Venezuela is going through a prolonged political and economic crisis, which keeps getting worse by the day. The country is experiencing a high rate of inflation that reached an astounding 80,000% by the end of 2018[1] and is certain to further rise in 2019, provided the current situation persists.
The country is in acute debt, which stands at 162.4% of GDP as of October 2018,[2] which is amongst the highest in the world. Medicine and food shortages, power cuts and hyper-inflation have resulted in serious humanitarian crisis and have caused over three million Venezuelans to flee the country since 2015.[3]
The economic growth fell by 5% as of October 2018 and is expected to further fall by 18% this year.[4] Similarly, the value of Venezuelan currency has fallen drastically over the years as
President Nicolas Maduro has been printing money due to shortages of its foreign reserves. This has basically rendered the national currency, the Venezuelan Bolivar worthless. To combat inflation, Nicolas Maduro has increased the minimum wage twenty four times since 2013 [5] which has not really helped as companies have not been able to keep the employees. The unemployment rate increased from 27.1% at the end of 2017 to 34.3% by October last year.[6] It would not be a surprise to see the unemployment spike close to 40% in 2019 as forecasted by the
IMF.
On the political front, Nicolas Maduro‘s legitimacy as a president of Venezuela has been questioned by many nations, primarily the US and its allies. Maduro has been accused of consolidating control and power through political repression and oppression of his opposition and orchestrating unfair elections. The US has alleged the Government of Venezuela under
Nicolas Maduro of the following actions [7]
- Installed an illegitimate Constituent Assembly
- Debased the currency for political gain
- Issued a digital currency in a process that Venezuela‘s democratically elected National Assembly has denounced as unlawful
- Degraded Venezuela‘s infrastructure and natural environment through economic mismanagement
- Manipulated the Venezuelan people through a corrupt food distribution program
- Sold Venezuela‘s future resources to line the pockets of corrupt officials
The US government has put numerous sanctions against key government officials and entities, including the president and his wife. The latest sanctions being imposed was on the state owned oil company Petroleos de Venezuela, S.A. (PDVSA) which prohibit American firms from doing business with PDVSA. Along with that, the sanction would also cause USD 7 billion assets belonging to PDVSA immediately blocked while losing USD 11 billion in export proceeds in the next year. The US recognizes the leader of the national assembly of Venezuela, Mr. Juan Guaido as the interim president and has urged the US‘s allies for support which has received strong opposition from Nicolas Maduro and his loyal supporters within the government.
So how does a country, once the richest in South America with the largest proven oil reserves in the world arrive at a situation of desperate economic peril?
Since the extraction of crude oil in 1914,[8] Venezuela has relied significantly on oil exports to fuel the country’s economy which quickly became a lifeline for most Venezuelans. In fact, in 2011, Venezuela’s 95% of the national revenue was solely generated from oil exports,[9] whereas it imported everything that it consumed. This was extremely risky as it drastically backfired for Venezuela when oil prices fell from about a yearly average of USD 98 a barrel in 2013 to a mere yearly average of USD 48 a barrel in 2016 with the lowest price being USD 26 a barrel.[10] It reduced country’s revenue from oil exports and increased its borrowing to keep the socialist economy running.
Furthermore, when Hugo Chavez came into power in 1999, he introduced 21st century socialism and vowed to end poverty and corruption in the country. He introduced several social welfare programs, commonly known as ―Misiones‖ which included subsidies towards food and housing, adult education programs, construction of free medical clinics for the poor and various antipoverty programs.[11] The revenue generated by export of oil continued to fuel the social welfare programs.
Chavez continued to aggressively expand his socialist agenda and turned hostile towards private establishments. He nationalized various establishments from wide industrial sectors such as oil, agriculture, telecommunications, power, finance, gold, transport. Under him, many local as well as foreign assets were expropriated causing many international establishments to incur severe losses to ultimately withdraw operations from Venezuela. Additionally, to avoid appropriation and to secure investments, many numbers of Venezuelan companies moved to Colombia, Panama and the US. Also, industries nationalized by Chavez performed so poorly that when oil prices tumbled, these nationalized industries from various sectors did not have the capacity to rebuild and pull Venezuela out of crisis. For, instance, since the steel company Sidor was nationalized in 2008, it has suffered an extreme disruption in production due to labour disputes and lack of maintenance.[12] Similarly, a study done by Transparency International found that 70% of the 511 wholly or majority state owned companies have produced losses in 2016 totaling to 1.29 trillion Venezuelan Bolivares or about $129 billion dollars.[13]
Furthermore, the national petroleum company (PDVSA) continues to suffer from lack of investment and low productivity and is unable to increase production to counter the fall of oil prices. The oil production of Venezuela reduced from 1.62 million barrels per day (mbd) in December 2017[14] to 1.14 mbd by December 2018 as per the OPEC‘s secondary sources.[15] With the current issues surrounding PDVSA, it is likely that the production levels will further decrease below 1 million mbd.
