Venezuela: Venezuelan National Assembly and government take steps to mitigate worsening economic crisis
February 11, 2016
The low price of oil has significantly limited Venezuela’s access to foreign currency and is simultaneously causing inflation to balloon and creating chronic goods shortages. The commodity, which accounts for about 95% of Venezuela’s exports and half of public revenues, plunged again at the beginning of the year. To combat the deepening crisis, President Nicolas Maduro created the National Council of Productive Economy (Consejo Nacional de Economía Productiva) comprised of 45 members from the public and private sector. The body, which is composed of politicians, businessmen and professionals, has the ambitious task of jumpstarting the economy by boosting productivity in nine key sectors or “engines” of the economy. The sectors range from the oil industry to agriculture and telecommunications. The Council, led by Vice President Aristóbulo Istúriz, aims to solve the crisis by focusing on five different levers: increasing the supply of foreign exchange earnings, regulating the system of production, improving the distribution of staple goods, optimizing revenue collection, and speeding up national banking process.
The opposition-controlled National Assembly is attempting to mitigate the crisis by approving and bringing numerous bills to the floor. The Assembly declared that there is a humanitarian crisis in Venezuela in order to enable Maduro to increase the supply of basic pharmaceutical products. Maduro can now increase the quantities of medicine sold and sell medicine without making a profit. On 11 February, the Assembly presented the Law of National Production and declared another national emergency, this time regarding food shortages. The law aims to invigorate domestic production by simplifying bureaucratic processes to attract foreign investment and to provide greater legal security to investors by eliminating the possibility of politically-motivated expropriations. Lastly, the Assembly plans to approve numerous laws that will increase subsidies to retirees and pensioners’ in an effort to alleviate high consumer prices.
Amid the mounting economic crisis, the president has been trying to give the impression that he is taking concrete action. However, analysts agree that the Venezuelan government, as well as the opposition, are running out of time. The shortage of basic consumer goods is hitting a critical state and access to foreign currency is becoming even more difficult. In an effort to improve the liquidity of its foreign reserves ahead of the USD 9.5 billion in external debt payments that are due this year alone, the Venezuelan government started negotiating a gold swap with Deutsche Bank. This is not the first time that the government has resorted to selling gold reserves in an effort to raise cash. The IMF revealed that Venezuela exchanged its Special Drawing Rights (SDR) for hard currency three times last year and the latest available data from the Central Bank show that international reserves are lingering near a 12-year low. The ability of the oil-exporting country to make good on its debt commitments is becoming increasingly uncertain. To further compound the issue, the highly-anticipated meeting between Venezuela’s and Saudi Arabia’s oil ministers was inconclusive. The parties were unable to reach an agreement regarding oil production cuts to shore up oil revenues, and this suggests that public finances and government earnings will not improve in the coming months.
After President Maduro reported in January that inflation reached 141.5% in September, no new official figures have been released. Analysts’ view on price developments in the country has deteriorated. The analysts who participated in our poll estimate that inflation has worsened since the 141.5% recorded in September 2015 and that it soared from December’s 194.8% to 211.4% in January. Inflation has been skyrocketing without abating as the drop in oil prices is hindering the ability of the government to supply dollars to its complex exchange rate system. Public finances are unlikely to improve as the Venezuelan government has forecast the price per barrel of oil to average USD 40 in 2016 and oil prices dipped to multi-year lows in early January.