Will Venezuela find a way to conquer its Dutch Disease and decrease its enormously high inflation?
Venezuela is currently struggling with the greatest economic, social and political crisis in its history. What will happen tomorrow, and in the distant future has become questionable. The inflation has been hard-hitting and high every day, and the shortage of goods has already become critical. Inflation was predicted to soar up to 720% by the end of 2016, and 1500% in 2017. Solutions must be garnered for the catastrophic situation.
There are many different reasons cited for the current situation; the main cause is Venezuela’s oil-based economy. With the largest crude oil reserves in the world, and 25% of its GDP contributed by oil revenue, 96% of its export being oil, the economy is nothing but vulnerable. When the price of oil fell in 2014 and 2015, Venezuela found itself drowning, and the situation continues today. The next cause of the recursive economic situation when the government decided to fund social peace with oil-money. The next cause came in, in the form of Chávez, when preferential payment was given for oil to states of the Petrocaribe alliance. Furthermore, high governmental controls on prices has led to the reduced production level, which has lowered consumption and caused shortage of goods. In the already critical situation, the government decreased import in order to conserve a currency; this caused an even greater shortage of goods, and rise of the minimum wage contributed to the already high inflation.
Finding a solution to an undermined, underperforming economy has become the mainstay of many a political agenda. The country’s deep debt and low exchange rate has not been particularly helping. In addition, raging social crisis and criminal activities have already reached a precarious level. People are desperate, and the government powerless.
A well-tested solution maybe issuance of bonds. The step may be something like a multi-pronged solution. Devaluation of currency that has burdened the already financially weak, low production, poor imports, a decrease in the consumption and increasing black market would be targeted. Issuance of bonds may be able to assist the government in unloading funds from the market, and targeting inflation in the medium-term. Another bright spot is oil which, fortunately, Venezuela has in abundant. The Netherlands could find its way out in 1977, from a similar experience. It remains to be seen whether Venezuela, with the Dutch Disease, will be able to restore itself starting now. Some state that Venezuela would not have suffered such a collapse if it had established a fund and saved a part of the earned money from oil. Projections from the solution are reportedly good, but are futile at this juncture. However, the solution has been counted upon as useful, when Venezuela has recovered from its trenches of economic holocaust. Debt remains the biggest economic threat. It has come to around USD 138 billion, which is equal to the value of six years of oil exports. The greatest debt is toward China, about USD 65 billion; the only hope is that China agrees to grant loans in return for oil, in the long term. Bonds may actually be able to help the government pay off creditors and restore investor and consumer confidence. The bond-issuance comes with the ‘high-risk’ tag, not surprisingly. Since 2014, investors have faced desperate times with bonds. But perhaps, it is high time that it is understood that long-term solvency of Venezuela will not be an issue, thanks to its oil reserves.