Venezuela: A cautionary tale

As Sri Lanka begins budget season with the presentation of the 2022 Appropriation Bill by Finance Minister Basil Rajapaksa this week, it is wise to look to Venezuela as a cautionary tale of everything that could go wrong with financial mismanagement.

Not too long ago, in 2001 Venezuela was the richest country in South America. Even today it has the world’s largest oil reserves constituting almost one-fifth of the proven reserves of the precious commodity. It has not had a large-scale internal armed conflict in recent years which tends to destabilise governments. Yet, more than six million people have fled Venezuela, making it one of the main refugee-generating countries in the world alongside conflict-riddled Afghanistan and Syria. Its economy is in ruins as hyperinflation has made the country’s currency, the bolivar, basically worthless. This has wiped out the savings and pensions of millions of citizens, impoverishing a once-affluent community. Today’s reality in Venezuela is food and commodity shortages. 

One of the key elements of Venezuela’s current economic woes is its overspending in the State sector in the early 2000s during the oil prices boom. In order to remain popular, then President Hugo Chavez initiated numerous welfare projects, which seemed progressive at the outset but economically unsustainable once world oil prices started to decrease. The bloated State sector made the private sector uncompetitive, eventually ensuring that most jobs were part of the political patronage system. Once the oil price dropped from $ 100 to less than 20 per barrel, the Venezuelan economy collapsed like a house of cards in 2013, turning this once-wealthy nation into a failed state.

The economic woes of the country were compounded by political instability brought about by autocratic rule. Venezuela has been run since 1999 by two men. From 1999 until his death in 2013, Hugo Chávez was president. He was succeeded by his right-hand man, Nicolás Maduro. Maduro lacks Chavez’s charisma and political skill, and his rule has become increasingly authoritarian.

Many of the ingredients that destroyed the Venezuelan economy are part of Sri Lanka’s current economic story. To compound matters, Sri Lanka lacks a highly-desired commodity like oil which may eventually enable Venezuela to recover. Sri Lanka today is spending way over its means. At a time of economic turmoil, a country should focus its spending on sectors that generate economic activity. 

Instead Sri Lanka is spending a bulk of its public finance on defence and the maintenance of the State sector. The largest chunk of money, over Rs. 373 billion, is spent on the military, 13 years after the end of the conflict. Sri Lanka hardly has a defence industry that produces equipment and therefore a bulk of this money is used to pay salaries and purchase weapons from overseas. While the former may generate some economic activity through the trickledown effect, the latter would hardly impact the overall local economy except to make a few arms agents richer. The defence budget is in addition to the Rs. 100 billion allocated for public security. 

The second-largest allocation of public finances is for public services and provincial governments. These include sustaining over 400 State-Owned Enterprises, mostly loss-making and bloated political establishments. Hardly any of these expenditures will give a return on economic activity or generate wealth through new jobs or enterprises, rather only stifle market-driven economic activity.

Just like in Venezuela, Sri Lanka’s economic situation is compounded by political instability created through an increasingly autocratic rule. The lack of a democratic alternative and the rise in resentment of the masses will make protests and their eventual suppression inevitable. With looming food and commodity shortages in Sri Lanka, this instability will only exacerbate in the months and years to come. The removal of limited checks and balances imposed through the 19th Amendment now allows for blatant corruption across the spectrum which will generate further economic and political instability.

Once-prosperous nations can collapse due to financial mismanagement, as Venezuela stands testament. Sri Lanka has already been downgraded from an upper-middle-income country into a lower-middle-income country. If the warning signs are not heeded, Sri Lanka may very well end up being the next Venezuela. This is hardly a good outcome for anyone, least of all those who seek to hold on to political power.