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Venezuela’s Real Problem Is Financial

Jose Luis Chalhoub by Jose Luis Chalhoub
07/03/17
in Featured, Opinion
Demonstrators clash with members of Venezuelan National Guard during a rally demanding a referendum to remove Venezuela's President Nicolas Maduro in San Cristobal  in 2017. Photo: Reuters

Demonstrators clash with members of Venezuelan National Guard during a rally demanding a referendum to remove Venezuela's President Nicolas Maduro in San Cristobal in 2017. Photo: Reuters

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CARACAS — Massive protests in Venezuela’s largest cities against President Nicolas Maduro are now reaching more than 80 days, and show no signs of losing momentum. By contrast, similar protests often died down after just a few days.

Due to the most severe economic and financial situation the country has witnessed in the last 20 years, the protests may well lead to the fall of the Maduro government.

Venezuela is currently suffering the sharpest inflation in five years, which has shot up to above 800% and the local currency, the bolivar fuerte (VEF), has reached its weakest ever point due to a continuing mishandling of the economy by the government. Reduced inflows of money from oil exports and a never-ending spiral of printing money over the last five years has contributed to this.

In addition, as if all this was not enough, Venezuelans have experienced perpetual shortages of food, basic products, high levels of delinquency in almost every large city, and a corrupt security system in which police officers have been continuously implicated in criminal actions.

Furthermore, the price of oil is still not high enough for the country to keep up with its international and local obligations. Additionally, diminished foreign reserves, now around just $10 billion, mean the country has no safety net should it fall over the ever-closer brink of ruin.

In the wake of these protests, the Maduro administration stepped up its attacks against international companies. In the case of General Motors, one of its main units was seized in the industrial city of Valencia, and it afterward announced it would halt all operations in the country. Similarly, President Maduro blamed Telefonica-MOVISTAR, the largest cell phone operator in the country, for inciting people to join the wave of protests through text messages.

Mr. Maduro’s actions have raised the level of political risk in the region while also severely damaging Venezuela’s already weakened image on the global stage. The country is indisputably heading towards a total collapse. This could potentially reach a default on its international debts and loans, running out of enough of an influx of money due to the low levels of oil prices that are now running around $50. Venezuela has been lobbying within OPEC for prices between $60 and $70 per barrel to sustain the Bolivarian Revolution’s now decaying social programs.

In the heat of intensifying anti-government protests, Mr. Maduro proposed the idea of the Constituent Assembly, which is due to be held on July 30. The proposal was fiercely rejected by his opponents, who argue that it is designed to cool off the wave of riots and protests. They claim that its main goal is to push for general elections this year instead of the next year since Mr. Maduro nears the end of his presidential term in December 2018.

Rather than a political solution, which might be the first step to bring about financial and economic reforms, economic reforms are more urgent. The government, first of all, needs to lift the longstanding currency control and reform an almost historical policy of subsidies for many critical sectors and public services. It needs to set clear rules of games for foreign investors and progressively eliminate endemic bureaucratic red tape. The most important of all, the authorities have to set a real path for a diversification of the Venezuelan economy to avoid being the subject to the swings of oil prices.

In sum, Venezuela’s political and social problems will find a solution once its financial and economic hurdles are seriously settled, and the mindset in the country is changed.

Disclaimer: The views and opinions expressed here are those of the author and do not necessarily reflect the editorial position of The Globe Post.
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Jose Luis Chalhoub

Jose Luis Chalhoub

Political Risks Analyst based in Venezuela.

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