Alaco

20.05.2016 | Is Venezuela on the brink?

Anti-government protests spreading across the country as the economy collapses.

Embattled Venezuelan President Nicolas Maduro cuts an increasingly desperate figure.  His oil-dependent economy is in meltdown and an opposition campaign to oust him is gathering pace. He blames foreign powers for conspiring with right-wing politicians in Venezuela to bring down his administration, but it is all beginning to sound like the feverish claims of a leader who is rapidly running out of ideas.

The country, possessing the world’s largest oil reserves, is in deep recession.  Basic foodstuffs and medicines are in short supply. People are queuing for hours, with looting on the rise.  Many local businesses are said to be operating at less than half capacity because the government won’t allow them to buy dollars to pay foreign suppliers. The country’s largest food and beverage company, the Polar Group, stopped beer production last month because it had run out of barley. 

The shortage of dollars to pay for imports is only part of the problem. Price controls introduced in the early 2000s prompted some producers to boycott state-owned stores or stop producing subsidised foodstuffs altogether. The situation is said to have been exacerbated by hoarding and the smuggling of goods to neighbouring Colombia. Venezuela’s difficulties have been made even more acute by a severe drought that has hampered the country’s hydro-electric capacity, which provides most of its electricity needs, resulting in severe power cuts.  Public sector workers are employed for just two days a week, in order to save on energy bills.

With inflation standing at 180 per cent and the economy predicted to shrink by 8 per cent this year, Venezuela’s prospects are bleak.  Maduro, a former bus driver and trade unionist who succeeded his mentor, the late Hugo Chavez, three years ago, has declared a state of emergency for 60 days. The police and army have been granted sweeping powers, which include the supervision of the production and distribution of food. Maduro has threatened to seize factories that have halted output and arrest their owners. 

The opposition, which won control of the National Assembly in elections last December, ending 17 years of Socialist Unity party domination, has been emboldened by public anger over the chaos engulfing the country. However, a series of new laws enacted by the legislature have either been nullified by the Supreme Court or simply ignored by Maduro. The opposition has begun a process that could lead to a referendum vote on whether Maduro, whose term ends in 2019, should stay in power.

The ballot is gaining public support, and the authorities appear to be attempting to prevent it from going ahead. In response, the opposition has been organising nationwide protests that have led to clashes with security forces. The President has accused his opponents of trying to emulate the impeachment of President Dilma Rousseff in Brazil, but such is Maduro’s hold on the institutions of power that it will be hard to remove him from office. 

While the present crisis has been brewing for some time, the plunge in the oil price appears to be tipping the economy over the edge.  When it was high, the authorities spent generously on social and welfare programmes, which raised living standards significantly, but failed to diversify the economy or build up reserve funds.  Officials have turned their backs on the IMF, instead borrowing some 50 billion dollars from China, mostly in exchange for oil shipments. But Venezuela is reported to have struggled to meet repayments and oil obligations. 

In a vain attempt to calm the economic storm, Maduro has devalued the national currency and increased fuel prices. With few options left, Venezuela has been lobbying hard for the world’s major petroleum producers to cut production in order to boost the oil price. An attempt to get fellow OPEC members to freeze output at January levels recently came to naught.  Saudi Arabia, OPEC’s defacto leader, called off the move after Iran refused to play ball. The latter is only likely to consider a cap when its own production reaches pre-sanctions levels.  Venezuela wants non- OPEC members – including Russia, which has also been keen on an output freeze – to participate as observers at the cartel’s next meeting in June, concerned that unless there’s a broad agreement between producers prices could remain low.   

In the past week or so, the oil price has rallied due to falling production in America and output disruption in Canada, Nigeria and Venezuela. This may give Maduro some relief, but not for long as Iran and Saudi Arabia are showing little sign of slowing production. It’s hard to see a way out of the crisis. Maduro's position appears to be hardening, and with little likelihood of the economy improving demands for his removal are only likely to get stronger. That’s led to concerns that the country may be in danger of becoming a dictatorship.