On January 23, 2018, the Bretton Woods Committee hosted a virtual conference Regional Spotlight: Venezuela on the Brink? that explored the causes of the economic and political crisis in Venezuela, the regional and global ramifications of the instability, and the appropriate role for the international financial institutions and global community in responding. Featured speakers included Meg Lundsager, Public Policy Fellow at The Wilson Center and Executive Editor of the Caracas Chronicles Francisco Toro. Robert Kahn, Adjunct Professorial Lecturer at American University’s School of International Service, moderated the conversation.
The crisis in Venezuela is dire according to Toro, who illustrated the deleterious effects that hyperinflation has had on Venezuela. Severe depreciation of the Bolivar has resulted in widespread absenteeism that stands to cripple vital sectors of the economy, including transportation and oil production. Living conditions continue to plummet as Venezuelan’s cannot afford to buy what few basic necessities make it to stores. “No one can live on five cents a day,” Toro said pointedly. Banks cannot keep up with the rate of money creation, refugees have started to flee to neighboring countries, and Venezuela’s debt continues to rack up as GDP declines. As for the political situation, Toro was pessimistic on the probability of the opposition party coming to power, but rather anticipated fracturing within the regime was the more likely route to political change.
The IMF and global community have limited options for financial assistance Lundsager explained. The Venezuelan case is both unique and complicated given the diversity of debt holders, lack of financial data available, historical status as a middle-income country, outstanding arbitration claims, and strained relationship between the Venezuelan government and traditional lenders. In order to comply with stringent lending rules, the IMF would likely need months to a year of data collection and program design before money could be dispersed to Venezuela, and this could only happen after a shift in political leadership. Additionally, it is difficult for the United States to coalesce creditors behind a restructuring plan due to the assortment of bondholders and large portion of debt held by Russia and China. Lundsager acknowledged that even if a political turnover occurred and a supply response was mobilized, “It will still take quite a while to turn things around.”
Currency tricks will not work Kahn indicated in response to an audience question on the ability for a Venezuelan cryptocurrency to evade international sanctions and raise funds. “I see this as having no practical importance internationally,” Kahn opined. He explained that the resource-backed cryptocurrency, or “petro,” is still an extension of credit which is subject to sanctions and domestic law, it lacks a clear link to underlying resources, and would be converted at the official highly-inflated rate, meaning that launching a cryptocurrency does not enable Venezuela to solve its financial woes.
The world is watching and waiting, but it needs to mobilize resources the panelists agreed. Toro highlighted the possibility for a security vacuum in Venezuela – a country with weapons and drug-trafficking routes – to materialize if the trajectory towards state collapse continues. Kahn and Lundsager concurred that the global community should prepare to mobilize a humanitarian response of food and medicine quickly but faces challenges due to lack of in-country aid resources. The three experts underscored the importance of the Venezuelan case and that much is at stake in the coming months when a final tipping point may occur.