Many oil producers have been hard hit by the fall in oil prices, but perhaps none more so than Venezuela. Oil is Venezuela’s primary source of revenue and the economy is incredibly dependent on oil exports. In fact, oil revenue is thought to account for at least 95 percent of its foreign currency earnings. Within the past six months world oil prices have fallen by over 50 percent, hitting the already faltering economy very hard.
Critics say the crisis is the government’s own making, pointing to a failure to diversify the economy and a series of failed government policies. For over a decade, under Hugo Chavez and Nicolas Maduro, Venezuela developed a generous welfare system financed by oil sales. While cash transfer programs, subsidies and price controls were successful at reducing poverty, they had disastrous effects on the economy.
Manufacturers complain that the price controls have made it very difficult to make a living and have forced them to cut back on production. The number of Venezuelan manufacturers fell by more than a third during the first eight years of Chavez’s presidency. This helped to create an unhealthy economic climate well before the fall in oil prices.
Over the past few months things have gone from bad to worse. Any successes at reducing poverty are about to unravel as Venezuela’s economy deteriorates. Inflation in Venezuela is currently the highest in the world, estimated at close to 80 percent. That is more than four times higher than the inflation rate in Ukraine, another economy facing a major crisis. Its currency is severely overvalued. Government currency controls have kept the official exchange rate at 6.3 bolivars for one U.S. dollar, but the black market rate is more than 200 bolivars for one U.S. dollar and rising.
Venezuela has had to reduce imports by nearly half and the country is now facing widespread food and commodity shortages. Many foods and goods are no longer available in supermarkets. In fact, the Venezuelan government has asked for assistance from neighboring countries to resupply it.
The few goods that are available have become outrageously expensive and shoppers face extremely long lines. A pack of contraceptives costs nearly 800 dollars. This is bad news for a country that has one of the highest rates of HIV/AIDS and teen pregnancy in South America.
The inflated prices have caused the real value of the minimum wage to plummet from 360 dollars a month to 20 dollars a month. This puts it on par with the poorest countries in sub-Saharan Africa and means many Venezuelans are now living below the extreme poverty threshold of one dollar a day.
The economy is expected to contract by at least three percent, but many think this estimate is optimistic, especially since more trouble is on the horizon. The government has failed to explain how it plans to fulfill its debt obligations for 2015 and few expect it will be able to. Economists think it is probable that Venezuela will default on more than 10 billion dollars worth of debt next fall, which will inevitably make the situation worse.
Maduro’s popularity has plummeted; his approval rating is now lower than 25 percent. The government points fingers at the U.S. and opposition parties. The government has also cracked down on businesses and opposition lawmakers. Last month the mayor of Caracas was arrested on allegations of plotting a coup and a major supermarket chain was nationalized. Its CEO was arrested and is being accused of hording goods.
Elections are planned for later this year. Venezuela was once considered one of the most prosperous countries in Latin America, but now it is one of the poorest. While markets may be watching the Eurozone more closely because of its larger size, the worst economic crisis of the year is unfolding in Venezuela.
– Matt Lesso