[The original version of this piece was published in Spanish on Franciscorodriguez.net.]
The spread of the new coronavirus disease (COVID-19) to a global pandemic, and its arrival in Venezuela is one of the main threats that our country will have to face in these times. We are not only talking about a highly destructive epidemic with the capacity to overwhelm health systems and public services, even in developed countries with high levels of emergency readiness; we are also talking about its arrival in a country whose government and economy have a reduced capacity to respond to it, given the brutal economic crisis suffered in the last six years.
Venezuela not only has to face an unprecedented public health emergency but also a collapse in oil prices that has eroded its already diminished capacity to generate external income. Added to this is the decision by the United States government to apply secondary oil sanctions that penalize companies that help sell Venezuelan oil. This latest decision, which is part of the policies announced by the Trump administration in February of this year, has led intermediary agents to demand that Venezuela accept to sell its oil at an increasing discount due to the regulatory risk they incur. As a result, our country’s oil is traded today at a discount of around $ 20, falling below some estimates of the production cost.
All of this is happening in a country that has a minimal capacity to deal with a widespread public health emergency. According to a study by Johns Hopkins University, the Nuclear Threat Initiative and The Economist’s Intelligence Unit, Venezuela is one of the countries with the worst capacity to respond to a global health emergency, ranking 176 out of 195 countries (and last of 33 in the region of Latin America and the Caribbean) in the Global Index of Health Security. Venezuela’s weaknesses are particularly accentuated in two dimensions necessary to deal with this emergency, which are early detection and reporting, and rapid response and mitigation, in which it ranks 182 and 180 out of 195 countries evaluated.
Table 1 – Evaluation of the Venezuelan health system according to the Global Index of Health Security.
To a certain extent as a result of these weaknesses, the social quarantine measures announced by Nicolás Maduro are, in principle, part of the correct response that the country should give in the face of such a pandemic. Precisely because the capacity of the Venezuelan health system to handle this crisis is so limited, it is a priority to try to detect and isolate cases. This would, ideally, contain the spread of the disease or, failing that, flatten its growth rate and make it as consistent as possible with the capacity of our public health infrastructure.
Social distancing and economic incentives
The fundamental problem of applying social distancing measures in any economy relies on the capacity of the state and society to enforce them. Social pressure and the state’s ability to supervise its application and punish its non-compliance play a role in this. Either of these two factors can be overwhelmed by the substantial economic cost that obeying these restrictions imposes on citizens.
That is why developed economies are discussing the application of financial relief measures such as suspension of tax payments and low or zero-interest loans, together with expansionary monetary policies, to compensate families for the cost of limiting their economic activity and reduce their social exposure. These policies are not limited to advanced economies. The government of Peru, for example, has just announced the decision to grant a temporary subsidy of S / 380 (approximately $ 107) to three million families in poverty to help them cope with the effect of the crisis.
In Venezuela, the subsidy that is needed may be even higher. Although equilibrium wages in our country are lower, a more significant proportion of the population lives in precarious conditions, with which, in the absence of a universal or near-universal transfer, the incentives to not obey calls for social quarantine will be higher. Furthermore, only very small sectors have significant savings to enable them to overcome a prolonged period of reduced economic activities. Venezuela does not appear to have an effective targeting mechanism for the neediest sectors, which implies that perhaps there is no real alternative to a universal or near-universal transfer in the short term.
If we start from the assumption of a transfer of $ 25 per person per month, similar to the current opportunity cost for unskilled workers, and given an economically active population of approximately 15.9 million people, a universal or near-universal subsidy would cost around 400 million dollars a month. Even assuming a moderate duration of the social quarantine period, we would be talking about a cost of $ 1.2 billion over three months.
Can Venezuela afford this cost? With the weakened state of its public finances and in the absence of political agreements that allow it to access other funds, the answer is no. Given that the post-discount price of our oil is today below production costs, it is unlikely that there would be any oil income to direct towards the payment of a new direct subsidy program like this one. This also occurs in a situation in which the recession will also hit the income from tax collection.
One of the risks in this situation is if the authorities decide to grant a direct transfer financed through the printing of money. Already in hyperinflation, Venezuela has no space to carry out an expansionary monetary policy. Monetary financing of this amount of spending would likely be counterproductive, leading to a further decline in the demand for money and a decrease in the real value of savings and wages, exacerbating the contraction in aggregate demand.
