The Venezuelan economy expanded greatly under Hugo Chavez and has, at least on the surface, continued to do so. Take a look below at GDP growth in Venezuela over the past decade.
Notice that, among other things, GDP increased greatly in the fiscal year following Chavez’s death.
That being said, this is greatly misleading. The “expansion” of Venezuela’s economy is due to export growth from PDVSA, the state-controlled oil company that was established in 1976, and increased government spending. The costs of the petrolization of Venezuela have crippled the national economy, which is based almost in its entirety on oil. This becomes especially problematic when government spending is high.
The following graph compares expenditure and revenue as a percentage of the GDP.
While the GDP may be growing, Venezuela has created a massive deficit. Exact numbers are unavailable, but it is estimated to amount to roughly 11.5 percent of GDP. This has forced the government to borrow large quantities of money from other countries such as China, from which Venezuela has borrowed at least $45 billion as of March 2015.
President Maduro has continued to promote the Chavista reliance on Venezuela’s oil reserves, which are the largest in the world. But Venezuela is floundering because of this government policy. Over 95 percent of export revenue comes from oil. Any alternatives ought to support long-term investment into diversifying the oil-centric economy. The difficulty with this matter is that the economy is so thoroughly dependent on oil money that any transition could put tremendous strain on the country, such as higher debt or a capital flight.
Social spending has also contributed to Venezuela’s deficit, accounting for as much as 40 percent of the country’s budget in 2012. During this same year, spending on housing programs increased by a whopping 88 percent, with social security and healthcare spending increasing by over 40 percent each. For the 2017 fiscal year, Maduro’s government announced a federal budget of 8.5 trillion bolivars, US$ 8.5 billion at the parallel market rate, more than five times the amount for 2016. Social programs will account for 73 percent of the 2017 budget.
Given the overall lack of reliable income, Venezuela is bound to default on its debt. Maduro is insistent on repaying, but the problem is that revenue going towards debt payments puts sectors such as food distribution and production in jeopardy as they struggle to find funding. This leads to loans and newly printed bolivars. Consequently, Venezuela faces an inflation rate that may well exceed 200 percent.
Restructuring the debt is inevitable, but Venezuela has shrugged off legions of starving citizens to support burgeoning debt payments.
Venezuela ought to reduce costly social spending to control the country’s budget and develop a comprehensive plan to restructure the national debt, ceasing the careless printing of money. The administration must take a turn inward and ensure the welfare of their own people before attending debt obligations. Negotiations with bondholders should be held to prepare for debt restructuring.
Serious budgetary and fiscal policy reform is needed to maintain the accomplishments of Chavism, such as vast reductions of illiteracy and extreme poverty. Developing an economic plan aimed at curbing the ever-increasing deficit and restructuring the national debt will be the two most important issues going forward.
Read the first article of our VENEZUELA SERIES.