How Venezuela's economy went to ruins?

Hello everyone, this week I will be analysing how the oil-rich Venezuela's economy went downhill and what repercussions the nation faced resultantly.

In November 2022, the United States of America lifted the three-year-long oil sanctions on Venezuela opening a new chapter and prospects for the Latin nation's economic growth which has been facing years of economic and political turmoil. Venezuela is home to one of the world's largest oil reserves and oil export became the economy's main driving force. The nation's majority of revenues came from the export of oil, leading to high dependence on its export of the mineral. Venezuela was the richest of all Latin American nations however, the nation plunged into an economic and political crisis in 2016, for the very same reason for its high dependence on its oil exports when the world prices of oil went downhill from $100 per barrel to just about $30 per barrel in 2016, pushing the economy into a deep crisis. The plunge in oil prices accompanied by President Maduro's inaction pushed the economy into a 7-year-long recession.

Economy's dependence on Oil

Oil has been the major export of Venezuela's economy making oil sales about 99% of the nation's export earnings and making up to a quarter of the nation's total GDP. This high dependence on oil exports brought misery to Venezuela's economy in 2016, which was the world's fourth-largest oil exporter when oil prices plummeted from $100 a barrel to just about $30 per barrel. This free fall in oil prices plunged the nation's export earnings because of its high dependence on oil exports.

In January 2019, the United States which made up to 41% of Venezuela's oil exports, imposed sanctions on the nation's state-owned oil company PDVSA accusing President Maduro (Venezuela's undeclared dictator) of stealing the company's oil funds. This hit Venezuela hard as America and its allies stopped oil imports from the country and this plummeted the nation's oil earnings pushing the nation into a 7-year-long recession as the government's revenues plummeted and inflation skyrocketed.

Falling Oil production

As the US imposed sanctions on the Venezuelan economy, foreign investments dried up and the nation's revenue nosedived, this had a huge impact on the nation's oil production which declined to its lowest in decades in 2020. This loss of revenue made the country run into a fiscal deficit for a very long time due to which the welfare programmes promised by the government were rolled back and the external debt of the nation increased. The nation currently has a debt of more than $150 billion.

Hyperinflation

Venezuela is one of the economies that is facing hyperinflation- a situation where inflation rates measure more than 50% per month. In 2019, the IMF warned that inflation in the second half of 2019 could top a staggering figure of 10 million per cent. The major reasons behind the inflation rate are the shortage of basic goods and services in the nation, the ill management of the economy under Maduro, the rising debt levels on the government has forced cuts in public expenditure and the falling oil revenues have skyrocketed inflation in the country.

Political Crisis

President Nicolas Maduro and his allies have possibly done everything to stay in power- rigged national elections, followed oppressive policies, and repressed opposition which has led to mismanagement of the economy due implementation of poor and ineffective policies. The economic and political situation of the nation has resulted in a humanitarian crisis leading to millions of Venezuelans leaving the country in search of a better future in their neighbour Colombia.

Analysis

The situation in Venezuela had gone from bad to worse after the COVID pandemic and the Russia-Ukraine war however the upliftment of the US sanctions on PDVSA's oil production could act as a major boost for the nation to restart its economy and get it back on track. However, in order to avoid such future problems the national government should formulate policies that can solve the crisis and be effective in the long run. These can include economic diversification of the economy, particularly in the export sector as the government is solely dependent on oil exports for its revenue. For this, the government can focus on the export and extraction of other minerals like gold and bauxite which are abundant in the nation.

The government can also encourage FDI by creating a conducive political environment in the nation by calling for fresh and fair elections to encourage foreign investors to invest in the economy. This will help improve the employment conditions in Venezuela, which will lead to the betterment of the standard of living thus promoting economic growth and development. The nation can also encourage the privatisation of firms which will help improve production efficiency and drive in more investments. As the US eases sanctions on Venezuela, it brings an opportunity for the nation to make a comeback in the oil market, help raise its revenues and use it for people's welfare in the economy.

---

References:

“Venezuela: The Rise and Fall of a Petrostate.” Council on Foreign Relations, Council on Foreign Relations, https://www.cfr.org/backgrounder/venezuela-crisis.

Buschschlüter, Vanessa. “Venezuela Crisis in Brief.” BBC News, BBC, 4 Jan. 2023, https://www.bbc.com/news/world-latin-america-48121148.

Sabga, Patricia. “What Brought Venezuela's Economy to Ruin?” Business and Economy | Al Jazeera, Al Jazeera, 1 Feb. 2019, https://www.aljazeera.com/economy/2019/2/1/what-brought-venezuelas-economy-to-ruin.

Uganda, Ntv. “President Nicolas Maduro Hailed a ‘New Dawn’ in Venezuela on Monday as He Celebrated His Now Total Grip on Power Following a Predictable Triumph in Polls Boycotted by the Opposition and Slammed as a Farce by International Powers #MorningatNTV #NTVNews Pic.twitter.com/2xwcvdtckv.” Twitter, Twitter, 8 Dec. 2020, https://twitter.com/ntvuganda/status/1336165920599904256.