Venezuela: Mired in crisis, with no clear path ahead

Venezuela: Mired in crisis, with no clear path ahead

With Venezuela facing an unprecedented economic crisis, time is running out to enact much-needed reforms and avoid a drawn out catastrophe.

Venezuela is a time bomb. The opposition, led by former presidential candidate Enrique Capriles, is calling for a referendum to recall President Nicolas Maduro. After gathering 1.85 million signatures that support the petition, Capriles has claimed victory and has said a recall vote will take place this year.

The opposition claims that Maduro has driven the country towards economic collapse. On the other hand, Maduro has just extended the state of emergency he issued earlier this year as a way to stave off the economic crisis. Protests keep surging across the country, showing everyone there is no easy way out of this worrying situation.

State of emergency

The state of emergency called by Maduro is a natural response to the critical economic situation Venezuela is struggling through. The inflation rate for 2015 was at 275%, while the IMF predicts it will surge to 720% by the end of 2016. The economy shrank by 5.7% in 2015 and analysts are foreseeing an 8% contraction for the present year. The government has started to sell its gold reserves as a way to mitigate the crisis, reducing them by 16% since January 2016.

As a response to this hostile environment, important companies have suspended their production faculties in the country. In May, Coca Cola announced it will temporarily halt its soda production due to sugar shortages. In a similar case, Polar Industries, the country´s largest brewery, stated it was closing operations due to insufficient supplies as a result of the lack of US Dollars within Venezuela.

But the economic factor is not the only one affecting the country. The crisis has also led to energy cuts across Venezuela as the government introduced in April a two-day working week for public servants and a four hour daily cut for a 40-day period. In the public health sector, media keeps showing a mediocre system with patients complaining about its quality. The Pharmaceutical Federation of Venezuela says the country is lacking around 80% of the medical supplies needed to treat its population.

In addition, there is also the food shortage issue, where Venezuelans complain they lack the most basic supplies like milk or butter. In 2015, NGOs recorded a total of 1,200 protests regarding food shortages and 170 lootings or attempted lootings nationwide.

What’s driving the crisis?

So the big question is: how did the country with the largest oil reserves on the planet end up in this crisis? There are several explanations for this situation, from local to international affairs.

First, there is price fixing issue. Since the Chavista government took control, it has been prone to fixing market prices as a way to help the low income class access basic market goods. In October of last year, President Maduro introduced a light modification to the price fixing laws. However, the price fixing policies have not considered the rampant inflation rates affecting the economy for the past years, resulting in a total disconnection between the “fair” price of products and the real price that reflect the production costs the manufacturer incurred. This situation has discouraged private production of goods in Venezuela and as a result most products are being imported from neighbor countries, devastating the local industries.

In addition to this, imports of goods have to be made with US Dollars and these are only sold legally by the government with an artificially fixed price once again. Buying dollars is a bureaucratic procedure that allows official corruption to prevail over efficient business planning. The result of this scenario is that private imports are hugely discouraged by the current laws, since they have no economical and practical logic behind them.

As a consequence of this economic situation, the Venezuelan government ended up as the only possible importer of goods, as it was the institution with sufficient funds to assume the costly imports the country needed; funds it had due to its fructiferous oil exports. Nevertheless, oil prices, which represent 96% of the country´s export revenues, fell to $24 a barrel, the lowest mark in 12 years. Therefore, in the present day, not even the government has enough capital to import goods, resulting in a widespread shortage of the most basic goods for the population.

A second factor behind the crisis is related to the government corruption cases, which reflect that the public finances are not being managed with strict responsibility. Earlier this year, opposition congressmen announced an investigation regarding $230 billion USD missing from public funds destined for food imports. In 2013, local media reported that 50,000 kg of medical supplies had expired in storage depots of the government’s Health Ministry. In addition, the state-owned oil firm PDVSA has been subject to increasing criticism due to corruption scandals and lack of transparency. These episodes of corruption provide a glimpse of the amounts of resources that are lost through loopholes, worsening the situation of the country.

Can international loans save Venezuela?

Regardless of severity of its economic crisis, the Venezuelan government seems to be looking abroad for help. In May, China and Venezuela reached an agreement on the terms of the loan Caracas currently has with Beijing. For the past decade, China has loaned more the $50 billion USD to Venezuela, an amount similar to that loaned to the entire South America combined.

The terms of the loan were modified to improve conditions of loan time frames, investment amounts and non-financial aspects. It was celebrated by officials in Caracas as a breather for the country´s economy, but it will compromise the government´s future oil production, as China will now receive more oil barrels to pay for the debt if the oil prices keep their low value. Venezuela should have used its oil production for deals with nations that could provide better dividends and solve its food shortage issue.

Looking ahead

The economic and political turmoil keeps increasing in the Latin American country, once considered the rich neighbor in the region. Economic reforms and structural shifts are needed, especially with a decreasing price of oil revenues. Recent polls shows 70% of Venezuelans agree that Maduro should go this year. However, the socialist leader keeps calling this an attempt of the opposition to call for foreign military intervention, showing no intention of peacefully leaving the presidency.

Categories: Economics, Latin America

About Author

Andres Felipe Hernandez

Andres Hernandez Amin currently works as a Legislative Advisor for the Ministry of Interior of Colombia. He previously worked for the legal office of the government of the Bolivar Department. He has also experience working in political elections with several local political campaigns. He is finishing his law degree in the Universidad de los Andes, Colombia.