Venezuela’s Crisis: Consequences, Root Causes, And Possible Way Out

Venezuela, the country with the largest crude oil reserves in the world, is currently facing one of its severest economic, social, and political crises. Its supermarkets are lacking food, medical supplies, and basic consumer goods like soap and toilet paper, thus forcing Venezuelans to line up for hours to buy products. Prices keep increasing: Coca-Cola cans are currently being sold at 5.56$, Barbie dolls at 194$, and tires at 750$. As a result of the inflation, the bolivar, Venezuela’s official currency, is weakening against the dollar, making imports more expensive, thus partially explaining the shortage of goods and why 80 percent of basic medicines are unavailable in the country. At the same time, the country is also facing shortages in energy because of a drought that has dried up the water used by the country’s dams, which normally supplies two-thirds of Venezuela’s electricity. The economy is expected to contract by 10.1% this year, up from 5.7% in 2015, and the inflation rate should soar up to 720% according to the International Monetary Fund (IMF).

This situation, unsustainable for the population, and especially for the low and middle classes, has been going on for months. 76% of Venezuelans are now living below the poverty line, which is up from 52% of the population in 2014, and according to the Network to Defend National Epidemiology, 400,000 Venezuelans have contracted the Zika virus. Violence has also risen in the country. The murder rate is currently reaching 92 killings per 100,000 residents (by comparison, the rate in Brazil is of 21 killings per 100,000 residents) and lootings are occurring daily, according to the Venezuelan Observatory for Violence. The present state has thus sparked up the debate as to whether Venezuela is, or at least, is becoming a failed state. Moisés Naím, a Venezuelan distinguished fellow at the Carnegie Endowment for International Peace, says that the “failed state is a nebulous concept often used too lightly. That’s not the case with today’s Venezuela.”

The UN Secretary General Ban-Ki Moon is even calling the terrible period Venezuela is going through a “humanitarian crisis,” and besides this, the state is also experiencing a political crisis. The opposition coalition, who won an impressive supermajority in the National Assembly in last December’s elections, wants the president to stand down and is prepared to amend the Constitution if this is what it takes. President Maduro, along with the supporters of Chavismo, accuses the opposition of waging an “economic war” backed by the United States.


The reasons behind Venezuela’s crisis are complex and interrelated, but deeply, everything gravitates around the country’s oil-based economy. 96% of the South American country’s exports are made of oil, and oil revenues account for up to 25% of its GDP. This makes Venezuela’s economy very vulnerable to any external shocks. With the prices of oil falling from $111 per barrel in June 2014 to $40 per barrel in late 2015, Venezuela is running out of money.

Experts, however, say that Venezuela’s situation also stems from years of economic mismanagement. Indeed, when prices of oil were going up under Chávez’s Presidency, he mainly used oil revenues to finance food and housing subsidies, medical services, and educational programs for the poor. Yet, while these policies may seem good from a social justice standpoint, they prove to be largely harmful in the long-term. Chávez also used his oil wealth to build strong and friendly international relationships by selling oil on conditions of preferential payment to states belonging to the Petrocaribe alliance. Had Chávez and Maduro invested a fraction of their country’s oil revenues in the Fondo de Estabilizacion Macroeconomico, the sovereign wealth fund Chávez created in 1998, the crisis Venezuela is facing would probably have been less severe.

Whereas Maduro points out to the falling oil prices as the sole cause of the crisis, experts also say that Venezuela’s economic policies that were designed for the poor, such as strict price controls, are to blame. They argue that price limits lead domestic manufacturers to reduce production, thus partially explaining the food and basic consumer good shortages. Critics also accuse the state-run petroleum company, Petroleos de Venezuela (PDVSA), of compounding the crisis by reducing its production of 11% in 2016. Critics argue that this fall in production is due to mismanagement of the company, corruption, and underinvestment in infrastructure.

The crisis is also paradoxically being aggravated in the eyes of Venezuelans by some of Maduro’s short-term policies to alleviate it. In an effort to reimburse the country’s debt, Maduro reduced imports to conserve scarce foreign currency to make debt payments, thus worsening the scarcity of goods. He also raised the country’s minimum monthly wage to 11,578bolivars, up from 9,647bolivars, thus taking a risk of increasing the already high inflation.


According to Venezuela’s Central Bank, the country’s debt amounts to $138 billion, the equivalent of six years of oil exports. In order to avoid a default, the government has been issuing bonds through PDVSA to obtain new funds at lower interest rates. A government default, which is increasingly likely to occur, would thus hurt PDVSA just as much as it would hurt the Venezuelan state since unpaid creditors would seek to seize the company’s global assets.

In another attempt to obtain funds for the payment of its debts, last February, Maduro increased the price of gasoline for the first time in seventeen years. While people used to fill up their tanks with only 4 bolivars, they will now have to pay 240 bolivars. Although the increase may seem important, the prices of oil in Venezuela remain the cheapest in the world. Accordingly, Maduro’s move will have little impact, since smugglers are still going to be incited to sell oil to neighboring countries, such as Colombia, given the huge difference in prices (a barrel of oil costs only 6 cents in Venezuela).

The President also devalued the national currency by more than 60% to reduce the wide gap between the official rate and the black-market exchange rate. This policy, although necessary, hurts the population since imported goods become more expensive and Venezuela’s foreign debt, in terms of bolivars, increases. Still, Luis Oliveros, an economist at the Central University in Caracas, said that “the devaluation fell far short of what is needed” and that it will have no impact. On the black-market, a dollar goes for approximately 1,000 bolivars, whereas for the official rate covering food and medicine, a dollar is worth 60 bolivars. Venezuela’s second exchange rate, the free-floating one that applies to everything else, is now 200 bolivars to the dollar.


According to experts, if Venezuela is to avoid defaulting on its creditors, China, which holds $65 billion of Venezuela’s debt, will have to play an important role. Up to now, it has accepted to grant loans to the state in return for oil. However, with Venezuela’s crisis, the state is incapable of paying back its debt, and the majority of its oil exports are paying for previous loans. The best way for Venezuela to avoid government default is then to count on China’s will to have a privileged access to its oil reserves over the long term and to restructure the debt it owes to China.

Venezuela’s situation as a country with large natural resources, which suffers from an economic crisis, is not unique and is more commonly known as the Dutch Disease, named in 1977 after the economic stagnation the Netherlands went through after the discovery of large gas reserves in 1959. Relying too heavily on its gas exports, the Netherlands’s currency appreciated, which in turn discouraged economic diversification and development of domestic industries. This situation makes the country in question highly vulnerable to external shocks and at the mercy of volatile international markets.