Most Venezuelans have been in an awful situation for quite some time: The country just came out of a period of electricity rationing that has been in effect since last April, during which rolling blackouts were common. In May, the country declared a state of emergency as inflation hit 180 percent, supermarket shelves emptied out, and food shortages became rampant.
But the country’s economic situation has gotten so dire that now, one thing seems clear: Something has to give. Many economists now believe that a default on the country’s debt—about $125 billion, $10 billion of which is due this year—or worse, an economic collapse, might be inevitable. A referendum to recall the country’s president, Nicolas Maduro, has garnered nearly 2 million signatures, and there are rumors about a restoration of diplomatic relations with the U.S. in light of the economic crisis. But a default, a recall, or improved foreign relations would do little to ease the day-to-day suffering that many Venezuelans have been experiencing as their economy spirals downward.
Venezuela is rich in oil, but its heavy dependence on exporting that oil, along with its government’s monetary and commodity-pricing policies, has pushed its economy into chaos. Globally, the price of oil has declined sharply over the past 20 or so months, which is bad news for the several countries that rely heavily on selling it. Oil exports have been responsible for 95 percent of Venezuela’s exports earnings and nearly half of its government’s income. And in 2015 alone, the revenue from oil exports and of Petróleos de Venezuela (PDVSA)—the state-owned oil-and-natural-gas company—plummeted by more than 40 percent.
But is the declining price of oil entirely responsible for the country’s devastated economy? Not quite. There are plenty of other countries that have relied heavily on oil for their economic stability, and whose situation is still not as dire as Venezuela’s. Saudi Arabia, for instance, derives 90 percent of its export revenues and around 40 percent of its GDP from the sale of oil. But the country has been seemingly more proactive and willing to change its economic strategy—namely, looking into diversifying its economy and making cuts in its public sector—in order to cope with the plummeting price of its most valuable commodity.
In Venezuela, the cratering of oil prices has effectively drained government coffers. PDVSA pours money into many of the country’s so-called “social ventures,” including stores that provide price-controlled goods—a policy’s that’s been in place since Hugo Chavez was in power. But the price ceilings on basic goods have meant that many of the country’s producers stopped making those basic goods, because they could only do so at a loss. Thus, Venezuela imports a large amount of its necessities, but the collapse in oil prices has limited its global buying power, which has produced shortages of consumer products. So black-market vendors have popped up, charging exorbitant prices. At the same time, even the legal import system has been rife with fraud, largely due to the country’s ill-conceived currency controls.
Amid all of this, Venezuela seems reluctant to use what appears to be the most logical tool in its economic toolkit to stave off a humanitarian crisis: default. Instead of holding off on making payments to foreign creditors, Venezuela’s president has remained committed to making timely payments on its debt—payments that some have called “surreal” and “suicidal” because they further sap the country’s already limited financial resources. In a May speech, President Maduro announced that he had spent nearly $36 billion repaying debts in the previous 20 months—a striking amount in a country where hard currency is now down to around $12 billion. On top of that, Venezuela still plans on paying around $1.5 billion in debt payments and more than $4 billion to PDVSA in 2016, according to Bloomberg.
Why would Maduro make this decision as the country literally struggled to keep the lights on? It may be, in part, because a default could put PDVSA—and thus Venezuela’s ability to export oil—in jeopardy. The country’s tactic, it seems, is to wait out the ongoing volatility of oil prices. But in the meantime, Venezuela desperately needs new economic policies—and likely new political leadership to enact them.