A collapsing Venezuelan economy on its way into the abyss

Masses of people waiting outside of state-owned supermarkets have become a common sight in Venezuela in the past year. The shortage of basic foods make Venezuelans spend entire nights outside grocery stores in the hopes of getting hold of some rice, milk, canned food or whatever might be offered that day. The economic collapse and uncontrolled inflation in Venezuela has hit the nation hard, and it is only getting worse.

For over a year the Venezuelan economy has been in absolute freefall and the situation is rapidly becoming critical. Inflation has skyrocketed and is expected to reach a staggering level of 720 % during 2016. The crisis affects citizens in a ruthless way as the availability of trivial goods is extremely scarce. When the rumour of an arriving delivery truck spreads, hundreds of people can be seen queuing outside of a store with an armed guard controlling the inflow in order to prevent chaos. Each time is uncertain, as customers never know what available products to expect.

Quite ironically Venezuela sits upon the largest oil reserves in the world, which has been both a blessing and a curse. It is hardly surprising that the crisis originates in the dramatic drop of oil prices in 2015. As the economy of Venezuela is dependent on oil prices to 95 % it was disastrous when the price of oil plunged from $100 per barrel to merely $40 per barrel.

As well as the huge and continuous inflation growth, the gross domestic product has fallen by 7.1 % in the final quarter of 2015 only. An enormous trade deficit of $782 million dollars according to the central bank threatens the country to bankruptcy. And there seems to be no light at the end of the tunnel as oil prices are predicted to only decrease further, to about $30 dollars per barrel. The enormous decrease in GDP during 2015 makes Venezuela the worst performing economy in the world according to IMF. The socialist regime has long been taking pride in the reduction of poverty during the rule of former president Hugo Chávez. The severe recession that has worsened for more than a year now challenges this claimed accomplishment. Since the crisis started, the Venezuelan poverty has increased rather dramatically and is said to have reached the highest levels in over a decade.

Long queues of waiting people has been a common sight outside supermarkets in Venezuela. Picture: DerMikelele, Flickr, CC

The fact that the regime has been put in an inconvenient position becomes obvious in their response to the crisis. President Nicolás Maduro very recently appointed a new economic team to tackle the crisis. Luis Salas, who is the minister in overall charge of the economy, actually rejects the idea that printing money to finance a deficit will cause inflation. This is a basic economic principle and the fact that major leaders dismiss it completely is bad news for the South American nation. The latest numbers show inflation running at 180.9 %¸ and as mentioned earlier is expected to reach outrageous levels during 2016. For the sake of putting this in perspective, Sweden currently has an inflation of 0.8 %.

The escalating Venezuelan inflation. Most recent numbers show it is running at 180.9 %, but is predicted to reach a level over 700 % in 2016. In comparison, Sweden has an inflation of 0.8 % at the moment. Source: tradingeconomics.com

A sign that the penny might have dropped for the regime is that President Maduro ultimately announced a 60-day economic emergency in January. If the declaration of the emergency is to pass in the National Assembly, it would imply that the government gets more influence during this period and is allowed further insight into companies. The increased state control over businesses and the industrial sector could make it possible for the government to intervene and also limit access to currency. If this will be enough remains to be seen but most projections show that the crisis is still far from having reached its lowest point. Young and educated people are fleeing Venezuela to neighbouring countries, the soaring inflation rate is out of control and oil prices are only predicted to decrease further.

Many politicians are blaming the situation on a so called “economic warfare” from the international community and North-American imperialism. Even though there could be some truth to these statements, it is nevertheless unavoidable to see Venezuela’s own responsibility in what has happened. In many aspects the nation has dug its own grave in the past 10 years as it has developed a harmful dependency on the export of oil. Critics claim that Venezuela has been naïve for a long time as they were unable to handle resources in a smart way and lacked in long-term thinking. For a long time they used their oil to create good relations and get allies as they basically handed out oil.

As new energy sources are developed and possibly could get a big impact on the world market, demand for oil might never reach its “glory days” again. Aside from the hopes of recovering oil prices in a near future, a rough road awaits Venezuela and a fresh start is needed. The country will have to adjust to the lower international oil prices, and restructure its economy. An economic diversification away from oil is essential and the implementation of measures to lower the inflation must take place immediately. These are just two out of numerous major steps that have to be taken in order to move in the right direction. Nevertheless, the road to stabilizing the Venezuelan economy will be both long and bumpy.

Alexander Edberg Thorén

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