Amidst Venezuela’s staggering crisis, President Nicolas Maduro chose to devote scarce resources to complete a massive military exercise to “be ready for any scenario.” The imaginary war he is thinking of is against the “oligarchic” private sector and their scheming capitalist backers whom he blames for the country’s woes. This calculated move may also be a tactic to sustain military support for the regime at the expense of the country’s suffering citizens.
Venezuela’s current crisis was completely preventable. In fact, it is the consequence of almost two decades of irresponsible policies. These policies caused the economy to collapse following the global oil slump together with the continuously deteriorating oil extraction capabilities of PDVSA, Venezuela’s national oil company. During the oil boom of the 2000s, both public and private consumption continuously increased, mostly fueled by an unprecedented rise in imports per capita that jumped to a high of US$2000 in 2013 from $500 in 2003 (in constant 2015 dollars). Meanwhile, the country’s external debt quintupled, isolating Venezuela from global financial markets and handicapping the country when it came time to absorb the negative external shock that hit last year. Poverty rates, once the banner of the Bolivarian revolution, are now back to where they were 18 years ago.
Since foreign currency controls were established in the early 2000s, Venezuelan firms rely solely on government bureaucrats to access foreign currency to import raw materials or final goods. As often happens with price controls, a black market for foreign currency emerged in which a US dollar was worth about 2 to 3 times the official exchange rate during 2010. Over these years, lobbying for official dollars and reselling them in the black market was the most profitable game in town.
Since oil prices dropped, the government ability to supply foreign currency has been virtually eliminated, driving black market rates to about 100 times higher the official exchange rate. Without enough income from oil exports, the government gradually exhausted all sources of financing its deficit: first by issuing foreign debt, then by forcing banks to acquire domestic bonds and finally by recurring to the last resource: the money printing press. The monetization of the large public deficit combined with the supply shock resulting from massive import cuts has driven the country to the brink of hyperinflation. As both public and private imports were slashed by more than half, productive capacity in the country collapsed. This comes already after over a decade of expropriations of private property by the government as part of a failed effort to control the economy even further. In this catastrophic situation, domestic producers have no option than to stop production while multinational corporations relocate abroad. This collapse is reflected in the expected contraction of Venezuela’s GDP by 10 percent this year and in the scarcity of over 80 percent of basic goods. Goods available at inflated prices in the black market are out of reach to all but a very few. Ironically, this chaos promoted by the government hurt the poor more than anyone else.
The country now faces an unprecedented crisis, never seen before in an oil exporting country, with sharply deteriorating public health, scarcity of food and basic goods, energy shortages, and widespread crime. In 2015 four times more people violently died in Venezuela than in Afghanistan.
Compounding this is an intractable governance crisis where the opposition-controlled assembly seems unable to enact any changes as it confronts judicial and electoral systems dominated by the executive. The opposition’s request for a recall referendum to revoke Maduro — a measure established in the constitution — would only be relevant if it happens during 2016, something those in power seem determined to avoid. After 2016, revoking the president won’t result in new elections but in the vice president taking over until the end of the ongoing term in 2019. This latter scenario would be unlikely to resolve either the political or the economic crisis.
Light at the end of the tunnel? A roadmap to solving the crisis
The solution will come if and when Maduro’s government is replaced. Whoever steps in must implement a recovery plan that addresses all the dimensions of the humanitarian crisis Venezuelans are currently living through. This is possible, based on a number of guidelines spelled out below.
The first and most urgent and crucial step for Venezuela is to seek all available international financing from multilateral agencies, bilateral loans and assistance from other organizations. Incidentally, these have been the only sources not tapped by the Chavista government, as they would imply a change in the course of policy they are neither capable nor willing to undertake. Also, accepting such financing would imply they recognize they have driven a resource-rich country into a colossal humanitarian crisis. But there is no real alternative: only by accessing external finance Venezuela will be able to resume imports to relieve the humanitarian crisis: food and medicines shall be brought in and private sector inventories of intermediate goods can then be replenished. Of course this will only deepen the financing gap in the balance of payments, which is why generous international financing available is required, along with a debt restructuring program.
Second, Venezuela must make sense of its fiscal accounts and slowly deregulate the controls on foreign currency. The government’s budget deficit, which today stands near 20 percent of GDP, must be reduced to avoid further money printing. The strategy includes reducing subsidies to the price of gasoline and eliminating subsidies to utilities for the private sector (which are now 170 times below international standards), as well as cutting military spending and other public outlays that do not specifically benefit the most vulnerable. Once these unjustified subsidies are eliminated, a direct subsidy on basic goods and medicines for vulnerable populations should be established. Additionally, Central bank independence must be restored, multiple exchange rates unified, and an effective band system implemented based on an annual inflation target.
Third, there is a need to incentivize private investment, both domestic and foreign. Doing this requires enforcing private property rights, freeing the private sector from a plethora of controls, regulations and inspections, and providing unfettered access to the foreign currency market. The implementation of a program that will attract back Venezuelan talent living abroad would be a reasonable way to lure skilled labor back into the country.
As difficult as these reforms will be to put in place, there is no doubt that as soon as they start being implemented Venezuelans will be better-off in every dimension when compared to the current catastrophic scenario brought by this already expiring Bolivarian “revolution.”