Venezuela is facing its worst economic crisis in decades.
There are food shortages and water outages that have sparked rioting across the country.
Inflation is estimated to be the highest in the world at around 500% and rising
worse still, infant mortality is rising by 20%.
There are constant blackouts with reports that neuro surgeons are finishing operations
with only the light from their smart phones…
This is a far cry from a decade ago when Venezuela was the richest country in South America and
its socialist leader, the swashbuckling former paratrooper Hugo Chavez, was determined to
improve the lives of the country’s poorest.
And he had the money to do it, all because of one commodity - oil.
But more specifically, the price of that oil.
Venezuela has the world’s largest proven oil reserves and is a major oil exporter.
In fact, the black-stuff accounts for 95% of its total exports.
So throughout the 2000s, during the oil boom, Venezuela was in a strong
financial position.
However, all that changed in 2014.
Following Chavez’s death a year earlier, the oil price that the government was so heavily
dependent on, dropped by half in 6 months.
The decline in the price of oil is a well-known fact, so why then has Venezuela’s economy
seen such a violent and prolonged reaction while other producing nations haven't?
To answer that question we have to go back to when Venezuela’s problems really started, 2003.
That year there was an oil workers’ strike – brought about by opposition leaders in
an attempt to overthrow Chavez’s government.
It meant the country stopped producing oil and therefore stopped making money.
It was a critical time for Chavez.
The country needed to keep importing but it was facing a perfect storm…not only a collapsing
oil price but also a collapsing currency vs the dollar.
On the advice of the late Fidel Castro….
Chavez decided to fix the exchange rate in order to keep the whole economy stable.
Not only that, but he brought in a rule which meant that if you wanted dollars you had to
buy them from the government.
And this is the moment where many argue Venezuela’s economic time bomb started ticking because
Chavez’s emergency economic plan is still in place today.
But for years this wasn’t a problem, as the price of oil continued to rise, filling
the government’s pockets.
Jump forward to 2013 and El Commandante himself, Hugo Chavez died.
His former finance minister Nicolas Maduro became president promising to keep Chavez’s
economic legacy alive but a year later comes the dramatic drop in the price of oil.
So new president Maduro went to OPEC and tried to convince the other members to cut production
to help shore up prices but they couldn’t agree.
For years, Chavez’s legacy was all about offering subsidies to the poor, and in that time
Venezuela overspent their oil revenue, so within the 6 months of the price drop there
was a huge shortage of dollars, essential for the country to function.
Because of the shortage the government refused to sell their dollars unless it was absolutely
necessary.
In order to keep providing subsidized gasoline and services in healthcare, housing and education
the government pegged the official exchange rate at 6 bolivars to a dollar.
That led to a massive explosion in black market currency trading…
Less dollars meant its currency’s blackmarket value shot up.
So now there’s different prices in different markets and many Venezuelans took advantage.
So people would scam the government into selling them dollars at the official exchange rate,
for a holiday to America for instance, but instead of going abroad they would sell
the dollars on the blackmarket for a much higher price, making them a small fortune.
Rather than accept currency market forces the government kept its peg and continued
to borrow and print more money.
As a result, inflation soared.
To hide how bad the economy really was becoming the government stopped reporting inflation
data but across the country the price of goods continued to rise and price controls did little
to help.
Now, in 2016 Venezuelans are facing a situation akin to the Weimar republic in Germany.
Store owners are weighing money instead of counting the notes.
And not only going up in price but staples such as rice, milk and consumer goods like
toilet paper and condoms are also becoming a rarity leading to people standing for hours
in long-lines at stores.
Under pressure to act, President Maduro has brought in new measures… school days and
office hours have been cut, borders have been temporarily closed to stop smuggling, and
the 100 bolivar note has been taken out of service.
And new higher denominated notes are being introduced.
Even more poignant: Christmas toys have been seized from big retailers and distributed
to the poor.
Throughout the economic and political turmoil of course, Venezuela is still exporting billions
of dollars’ worth of oil, but it’s not enough to help pay for the government’s
ongoing subsidies.
Some are hoping that OPEC’s recent agreement to slash production will keep pushing oil
prices higher - enough at least to ward off the very worst of Venezuela’s economic problems,
but most analysts agree the country needs to diversify away from its reliance on a single
commodity.
And ultimately It’s up to the country’s lawmakers to agree on how best to implement those
much needed reforms in order to bring about change.