“Life has been hard for years. It’s true that food prices have gone down recently, but they’re still too high,” said Rodrigo, a private security guard working in the Venezuelan capital, Caracas. He declined to give his last name.
After decades of economic crisis, Rodrigo believes “people want change.” On Sunday, he will join 21 million people eligible to vote to choose the country’s next president.
The elections will be held on the birthday of Hugo Chávez, a charismatic leftist leader who ruled Venezuela from 1999 until his death in 2013, despite his questionable record on human rights, and was praised as a champion of the poor.
His less popular successor, Nicolas Maduro, is now facing opposition candidate Edmundo Gonzalez Urrutia, a retired diplomat. And polls show Gonzalez leading by a wide margin.
But Maduro has a knack for clinging to power. Most of the opposition boycotted his 2018 re-election bid, claiming it was neither free nor fair. In January, Maduro banned his main rival, Maria Corina Machado, from running.
Accusations of government interference have marred elections in Venezuela for decades, but Maduro said Sunday he would recognize the results.
“I don’t know what will happen next Monday. There are rumors that there will be violence. But even if Gonzalez wins,” Rodrigo admits, “I’m not sure he can change the country like Chavez did.”
During his term, Chávez successfully capitalized on the high price of oil, the lifeblood of the Venezuelan economy, to double Venezuela’s GDP per capita. Welfare programs were expanded, and poverty and unemployment were reduced.
Maduro has not been so lucky. He has overseen an economic collapse in his 11th year in office. Since 2014, output has fallen 70%, more than double the hit the United States suffered during the Great Depression.
During that period, some 7.7 million Venezuelans, or a quarter of the population, left the country in search of work.
In 2022, the IMF described Venezuela’s chaos as “the largest non-conflict economic collapse in half a century.”
Government critics say the country is falling apart because of corruption.
Maduro attributes Venezuela’s plight to the paralysis caused by increasingly severe US-led sanctions since 2005. He is not alone. Several commentators have criticized the measures as illegal and harsh.
Caracas is prohibited from using international capital markets, limiting imports and debt financing to finance its budget deficit and infrastructure projects. In 2019, Donald Trump also banned Venezuela from exporting crude oil to the United States and importing the diluent needed to process its own heavy crude.
The curse of the commodity?
Venezuela boasts the world’s largest proven oil reserves. In the late 1990s, it produced 3.6 million barrels per day, generating 95 percent of its export revenue. But U.S. sanctions and years of mismanagement have brought production down to less than 1 million barrels per day.
“Sanctions have certainly hampered Venezuela’s oil and gas sector, but that’s coupled with administrative negligence,” said Tim Hunter, a Latin America analyst at Oxford Economics.
Hunter hinted at decades of underinvestment in PDVSA, the state-owned energy company and backbone of Venezuela’s economy. Then in 2017, Maduro announced a controversial executive shakeup, appointing loyal military officers to top positions at PDVSA.
“Even though production has been low in recent years, fossil fuels still account for nearly half of Venezuela’s official exports, so when sales decline due to lower production or lower prices, the economy suffers,” Hunter said.
The recent hyperinflation in Venezuela was driven by the sale of soft hydrocarbons. The continued decline in oil prices from 2014 to 2017 triggered a shortage of foreign currency and devalued the peso. It also reduced tax revenues from oil revenues, the main source of government revenue.
Inflation eventually passed 1 million percent in 2018 as central banks began printing more money to finance budget deficits and imports became more expensive.
“Venezuela relies on imports for basic goods, so imports have been compressed as the country faces hyperinflation. Supermarkets and pharmacies have been short of stock for years. That’s what’s caused many Venezuelans to leave, and growth has slowed even further,” Hunter said.
“Whoever wins on Sunday, the next government will have to move away from oil dependence and toward other productive activities. But in the short term, it needs to fix the inefficiencies in the oil sector and use the revenues to pay down outstanding debt.”
Mountain of Duty
Venezuela defaulted on its commercial debt in 2017. The government owes about $92 billion, including bonds issued by PDVSA and state-owned utility Elecar. It then owes China another $57.2 billion, and is subject to various arbitration awards, the Financial Times reported.
Overall, Venezuela’s debt to GDP is estimated at 148 percent. “Given the mountain of obligations, the next government will have to pay them off before it can start growing,” Luis Salas, a former vice president for economic affairs, told Al Jazeera.
“In theory, this would mean a restructuring of the national debt, where the government would negotiate with lenders to reduce its debt,” he added. “That would give them the fiscal space to focus on other areas, such as infrastructure spending.”
In April, it was reported that financial services firm Rothschild & Company had been hired to help Caracas sort out its tangled debts. Salas said the appointment of the adviser was a signal that Maduro was trying to engage with creditors and reintegrate Venezuela into global financial markets.
However, he noted that austerity programs tend to follow debt restructuring. When entering into a new transaction, lenders want to maximize the likelihood of repayment, while governments typically cut public spending to generate enough revenue to meet new obligations.
“What a lot of people are hoping is that instead of spending on education and health, we can use oil to make deals,” Salas said. “Of course, that’s not going to happen with sanctions. Until the sanctions are lifted, we’re going to continue to struggle without restructuring our debt.”
Sanctions – very negative impact
President Joe Biden’s administration inherited a maximum pressure strategy on Venezuela from President Trump. But despite the pressure, sanctions have failed to oust Maduro.
Meanwhile, Biden has pursued a different approach. Under the 2023 Barbados Agreement, he eased some sanctions (particularly on oil and debt) in exchange for political guarantees: free and fair elections and the release of detained U.S. citizens.
The deal helped Venezuela earn an additional $740 million in oil sales between October and March last year. But Biden reimposed U.S. sanctions in April after Maduro blocked Machado from running and a territorial dispute with Guyana flared up.
“Clearly, the U.S. restrictions have had an extremely negative impact,” said Mark Weisbrot, co-director of the Centre for Economic and Policy Research. “In fact, the paralyzing sanctions have done far more to damage the Venezuelan economy than any domestic policy mistake.”
Of course, Weisbrot believed that there was room for gains even in a “hostile foreign environment.” He noted that “there have been some gains in recent years on the inflation and growth fronts.”
The consumer price inflation rate in June is estimated to have fallen to 51%., GDP growth in 2023 is expected to exceed 5%.
“But,” he cautioned, “there can be no wholesale recovery under sanctions. If Gonzalez wins, they could probably be lifted quickly. Even if Maduro wins, even cleanly, I don’t expect any change in the U.S. position, regardless of who becomes president in November.”
