation?
Hugo Chávez came to power on the promise of setting up a modern socialist republic and bringing inclusive growth to Venezuela, which had low growth, high inflation and high levels of poverty. He nationalised over 1,000 companies, funded welfare programmes and cash transfers to the poor from oil revenues, and offered an economic and political counter-narrative to what the U.S. proffered. All this earned Chávez wide popular appeal; poverty declined, employment increased as did college enrolment. However, Chávez’s rule was marked by an increasing authoritarianism and a gross mismanagement of the country’s oil; ironically, problems Chaávez was elected to mitigate.
How was the economy mismanaged?
Rather than saving some of the oil revenues, which came pouring in because of booming oil prices for the decade up to 2014, or investing the cash in other industries or diversifying investments via a sovereign wealth fund, the economy was over-concentrated in oil while other sectors became uncompetitive and unproductive; the economy became dependent on imports. A regime of excessive price controls meant a misallocation of resources and a fixed exchange rate created opportunities for corruption among the regime’s elite. Many of these problems have been compounded since Mr. Maduro took charge in 2013.
