Venezuela's Worst Economic Crisis: What Went Wrong?

May 4, 2017

Country sitting on world's biggest oil reserves is now region's poorest performer in terms of GDP growth per capita.



Venezuela is experiencing the worst economic crisis in its history, with an inflation rate of over 400 percent and a volatile exchange rate.


Heavily in debt and with inflation soaring, its people continue to take to the streets in protest.


President Nicolas Maduro  announced the highest increase in the minimum wage ordered by him  -  65 percent of the monthly income, and recently announced the creation of a new popular assembly with the ability to re-write the constitution.


International concern raised, with Chile and Argentina among the countries expressing worry. The Venezuelan opposition says the move further weakens the chances of holding a vote to remove Maduro.


But backing has come from regional leftist allies including Cuba. Bolivia's President Evo Morales said Venezuela had the right to "decide its future... without external intervention."


The country sits on the world's largest oil reserves, but, over the past decade, it has been the region's poorest performer in terms of growth of GDP per capita.


Since 2014 the government has not made any economic data available making it difficult to track.


But what went wrong?


1) What is the state of Venezuela's economy today?


Venezuela depends heavily on its oil. It has the largest oil reserves in the world which, in 2014, had 298 billion barrels of proved oil reserves.


Oil revenue has sustained Venezuela's economy for years. During the presidency of Hugo Chavez, the price of oil reached a historic high of $100 a barrel.


The billions of dollars in revenue were used to finance social programmes and food subsidies.


But when the price of oil fell, those programmes and subsidies became unsustainable.


The government is also running out of cash. According to the Central Bank of Venezuela, the country has $10.4bn in foreign reserves left, and it is estimated to have a debt of $7.2bn.


According to International Monetary Fund (IMF) figures, in 2016, the country had a negative growth rate of minus 8 percent, an inflation rate of 481 percent and an unemployment rate of 17 percent that is expected to climb to 20 percent this year.


Currency controls have limited imports, putting a strain on supply.


The government controls the price of basic goods, this has led to a black market that has a strong influence on prices too.


The most recent report by CENDAS (Centre for Documentation and Social Analysis) indicates that in March 2017 a family of five needed to collect 1.06 million bolivars to pay for the basic basket of goods for one month, that includes food and hygiene items, as well as spending on housing, education, health and basic services.


The cost of that basket rosed by 15.8 percent that is an increase of 424 percent compared to 2016.


2) Shortages of food and medicines


During the rule of Hugo Chavez, the price of key items, food and medicines were reduced. Products became more affordable but they were below the cost of production.


Private companies were expropriated, and to stop people from changing the national currency into dollars, Chavez restricted the access to dollars and fixed the rate.


When it became unprofitable for Venezuelan companies to continue producing their own products, the government decided to import them from abroad, using oil money.


But oil prices have been falling since 2014, which has left the economic system unable to maintain the system of subsidies and price controls that functioned during the oil boom years.


The inability to pay for imports with bolivares coupled with the decline in oil revenues has led to a shortage of goods.


The state has tried to ration food and set their prices, but the consequence is that products have disappeared from shops and ended up in the black market, overpriced.


As many as 85 of every 100 medicines are missing in the country. Shortages are so extreme that patients sometimes take medicines ill-suited for their conditions, doctors warn.


Given the long litany of woes, some analysts think there are two options before Maduro's government: to default on its debt or to stop importing food.


Follow the link to see the source article published by Al Jazeera May 3, 2017.



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