What the IMF World Economic Outlook Reveals About Venezuela and the World
More than one million lives have been lost due to COVID-19 since the start of the year. The global pandemic overwhelmed national health systems and strained supply chains, leaving important marks on the socio-economic fabric of society. Nothing has been left untouched by COVID-19.
In the latest World Economic Outlook (WEO), published on October 13, 2020, the International Monetary Fund (IMF) sheds light on the impact of the global health crisis on the socio-economic performance of its member countries. The analysis offers 2020-2021 projections of the world’s economic growth, calculated with respect to previous year(s), and presented in percent change, unless noted otherwise.
The current global economic downturn is the greatest contraction since the Great Depression nearly 100 years ago. While in April 2020, the IMF projected the world economy would contract by three percent in 2020, the October report forecasts a global growth of -4.4 percent. The growth of the advanced economies is projected to be -5.8 percent this year, while growth for emerging markets and developing economies is -3.3 percent.
The main takeaway from the IMF report is that the global economy is contracting. But if the pandemic has overwhelmed even the most advanced public systems, how are some of the most fragile countries, like Venezuela, performing?
The Case of Venezuela
The Venezuelan economic performance is alarming. According to the IMF report, Venezuela’s economy contracted 35 percent in 2019 in terms of real GDP. This year, its economy is expected to shrink by 25 percent. The projections for 2021 are negative ten percent and are likely to be underestimated considering the extent to which international sanctions, and the economic, and diplomatic isolation of the Maduro regime are accelerating the free fall of the country with the world’s largest oil reserve. Looking at statistical breakdowns, it is worth noting that Venezuela has been excluded from the bulk of IMF estimations, as according to the IMF, “Projecting the economic outlook in Venezuela, including assessing past and current economic developments as the basis for the projections, is complicated by the lack of discussions with the authorities,” which last took place in 2004.
The COVID-19 pandemic has hit Venezuela hard. The global emergency strained the already collapsed health system and highlighted the weak state capacity, unable to scale up testing. Hospitals and clinics lack basic functioning amenities such as running water, power, and soap. Health workers are not provided with personal protective equipment (PPE), recently causing the death of over 100 medics. Severe shortage of gasoline and strict quarantine rules have shrunk the domestic commercial activity even more than what it was before the pandemic. Venezuela lacks resilient infrastructure and is clearly ill-equipped for an effective COVID-19 national response.
Since the start of the pandemic, the IMF has been disbursing large funds to support the recovery of countries. As stated in the WEO report, the institution has “provided funding at record speed to 81 members since the start of the pandemic, granted debt relief, and called for extended debt service suspension for low-income countries and for reform of the international debt architecture.”
In its speeches and official guidance, the IMF has emphasized support for protecting vulnerable people, but Venezuela has not been on the list of countries to help. Maduro and his predecessor, Hugo Chavez, rejected any IMF funding for nearly two decades. But given the dire conditions of the country, on March 15 2020, Maduro made the request to the IMF for a massive influx of COVID-19 financial relief. The foreign ministry of the government of Venezuela sent a letter to the IMF asking for funds to finance the government’s “detection and response systems” for its efforts against the coronavirus. In the letter, Maduro wrote that his government is “executing strict and exhaustive prevention and control measures to protect the Venezuelan people.” Implementing these measures and importing healthcare goods require funding, which is why the Venezuelan officials “come up to your Honorable organism (the IMF) to request your evaluation about the possibility of granting Venezuela a financing line of $5 billion from the Rapid Financing Instrument.”
But very quickly, the Washington-based institution rejected the request. “Unfortunately, the Fund is not in a position to consider this request because there is no clarity on international recognition of the country’s government,” said an IMF spokesperson. This denial is understandable. Considering the division among IMF member countries regarding the recognition of the legitimate government of Venezuela, no clear path exists for IMF staff negotiations.
However, denying support to an exceptionally vulnerable country raises another issue. An effective COVID-19 response cannot take place in Venezuela, considering its economic and financial stagnation. Integration with the global economy is even harder given the fluctuating oil prices during the pandemic further decreasing oil revenues, prolonged state of domestic hyperinflation, and local currency devaluation against the main trading currencies. Without access to IMF assistance, Venezuela may collapse amidst the global health shock and trigger a regional financial crisis. The mission of the IMF is to preserve financial stability and mitigate crises. Thus, it is in the interest of the Fund to assist Venezuela.
The IMF estimations are clear: Venezuela is in a state of economic free fall and cannot confront a post-pandemic world alone. Although forcing Venezuela to international isolation is a deterrence that sends a strong message of political disapproval, this behavior prevents any kind of stage-setting for dialogue, interaction with the Maduro regime, and, in the case of IMF credit lines, mitigation of a crisis. A country completely excluded from the international arena can only get worse, not better.
In an IMF blog post, it is stated that “it will take significant innovation on the policy front, at both the national and international levels to recover from this calamity” making the point that these unprecedented times require new approaches in the policy-making process. So what kind of innovations are in place for Venezuela? What is the new wave of policies proposed to tackle the country that registered the largest exodus in the Latin American and Caribbean (LAC) region in modern times and that is going through the most underfunded crisis?
The urgent request for assistance by Venezuela should not be overlooked on the basis of political matters. Hundreds of thousands of Venezuelans currently depend on whether the battle over political legitimacy and control can be put aside in order to prioritize human well-being. The world’s fragile climate as predicted by the WEO should trigger a shift in priorities for all multilateral organizations, including the IMF, to people-centered decisions.
In addition, there are legitimate concerns on the manipulation of financial inflows, as well as on the risk of defaulting on loans. However, the disbursement of funding could be a successful inducement of cooperation between the two contested domestic leaderships. Juan Guaidó can achieve little as long as domestic power is de facto held by Maduro, but economic assistance from major international organizations and repatriation of frozen assets that can be used as loan collaterals can only be unlocked by Guaidó, as recently demonstrated. An option to consider is to negotiate the disbursement of credit lines with the European Union, serving as a mediator between the Fund and the two Venezuelan parties. The EU is a strong player in the international arena and has open channels of communication with both the ruling and the opposition parties of Venezuela. “Elsewhere countries like Venezuela or Iran may well collapse without our support. This means we should ensure they have access to IMF assistance,” Joseph Borrell, EU Minister for Foreign Affairs, noted in his statement in March 2020.
It is hard to stop the Venezuelan free fall, given its complex political and economic system, but it is still worth trying. To really protect the vulnerable, the international community should listen to the urgent request for assistance by Venezuela.