For over a year we’ve been writing about the economic reforms needed in Venezuela. The frame is always the same: we tend to write on the assumption MUD might have a chance to govern soon.
It will be an adjustment that lets chavismo continue being chavismo: an organized plundering party.
Now that our dreams have been shattered by a sledgehammer labeled “dialogue”, it’s time to face the facts: from now until at least 2019 (fingers crossed!), any adjustment will be carried out by chavismo.
How can chavismo avoid the economic precipice, while remaining chavismo? We can assume confidently that, whatever they do, they won’t surprise us with something competent. It will be an adjustment that lets chavismo continue being chavismo: an organized plundering party.
So let’s don our red berets, channel our inner Giordani, and put ourselves in the shoes of Maduro’s favorite economic advisor Alfredo Serrano, chavismo’s very own Josef Mengele, brought here to experiment on the poor and defenseless.
Their goals are narrow: they need to make it to December 2018 in better shape than today; even if just marginally better. And they face several restrictions in their policy choices.
First, adjustments can’t, under any circumstances, disturb the shared plundering of the country that keeps the different factions in the government at peace. This means, for example, that exchange controls will remain in place, and the military will continue to control food distribution.
Second, they can’t be seen to betray their so-called ideals, or their voting base. Thus, no one’s calling the IMF, price controls and subsidies will continue in some form or another, and the price of gasoline won’t increase up to international levels.
And lastly, there will be little deviation from what they had done in the previous 18 years, especially if it might violate the first two restrictions. No experimenting with things that worked in other countries, and no default.
How can chavismo avoid the economic precipice, while still being chavismo? We can assume confidently that whatever they do, they won’t surprise us with something competent.
Putting these goals and restrictions together, the government might be able to make it to late 2018 if they make the following half-assed, completely dumb and irresponsible “adjustments” that neither I nor anyone that writes for Caracas Chronicles would ever, ever, ever endorse, even if very drunk on cocuy while high on mushrooms.
Close the external gap
The government needs to come up with $8-10 billion to be able to keep paying the external debt this year, and pay for the already dangerously low level of imports (assuming there are no other surprise expenses, such as arbitration awards, and the price of oil stays around $45). Venezuela still has a lot of gold in its foreign reserves –around 189 tons, worth $7.4bn today. They could sell or swap a good chunk of that, like they’ve done before. They can cover the rest with help from China. If that’s not enough, they could cut public imports a bit more. Who cares? Wall St. has to get paid.
Devalue the bolívar
Maduro’s been reluctant to devalue the official rate as much as his mentor did, but he needs to do it this year, to temporarily erase part of the fiscal deficit. Within their framework, they can go about this in two ways. They could simply merge the two official rates, with the new rate around the middle point between 10 and 700 Bs/$, and leave it at that (like in the old days of CADIVI). Or they could devalue the CENCOEX rate, and sell more dollars at the SIMADI rate (closer to the SICAD 2 model).
Under either plan, the black market stays alive and well. However, both options could be complemented with a return of the legal parallel market that was outlawed in 2010 by our chosen guide into this underworld, Giordani. This might sound fanciful and unlikely. But, what if I told you that this time, the government would give licenses to operate this market only to brokerage firms owned by their front men and to public banks? Then it sounds perfectly in tune with the first restriction: more party favors to distribute.
Do something about inflation
Solving very high inflation is straightforward; stop printing money to finance the fiscal deficit. That’s it. Since the government has no assets or financing to cover such a large deficit (circa 10% of GDP), it must try to reduce the gap between revenues and spending. The devaluation would increase government revenues in bolivars, and reduce the deficit even if just for a while. They’re already doing other things that can reduce the deficit, such as cutting spending and raising taxes, and could do more, like raising energy prices.
The government is too deep in the red to stop printing money, but these measures would help. On top of this, opening a new channel in the official exchange markets for private companies would also help with inflation; let them buy and sell dollars at a more sensible rate, instead of forcing them into the super high and unpredictable black market.
Any adjustment, whether competent or not, will hit the poor the hardest. A good option to help them deal with this shock is to give them money with a cash transfer program, as we have explained before in Caracas Chronicles.
The government is building and expanding the Carnet de la Patria, which could easily turn into a Cash Transfers platform. It’s likely to be terrible at targetting poor poeple, just like the Misiones are.
Instead of trying to identify who needs the transfers the most, they are giving cards to anyone willing to stand in line and sign up. It’s a wildly inefficient program, that will cost a lot more than one targeting only the truly poor, and yield inferior results. Still, it’s better than nothing.
Curtail indirect subsidies and let the private sector breathe
They could keep their beloved Law of Fair Prices, but stop enforcing the direct price controls on basic goods. This, coupled with the easier and legal access to dollars mentioned above, could allow the private sector to fill at least part of the empty shelves in supermarkets and pharmacies, and avoid more closures of idled companies and mass layoffs.
Keep giving PDVSA operations to foreigners
The drop in oil production by Venezuela is mostly due to steep falls in the output of oil fields managed by PDVSA. Fields managed by foreign companies are doing a lot better, and have compensated the terrible yields in the PDVSA ones.
The government —desperate to keep this boat afloat— could give more fields to foreign companies under unfavorable terms, but that are nonetheless preferable to the disastrous local management.
This terrible plan could improve conditions a little bit, allowing the government to stagger to December 2018 without a worsening of the humanitarian crisis, leaving them free to keep crushing MUD, and giving them a non-negligible chance of winning and unfair, lopsided and uncompetitive presidential election.
A now, if you’ll excuse me, I need to take a shower.