Crisis in Venezuela: Explained

Crisis in Venezuela: Explained

Kamaraj IAS Academy | Crisis in Venezuela: Explained
  • March 13, 2019, 1:22 pm

Venezuela has been caught in a downward spiral for years with political discontent further fuelled by skyrocketing hyperinflation, power cuts and shortages of food and medicine. More than three million Venezuelans have left the country in recent years.

Times of  Hugo Chavez

1999 Elections brought Hugo Chavez as president in power. In 2002, the Venezuelan opposition staged a coup d’etat that removed Chavez and installed the businessman Pedro Carmona as president. Carmona immediately received the backing of both the Bush administration and the US liberal establishment. However, huge popular protests forced Carmona to flee and Chavez returned to the presidency within 48 hours.

In reaction to Chavez, Venezuelan business leaders launched a “lockout”, hoping to oust Chavez by precipitating an economic crisis. The lockout caused GDP to contract by more than 25%, the Chavez government sustained by wresting control of the oil sector. By redirecting Venezuela’s oil revenues towards people’s needs, the government was able to cut poverty by more than half by 2009. At the same time, unemployment fell by 40%, and the Gini index, which measures inequality, fell from 48.1 to 41.

Chavez called it “21st-century socialism”. This project had significant popular support, and Chavez repeatedly won national elections.

Nevertheless, Chavez failed to address several structural problems. Oil revenues constituted more than 90% of Venezuela’s exports, and the country remained dependent on imports for essential commodities, including food. When Chavez died in 2013, Hell broke loose. Global oil prices crashed from over $100 per barrel in 2011-13 to $30 per barrel in 2015. This forced Venezuela, whose main source of income was oil exports, to reduce imports by 81% from 2012 to 2017, and led to an acute shortage of daily commodities. A loss of confidence in the domestic currency caused its value to collapse.


What exactly is the crisis rocking Venezuela now?

In Venezuela, many want to know exactly who’s the president? On 23 January 2019, the leader of the legislature, Juan Guaidó, declared himself acting president and said he would assume the powers of the executive branch from there onwards. The move was a direct challenge to the power of President Nicolás Maduro, who had been sworn into a second six-year term in office just two weeks previously.


How did the protests start?

Nicolás Maduro was first elected in April 2013 after the death of his socialist mentor and predecessor in office, Hugo Chávez. During his first term in office, the economy went into freefall and many Venezuelans blame him and his socialist government for the country's decline. Mr Maduro was re-elected to a second six-year term in highly controversial elections in May 2018, which most opposition parties boycotted. Many opposition candidates had been barred from running while others had been jailed or had fled the country for fear of being imprisoned and the opposition parties argued that the poll would be neither free nor fair.


Who is Juan Guaidó?

Citing articles 233 and 333 of Venezuela's constitution, the legislature says that in such cases, the head of the National Assembly takes over as acting president. That is why Mr Guaidó declared himself acting president on 23 January. Followed by which the supreme court takes over the National assembly. Protests start on the next day in Caracas. Demonstrators also protested hyperinflation and shortages of food and medicines in the country.


Problems in Venezuela

The socialist policies brought in which aimed to help the poor backfired. Take price controls, for example. They were introduced by President Chávez to make basic goods more affordable to the poor by capping the price of flour, cooking oil and toiletries. But this meant that the few Venezuelan businesses producing these items no longer found it profitable to make them.


The foreign currency controls brought in by President Chávez in 2003. Since then, Venezuelans wanting to exchange bolivars for dollars have had to apply to a government-run currency agency. Only those deemed to have valid reasons to buy dollars, for example, to import goods, have been allowed to change their bolivars at a fixed rate set by the government.

With many Venezuelans unable to freely buy dollars, they turned to the black market.


Hyperinflation:  Venezuela's inflation rate, which has been over 50 per cent since 2014, reached 536.2 per cent in 2017 largely due to the rapid depreciation of the local currency on the black market. The International Monetary Fund estimates that inflation will reach 2,068.5 per cent by 2018.

Economic war: The government says it is the victim of "economic war", including speculation and hoarding, by pro-opposition businessmen. Venezuela's currency has weakened sharply on the black market.

Food shortages: The government controls the price of basic goods, but the black market still has a powerful influence on prices. Prices on basic goods can change in a matter of days, causing severe food shortages.

Oil output: Venezuela's oil production, which has been falling by about 20,000 barrels per day (bpd) since last year

Health assistance: The economic crisis is also hitting Venezuela's public health system the hardest. In the country's public hospitals, medicine and equipment are increasingly not available since they are import dependent on it.


Latest developments

On February 2018, Venezuela officially launched the pre-sale of its new digital currency called the petro. According to the government, the petro is backed by oil, gas, gold and diamonds, and is meant to help overcome US and EU sanctions.

President Donald Trump signed an executive order barring any US-based financial transactions involving Venezuela's new cryptocurrency.US President Donald Trump officially recognised Juan Guaidó as the legitimate president of Venezuela just minutes after the latter had said he would take over the executive powers. Predictably, Mr Maduro broke off relations with the US and gave US diplomats 72 hours to leave Venezuela.


Case of India and Venezuela

India is one of the largest purchasers of Venezuelan oil, of which it imports about 300,000 barrels a day for which it pays cash. In 2017-18, India imported 11.5 million tonnes of oil from Venezuela, which is its fourth biggest source and the largest customer for Venezuelan oil last month, buying about 55 per cent of that country's oil production.

The recent US sanctions have left Venezuela with significant surplus capacity. This provides India with an opportunity to increase Venezuelan oil imports, for which Venezuela has already agreed to accept Indian rupees. Such a payment-mechanism would allow the Indian government to reduce its external deficit without drawing down on foreign-exchange reserves. On the other hand, Venezuela could use rupees to purchase food and medicines from India.

This arrangement would displease Washington. Not only would it undermine US sanctions, but it would also pose a long-term threat to the domination of the dollar in the international oil trade. So in near term, India might face problems continuing oil transactions with Venezuela because the US clamping down on banks handling cash for it.