Beginning in the past decade until late 2014, Venezuela 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 hydrocarbons, mining and metallurgy, cement, banking and telecommunications. Large social programs called misiones were implemented to deliver basic services and transfer resources to traditionally excluded sectors. Economic growth and resource redistribution 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, falling international oil prices, along with inadequate macro and microeconomic policies, have significantly affected Venezuela’s economic performance. The country relies heavily on the hydrocarbon sector (oil accounts for 96 percent of its exports). During the economic boom, Venezuela did not accumulate savings to mitigate a reversal in the terms of trade or to cushion the necessary macroeconomic adjustments.
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$35 billion. Access to external financing is restricted and the public deficit has been largely monetized. This type of financing, together with price controls and limitations on access to foreign currency and the participation of the private sector in terms of providing some basic goods, have led to one of the world’s highest inflation rates. The official rate at the end of 2015 was 180.9 percent, although unofficial estimates are much higher.
These imbalances have generated pressure on the exchange rate, even before international oil prices collapsed in late 2014. The government has worked to contain these pressures by implementing a multiple exchange rate system and additional exchange rate controls. These measures have contributed to a strong external adjustment through a contraction of imports. However, they have been unable to stem the outflow of foreign currency. At the same time, exchange measures and regulations on private sector participation in the production and distribution of some basic goods have triggered shortages of basic goods, inflationary pressures and supply problems in a productive structure that is heavily dependent on imports. In early 2016, the government switched to a dual exchange rate system, at the same time devaluing the lowest official rate by 37 percent, from 6.3 BsF per US$ 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 (official statistics demonstrate that GDP contracted by 5.7 percent in 2015 after contracting 4 percent in 2014, in a context of high inflation). On the demand side, it is presumed that economic activity is being maintained by public sector activity, particularly public sector consumption. Private consumption and investment have declined sharply, compromising long-term growth.
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.
Consequently, Venezuela faces major challenges. The most pressing is to contain the major macroeconomic imbalances that could easily reverse the social advances made. 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 should be accompanied by an active, well-designed policy to protect the population living in poverty.
- 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: Apr 11, 2016