Venezuela doesn’t have enough food to feed its 30 million residents. It also can’t guarantee them electricity or medical supplies in its hospitals. The country’s steering down social upheaval, political unrest and bordering on economic collapse. There are multiple states of emergency that have been declared.
But the question is, how did it happen to the country with the largest oil reserves in the world?
For years, subsidized oil brought Venezuela’s government influence abroad and popular support at home. But collapsing oil revenue in an economy dependent on it has caused civil unrest and calls for the unpopular president, Nicolas Maduro. Maduro has responded with mostly successful attempts to consolidate his power and squash opposition and trying to take the Venezuela’s democracy towards a dictatorship.
Venezuela’s Current Situation
Venezuela’s current crisis started long before Maduro with his current predecessor, the late president Hugo Chavez. He revolutionized the Venezuelan politics with his left-wing ideology called ‘chavismo’. While in power, Chavez focused the entire country’s resources on one thing – producing oil. This meant that everything that Venezuela consumes beside oil needed to be imported and Chavez borrowed a lot of foreign money to fund it all.
While oil prices were high, it worked. But in 2013, the first blow came to the country – Chavez died. Maduro took over and in 2014, the second blow was there – the price of oil started to crumble. Since the revenues from oil accounts for 95% of Venezuela’s export earnings, it hit the country’s economy very hard. When the prices of the commodity started to decrease, the country found itself short on cash.
The government responded by slashing the import of things like basic groceries and medical supplies to avoid defaulting on its foreign debt. It also started printing money which caused the inflation resulting in a triple digit without any end in sight. This has led to major social problems. The food shortages are so bad that it has led to riots.
Pre Election Scenario
A coalition opposed Maduro and wanted a majority in National Assembly in 2015, but its attempt to remove the president from the office has failed. Maduro recently formed a task group called “La Constituyente” to rewrite the country’s constitution. Less than a day later, he had two opposition leaders thrown back in jail snatched from their homes in a midnight raid at the gunpoint.
Then it came – the July 30th election. All the opposition people boycotted so the only option was to vote for presumed Maduro allies. The assembly has powers more than any other branch of the government. After the elections, the US Treasury imposed sanctions on the Maduro’s personal assets. The USA is Venezuela’s largest oil consumer, so these sanctions would most certainly be devastating.
Maduro’s critics say that he has done his presidency so badly that he should resign immediately. However, some other people say that the alternative isn’t much better. The opposition is made of more than a dozen parties without any unified plan to fix the economy without any single leader to do it.
Venezuela owes almost $90 Billion in foreign debt over the ten years and seeing the oil prices, it is very unlikely that they will hit the previous highs that kept the nation afloat. This is raising chances the country could default. So, for now, people are stuck with failing economy and a leader largely focused on staying in power.
Bills keep piling up
“This model is broken, and the default is inevitable,” says Siobhan Morden, an expert in Latin American bonds at Nomura Holdings. Oil “sanctions will probably arrive sooner and force default sooner.”
The Trump administration says harsher sanctions could come if the political situation continues to deteriorate. Trump’s big weapon to retaliate – A ban on Venezuelan oil, the country’s only source of income. The government’s cash pile would quickly dry up if it couldn’t sell to the United States, one of its top customers.
But sanctions are a double-edged sword. They could make Venezuela’s food and medical shortages even worse than they already are. They could also embolden Maduro’s base.
Beyond sanctions, Venezuela’s economy continues to spiral out of control. The unofficial exchange rate that most Venezuelans use has more than doubled since late July. Inflation is expected to soar 720% this year and over 2,000% next year, according to the International Monetary Fund.
Against that backdrop, experts say more sanctions from the White House would give Venezuela few options but to dry up its cash pile and miss payments.