Additionally, Venezuelan government’s heavy involvement in price controls and interventions has worsened the situation. It has hindered the market forces to auto adjust the prices of commodities as per the demand and supply which have caused severe shortages and unrealistic prices that could be seen today. Uncontrolled borrowing due to depletion of foreign reserves and ineffective monetary policies only caused the situation to worsen. Hence, the ongoing economic crisis is not to be blamed solely on the fall of oil prices as the root of the problem exists somewhere else.
The tumbling oil prices only exposed the real problem of Venezuela that is its ineffective socialist agenda and political interventions comprising of price controls, currency controls, aggressive nationalizations and anti-private instalments and uncontrolled monetary policies. As long as Nicolas Maduro continues on this broken path and does not bring significant reforms in government and economic policies, the current crisis may further worsen and any increase in oil prices will just be a band-aid in a fracture.
What could be expected from the ongoing crisis?
The current situation in Venezuela has spiraled out of control and has divided the world again. Prominent autocratic states such as Russia, China, Iran, Cuba and Turkey have recognized Nicolas Maduro as the president of Venezuela, who was sworn in for a second term earlier last month. On the other hand, the US and its allies such as Canada, the EU‘s key states (France, Germany, Spain and the UK), Latin America‘s Panama, Brazil, Argentina, Colombia, Chile do not recognize Maduro as the president as he has been accused of coming into power by conducting unfair elections which was largely boycotted by his opposition. The US and its allies have recognized Juan Guaido, the leader of Venezuela‘s national assembly as the interim president until free and fair elections have been conducted. The self proclaimed interim president has called for mass protests against Maduro and pledged Venezuela‘s military to defect.
The continuing situation in Venezuela has resulted in a geopolitical tussle whilst the vast number of ordinary civilians continue to endure hardships caused by food and medicine shortages, power cuts and hyperinflation. If this geopolitical crisis continues, there is a strong possibility that the whole region could be entangled in a complex geopolitical game that may not end very well, especially for Venezuela.
References:
- “Venezuela’s Hyperinflation Hits 80000% Per Year in 2018 – Forbes”. January 1, 2019. https://www.forbes.com/sites/stevehanke/2019/01/01/venezuelas-hyperinflation-hits-80000-per-year-in-2018/#5eba686d4572
- “IMF, World Economic Outlook (October 2018). General government gross debt Percent of GDP” https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO/WEOWORLD/VEN
- “UN News, Solidarity needed to overcome ‘isolated’ attacks on Venezuela refugees, migrants”. January 28, 2019. https://news.un.org/en/story/2019/01/1031412
- “IMF, World Economic Outlook (October 2018). Inflation rate, average consumer prices annual percent change”. https://www.imf.org/en/Countries/VEN#
- “Venezuela’s 2018 Inflation to Hit 1.37 Million Percent, IMF Says”. Bloomberg. October 9, 2018. https://www.bloomberg.com/news/articles/2018-10-09/venezuela-s-2018-inflation-to-hit-1-37-million-percent-imf-says
- “IMF, World Economic Outlook (October 2018)”. Unemployment rate Percent. https://www.imf.org/external/datamapper/LUR@WEO/OEMDC/ADVEC/WEOWORLD/VEN
- “US Department of State, Venezuela Fact Sheet, Bureau Of Economic And Business Affairs”. December 18,2018. https://www.state.gov/e/eb/rls/fs/2018/288151.htm
- “OPEC, Venezuela facts and figures”. https://www.opec.org/opec_web/en/about_us/171.htm
- “5 Ways Hugo Chavez Has Destroyed the Venezuelan Economy”. ABC News. January 17, 2013. https://abcnews.go.com/ABC_Univision/News/ways-chavez-destroyed-venezuelan-economy/story?id=18239956
- “Macrotrends, Crude Oil Prices – 70 Year Historical Chart”. https://www.macrotrends.net/1369/crude-oil-price-history-chart
- “Clientelism and Social Funds: Empirical Evidence from Chávez’s “Misiones”Programs In Venezuela”. Michael Penfold-Becerra. IIIWB Conference. May, 2006. http://siteresources.worldbank.org/INTDECINEQ/Resources/1149208-1147789289867/IIIWB_Conference_Clientelism_and_Social_FundsREVISED.pdf
- “Struggling to smelt, Venezuela state-run steelmaker grows sunflowers, crops”. Reuters. May 6, 2017 https://www.reuters.com/article/us-venezuela-steel/struggling-to-smelt-venezuela-state-run-steelmaker-grows-sunflowers-crops-idUSKBN16D1I7
- “Venezuelan government controls more than 500 businesses — and most are losing money”. Miami Herald. March, 2017. https://www.miamiherald.com/news/nation-world/world/americas/venezuela/article138402248.html
- “How Low Can Venezuelan Oil Production Go?”. Centre for Strategic and International Studies. June 18, 2018. https://www.csis.org/analysis/how-low-can-venezuelan-oil-production-go
- “Monthly Oil Market Report. Feature article: Monetary policies and their impact on the oil market”. January 17, 2019. Organization of the Petroleum Exporting Countries(OPEC). file:///C:/Users/Dell%20Pc/Downloads/OPEC_MOMR_January_2019.pdf
