From the beginning of the past decade until late 2014, Venezuela has benefited from historically high oil prices, which enabled increased public spending on ambitious programs. The government established a variety of public companies and nationalized many private firms in sectors such as oil and gas, mining and metallurgy, cement, banking and telecommunications. Large social programs called misiones were implemented to deliver basic services and transfer resources to previously excluded parts of the population. Economic growth and redistribution policies led to a significant decline in poverty, from 50 percent in 1998 to approximately 30 percent in 2013, according to official figures. Inequality also decreased, as reflected in the decrease in the Gini Index, from 0.49 in 1998 to 0.40 in 2012, among the lowest rates in the region.
Nevertheless, the collapse in international oil prices, along with inadequate macro and microeconomic policies, have significantly affected Venezuela’s economic and social performance. The country’s reliance on the hydrocarbon sector has sharply increased (oil now accounts for 96 percent of exports). Also, during the economic boom Venezuela did not accumulate savings to mitigate a reversal in terms of trade or to cushion the necessary macroeconomic adjustment.
In the short and medium term, Venezuela faces major financing needs, with a fiscal deficit estimated at 20 percent of GDP at the end of 2015, and external financing needs estimated at between US$25 billion and US$35 billion. Access to external financing is restricted and the public deficit has been largely monetized. This source of financing, price controls, limitations on access to foreign currency, and the collapse of the private sector in the provision of basic goods, have cumulatively led to one of the world’s highest inflation rates.
These imbalances generated pressure on the exchange rate even before international oil prices collapsed in late 2014. The government has worked to contain these pressures by implementing a multiple exchange rate system and additional exchange rate controls. These measures have contributed to a strong external adjustment through a contraction of imports. However, they have been unable to stem the outflow of foreign currency. At the same time, exchange measures, and regulations on private sector participation in the production and distribution of some basic goods, have triggered shortages of basic goods, inflationary pressures, and supply problems in a productive structure that is heavily dependent on imports. In early 2016, the government switched to a dual exchange rate system, at the same time devaluing the lowest official rate by 37 percent, from 6.3 BsF per US$ to 10 BsF per US$ and ordering that the other exchange rate would be a floating rate. The government also announced an increase in fuel prices, although the new prices are still heavily subsidized.
As a result, Venezuela faces major stagflation. GDP is estimated to contract in excess of 10 percent in 2016, implying a cumulative output contraction of more than 20 percent since 2013. Private consumption has collapsed as runaway inflation eroded incomes. Moreover, investment has plunged, undermined by widespread distortions and uncertainty, causing the capital stock to shrink. The sharp compression in domestic demand has been accompanied by a collapse in imports. Output was further undermined by a severe drought that, together with underinvestment in the hydropower system, triggered an electricity crisis, which has abated in recent months.
Falling global oil prices have deepened macroeconomic imbalances. The current account recorded a significant deficit in 2015, after a small surplus in 2014, with a sharp decline in the surplus of trade given that the price of Venezuelan oil fell 50 percent in 2015, in line with international crude prices and despite a marked decline in imports. The price of the Venezuelan crude fell an additional 35 percent in the first eight months of 2016, averaging less than half the level required to balance the fiscal accounts, while oil production contracted by an estimated 10 percent in the first half of 2016.
Consequently, Venezuela faces major challenges. The most pressing challenge is to contain the major macroeconomic imbalances that are already reversing previous social advances. As a complementary measure, Venezuela needs to reestablish private sector confidence by improving the investment climate in an effort to strengthen its long-term growth perspectives, and to diversify its exports to reduce its extreme vulnerability to oil price fluctuations. Finally, these adjustments could be accompanied by an active, well-designed policy to protect the population living in poverty.
QUICK FACTS:
- Name: Bolivarian Republic of Venezuela.
- Population: 31.4 million (estimated, 2013).
- Capital: Caracas.
- Other important cities: Maracaibo, Valencia, Maracay, Barquisimeto, Mérida, San Cristóbal and Barcelona-Puerto La Cruz.
- Area: 916,445 km².
- Currency: Bolívar.
- Exports: Oil.
- Language: Spanish.
- Religion: Catholic majority.
- Life expectancy: 75 years (2013).
Last Updated: May 02, 2017
