An Economic Crisis of Historic Proportions

Moisés Naím / New York Times

Last month, Jorge Botti, the head of Fedecámaras, Venezuela's business federation, explained that unless the government supplies more dollars to pay for imports, shortages -- from food to medicine -- would be inevitable. "What we will give Fedecámaras is not more dollars but more headaches," replied acting president Nicolas Maduro, the heir apparent to the Chavista regime (and Hugo Chávez's vice president).

Maduro is correct. Crushing headaches will soon be inevitable across the country, including within the private sector but especially among the poor. President Chávez has bequeathed the nation an economic crisis of historic proportions.

The crisis includes a fiscal deficit approaching 20 percent of the economy (in the cliff-panicking United States it is 7 percent), a black market where a U.S. dollar costs four times more than the government-determined exchange rate, one of the world's highest inflation rates, a swollen number of public sector jobs, debt 10 times larger than it was in 2003, a fragile banking system and the free fall of the state-controlled oil industry, the country's main source of revenue.

Oil-exporting countries rarely face hard currency shortages, but the Chávez regime may be the exception. Mismanagement and lack of investment have decreased oil production. Meanwhile oil revenue is compromised partly because of Chávez’s decision to supply Venezuelans with the country's most valuable resource at heavily subsidized prices. Thus a large and growing share of locally produced oil is sold domestically at the lowest prices in the world (in Venezuela it costs 25 cents to fill the tank of a mid-sized car).

Another share of the oil output is shipped abroad to Cuba and other Chávez allies, and to China, which bought oil in advance at deeply discounted prices (apparently the revenue from China has already been spent). Most of the crude left to be exported at market prices is sold to Venezuela's best client, and, ironically, Chávez's main foe: the United States. Yet, as a result of America's own oil boom, U.S. imports of Venezuelan oil have recently hit a 30-year low.

Moreover, due to an explosion in its main refinery, Venezuela is now forced to import gasoline. The Financial Times reckons that for each 10 barrels of crude it sells to the US, it has to import back (at a higher price) two barrels of oil refined abroad. Meanwhile, the nation's total imports have jumped from 13 billion dollars in 2003 to over $50 billion dollars currently. Paying for those imports and servicing its huge debt requires more hard currency than Venezuela's weakened economy can generate.

Yes, huge headaches are looming.