Monday, November 27, 2017

VENEZUELA SHOULD SERVE AS A CAUTIONARY TALE

Events across the border have captured our collective imaginations in recent weeks. US President Donald Trump never disappoints from day to day with his faux pas. Now everybody in show business is running scared for fear of the next set of revelations on sexual harassment. And meanwhile British prime minister Theresa May is scrambling to negotiate a soft Brexit that has left her isolated at home and abroad.

These and many other stories are a big deal.

But in South America Venezuelans are fighting an existential battle with disease, hunger and poverty and we are not just talking about the bottom of the pyramid people. Increasingly now everyone in Venezuela is living below the poverty line.

"It wouldn’t be a big deal. We would have brushed it off just another Godforsaken third world country excelling only at doing things wrong at every turn. But Venezuela has the largest oil reserves in the world. And as if that is not enough, is a stone’s throw away from energy hungry USA...

Things are so bad in Venezuela that inflation has sky rocketed to the point that people are throwing money away– the International Monetary Fund (IMF) projects it go beyond 2,000 percent next year from this year’s 650 percent.

Things are so bad that murder and kidnapping are the only serious growth industry.

Things are so bad that malaria which was eradicated in 1961 – before the US, is back with a vengeance so are measles, there are no HIV or hytertension drugs.

Things are so bad that the people are dying of starvation in the streets, because the government would rather meet its international debt obligations than import food. If they did not meet their debt obligations, debts which were incurred during the oil boom days when a barrel peaked at $114.

The official figures paint a rosy picture of an upper middle income country with a GDP of $440b – almost 20 times our economy’s size and per capita incomes of about $8,000.

How did it come to this?

As so often happens it was a case of expedient politics being applied to remedy economic shortfalls. 
Former president Hugo Chavez in an attempt to endear himself to the Venezuelans after being overthrown once before, used oil to massively expand social programs, nationalised companies and looked the other way when his cronies were gouging themselves at the trough of state resources.

As long as oil revenues stayed high some of the worst ills could be paperd over.

Oil, which was discovered in 1935, has so dominated the economy that it accounts for a third of the Latin America’s economy, 80 percent of export earnings and more than half the tax revenues.

So when prices started falling to current levels of about $50 a barrel the emperor’s nakedness was exposed. As if that was not enough during the good day Caracas borrowed voraciously against future earnings from oil. As it is now it receives almost no money from oil exports but still ships off massive amounts to Russia and China as debt payments.

"While we scout the globe for best practice in how to deal with our oil sector, we should not lose sight of how not to run an oil economy – and Venezuela, better than Nigeria and Angola can serve as a powerful cautionary tale...

Thankfully we are at least making the right noises.

The government is committed to using revenues to boost our infrastructure, which is important to ensure that other parts of the economy can continue to grow alongside the oil industry.

We are also talking about a sovereign fund, finance by oil revenues housed abroad. This is important because if all oil revenues gush back into the economy it can cause a massive appreciation of the shillings and make our other exports uncompetetive.

The argument that we should bring the money all back and not keep it offshore developing other economies is a populist one but not based on the facts. If the sh7trillion NSSF is struggling to find bankable projects in Uganda what off the estimated trillion of shillings in revenue we are expecting annually when production kicks off?

Beyond infrastructure it would do us a world of good if we could shore up our education and health services. This would have enable upward mobility of populations. A healthier and better educated population is a more productive one.

The temptation to set a flurry of state enterprises will always be there but we should resist the urge. 

State enterprises are not only inefficient, because their main role is not to deliver service or show a return but to pay off constituencies, they also distort markets, frustrating private sector players through preferential treatment, while giving suppliers and clients a raw deal.

We lack the discipline to run or even oversee the good running of good state enterprises, unlike Dubai. We would be better served if, along with improving our infrastructure – soft and hard, we developed industry wide incentives for investors – foreign and local, to come and set up the companies that can ensure an alternative economy to oil exists. These industries’ output would eventually eclipse oil.

"As we all know in our personal lives, there is no money that is too much to finish. Oil is finite resource and we should behave with this in mind, unlike Venezuela which was seduced into thinking the good times would always roll...


And now after decades of betting solely on oil the irony is everything else doesn’t work, the oil industry inclusive and yet they still have billions of oil barrels still underfoot!

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