Is it possible to escape the misery-spiral Venezuelans face? In a post for Prodavinci, Ricardo Hausmann and Miguel Ángel Santos propose a solution.
Firstly, how deep is the crisis? Although the images and stories of the crisis are well-known, the authors point out some devastating figures to give a sense of the magnitude: A GDP fall of 37% in the last 4 years and a fall in real terms of 87% of the minimum wage. Moreover, a 48% fall in the oil-production compared to ‘98 levels.
Decline in imports levels are so high that they are larger than those experienced by African countries during their civil wars, such as Nigeria (1987) or Sierra Leone (1998).
Chavismo can be worse than war…
Well, what brought us here? Several things didn’t help.
- No access to foreign currency since 2013: A combination of falling oil prices (101 $ per barrel in 2013 to 35 $ in 2016), declining production and no access to international debt markets since 2014, have greatly reduced available dollars for our economy. In short, lower prices, less production and no-one wants to lend. The few dollars we generate go to Wall-Street and the remains to medicine, food, the military and corruption.
- Too much debt: Although we come from a 10-year oil boom, our current debt load stands at around 178 billion dollars (178 millarditos). To put the number in perspective, the debt is the equivalent of 6 times our yearly exports. That’s 3 times the average of Latin America and more than Sudan (4,1), Yemen (3,9) or Burundi (3,3). What a club!
- BCV finances the fiscal deficit: In the past 12 months, the amount of money the central bank printed rose by… 716%. Basically, when the government runs out of bolívares, they just print s’more. For inflation, that is the equivalent of throwing gasoline to a house on fire.
Ok. But, how do we get out of this?
Hausmann and Santos think the prerequisite for recovery is that the current regime must change. Economic recovery without political change is impossible. Once it comes, they have three main proposals:
- Unifying exchange rates. Among economists, there is a discussion whether unifying exchange rates – which would imply an important devaluation of official exchange rates – would cause more inflation since all imported goods would then rise in the same way the exchange rate would. The authors argue that in the context of unifying exchange rates with an opening to international trade, the bolívar would stabilize at a rate stronger than the black market’s. Additionally, ending the scope for currency arbitrage would close off the transfer of public wealth to the connected elite. The money that comes from the elimination of the subsidy would go to closing the fiscal deficit and thus stopping the crazy ongoing creation of bolívares by the Central Bank, and the inflation that goes with it.Wait… can the exchange rate really go down? First, let’s start by acknowledging that the black market rate is higher than it would be if we were open to international trade. The logic is that, for example, if potatoes cost $1in Barranquilla, they should cost more or less the same (expressed in $) in Barquisimeto, because there is trade. Currently, that relation does not hold.
- Turning around the country’s currency cash flow: Given the ill-state of PDVSA, increasing oil production is not a viable solution… in the short term. Asking the IMF for loans is – according to the authors – the only way of generating more foreign currency for the public sector. This would be at a 2% interest rate, which is way lower than the 48% rate that the government accepted in the Hunger-Bonds operation with Goldman Sachs in June. Nonetheless, this would increase debt, so it is not sustainable if it does not come with other measures.
- Restructuring debt: Besides an IMF loan, the old debt has to be restructured, which, accompanied with a reform program, would lower interest rates and thus reduce the necessity of having to ask for more debt just to pay debt. Imagine you are a student with complications preventing you from paying a loan and your folks commit to help you, while ensuring you are more responsible and find a good job that would make your debt less riskier.
Recovery can only be achieved through an expansion in production and consumption, which requires a significant reduction of controls and respect for private property with a simultaneous increase of imports.
Hausmann and Santos argue that international loans, debt-restructuring and a reversal of the country’s currency cash flow are the pillars for an economic environment that can lead to recovery.
But remember, none of this can take place with the current regime in power…