Venezuela was once the richest country in South America where its economy was supported by large oil reserves. Its oil accounted for more than 90% of its exports and the Venezuelan government relied heavily on the sales. The oil exports were also a way to provide the country with imported consumer goods. However, under years of mismanagement from President Hugo Chavez, Venezuela was not prepared for the sharp fall in oil prices in 2014. Economic conditions have worsened and become unstable under its new President, Nicolas Maduro, an authoritarian leader, which created a political and economic crisis in Venezuela. Its economy has declined by 35% since 2013, worse than what the United States experienced during the Great Depression in the 1930s and it continues the decline. The crisis is evaluated by hyperinflation, shortages of consumer goods, default on the government’s debt obligations, and poorer living conditions, reasons which can be seen in the charts of Venezuela’s Real GDP Growth and GDP per Capita. This research paper analyzes the economic crisis in Venezuela, including the causes of the economic downturns and government responses to the issue.
Crash in Oil Prices
Before Nicolas Maduro was elected President in April 2013, President Chavez didn’t create a stabilization fund to protect against a future fall in oil prices, believing that oil prices would remain high. The crash in oil prices in 2014 led to a sharp decline in government revenue and, along with the government’s policy choices, triggered the economic crisis. The Maduro government was not prepared for the effects to the Venezuelan economy and many producers used the prosperous years to build foreign exchange reserves to lessen risks from big prices in commodity items. Venezuela’s economy is estimated to have declined by nearly 35% between 2012 and 2017.
President Chavez also contributed to the economic crisis by declaring an ‘economic war’ on June 2, 2010, because of increasing shortages in Venezuela. The debt grew under the Maduro government, as a result of low oil prices in early 2015. Venezuela’s oil production also dropped from lack of maintenance and investment. The debt has risen to about $156 billion in 2018, about 738% of the value of its exports is the total amount owed by Venezuela.
The fall in oil prices drained public finances and the Maduro government tried to address its growing budget deficit by printing money, instead of adjusting policies through tax increases and spending cuts, which led to inflation. Inflation in Venezuela was about 20% in 2012, then 181% in 2015 and now it increased to 282,973% in April of 2019. (Figure below shows the change in the inflation rate from 2015 to 2019). The government has tried to suppress inflation through price controls, but they are ineffective as supplies have become scarce and people began to do transactions in the black market.
On November 2, 2017, President Maduro announced in a televised address that the country would seek to restructure and refinance its debt. It is estimated that Venezuela owed about $64 billion to bondholders, $20 billion to China and Russia, $5 billion to multilateral lenders like the Inter-American Development Bank, and tens of billions to importers and service companies in the oil industry. Maduro blamed U.S. sanctions for Venezuela’s need to restructure, arguing that U.S. sanctions made it impossible for the government to find new financing. Although President Maduro didn’t provide much about how the restructuring would be implemented, the announcement addressed the government’s dire fiscal situation and shift in policy.
Until recently, the Maduro government had committed to repaying its debts despite tight resources. However, its government commitment to debt service came at the high cost of international repayments, restrictions on access to foreign currency, imposed price controls, and cut imports. Venezuela’s imports of goods fell from $83.1 billion in 2015 to $67.1billion in 2019. Venezuela relies heavily on imports for most consumer goods, and cuts to imports led to severe shortages of food and medicine.
Higher Unemployment Rate
Unemployment in Venezuela is forecast to reach 35% in 2018, more than four times the level of unemployment in 2015, which was 7.4%.
Venezuela faces economic challenges of inflation, and budget deficits and debt that rooted from government failure to address and relying heavily on oil prices to sustain their economy. The government’s policy responses, including price and import controls, vague restructuring plans, and deficit spending financed by expanding the money supply (printing money), have not been affected. There are serious questions about what the Maduro presidency should do now to minimize the effects of the economic crisis and if the plans of restructuring work change the economy for the better.
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