Venezuela is surely the ultimate victim of the oil crash. The country’s economy has been driving on empty for many months, and visitors can feel a sense of crisis in the air.
Forget if you can the government deficit (24 per cent of GDP), the soaring inflation rate (which could top 700 per cent this year) and collapsing growth (the economy shrank by 10 per cent last year).
Look at what is happening on the ground. Crime is rampant, there are long queues for food, which regularly erupt into looting, and medicines are in short supply. On the fringes of the Zika-impregnated Amazon, there is a shortage of mosquito repellent.
In one five-star hotel in Caracas last week, management shut down lifts and escalators for long periods while malls were told by the authorities to close at 6pm to save fuel. All this in a country awash with oil and natural resources.
Clearly something has gone seriously wrong. The socialist government – still inspired by the egalitarian principles of the late president Hugo Chavez – blames international speculators and capitalists.
Venezuela’s trading partners and creditors blame Chavismo, which the current president Nicolas Maduro stubbornly embraces.
And they all blame oil. Energy revenue accounted for 75 per cent of GDP, so a 70 per cent price drop is a disaster for Venezuela, rendering it impossible to pay for its imports or service its loans.
There is another reason for Venezuela’s decline, which is now being belatedly addressed. In the good years, the country failed to diversify its economy and instead binged on social services, phantom public-sector employment and subsidies.
Last week, the progressives revealed a diversification strategy based in the under-exploited mineral wealth of Venezuela, in particular diamonds. All of a sudden, Caracas is embarking on a crash course in diversification. Diamond mining is at the forefront. Venezuela wants to become a diamond exporter again, and is forming a new company – open to private and foreign investors – to help it do so. The first step is to re-enter the Kimberley Process, which will allow it to trade stones again.
The estimates of reserves are eye-watering: 3 billion carats, one minister said, which would make the country one of the biggest producers in the world.
That income has already been spent. Diamond reserves were quietly added to central bank reserves, enabling it to draw down or borrow against the precious stones. A similar scheme was recently set up with gold, with the help of Deutsche Bank.
All that is good, a serious step in the right direction, even if it may come too late to prevent a general default on bonds. It’s scandalous that the government has ignored mineral wealth for so long and there is no logical reason it should not be back in KP.
But the near-certainty remains that it’s all too little, too late.
Back-of-the-envelope calculations suggest the potential diamond reserves could be worth many tens of billions of dollars. But even if they reached that very optimistic long-term figure, it would put only the smallest dent in the annual import bill.
A much more serious withdrawal from discredited orthodoxy is required if Venezuela is to survive, starting at the very top. Last week, the leader of one of the biggest private food companies, essential for the daily sustenance of millions of Venezuelans, was branded a “bandit, thief, oligarch and traitor”. The accuser was the heir of Chavismo, the president himself.
With that mindset, diversification is bound to fail.
Follow The National’s Business section on Twitter