Buenos Aires Hours | Can Maduro’s reluctant reforms stop Venezuela’s economic free fall?

After the worst economic collapse in modern history, the Venezuelan economy may have finally bottomed out.

The hyperinflation of years past is still, well, hyper, but it has moderated considerably from levels exceeding hundreds of thousands of percentage points per year. And President Nicolás Maduro is convinced that production, which has contracted by around 80% since 2012, will increase slightly in 2021, a forecast shared by some private analysts.

The turnaround is mainly due to a combination of reforms straight out of economic orthodoxy: removal of price controls, reduction in subsidies on basic necessities such as gasoline, and removal of many restrictions on foreign exchange. Today almost everything in the country is denominated in dollars, not bolivars. Even a sign in the largest slum in Caracas, the capital, advertises a haircut for US $ 2.

Behind all this hides Delcy Rodríguez, the vice-president who is also Minister of Finance. With Patricio Rivera, a former Ecuadorian economy minister advising her since 2019, she borrowed from the capitalist playbook to revive an economy damaged by US sanctions that effectively ban Venezuela from exporting oil.

The result is a policy mix that bears little resemblance to the neo-Marxist “21st century socialism” that Venezuela pursued under the late Hugo Chávez, Maduro’s predecessor. This system created a Byzantine set of currency controls and preferential rates, largely to the benefit of those with ties to the government, not to mention a huge black market for dollars. The bolivar lost 99% of its value and inflation got out of hand.

“You can’t say it was socialism back then, no,” Rodríguez said in an interview in a poor neighborhood in southwest Caracas. “It went directly against the people, against the purchasing power of the people.”

Combined with severe limits on lending and printing of money by the central bank, ad hoc dollarization of the economy has kept prices rising at a much slower pace. Annual inflation is down to 2,266% per year, compared to more than 300,000% in 2019; on a monthly basis, price gains slowed further to around 20 percent in May.

One of the challenges is to keep enough US currency in circulation. Since last year, the Central Bank has sent millions of dollars – and, to a lesser extent, euros – in cash to local lenders to trade with customers. This has helped prevent the bolivar from collapsing in the parallel foreign exchange market that most Venezuelans use.

The reforms also helped boost domestic demand, according to a Credit Suisse Group AG note in April. The Swiss bank forecasts a 4% growth in gross domestic product, unless there is a major blockage from Covid-19. Caracas-based consulting firm Economtrica is seeing its GDP increase by 8%, said director Henkel García.

The nation rarely releases its economic data, and when it does, it is usually accompanied by months of delay, meaning most economists are generally left in the dark when making their own economic growth forecasts. or inflation.

In another move away from socialism, private enterprises have replaced the state as the dominant force in many sectors of the economy. They accounted for 92% of Venezuela’s raw materials and food imports in 2020, up from 25% the year before, according to government figures seen by Bloomberg News. This allowed the Maduro government to close some of its huge budget deficit.

Little relief

Granted, green shoots are just a little relief. The country is still reeling from two decades of economic mismanagement and four years of crippling sanctions. Most of the population does not have access to dollars.

“The reality is that almost everyone in the country goes through poverty and extreme hardship,” Sergi Lanau, deputy chief economist at the Institute of International Finance, said by phone from Washington.

His forecast for Venezuelan growth is more modest by 0.3% this year, rising to 1.3% in 2022. While some growth after so many years of misery is positive, there is a “complete disconnect” between what ordinary people experience on a daily basis. and government assurances that the economy is recovering, he said.

Moreover, attracting the capital necessary to rebuild Venezuela’s critical oil industry is still nearly impossible. Not only is the country excluded from dollar-based financial markets due to the sanctions, Lanau also cited the current state of political uncertainty and the need for the involvement of the International Monetary Fund.

Other economists are even more pessimistic: Asdrubal Oliveros of Ecoanalítica sees the GDP contract by 4.4% this year.

Oil production, the country’s biggest source of income, remains a huge driver of change.

In 2019, the Donald Trump administration de facto banned US imports of Venezuelan oil. Production plunged to just 310,000 barrels per day in August 2020, the lowest level since the 1940s, but has since rebounded to over 500,000.

After months of severe fuel shortages, the state began selling fuel at the equivalent of 50 US cents per liter at gas stations across the country last year. It was a historic decision after decades in which Venezuelans filled their tanks essentially for free. Now, the new revenues could allow state-owned national producer Petroleos de Venezuela SA, or PDVSA, to recoup the millions lost in subsidies.

Nothing in Venezuela resembles the days when production regularly exceeded 2.5 million barrels per day, billions of dollars poured into public coffers and when Chávez, in the name of a Bolivarian revolution, nationalized hundreds of companies. Today, even reluctantly, the state has no choice but to lean on the capitalists it once demonized if it wants growth, jobs and higher wages.

“Today, Venezuela’s private sector is less and less dependent on oil revenues,” said Rodriguez, the vice president. “It is becoming a sector that invests, produces and finds in Venezuela a space where it can develop its potential.”

Not exactly a revolutionary rallying cry.

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by Patricia Laya, Alex Vasquez & Erik Schatzker, Bloomberg

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