Sources and possibilities
The ability of an economy to assure its population basic consumption conditions depends not on the money that is put in its hands but on the amount of goods that it puts on its shelves. In an economy whose population is actively working, these goods are generated through national production or international trade. To the extent that people must be quarantined, availability ofthese goods will depend on the ability of society to reorganize its production processes and to import goods from economies that are still in a position to supply them.
In other words, it is useless to give Venezuelans purchasing power in the local market if the country cannot increase its imports. For this reason, it is essential that the country access the sources of resources available in foreign currency to pay for the international purchases necessary to maintain local consumption and production, as well as to meet the basic equipment needs of our public health system. For this, there are several sources of resources to which you can appeal.
- Multilateral entities. The Rapid Financing Instrument of the International Monetary Fund allows resources to be mobilized to countries with urgent balance of payments needs without the need to enter a complete reform program. Countries can obtain up to 50% of their quota in the first year, which for Venezuela would imply an availability of USD 2.6 billion.1 The World Bank recently announced the availability of USD 12 billion globally to attend to initiatives from affected countries.
- Funds in the United States. Venezuela currently has several billion dollars in accounts in the United States that are under the legal control of the Juan Guaidó administration. This includes $ 1.4 billion in cash and cash equivalents held by CITGO, as well as a more significant amount in joint venture accounts. The total amount is unknown since the Guaidó administration has not published official figures. But we know that only Chevron’s joint ventures – Petropiar and Petroboscán – have USD 1.9 billion in earnings not distributed to PDVSA as a result of the dividend payment ban imposed by the 2017 sanctions. If the other joint ventures (excluding Russian and Chinese operations) that maintained accounts in the United States had a similar level of dividend retention, we would be talking about a total sum of almost USD 7 billion in addition to Citgo’s USD 1.4 billion.
- Oil sales. An agreement to temporarily loosen restrictions on oil sales to the United States as a result of economic sanctions could help reduce or eliminate the discount on Venezuelan oil sales. Starting from an export level of approximately 600 thousand b / d, the reduction of that discount could provide Venezuela with approximately USD 4.4 billion a year. Some of this oil could be sold via futures contracts to ensure the immediate availability of funds.
Table 2: International resources available for emergencies.
In search of the necessary cooperation
Using conservative calculations, we estimate that Venezuela could dispose of approximately a quarter of dividends withheld in joint ventures, all the IMF’s IFR resources, and half of the losses resulting from discounts on its oil. This would imply the availability of USD 6.7 billion to attend the current emergency. This funds would be more than enough to finance a transfer program such as the one indicated above, as well as a plan to acquire the equipment and medical supplies necessary to attend to the emergency.
None of these measures is possible, however, in the absence of a political agreement between the parties. It is highly unlikely that any multilateral entity will decide to lend resources to Venezuela without these loans being endorsed by the National Assembly. In the same way, access to the resources available in accounts abroad requires in the cases of joint ventures the acceptance of the United States to authorize blocked transactions as a result of past executive orders (in the case of CITGO resources, it would also be necessary to seek the approval of creditors). The approval of a general license with a humanitarian exception to the restriction on the purchase of Venezuelan oil would also be necessary to reduce the discount to which Venezuelan oil is placed today.
It is to be expected that the Juan Guaidó administration, like the United States government, will demand conditions on the use of these revenues, to ensure that they are directed to the attention of the health emergency. Precisely the design of this type of mechanism has been one of the research focuses of the Oil for Venezuela Foundation that I lead. They include the appointment of professional and depoliticized supervisory boards by mutual agreement between the parties, administrative and supervisory role for international organizations such as the United Nations, and prior and subsequent control by the National Assembly.
The achievement of sectoral political agreements that allow addressing specific problems of Venezuelans and protects them from the collateral effects of the political crisis takes on a new urgency today. Faced with a direct threat to the lives of millions of Venezuelans, we have a responsibility to call for a truce to confront a real enemy. The future will judge the political leaders of our time for their ability to put aside their differences and join efforts to face a threat to everyone’s life. Uniting to combat the pandemic does not in any way imply setting aside valid grievances, let alone accepting the legitimacy of the opponent. It means affirming our will to save Venezuelan lives.
- On March 17, the Nicolás Maduro administration announced that it had requested access to this instrument in the order of $ 5 billion. https://twitter.com/jaarreaza/status/1239977222271893504?s=08. The figure estimated by us corresponds to access in one year. In contrast, the government figure is the figure of total availability over several years in the event of a fall of more than 20% in terms of trade.